UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended
December 31, 20202022
or
oor
☐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 001-15749
BREAD FINANCIAL HOLDINGS, INC.
ALLIANCE DATA SYSTEMS CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware |
| 31-1429215 |
(State or other jurisdiction of |
| (I.R.S. Employer
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incorporation or organization)
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| (I.R.S. Employer
Identification No.) |
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30753095 Loyalty Circle
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| 43219 |
Columbus,, Ohio |
| (Zip Code) |
(Address of principal executive offices) |
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(614)
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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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 |
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ⌧x No ◻o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻o No ⌧x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧x No ◻o
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 ⌧x No ◻o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated
filer,”filer”, “accelerated
filer,”filer”, “smaller reporting
company,”company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧x Accelerated filer ◻o Non-accelerated filer ◻o Smaller reporting company ☐o Emerging growth company ☐o
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. ◻o
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧x If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. o
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐o No ⌧x
As of June30, 2020,2022, the aggregate market value of the common stock held by non-affiliates of the registrant was approximately $2.1$1.8 billion, based upon the closing sale price of $45.12 per share$37.06 as reported on the New York Stock Exchange on JuneExchange.30, 2020, which was the last business day of the registrant’s most recently completed second fiscal quarter.
As of February
18, 2021, 49,695,05122, 2023, 50,115,421 shares of common stock
of the registrant were outstanding.
Documents Incorporated By Reference
Certain information called for by Part III is incorporated by reference to certain sections of the Proxy Statement for the 20212023 Annual Meeting of our stockholders, which will be filed with the Securities and Exchange Commission not later than 120 days after December31, 20202022.
ALLIANCE DATA SYSTEMS CORPORATION
INDEX
BREAD FINANCIAL HOLDINGS, INC.
TABLE OF CONTENTS
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| Item No. | | Form 10-K Report Page |
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This report includes trademarks, such as Bread®, Bread Cashback™, Bread Pay™ and Bread Savings™, which are protected under applicable intellectual property laws and are the property of Bread Financial Holdings, Inc. or its subsidiaries. This report also contains trademarks, service marks, copyrights and trade names of other companies, which are the property of their respective owners. Solely for convenience, our trademarks and trade names referred to in this report may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks and trade names.
Effective March 23, 2022, we changed our corporate name to Bread Financial Holdings, Inc. from Alliance Data Systems Corporation, and on April 4, 2022, we changed our ticker to “BFH” from “ADS” 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 consolidated financial statements. On November 5, 2021, our former 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”, “brand 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. We offer our credit products primarily through our insured depository institution subsidiaries, Comenity Bank and Comenity Capital Bank, which together are referred to herein as the “Banks”. Bread Financial is also used in this report to include references to transactions and arrangements occurring prior to the name change.
Cautionary Note Regarding Forward-Looking
StatementsStatements
This Form 10-K 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,”“believe”, “expect”, “anticipate”, “estimate”, “intend”, “project”, “plan”, “likely”, “may”, “should” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding, strategic initiatives, our expected operating results, future economic conditions including currency exchange rates, future dividend declarations and the guidance we give with respect to, our anticipated operating or financial performance. results, future financial performance and outlook, future dividend declarations and future economic conditions.
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 causeare difficult to predict and, in many cases, beyond our control. Accordingly, our actual results
tocould 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 uncertaintiesFactors that could cause the outcomes to differ materially include, but are not limited to, the following:
| ● | continuing impacts related to COVID-19, including government economic stimulus, relief measures for impacted borrowers and depositors, labor shortages due to quarantine, 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; |
| ● | 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 (“FDIC”), 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 discussed in Item 1A of this Form 10-K, elsewhere in this Form 10-K and in the documents incorporated by reference in this Form 10-K. |
•macroeconomic conditions, including market conditions, inflation, rising interest rates, unemployment levels and the increased probability of a recession or prolonged economic slowdown, and the related impact on consumer spending behavior, payments, debt levels, savings rates and other behavior;
•global political, market, public health and social events or conditions, including the ongoing war in Ukraine and the continuing effects of the COVID-19 pandemic;
•future credit performance of our customers, including the level of future delinquency and write-off rates;
•loss of, or reduction in demand for services from, significant brand partners or customers in the highly competitive markets in which we compete;
•the concentration of our business in U.S. consumer credit;
•increases or volatility in the Allowance for credit losses that may result from the application of the current expected credit loss (CECL) model;
•inaccuracies in the models and estimates on which we rely, including the amount of our Allowance for credit losses and our credit risk management models;
•increases in fraudulent activity;
•failure to identify, complete or successfully integrate or disaggregate business acquisitions, divestitures and other strategic initiatives, including failure to realize the intended benefits of the spinoff of our former LoyaltyOne segment;
•the extent to which our results are dependent upon our brand partners, including our brand partners’ financial performance and reputation, as well as the effective promotion and support of our products by brand partners;
•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;
•our level of indebtedness and 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;
•pending and future litigation;
•pending and future legislation, regulation, supervisory guidance and regulatory and legal actions including, but not limited to, those related to financial regulatory reform and consumer financial services practices, as well as any such actions with respect to late fees, interchange fees or other charges;
•increases in regulatory capital requirements or other support for our Banks;
•impacts arising from or relating to the transition of our credit card processing services to third party service providers that we completed in 2022;
•failures or breaches in our operational or security systems, including as a result of cyberattacks, unanticipated impacts from technology modernization projects or otherwise;
•loss of consumer information due to compromised physical or cyber security;
•any tax liability, disputes or other adverse impacts arising out of the spinoff of our former LoyaltyOne segment; and
•those factors discussed in Item 1A of this Form 10-K, elsewhere in this Form 10-K and in the documents incorporated by reference in this Form 10-K.
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-K 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.
Item 1. Business.
We are a leading provider of data-driven marketing, loyaltytech-forward financial services company that provides simple, personalized payment, lending and payment solutions serving large, consumer-based industries.saving solutions. We create opportunities for our customers and deploy customizedpartners 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 and buy now, pay later products such as installment loans and our “split-pay” offerings. We also offer direct-to-consumer solutions that measurably change consumer behavior while driving business growthgive customers more access, choice and profitability for some of today’s most recognizable brands. We helpfreedom through our partners createbranded Bread CashbackTM American Express® Credit Card and increase customer loyalty across multiple touch points using traditional, digital, mobile and emerging technologies. Bread SavingsTM products.
Our
LoyaltyOne® business owns and operates the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of tailor-made loyalty programs for grocers. Our Card Services business is a comprehensive provider of market-leading private label, co-brand, general purpose and business credit card programs, digital payments, including Bread®, and Comenity-branded financial services.
Our clientpartner base of more than 900 companies and online merchants consists primarily of large consumer-based businesses, including well-known brands such as (alphabetically) AAA, Academy Sports + Outdoors, Caesars, Michaels, the NFL, Signet, Ulta and Victoria’s Secret, Signet, IKEA, Ulta, Caesars Entertainment, Sephora, Bank of Montreal, Amex Bank of Canada, Sobeys Inc., Shell Canada Products, Reweas well as small- and Albert Heijn.medium-sized businesses (SMBs). Our clientpartner base is also well diversified across a broad range of end-markets,industries, including financial services, specialty retail, groceryapparel, sporting goods, health and drugstore chains, petroleum retail,beauty, jewelry, home furnishings and hardware, beauty and jewelry, hospitalitygoods and travel and telecommunications.entertainment. We believe our comprehensive suite of payment, lending and saving solutions, along with our related marketing solutionsand data and analytics, offers us a significant competitive advantage as many of our competitors offer a more limited range of services. We believe thewith products relevant across customer segments (Gen Z, Millennial, Gen X and Baby Boomers). The breadth and quality of our product and service offerings have enabled us to establish and maintain long-standing clientpartner relationships.
On November 5, 2021, we completed the spinoff of our former LoyaltyOne® segment, consisting of the Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc. (LVI), which is listed on Nasdaq under the symbol “LYLT”. The spinoff was completed through the pro rata distribution of 81% of the outstanding shares of LVI common stock to holders of our common stock at the close of business on the record date of October 27, 2021, with Bread Financial Holdings, Inc. retaining the remaining 19% of the outstanding shares of LVI common stock. Our stockholders of record received one share of LVI common stock for every two and one-half shares of Bread Financial Holdings, Inc. common stock held on the record date.
Unless otherwise noted, all discussion below, including amounts and percentages for all periods, reflect the results of operations and financial condition of Bread Financial Holdings, Inc.’s continuing operations. As such, the LoyaltyOne segment, which was classified as discontinued operations as of November 5, 2021, has been excluded from all presentations below, unless otherwise noted. Prior to the spinoff of the LoyaltyOne segment, we had two reportable operating segments (Card Services and LoyaltyOne). We now operate as a single segment that includes all of our continuing operations.
Business Strategy
& Transformation
Beginning in 2018, our boardBoard of directorsDirectors undertook a series of strategic initiatives based on an evaluation of the portfolio of businesses that constituted our company.company at that time. Subsequently, we completed the sale of our former Epsilon onbusiness in July 1, 2019, andthe sale of our Precima® business fromin January 2020, and the spinoff of our LoyaltyOne segment in January 2020. AdditionalNovember 2021. Through these transactions and other initiatives, to further simplifywe have simplified our business structuremodel as well as focusa leading tech-forward financial services company providing payment, lending and saving solutions, while also reducing debt and improving leverage and capital ratios. As we have transformed the business, we have made strategic investments in assets with the highest growth potential, focused on expanding our highest earningproduct suite and growth assets remain ongoing. direct-to-consumer offerings, diversifying our customer base, developing key strategic relationships, enhancing our core technology, and digital capabilities, and increasing our emphasis on environmental, social and governance (ESG) initiatives. Below is a timeline of key milestones in our business transformation since 2020:
We continue to make strategic investments in technology, people, data management tools and digital capabilities to further improve our competitive position and drive future growth.
These investments also further our objective to make our Card Services segmentgrow sales through the best payment and lending solution for traditional retail partners and emerging digital players, growing sales andorigination of credit card and loan receivables byother loans, making it easier for consumers to finance purchases and make payments wherever they occur— online, in store and in-app. We intendBy offering consumer choice, we provide relevant products across consumer segments, including Gen Z and Millennials who we believe are more likely to be drawn to cash flow management products such as installment lending and split-pay, while Gen X and Baby Boomers generally gravitate towards rewards and the convenience of a private label or co-brand card. With our broad suite of products, including private label and co-brand credit cards, installment lending and split-pay, together with digital, analytical and servicing capabilities to support and grow alongsidethose products, we drive incremental sales for our key retail partners with leading product, digital and analytic capabilities to power their business, private label, co-brand, general purpose and business credit cards, point-of-sale lending solutions, installment products and analytical capabilities.partners’ businesses. We also intend to rebalancecontinue rebalancing our portfolio, prioritizing and investing in profitable, strong performing partners, targeting core and new verticals by improving our cost baseindustries, and becoming a more efficient cost provider.cost-efficient provider of financial products and services. In addition, we expectcontinue to selectively branch intoexpand our direct-to-consumer lending and payment products for new and existing cardholders,customers, including debt consolidation products andour proprietary credit cards (Bread Cashback
TM) for growth and value retention. We intendAs reflected below, during 2022 we continued to be the best provider of payment solutions and credit to revolving consumers, increasing Comenity’s brand awareness without directly competing withdiversify both our retail partners. In December 2020, we completed the acquisition of Lon Inc., a technology-driven digital payments company operating under the trademark Bread, offering an omnichannel solution for retailers and platform capabilities to bank partners. Bread’sproduct offerings and on-boarding capabilities enhance the industries in which our partners operate, which we believe will allow us to balance growth prospects of our Card Services’ verticals and increaseexpand the addressable marketmarket:
Our Primary Product Offerings
Our primary product offerings consist of our: (i) private label and medium-sized merchants. Bread also offers our existing partners a broader digital product suite and additional white-label product solutions.
Products and Services
Our products and services are reported under two segments—LoyaltyOne and Card Services, and are listed below. Effective March 31, 2019, our former Epsilon segment was treated as a discontinued operation, and was subsequently sold on July 1, 2019. Financial information about our segments and geographic areas appears in Note 25, “Segment Information,” of the Notes to Consolidated Financial Statements.
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Segment
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LoyaltyOne
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| AIR MILES Reward Program
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| Short-term Loyalty Programs
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| Loyalty Services
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| —Loyalty consulting
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| —Customer analytics
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| —Creative services
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| —Mobile solutions
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Card Services
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| Receivables Financing
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| —Underwriting and risk management
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| —Receivables funding
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| —Comenity CardSM
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| —Private label and co-brand credit card programs
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| —Installment lending (including buy now, pay later)
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| Processing Services
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| —New account processing
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| —Bill processing
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| —Remittance processing
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| Marketing Services
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| Digital Offerings
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| —Digital payments platform
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| —Enhanced Digital SuiteSM
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LoyaltyOne
Our LoyaltyOne clients are focused on acquiring and retaining loyal and profitable customers. We use the information gathered through our loyalty programs to help our clients design and implement effective marketing programs. Our clients within this segment include financial services providers, grocers, drug stores, petroleum retailers and specialty retailers. LoyaltyOne operates the AIR MILES Reward Program and BrandLoyalty.
The AIR MILES Reward Program is a full service outsourced coalition loyalty program for our sponsors, who pay us a fee per AIR MILES reward mile issued, in return for which we provide all marketing, customer service, rewards and redemption management. We typically grant participating sponsors exclusivity in their market category, enabling them to realize incremental sales and increase market share as a result of their participation in the AIR MILES Reward Program coalition.
The AIR MILES Reward Program enables consumers, referred to as collectors, to earn AIR MILES reward miles as they shop across a broad range ofwith retailers and other sponsors participating in the AIR MILES Reward Program.brand partners; (ii) Bread CashbackTM products; (iii) Bread PayTM products; and (iv) Bread SavingsTM products. These AIR MILES reward miles can be redeemed byproduct offerings are not exclusive, and, where appropriate, we seek to introduce partners and customers to our collectors for travel or other rewards. Through our AIR MILES Cash program option, collectors can also instantly redeem their AIR MILES reward miles collected in the AIR MILES Cash program option toward in-store purchases at participating sponsors. Approximately two-thirds of Canadian households actively participate in the AIR MILES Reward Program,product offerings.
Private Label and itCo-Brand Credit Card Lending
Our core business, historically, has been
named a “most influential” Canadian brandto assist many of the country’s best-known brands and retailers in
Canada’s Ipsos Influence Index.
The three primary parties involved in our AIR MILES Reward Program are: sponsors, collectorsdriving sales and suppliers, each of which is described below.
Sponsors. Approximately 135 brand name sponsors participate in our AIR MILES Reward Program, including Shell Canada Products, Jean Coutu, Amex Bank of Canada, Sobeys Inc. and Bank of Montreal.
Collectors. Collectors earn AIR MILES reward miles at thousands of retail and service locations, typically including any online presence the sponsor may have. Collectors can also earn AIR MILES reward miles at the many locations where collectors can use certain credit cards issued by Bank of Montreal and Amex Bank of Canada. This enables collectors to rapidly accumulate AIR MILES reward miles across a significant portion of their everyday spend. The AIR MILES Reward Program offers a reward structure that provides a quick, easy and free way for collectors to earn a broad selection of travel, entertainment and other lifestyle rewardsloyalty through their day-to-day shopping at participating sponsors.
Suppliers. We enter into agreements with airlines, manufacturers of consumer electronics, supplier platformsprivate label and other providersco-brand credit card programs. In these programs, we (through our Banks) are the credit card issuer and lender to supply rewards for the AIR MILES Reward Program. The broad range of rewards that can be redeemed is one of the reasons the AIR MILES Reward Program remains popular with collectors. Hundreds of brands use the AIR MILES Reward Program as an additional distribution channel for these products. Suppliers include well-recognized companies in diverse industries, including travel, hospitality, electronics and entertainment.
BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made loyalty programs for grocers worldwide. These loyalty programs are designed to generate immediate changes in consumer behavior and are offered through leading grocers across Europe and Asia, as well as around the world. These short-term loyalty programs are designed to drive traffic by attracting newour partner’s customers, and motivating existing customers to spendwe also service the loans and provide a variety of other related services, which are described in more becausedetail below. Our partner base, with approximately 100 brands and numerous online merchants, consists of many large consumer-based businesses, including well-known brands such as (alphabetically) AAA, Academy Sports + Outdoors, Caesars, Michaels, the reward is instant, topicalNFL, Signet, Ulta and newsworthy. These programs are tailored for the specific client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Rewards for these programs are sourced from, and in some cases produced by, key suppliers in advance of the programs being offered based on expected demand. Following the completion of each program, BrandLoyalty analyzes spending data to determine the grocer’s lift in market share and the program’s return on investment.
Card Services
Our Card Services segment assists some of the best-known retailers in extending their brand through an expanding suite of payment solutions, including private label, co-brand, general purpose and business credit card programs, digital payments, including Bread, and Comenity-branded financial services that can be used by their customers in the store, or through online or catalog purchases.Victoria’s Secret. Our partners benefit from customer insights and analytics, with each of our credit card branded programs tailored to our partner’s brand and their unique customers.
Specifically, private label credit cards are partner-branded credit cards that are used exclusively for the purchase of goods and services from that particular partner. Credit under a private label credit card
members.
Receivables Financingtypically is extended either on standard terms only, which means accounts are assessed periodic interest charges using an agreed non-promotional fixed and/or variable interest rate, or pursuant to a promotional financing offer, involving deferred interest, reduced interest or no interest during a set promotional period (typically between six and 60 months). We receive a merchant discount from our partners to compensate us for all or part of the foregone interest income associated with promotional financing. The terms of these promotions vary by partner, but generally the longer the deferred interest, reduced interest or interest-free period, the greater the partner’s merchant discount. Some offers permit customers to pay for a purchase in equal monthly payments with no interest or at a reduced interest rate, rather than deferring or delaying interest charges. We typically do not charge interchange or other fees to our partners when a customer uses a private label credit card to purchase our partners’ goods and services through our payment system. Our private label credit card loan balances are typically smaller (with an average customer balance of approximately $400); although, we offer “big ticket” financing with certain private label brand partners, which often involves larger amounts. Relative to our co-brand loan portfolio, our private label loan portfolio generally has higher revenue yields, and customers with lower credit lines and lower credit scores.
Our co-brand credit cards are general purpose credit cards that can be used to purchase goods and services from the applicable partner, as well as other retailers wherever cards from those card networks are accepted. We currently issue co-brand credit cards for use on the MasterCard and Visa networks. Credit extended under our co-branded credit cards typically is extended on standard terms only. Charges made using a co-branded credit card, particularly charges made outside of that co-brand partner, generate interchange income for us. Relative to our private label loan portfolio, our co-brand loan portfolio generally has lower revenue yields, and customers with higher credit lines and higher credit scores (with the majority of our co-brand customers having a Vantage score in excess of 660).
As a general matter, the financial terms and conditions governing our private label and co-brand credit card products vary by program and product type and change over time, although we seek to standardize the non-financial provisions consistently across all products. The terms and conditions of all of our credit card products are governed by a cardholder agreement and applicable laws and regulations. We assign each card account a credit limit when the account is initially opened. Thereafter, we may increase or decrease individual credit limits from time to time, at our sole discretion, based primarily on our evaluation of the customer’s creditworthiness and ability to pay. For the vast majority of accounts, periodic interest charges are calculated using the daily balance method, which results in daily compounding of periodic interest charges. Cash advances are not subject to a grace period, and some credit card programs do not provide a grace period for promotional purchases. In addition to periodic interest charges, we may impose other charges and fees on credit card accounts, including, as applicable and provided in the cardholder agreement, late fees where a customer has not paid at least the minimum payment due by the required due date. Typically, each customer with an outstanding amount due on his or her credit card account must make a minimum payment each month. A customer may pay the total amount due at any time without penalty. We also may enter into arrangements with delinquent customers to extend or otherwise change payment schedules and to waive interest charges and/or fees. To help further the ease with which customers can make payments, we offer automatic payment functionality on all cardholder accounts.
Bread CashbackTM
In April 2022, we launched our branded Bread CashbackTM American Express® Credit Card, which is a direct-to-consumer, general purpose cashback credit card. This open-network card is an important new product for us to capture incremental spend and build and retain customer relationships. We anticipate the Bread CashbackTM American Express® Credit Card will increase our total addressable market, including the Millennial and Gen Z populations. The Bread CashbackTM American Express® Credit Card offers unlimited 2% cashback, no annual fee, no foreign transaction fees, premium protection benefits, American Express® lifestyle benefits and instant mobile acquisition and wallet provisioning. Prior to launching our new Bread CashbackTM American Express® Credit Card, since 2020 we have offered our Comenity-branded general purpose cash-back credit card.
Bread PayTM
Bread PayTM is our pay-over-time payment technology solution, which includes both our installment loan and “split-pay” offerings, as described in more detail below. Through Bread PayTM, we offer an omnichannel solution for over 700 SMB retailers and merchants, and platform capabilities to bank partners. The Bread PayTM offerings and on-boarding capabilities enhance the growth prospects of our industries and increase the addressable market of SMBs. Bread PayTM also offers our existing private label and co-brand credit card partners a broader digital product suite and additional white-label product solutions for those customers preferring a “closed-end” payment option (i.e. a non-revolving loan with fixed repayment terms). As part of our Bread PayTM products, we offer a flexible platform and robust suite of application programming interfaces (APIs) that allow merchants and partners to seamlessly integrate online point-of-sale financing and other digital payment products. As Bread PayTM has grown, it has expanded our ability to leverage our digital offerings to build both strategic technology platform partnerships and more traditional brand partnership sales and loans.
Our Bread PayTM installment loans are closed-end credit accounts where the customer pays down the outstanding balance in monthly installments, typically over a 3 to 48 month period. The terms of our installment loans are governed by customer agreements and applicable laws and regulations. Installment loans are generally assessed interest charges using fixed interest rates. We do not currently impose other charges or fees on loan accounts, such as late fees where a customer has not made the required payment by the required due date or returned payment fees.
Our “split-pay” loans are short-term, interest-free financing, to be repaid by the customer in four equal installments, with the first payment due at the time of purchase and the remaining three payments due in subsequent two-week intervals. The terms of our split-pay loans are governed by customer agreements and applicable laws and regulations. We do not currently impose charges or fees on these split-pay loan accounts, such as late fees where a customer has not made the required payment by the required due date or returned payment fees.
We have also been working to grow revenue generated through various Bread PayTM strategic partnerships. For example, since 2021 we have licensed our payments technology platform on a white-label basis to RBC (NYSE:RY), a premier global financial services provider. RBC uses our platform to operate its PayPlan by RBC solution, which allows Canadian customers to pay for big-ticket items over time. We do not originate the loans made through PayPlan, but instead earn transaction and servicing fees. We are also working to expand our partnership with Sezzle (ASX:SZL), which we announced in October 2021. We offer our installment or other loan products through Sezzle’s merchant network.
Bread SavingsTM
Bread SavingsTM refers to our direct-to-consumer, or retail, deposit products, primarily in the form of certificates of deposit and savings accounts. Our Bread SavingsTM products support loan growth and improve our funding mix, making us less reliant on our securitization programs and other sources of wholesale funding. In recent years, retail deposits have become an increasingly important source of funds for us, growing 72% from $3.2 billion as of December 31, 2021 to $5.5 billion as of December 31, 2022. As of December 31, 2022, retail deposits represented 26% of our total funding sources.
Our online Bread SavingsTM platform is scalable allowing us to expand without having to rely on a traditional “brick and mortar” branch network. We continue to focus on growing our Bread SavingsTM operations and believe we are well-positioned to continue to benefit from the consumer-driven shift from branch banking to direct banking. We seek to differentiate our deposit product offerings from our competitors on the basis of rates we pay on deposits, the quality of our customer service and the competitiveness of our digital banking capabilities.
Services segment providesSupporting our Primary Product Offerings
Our primary product offerings, as described above, are supported and enhanced by numerous services and capabilities that we provide, including: (i) risk management, account origination and funding services; (ii) loan processing and servicing; (iii) marketing and data and analytics; and (iv) our Enhanced Digital Suite.
Risk Management, Account Origination and Funding Services. We provide risk management solutions, account origination and funding services for our more than 130 private label and co-brand credit card programs, as well as throughour Bread partnerships, with over 500 online merchants. In 2020, we launched our Comenity-branded general purpose cash-back credit card, an important new product for us to serve and retain our cardholders and capture incremental spend. As of December 31, 2020, we had $16.0 billion in principal receivables from 40.2 million active accounts, with an average balance for the year ended December 31, 2020 of approximately $832 for accounts with outstanding balances.Pay
TM partnerships.
We process millions of credit card applications each year using automated proprietary scoring technology and verification procedures to make
responsible risk-based
underwriting and origination decisions when approving new
credit card accountholdersaccounts and establishing
their credit limits. Credit quality is monitored
at least monthly during the life ofon a
regular and consistent basis, utilizing internal algorithms and external credit
card account. We augment these procedures with creditbureau risk
scores provided by credit bureaus.scores. This information helps us segment
prospectsnew and existing customers into narrower risk ranges, allowing us to better evaluate individual credit risk.
As macroeconomic conditions have weakened over the last year, we have continued to enhance our credit risk management, including through stronger underwriting resulting from enhanced technology, monitoring, and data, prudent and proactive line management, well-established risk appetite metrics, and we are proactively using our recession readiness playbook. As of December 31, 2022 we had $20.1 billion in principal loans from approximately 43 million active accounts, with an average balance for the year ended December 31, 2022 of approximately $870 for accounts with outstanding balances.
Loan Processing and Servicing. We use securitizationmanage and depositservice the loans we originate for our private label and co-brand credit card programs, as principal funding vehicles forwell as our Bread CashbackTM and Bread PayTM products. In 2022, we completed the transition of our credit card and loan receivables. Securitizations involve the packaging and selling of both current and future receivable balances of credit card and loan receivables to a trust, which is a variable interest entity, or VIE. These VIEs are consolidated in our financial statements.
Processing Services. We perform processing services to Fiserv, a leading global provider of outsourced payments and provide service and maintenance for private label, co-brand, general purpose and business credit card programs and digital payments,financial services technology solutions; with the transition we expect to improve our speed to market, including Bread. We use automated technology for bill preparation, printing and mailing, and also offer consumers the ability to view, printquickly and pay their bills online. By doing so, we improve the funds availability for bothseamlessly add new products and capabilities that benefit our clientspartners and for those credit cardcardholders. This transition enables efficient integration of digital technology, while supporting our data and loan receivables that we own or securitize. We also provide collection activities on delinquent accounts to support our programs. analytics capabilities and improving operational efficiencies.
Our customer care operations are influenced by our retail heritage and we view every customer touch point as an opportunity to generate or reinforce a sale.provide an exceptional experience. Our customer care centers are equipped to handle a variety of inquiry types,operations offer omnichannel servicing, including phone, mail, fax, email, text and web. We provide focused training programs in all areas to achieve the highest possible customer service standards and monitor our performance by conducting surveys with our clientspartners and theirour customers. In 2020,2022, for the fifteenthseventeenth time since 2003, we were certified as a Center of Excellence for the quality of our operations, the most prestigious ranking attainable, by BenchmarkPortal. Founded by Purdue University in 1995, BenchmarkPortal is a global leader of best practices for customer care centers. In 2020, Card Services entered intocenters. We blend domestic and off-shore locations as an agreementimportant part of our servicing strategy, to transition its credit card processing servicesmaintain service availability beyond normal work hours in the United States and to Fiserv, a leading global provider of paymentsoptimize our cost structure.
Marketing and financial services technology solutions. With the transition of Card Services’ core processing to Fiserv, we expect to improve our brand partner conversions and speed to market, including the ability to quickly and seamlessly add new products and capabilities that benefit our partners and cardholders. The platform enables efficient integration and use of mobile wallets and virtual cards, while supporting our data and analytics capabilities and improving operational efficiencies, with the integration and transition beginning in 2021.Data & Analytics
Marketing Services. Through our integrated marketing services, we design and implement strategies that assist our clientspartners in acquiring, retaining and managing valuable repeat customers.expanding customer engagement to drive a more loyal, frequent shopper that increases customer lifetime value. Our programs capture transaction data that we analyze to better understand consumer behavior and use to increase the effectiveness of our clients’partners’ marketing activities. Through our data and analytics capabilities, including machine learning and artificial intelligence, we focus on data insights that drive actionable strategies and enhance revenue growth and customer retention. We use multi-channel marketing communication tools, including in-store, web, permission-based email, permission-based mobile messaging and direct mail to reach our clients’ customers.
engage customers in the channel of their choice.
Enhanced Digital OfferingsSuite. In 2020, we launchedThrough our Enhanced Digital Suite, a group of marketing and credit application features, towe help our brand partners capitalize on the accelerated adoption of e-commerce,online trends by bringing through more qualified applicants, a higher average purchase value,credit sales conversion rate and a higher credit sales conversion rate.average purchase value. Enhanced Digital Suite includes a unified software development kit (SDK) that provides access to our broad suite of products; it also promotes credit payment options, relevant to the customer, earlier in the shopping experienceexperience. The credit application is simple and easy, offers prefilled fields and pre-screens customers in real-time, allowing for immediate credit approval without leaving the brand partner’s site.
For additional information relating to our business, business strategy and products and services, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Year in Review – Business Environment”.
During 2020,Technology/Systems
We leverage information and technology to help achieve our business objectives and to develop and deliver products and services that satisfy our brand partners and customers’ needs. A key part of our strategic focus is the development and use of efficient, flexible computer and operational systems, such as cloud technology, to support complex marketing and account management strategies, the servicing of our customers, and the development of new and diversified products. We believe the continued development and integration of these systems is an important part of our efforts to reduce costs, improve quality and security, and provide faster, more flexible technology services. Consequently, we also acquired technology-driven digital payments company Loncontinuously review capabilities and develop or acquire systems, processes and competencies to meet our unique business requirements.
As part of our continuous efforts to review and improve our technologies, we may either develop such capabilities internally or rely on third-party outsourcers who have the ability to deliver technology that is of higher quality, lower cost, or both. We continue to rely on third-party outsourcers to help us deliver systems and operational infrastructure; these relationships include (but are not limited to): Microsoft and Amazon Web Services, Inc., operatingfor our cloud infrastructure and Fiserv for credit card processing services.
We are committed to safeguarding our customers’ and our own information and technology, implementing backup and recovery systems, and generally require the same of our third-party service providers. We take measures that mitigate against known attacks and use internal and external resources to scan for vulnerabilities in platforms, systems, and applications necessary for delivering our products and services. For a discussion of the risks associated with our use of technology systems, see “Part I—Item 1A. Risk Factors” under the
trademark Bread, expanding Card Services’ offerings to include pay-over-time products. Our acquisition of Bread opens new opportunities to leverage our digital offerings to build both strategic technology platform partnershipsheading “Cybersecurity, Technology and
more traditional brand partnership sales and loan receivables. Bread's flexible platform and robust suite of application programming interfaces (APIs) allow merchants and partners to integrate point-of-sale financing and other digital payment products, including installment and buy now, pay later solutions.Bread’s offerings and on-boarding capabilities enhance the growth prospects of our Card Services’ verticals and increase the addressable market of small- and medium-sized merchants. At the same time, Bread offers our existing partners a broader digital product suite and additional white-label product solutions.Vendor Risks”.
Disaster and Contingency Planning
We operate, either internally or through third-party service providers, multiple data processing centers to
processstore and
storeotherwise process our customer transaction data. Given the significant amount of data that we or our third-party service providers manage, much of which is real-time data to support our
clients’partners’ commerce initiatives, we have established redundant capabilities for our data centers. We have a number of safeguards in place that are designed to protect us from data-related risks and in the event of a disaster, to restore our data centers’ systems.
For additional information, see “Item 1A. Risk Factors – Risk Management – Operational Risk”.
Protection of Intellectual Property and Other Proprietary Rights
We rely on a combination of
patents, copyright, trade secret and trademark laws, confidentiality procedures, contractual provisions and other similar measures to protect our proprietary information and technology used in
each segment of our business. We generally enter into confidentiality or license agreements with our employees, consultants and corporate partners, and generally control access to and distribution of our technology, documentation and other proprietary information. Despite the efforts to protect our proprietary rights, unauthorized parties may attempt to copy or otherwise obtain the use of our products or technology that we consider proprietary and third parties may attempt to develop similar technology independently. We have a number of domestic and foreign patents and pending patent applications. We pursue registration and protection of our trademarks primarily in the United States,
and Canada, although we also have either registered trademarks or applications pending for certain marks in other countries. No individual patent or license is material to us or our
segments other than that we are the exclusive Canadian licensee of the AIR MILES family of trademarks pursuant to a perpetual license agreement with Diversified Royalty Corp., for which we pay a royalty fee. We believe that the AIR MILES family of trademarks and our other trademarks are important for our branding, corporate identification and marketing of our services in each business segment.business.
The markets for our products and services are highly
competitive.competitive, continuously changing, highly innovative, and subject to regulatory scrutiny and oversight. We compete with
marketing services companies,a wide range of businesses, including major financial institutions
fintechs and
payment networks, as well as with the in-house staffsfinancial technology firms, or fintechs. Some of our current and potential
clients.
LoyaltyOne. Ascompetitors may be larger than we are, have larger customer bases, greater brand recognition, longer operating histories, a provider of marketing services, our LoyaltyOne segment generally competes with advertisingdominant or more secure position, broader geographic scope, volume, scale, resources, and other promotional and loyalty programs, both traditional and online, for a portion of a client’s total marketing budget. In addition,market share than we compete against internally developeddo, or offer products and services created by our existingthat we do not offer. Other competitors are smaller or younger companies that may be more agile in responding quickly to regulatory and potential clients. We expect competition to intensify as moretechnological changes. Many of the areas in which we compete evolve rapidly with innovative and disruptive technologies, emerging competitors, enter our market. Competitors may target our sponsors, clientsbusiness alliances, shifting consumer habits and collectors as well as draw rewards from our rewards suppliers. Our ability to generate significant revenue from clientsuser needs, price sensitivity on the part of merchants and loyalty partners will depend on our ability to differentiate ourselves through theconsumers, and frequent introductions of new products and servicesservices. The consumer credit and payments industry is highly competitive and we provideface an increasingly dynamic industry as emerging technologies enter the marketplace.
In competing to acquire and
retain the
attractivenessbusiness of
brand partners and customers, our
loyalty and rewards programs to consumers. The continued attractiveness of our loyalty and rewards programs will also depend on our ability to remain affiliatedprimary competition is with
sponsors and suppliers that are desirable to consumers and to offer rewards that are both attainable and attractive to consumers.
Card Services. Our Card Services segment competes primarily withother financial institutions whose marketing focus has been on developing credit card programs with attractive value propositions and consequentially large revolving balances. These competitors further drive their businesses by cross-selling their other financial products to their cardholders. We also compete for partners on the basis of a number of factors, including program financial and other terms, underwriting standards and capabilities, marketing expertise, service levels, the breadth of our product and service offerings, digital, technological and integration capabilities, brand recognition and reputation. Our focus has beenis on targeting specialty retailers and other brand partners that understand the competitive advantage of developing loyal customers. Typically, these partners seek customers that make more frequent but smaller
transactions at their retail locations. As a result, we are able to analyzefocus on analyzing transaction data we obtain through partner loyalty programs and managing our lending programs, including customer specific transaction data and overall consumer spending patterns, to develop and implement successful marketing strategies for our clients. partners.
As
an issuera form of
private label retailpayment, our customers have numerous consumer credit
cards, co-brand and
Comenity general purpose, Visa®, MasterCard®other payment options available to them, and
Discover® credit cards, we alsoour products compete with
cash, checks, electronic bank transfers, debit cards, general purpose credit cards
issued by(including Visa, MasterCard, American Express and Discover Card), various forms of consumer installment loans and split-pay products, other
financial institutions, as well as cash, checksprivate label card brands, prepaid cards, digital wallets and
debit cards.mobile payment solutions, and other tools that simplify and personalize shopping experiences for consumers and merchants. Among other factors, our products compete with these other forms of payment on the basis of interest rates and fees, credit limits, reward programs and other product features. As the payments industry continues to evolve, in the future we expect increasing competition with emerging payment technologies from financial technology firms and payment networks. Moreover, some of our competitors, including new and emerging competitors in the digital and mobile payments space, are not subject to the same regulatory requirements or legislative scrutiny to which we are subject, which could place us at a competitive disadvantage.
In our retail deposits business, we have acquisition and servicing capabilities similar to other direct-banking competitors. We compete for deposits with traditional banks, and in seeking to grow our Bread SavingsTM platform, we compete with other banks that have direct-banking models similar to ours. Competition among direct banks is intense because online banking provides customers the ability to quickly and easily deposit and withdraw funds, and open and close accounts in favor of products and services offered by competitors.
Supervision and Regulation
We operate primarily through our insured depository institution subsidiaries, Comenity Bank (CB) and Comenity Capital Bank (CCB), which, as noted above, together are referred to herein as the “Banks”. Federal and state laws and regulations extensively regulate the operations of our bank subsidiaries, Comenity Bankthe Banks. This regulatory framework is intended to protect individual consumers, depositors, the Deposit Insurance Fund (DIF) of the Federal Deposit Insurance Corporation (FDIC) and Comenity Capital Bank. Manythe U.S. banking system as a whole, rather than for the protection of thesestockholders and creditors. Set forth below is a summary of the significant laws and regulations applicable to each of CB and CCB. The description that follows is qualified in its entirety by reference to the full text of the statutes, regulations, and policies that are intendeddescribed. Such statutes, regulations, and policies are subject to maintainongoing review by Congress, state legislatures, and federal and state regulatory agencies. A change in any of the safetystatutes, regulations, or regulatory policies applicable to CB and/or CCB, or in the leadership or direction of our regulators, could have a material effect on the operations or financial condition of Bread Financial Holdings, Inc. Further, the scope of regulation and soundnessthe intensity of Comenity Bank and Comenity Capital Bank, and they impose significant restraints to which other non-regulated companies are not subject. Because Comenity Banksupervision will likely remain high in the current regulatory environment.
CB is deemeda Delaware-chartered bank operating as a credit card bank under a Competitive Equality Banking Act (CEBA) exemption from the definition of “bank” under the Bank Holding Company Act (BHC Act). To maintain its status as a CEBA credit card bank, CB must continue to comply with the following requirements:
•engage only in credit card operations;
•do not accept demand deposits or deposits that the depositor may withdraw by check or similar means for payment to third parties;
•do not accept any savings or time deposits of less than $100,000, except for deposits pledged as collateral for its extensions of credit;
•maintain only one office that accepts deposits; and
•do not engage in the business of making commercial loans (except credit card loans to certain small businesses).
CB is subject to prudential regulation, supervision and Comenity Capitalexamination by the Delaware Office of the State Bank Commissioner, as its chartering authority, and the FDIC as its primary federal regulator. CB’s deposits are insured by the DIF of the FDIC up to the applicable deposit insurance limits in accordance with applicable law and FDIC regulations. CB is not a member of the Federal Reserve System.
CCB is a Utah-chartered industrial bank. As an industrial bank, CCB is exempt from the definition of “bank” under the BHC Act. CCB is subject to prudential regulation, supervision and examination by the Utah Department of Financial Institutions, as its chartering authority, and the FDIC as its primary federal regulator. CCB’s deposits are insured by the DIF of the FDIC up to the applicable deposit insurance limits in accordance with applicable law and FDIC regulations. CCB is not a member of the Federal Reserve System.
The Consumer Financial Protection Bureau (CFPB) promulgates regulations for the federal consumer financial protection laws and supervises and examines large banks (those with more than $10 billion of total assets) with respect to those laws. Banks in a multi-bank organization, such as CB and CCB, are subject to supervision and examination by the CFPB with respect to the federal consumer financial protection laws if at least one bank reports total assets over $10 billion for four consecutive quarters. While the Banks were subject to supervision and examination by the CFPB with respect to the federal consumer financial protection laws between 2016 and 2021, this reverted to the FDIC in 2022. However, CCB’s total assets then exceeded $10 billion for four consecutive quarters as of September 30, 2022, and both Banks are now again subject to supervision and examination by the CFPB with respect to federal consumer protection laws.
The CFPB has broad rulemaking authority that has impacted, and is expected to continue impacting, the Banks’ operations, including with respect to credit card late fees and other amounts that we may charge. For example, the CFPB’s rulemaking authority may allow it to change regulations adopted in the past by other regulators including regulations issued under the Truth in Lending Act by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Most recently, in February 2023, the CFPB published a proposed rule with request for public comment that would: (i) decrease the safe harbor dollar amount for credit card late fees to $8 and eliminate a higher safe harbor dollar amount for subsequent late payments; (ii) eliminate the annual inflation adjustments that currently exist for the late fee safe harbor dollar amounts; and (iii) require that late fees not exceed 25% of the consumer’s required minimum payment. The “safe harbor” dollar amounts referenced in the CFPB’s proposed rulemaking refer to the amounts that credit card issuers may charge as late fees under the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act). Under the CARD Act, as implemented, these safe harbor amounts have been subject to annual adjustment based on changes in the consumer price index, and the safe harbor amounts are currently set at $30 for an initial late fee and $41 for subsequent late fees in one of the next six billing cycles. Accordingly, the proposed $8 safe harbor amount on late fees (and proposed elimination of the annual inflation-based adjustment thereto) would represent a significant decrease from the current safe harbor amounts. In addition, the proposed rulemaking seeks comment on whether late fees should be prohibited if the applicable payment is made within 15 days of the due date and whether, as a condition to utilizing the safe harbor, credit card issuers should be required to offer automatic payment options and/or provide certain notifications of upcoming payment due dates. We are closely monitoring the content and timing of the CFPB’s proposed rulemaking and its impact on our business.
More generally, the CFPB’s ability to rescind, modify or interpret past regulatory guidance could reduce fee income, increase our compliance costs and litigation exposure. Further, the CFPB has broad authority to enforce the prohibitions of “unfair, deceptive or abusive” acts or practices regardless of which agency supervises the Banks. The CFPB has taken enforcement action against other credit card issuers and financial services companies. Evolution of these standards could result in changes to pricing, practices, procedures and other activities relating to our credit card accounts in ways that could reduce the associated return from those accounts and potentially impact business growth plans. While the CFPB has taken public positions on certain matters, it is unclear what additional changes may be promulgated by the CFPB and what effect, if any, such changes would have on our credit accounts.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) authorizes certain state officials to enforce regulations issued by the CFPB and to enforce the Dodd- Frank Act’s general prohibition against unfair, deceptive or abusive practices. To the extent that states enact requirements that differ from federal standards or courts adopt interpretations of federal consumer laws that differ from those adopted by the FDIC, the Federal Reserve Board and the Office of the Comptroller of the Currently (collectively, the Federal Banking Agencies), we may be required to alter products or services offered in some jurisdictions or cease offering products, which will increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide.
Regulation of Bread Financial Holdings, Inc.
Because neither CB nor CCB is considered a “bank” within the meaning of the Bank Holding CompanyBHC Act, we areBread Financial Holdings, Inc. is not a bank holding company (BHC) subject to regulation thereunder. If any of our entities became subject to regulation as a bank holding company. If we wereBHC, among other things, Bread Financial Holdings, Inc. and its non-bank subsidiaries would be subject to regulation, as a bank holding company, wesupervision and examination by the Federal Reserve Board and our operations would be constrained in our operationslimited to a limited number ofcertain activities that are closely related to banking or financial services in nature.
However, under Section 616 of the Dodd-Frank Act, any company that directly or indirectly controls an insured depository institution is required to serve as a source of financial strength to its subsidiary institution and may not conduct its operations in an unsafe or unsound manner. This doctrine is commonly known as the “Source of Strength” doctrine. As such a company, this means that Bread Financial Holdings, Inc. must stand ready to use available resources to provide adequate capital funds to the Banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources to support the Banks. This support may be required at times when Bread Financial Holdings, Inc. might otherwise have determined not to provide it or when doing so is not otherwise in the interests of Bread Financial Holdings, Inc. or its stockholders or creditors. Bread Financial Holdings, Inc.’s failure to meet its obligation to serve as a source of strength to the Banks would generally be considered to be an unsafe and unsound banking practice.
Regulation of the Banks
Federal and state banking laws and regulations govern, among other things, the scope of a bank’s business, the investments a bank Comenity Bank ismay make, the reserves against deposits a bank must maintain, the loans a bank makes and collateral it takes, the activities of a bank with respect to mergers and acquisitions, management practices, and numerous other aspects of its operations.
Regulatory Capital Requirements
The Banks are subject to
overlapping supervisioncertain risk-based capital and leverage ratio requirements under the U.S. Basel III capital rules adopted by the
FDIC andFDIC. These rules implement the
State of Delaware; as an industrial bank, Comenity Capital Bank is subject to overlapping supervision by the FDIC and the State of Utah. Both Comenity Bank and Comenity Capital Bank are under the supervision of the Consumer Financial Protection Bureau, or CFPB—a federal consumer protection regulator with authority to make further changes to the federal consumer protection laws and regulations—who may, from time to time, conduct reviews of their practices.
Comenity Bank and Comenity Capital Bank must maintain minimum amounts ofBasel III international regulatory capital including maintenance of certain capital ratios, paid-in capital minimums, and an appropriate allowance for loan loss,standards in the United States, as well as meeting specific guidelinescertain provisions of the Dodd-Frank Act. These quantitative calculations are minimums, and the FDIC may determine that involve measuresa bank, based on its size, complexity, or risk profile, must maintain a higher level of capital in order to operate in a safe and sound manner.
Under the U.S. Basel III capital rules, the Banks’ assets, exposures, and certain off-balance sheet items are subject to risk weights used to determine an institution’s risk-weighted assets, which then are used to determine the minimum capital that CB and CCB should keep as a reserve to reduce the risk of insolvency. These risk-weighted assets are used to calculate the following minimum capital ratios for the Banks:
•Common Equity Tier 1 (CET1) Risk-Based Capital Ratio - the ratio of theirCET1 capital to risk-weighted assets. CET1 capital primarily includes common stockholders’ equity subject to certain regulatory adjustments and deductions, including goodwill, intangible assets, liabilities, regulatorycertain deferred tax assets, and Accumulated Other Comprehensive Income (AOCI).
•Tier 1 Risk-Based Capital Ratio - the ratio of Tier 1 capital to risk-weighted assets. Tier 1 capital is primarily comprised of CET1 capital, perpetual preferred stock, and certain qualifying capital instruments.
•Total Risk-Based Capital Ratio - the ratio of total capital, including CET1 capital, Tier 1 capital, and interest rate, among other factors. If Comenity Bank or Comenity Capital BankTier 2 capital, to risk-weighted assets. Tier 2 capital primarily includes qualifying subordinated debt and qualifying Allowance for credit losses.
The Banks are also subject to the requirements of a fourth ratio, the Leverage ratio, which itself does not incorporate risk-weighted assets:
•Tier 1 Leverage Ratio - the ratio of Tier 1 capital to quarterly average assets (net of goodwill, certain other intangible assets, and certain other deductions).
Failure to be well-capitalized or to meet theseminimum capital requirements their respectivecould result in certain mandatory and possible additional discretionary actions by regulators have broad discretion to institute a number of corrective actions that, if undertaken, could have a direct material adverse effect on our operations or financial statements. condition. Failure to be well-capitalized or to meet minimum capital requirements could also result in restrictions on the Banks’ ability to pay dividends or otherwise distribute capital or to receive regulatory approval of applications.
The U.S. Basel III capital rules require a minimum CET1 Risk-Based Capital Ratio of 4.5%, a minimum Tier 1 Risk-Based Capital Ratio of 6.0%, and a minimum Total Risk-Based Capital Ratio of 8.0%. In addition to meeting the minimum capital requirements, under the U.S. Basel III capital rules, the Banks must also maintain the required 2.5% Capital Conservation Buffer to avoid becoming subject to restrictions on capital distributions and certain discretionary bonus payments to executive management. The Capital Conservation Buffer is calculated as a ratio of CET1 capital to risk-weighted assets, and it essentially increases the required minimum risk-based capital ratios. As a result, the Banks must maintain a CET1 Risk-Based Capital Ratio of at least 7%, a Tier 1 Risk-Based Capital Ratio of at least 8.5% and a Total Risk-Based Capital Ratio of at least 10.5% to avoid being subject to restrictions on capital distributions and discretionary
bonus payments to its executive management. The Tier 1 Leverage Ratio is not impacted by the Capital Conservation Buffer, and a bank may be considered well-capitalized while remaining out of compliance with the Capital Conservation Buffer. The required minimum Tier 1 Leverage Ratio for all banks and BHCs is 4%.
To be considered well-capitalized, the Banks must maintain the following capital ratios which are in excess of the minimums described above:
•CET1 Risk-Based Capital Ratio of 6.5% or greater;
•Tier 1 Risk-Based Capital Ratio of 8.0% or greater;
•Total Risk-Based Capital Ratio of 10.0% or greater; and
•Tier 1 Leverage Ratio of 5.0% or greater.
As of December 31, 2022, the Banks’ regulatory capital ratios were above the well-capitalized standards and met the Capital Conservation Buffer. The Banks seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer.
Dividends
Bread Financial Holdings, Inc. is a legal entity separate and distinct from the Banks. Declaration and payment of cash dividends depends upon cash dividend payments to Bread Financial Holdings, Inc. by the Banks, which are our primary source of revenue and cash flow. As state-chartered banks, under Delaware or Utah law, as applicable, the Banks are subject to regulatory restrictions on the payment and amounts of dividends. Further, the ability of the Banks to pay dividends to Bread Financial Holdings, Inc. is also subject to their profitability, financial condition, capital expenditures and other cash flow requirements, and any dividend, Comenity Banksuch dividends are also subject to the approval of the Board of Directors of the applicable Bank.
The payment of dividends by the Banks and
Comenity Capital Bank mustBread Financial Holdings, Inc. may also be affected by other factors, such as the requirement to maintain adequate capital above regulatory
guidelines.requirements. The Federal Banking Agencies have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice; a bank may not pay any dividend if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the Federal Banking Agencies have issued policy statements that provide that banks should generally only pay dividends out of current operating earnings. The Federal Banking Agencies have the authority to prohibit banks from paying a dividend if it is deemed that such payment would be an unsafe or unsound practice.
Prompt Corrective Action and Safety and Soundness
Under applicable “prompt corrective action” (PCA) statutes and regulations, insured depository institutions, such as the Banks, are limitedplaced into one of five capital categories, ranging from “well capitalized” to “critically undercapitalized”. The PCA statute and regulations provide for progressively more stringent supervisory measures as an institution’s capital category declines. An institution that is not well capitalized is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. An undercapitalized institution must submit an acceptable restoration plan to the appropriate Federal Banking Agency. One requisite element of such a plan is that the institution’s parent holding company guarantee the institution’s compliance with the plan, subject to certain limitations. As of December 31, 2022, the Banks qualified as “well capitalized” under applicable regulatory capital standards.
Insured depository institutions may also be subject to potential enforcement actions of varying levels of severity by the Federal Banking Agencies for unsafe or unsound practices in conducting their businesses, or for violation of any law, rule, regulation, condition imposed in writing by the agency, or term of a written agreement with the agency. In more serious cases, enforcement actions may include the issuance of directives to increase capital; the issuance of formal and informal agreements; the imposition of civil monetary penalties; the issuance of a cease and desist order that can be judicially enforced; the issuance of removal and prohibition orders against officers, directors, and other institution-affiliated parties; the termination of the institution’s deposit insurance; the appointment of a conservator or receiver for the institution; and the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the FDIC, as receiver, would be harmed if such equitable relief was not granted.
Reserve Requirements
Federal Reserve Board regulations require insured depository institutions to maintain cash reserves against their transaction accounts, primarily interest-bearing and regular checking accounts. The required cash reserves can be in the form of vault
cash and, if vault cash does not fully satisfy the required cash reserves, in the form of a balance maintained with Federal Reserve Banks. The regulations authorize different ranges of reserve requirement ratios depending on the amount of transaction account balances held. A zero percent reserve requirement ratio is applied to transaction balances below the reserve requirement exemption amount. In addition, transaction account balances maintained over the reserve requirement exemption amount and up to a certain amount, known as the low reserve tranche, may be subject to a reserve requirement ratio of not more than 3 percent (and which may be zero), and transaction account balances over the low reserve tranche may be subject to a reserve requirement ratio of not more than 14 percent (and which may be zero). The reserve requirement exemption and the low reserve tranche are both subject to adjustment on an annual basis, as applicable, by the Federal Reserve Board. Effective March 26, 2020, in response to the COVID-19 pandemic, the reserve requirement ratios on all net transaction accounts were reduced to zero percent, thereby eliminating reserve requirements for all depository institutions. The annual indexation of the reserve requirement exemption amount and the low reserve tranche for 2021, 2022 and 2023 was required by statute, but did not affect depository institutions’ reserve requirements, which remain at zero.
Federal Deposit Insurance
The deposits of the Banks are insured up to applicable limits by the DIF of the FDIC. The current standard maximum deposit insurance amount is $250,000 per depositor, per insured depository institution, per ownership category, in accordance with applicable FDIC regulations.
The FDIC uses a risk-based assessment system that imposes insurance premiums based on a risk matrix that takes into account an institution’s capital level and supervisory rating. The base for insurance assessments is the average consolidated total assets less tangible equity capital of an institution. Assessment rates are calculated using formulas that take into account the risk of the institution being assessed.
Under the Federal Deposit Insurance Act (the FDIA), the FDIC may terminate an institution’s deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe and unsound condition or has violated any applicable law, regulation, order or condition imposed by the FDIC.
Depositor Preference
The FDIA provides that, in the event of the liquidation or other resolution of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC as subrogee of insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent company, with respect to any extensions of credit they have made to such insured depository institution.
Restrictions on Transactions with Affiliates and Insiders
Sections 23A and 23B of the Federal Reserve Act
inlimit the extent to which we can borrow or otherwise obtain credit from, or engage in other
“covered transactions”covered transactions with
Comenity Bank or Comenity Capital Bank,either of the Banks, which may have the effect of limiting the extent to which
Comenity Bank or Comenity Capitaleither Bank can finance or otherwise supply funds to us. “Covered transactions” include loans or extensions of credit, purchases of or investments in securities, purchases of assets, including assets subject to an agreement to repurchase, acceptance of securities as collateral for a loan or extension of credit, or the issuance of a guarantee, acceptance, or letter of credit. Although the applicable rules do not serve as an outright bar on engaging in
“coveredcovered transactions,
” they do require that we engage in “covered transactions” with
Comenity Bank or Comenity Capitaleither Bank only on terms and under circumstances that are substantially the same, or at least as favorable to
Comenity Bank or Comenity Capitalthe Bank, as those prevailing at the time for comparable transactions with nonaffiliated companies. Furthermore, with certain exceptions, each loan or extension of credit by
Comenity Bank or Comenity Capitaleither Bank to us or our
other affiliatesnon-bank subsidiaries must be secured by collateral with a market value ranging from 100% to 130% of the amount of the loan or extension of credit, depending on the type of collateral.
The Banks are also subject to Sections 22(g) and 22(h) of the Federal Reserve Act, and the implementing Regulation O as applied to the Banks. These provisions impose limitations on loans and extensions of credit by the Banks to their executive officers, directors and principal stockholders and their related interests, as well as those of the Banks’ affiliates. The limitations restrict the terms and aggregate amount of such transactions. Regulation O also imposes certain recordkeeping and reporting requirements.
Restrictions on transactions with affiliates and insiders under Federal Reserve Act Sections 23A, 23B, 22(g) and 22(h), as well as the requirements of Regulation O, are monitored for compliance by our internal audit department.
Volcker Rule
Section 619 of the Dodd-Frank Act, commonly known as the Volcker Rule, restricts the ability of banking entities, such as Bread Financial Holdings, Inc. and the Banks, from (i) engaging in proprietary trading and (ii) investing in or sponsoring covered funds, subject to certain limited exceptions. Under the Volcker Rule, the term covered funds is defined as any issuer that would be an investment company under the Investment Company Act but for the exemption in section 3(c)(1) or 3(c)(7) of that Act, which includes collateralized loan obligation securities (CLO) and collateralized debt obligation securities. There are also several exemptions from the definition of covered funds, including, among other things, loan securitization, joint ventures, certain types of foreign funds, entities issuing asset-backed commercial paper, and registered investment companies. We do not engage in these restricted activities, including in proprietary trading.
Incentive Compensation
The Dodd-Frank Act requires the Federal Banking Agencies and the Securities and Exchange Commission (SEC) to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, including the Banks, that encourage inappropriate risks by providing an executive officer, employee, director or principal stockholder with excessive compensation, fees, or benefits resulting from inappropriate risk taking, as these actions could lead to material financial loss to the entity. The Federal Banking Agencies and the SEC most recently proposed such regulations in 2016, but the regulations have not yet been finalized. If the regulations are adopted in the form initially proposed, the manner in which executive compensation is structured will be restricted.
The Dodd-Frank Act also requires publicly traded companies to give stockholders a non-binding vote on executive compensation at least every three years and on so-called “golden parachute” payments in connection with approvals of mergers and acquisitions. Bread Financial Holdings, Inc. has held its “say-on-pay” vote annually.
USA PATRIOT Act
Under Title III of the USA PATRIOT Act, all financial institutions are required to take certain measures to identify their customers, prevent money laundering, monitor customer transactions, and report unusualsuspicious activity to U.S. law enforcement agencies. Financial institutions also are required to respond to requests for information from Federal Banking Agencies and law enforcement agencies. Information sharing among financial institutions for the above purposes is encouraged by an exemption granted to complying financial institutions from the privacy provisions of the Gramm-Leach-Bliley Act (GLBA) and other privacy laws. Financial institutions that hold correspondent accounts for foreign banks or suspicious account activity as well as transactions involving amountsprovide private banking services to foreign individuals are required to take measures to avoid dealing with certain foreign individuals or entities, including foreign banks with profiles that raise money laundering concerns, and are prohibited from dealing with foreign “shell banks” and persons from jurisdictions of particular concern. The Federal Banking Agencies and the Secretary of the Treasury have adopted regulations to implement several of these provisions. All financial institutions also are required to establish internal anti-money laundering programs. The effectiveness of a financial institution in excess of prescribed limitscombating money laundering activities is a factor to be considered in any application submitted by a financial institution to engage in a merger transaction under the Bank Merger Act. The Banks have in place a Bank Secrecy Act Internal Revenue Service,and USA PATRIOT Act compliance program and engage in very few transactions of any kind with foreign financial institutions or IRS,foreign persons.
Office of Foreign Assets Control Regulations
The United States government has imposed economic sanctions that affect transactions with designated foreign countries, nationals, and others. These are typically known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control. The Office of Foreign Assets Control-administered sanctions targeting countries take many different forms. Generally, OFAC sanctions contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on U.S. persons engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off, or transferred in any manner without a
license from the Office of Foreign Assets Control. Failure to comply with these sanctions could have serious legal and reputational consequences.
Identity Theft
The SEC and the Commodity Futures Trading Commission (CFTC) jointly issued final rules and other regulations. Congress,guidelines implementing the IRSprovisions of the Fair Credit Reporting Act (FCRA), as amended by the Dodd-Frank Act, which require certain regulated entities to establish programs to address risks of identity theft. The rules require financial institutions and creditors to develop and implement a written identity theft prevention program that is designed to detect, prevent, and mitigate identity theft in connection with certain existing accounts or the bank regulators have focused their attention on banks’ monitoring and reporting of suspicious activities. Additionally, Congress and the bank regulators have proposed, adopted or passed a numberopening of new accounts. The rules include guidelines to assist entities in the formulation and maintenance of programs that would satisfy these requirements. In addition, the rules establish special requirements for any credit and debit card issuers that are subject to the jurisdiction of the SEC or the CFTC to assess the validity of notifications of changes of address under certain circumstances. The Banks implemented an ID Theft Prevention Program, approved by their Boards of Directors, in compliance with these requirements.
Community Reinvestment Act
The Community Reinvestment Act of 1977 (CRA) is intended to encourage banks to help meet the credit needs of their service areas, including low- and moderate-income neighborhoods, consistent with safe and sound business practices. The relevant Federal Banking Agency, the FDIC in the Banks’ case, examines each bank and assigns it a public CRA rating. A bank’s record of fair lending compliance is part of the resulting CRA examination report. CRA performance evaluations are based on a four-tiered rating system: Outstanding, Satisfactory, Needs to Improve and Substantial Noncompliance. CRA performance evaluations are considered in evaluating applications for such things as mergers, acquisitions and applications to open branches. The Banks each received a CRA rating of “Outstanding” at their most recent CRA examinations.
Consumer Protection Regulation and Supervision
We are subject to the federal consumer financial protection laws and regulations that may increase reporting obligations of banks. implemented by the CFPB.We are also subject to numerouscertain state consumer protection laws and regulations thatstate attorneys general and other state officials are intendedempowered to protect consumers, including state laws, the Truth in Lending Act, as amended by the Credit Card Accountability, Responsibility and Disclosure Act of 2009, or the CARD Act, Equal Credit Opportunity Act and Fair Credit Reporting Act. Theseenforce certain federal consumer protection laws and regulations mandateregulations. State authorities have increased their focus on and enforcement of consumer protection rules. These federal and state consumer protection laws apply to a broad range of our activities and to various disclosure requirementsaspects of our business, and regulateinclude laws relating to interest rates, fair lending, disclosures of credit terms and estimated transaction costs to consumer borrowers, debt collection practices, the manner in which we may interact with consumers. Theseuse and other laws also limit finance charges or other fees or charges earned in our lending activities. We conduct our operations in a manner that we believe excludes us from
regulation as ainformation to consumer reporting agency underagencies, and the Fair Credit Reporting Act. If we were deemed aprohibition of unfair, deceptive, or abusive acts or practices in connection with the offer, sale, or provision of consumer reporting agency, however, we would befinancial products and services. Each Bank has in place an effective compliance management system to comply with these laws and regulations.
Privacy, Information Security and Data Protection
We are subject to
a numbervarious privacy, information security and data protection laws, including requirements concerning security breach notification. For example, in the United States, we are subject to the GLBA and implementing regulations and guidance. Among other things, the GLBA: (i) imposes certain limitations on the ability of
additional complex regulatory requirements and restrictions.
Data protection and consumer privacy laws and regulations continuefinancial institutions to evolve, increasing restrictions on our abilityshare consumers’ nonpublic personal information with nonaffiliated third parties; (ii) requires that financial institutions provide certain disclosures to collect and disseminate customer information. In addition, the enactment of new or amended legislation or industry regulations pertaining to consumer, public or private sector privacy issues may impact our marketing services, including placing restrictions upon theconsumers about their information collection, sharing and use of information that is currently legally available. There are also a number of specific lawssecurity practices and regulations governingaffords consumers the collection and use of certain types of consumer data primarily in connection with financial services transactions that are relevant to our various businesses and services. In the United States, federal laws such as the Gramm-Leach-Bliley Act, or GLBA, and the Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003, as well as similar and applicable state laws, make it more difficult to collect, share and use information that has previously been legally available and may increase our costs of collecting some data. These laws give bank customers, including cardholders and depositors, the abilityright to “opt out” of havingthe institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions); and (iii) requires financial institutions to develop, implement and maintain a written comprehensive information generated by their applicablesecurity program containing safeguards that are appropriate to the financial services transactions shared with other affiliatedinstitution’s size and unaffiliated parties orcomplexity, the public. Our ability to gather, sharenature and utilize this data will be adversely affected if a significant percentagescope of the consumers whose purchasing behavior we track electfinancial institution’s activities, the sensitivity of consumer information processed by the financial institution as well as plans for responding to “opt out,” thereby precluding us and our affiliates from using their data.
data security breaches.
In the United States, the federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with prospective and existing customers. Similar measures were implemented in Canada beginning September 1, 2008. Regulations in both the United States and Canada give consumers the ability to “opt out,” through a national do-not-call registry
Federal and state do-not-call registries, of having telephone solicitations placed to them by companies that do not have an existing business relationship with the consumer. In addition, regulationslaws also require companies to maintain an internal do-not-call list for those who do not want the companies to solicit them through telemarketing. These regulations could limit our ability to provide services and information to our clients. Failure to comply with these regulations could have a negative impact on our reputation and subject us to significant penalties. Further,respond appropriately to data security breaches. A final rule issued by the Federal Communications CommissionReserve, OCC, and FDIC, which became effective in May 2022, requires banking organizations to notify their primary federal regulator of significant computer security incidents within 36 hours of determining that such an incident has approved interpretationsoccurred.
In 2018, the
Telephone Consumer Protection Act defining robo-calls broadly, which may affect our ability to contact customers and may increase our litigation exposure.
In the United States, the federal Controlling the AssaultState of Non-Solicited Pornography and Marketing Act of 2003 restricts our ability to send commercial electronic mail messages, the primary purpose of which is advertising or promoting a commercial product or service, to our customers and prospective customers. The act requires that a commercial electronic mail message provide the customers with an opportunity to opt-out from receiving future commercial electronic mail messages from the sender.
In the United States, California enacted the California Consumer Privacy Act or CCPA, which went into effect on January 1, 2020. The CCPA provides individual privacy rights for California consumers and places increased privacy and security obligations on entities handling certain personal data of consumers and households.(CCPA). The CCPA requires disclosurescovered businesses to comply with requirements that give consumers about companies’ data collection, usethe right to know what information is being collected from them and sharing practices; provideswhether such information is sold or disclosed to third parties. The statute also allows consumers ways to opt-out of certain sales or transfers of personal information;access, delete, and provides consumers with additional causes of action. The CCPA prohibits companies from discriminating against consumers who have opted out ofprevent the sale of their personal information subject to a narrow exception. The CCPA provides for certain monetary penalties and for enforcement of the statute by the California Attorney General or by consumers whose rights under the law are not observed. It also provides for damages, as well as injunctive or declaratory relief, if therethat has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures.collected by covered businesses in certain circumstances. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where theto personal information is collected, processed, sold, or disclosed pursuant to the GLBA ifor the GLBA is in conflict withCalifornia Financial Information Privacy Act. We are a covered business under the CCPA.
CCPA, which became effective on January 1, 2020. In November 2020, the State of California voters passed Proposition 24,amended the CCPA by passing a ballot initiative known as the California Privacy Rights ActAct. This initiative added a number of requirements to the CCPA with which we are finalizing our compliance.
We continue to monitor, and have a program in place to comply with, applicable privacy, information security and data protection requirements imposed by federal, state, and foreign laws. However, if we experience a significant cybersecurity incident or CPRA. CPRA, which will amend existing CCPA requirements effective January 2023 with a one-year lookback period, includes limitations on the sharing of personalour regulators deemed our information for cross-context behavioral advertising and the use of “sensitive” personal information; the creation of a new correction right; and the establishment of a new agency to enforce California privacy law.
Further, there continuessecurity controls to be an increased interestinadequate, we could be subject to supervisory criticism or penalties, and/or suffer reputational harm. For further discussion of privacy, data protection and cybersecurity, and related risks for our business, see “Part I—Item 1A. Risk Factors” under the headings “Regulation in the areas of privacy, laws at the federaldata protection, data governance, account access and state levels where legislators are reviewinginformation and cyber security could increase our costs and affect or proposing the need for greater regulationlimit our business opportunities and how we collect and/or use personal information”, “Failure to safeguard our data and consumer privacy could affect our reputation among our partners and their customers, and may expose us to legal claims”, and “Business interruptions, including loss of the collection, processing, sharing and usedata center capacity, interruption due to cyber-attacks, loss of consumer data for marketing purposesnetwork connectivity or otherwise, including two federal privacy regulations introduced in late 2020.
In Canada, the Personal Information Protection and Electronic Documents Act, or PIPEDA, requires an organizationinability to obtain a consumer’s consent to collect, use or disclose personal information. Under this act, consumer personal information may be used only for the purposes for which it was collected. We allow our customers to voluntarily “opt out” from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail. Heightened consumer awarenessutilize proprietary software of and concern about, privacy may result in customers “opting out” at higher rates than they have historically. This would mean that a reduced number of customers would receive bonus and promotional offers and therefore those customers may collect fewer AIR MILES reward miles. The Government of Canada has created a Digital Charter providing new rights and expectations, including expected changes to PIPEDA.
Canada’s Anti-Spam Legislation, or CASL, may restrictthird party vendors, could affect our ability to send “commercial electronic messages,” defined to include text, sound, voicetimely meet the needs of our partners and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and prospective customers. CASL requires, in part, that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender.
On May 25, 2018, The General Data Protection Regulation, or GDPR, a European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights came into force. The GDPR replaced the European Union Directive 95/46/EC and applies to and binds the EU Member States and the European Economic Area countries, which includes a total of 30 countries. The GDPR details greater compliance obligations on organizations, including the implementation of a number of processes and policies around data collection and use. These, and other terms of the GDPR, could limitharm our ability to provide services and information to our customers. In addition, the GDPR includes significant penalties for non-compliance.
business”.
In general, GDPR, and other European Union and Member State specific privacy and data governance laws, could also lead to adaptation of our technologies or practices to satisfy local privacy requirements and standards that may be more stringent than in the U.S. Similarly, it is possible that in the future, U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our advertising services, such as the FTC’s proposed “Do-Not-Track” standard or other legislation or regulations similar to EU Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” which directs EU Member States to ensure that accessing personal information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. In July 2020, the Court of Justice of the European Union, or CJEU, ruled the EU-US Privacy Shield Framework invalid, but noted the use of standard contractual clauses for data transfers is still valid. On January 31, 2020, the United Kingdom left the European Union and entered into a Brexit transition period. Effective January 1, 2021, the EU and UK have adopted a new agreement providing that all transfers of personal data between stakeholders subject to GDPR and UK entities will not be considered as transfers to a third country provided that the UK’s current data protection scheme stays in place for the designated maximum period of six months through June 30, 2021. It is not yet known what the data protection landscape will look like at the end of the transition period.
In addition to the jurisdictions noted above, there is also rapid development of new privacy laws and regulations elsewhere around the globe, including amendments of existing data protection laws, to the scope of such laws and penalties for noncompliance. Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation and subject us to significant penalties.
While all 50 U.S. states and the District of Columbia have enacted data breach notification laws, there is no such U.S. federal law generally applicable to our businesses. Data breach notification legislation and regulations relating to mandatory reporting came into force in Canada on November 1, 2018. Data breach notification laws have been proposed widely and exist in other specific countries and jurisdictions in which we conduct business. Legislative and regulatory measures, such as mandatory breach notification provisions, impose, among other elements, strict requirements on reporting time frames and providing notice to individuals.
We also have systems and processes to comply with the USA PATRIOT ACT of 2001, which is designed to deter and punish terrorist acts in the United States and around the world, to enhance law enforcement investigatory tools, and for other purposes.
Ontario’s Protecting Rewards Points Act (Consumer Protection Amendment), 2016, and additional related regulations, prohibit suppliers from entering into or amending consumer agreements to provide for the expiry of rewards points due to the passage of time alone, while permitting the expiry of rewards points if the underlying consumer agreement is terminated and that agreement provides that reward points expire upon termination. Similar legislation pertaining to the expiry of rewards points due to the passage of time alone is also in effect in Quebec.
Human Capital
As of December 31,
2020,2022, we employed approximately
8,0007,500 associates worldwide, with the majority concentrated in the United
StatesStates. Attracting, developing and
Canada. Ourretaining top talent is critical to our business. As a core component of our broader Environmental, Social and Corporate Governance (ESG) and sustainability efforts, our key human capital management
objectives areobjective is to
attract,promote an inclusive, engaged culture that empowers associates through opportunities to grow, develop and
retain top talent. To support these objectives,lead. Our associates have been, and will remain, the backbone of our business, and we take a holistic approach to our associates’
experience as an employee,experiences, recognizing that an engaged workforce drives our long-term growth and sustainability. Our
boardBoard of
directorsDirectors and
designated committeesCompensation & Human Capital Committee provide the important oversight of our human capital management strategy, including diversity, equity and inclusion
or DE&I,(DE&I) efforts, which are led by our
global senior vice presidentHead of
human resources. The boardDiversity and Inclusion and our Chief Diversity Officer. Our Compensation & Human Capital Committee and our full Board of
directors and relevant committeesDirectors receive regular updates
from senior management and third-party consultants on human capital trends and developments,
from senior management and
third-party consultants onother key human capital matters that drive our ongoing success and performance.
With COVID-19 impacting the majority of 2020,
Associate Health and Wellbeing
Associate health and wellbeing remains a top human capital priority, and we
adaptedare committed to
support and empowerproviding our associates
throughoutwith competitive total compensation, benefits and wellness resources. Our associates continue to express enthusiasm for the
significant transformation of theirflexible remote work
experience. In March 2020,policies that we adopted during the COVID-19 pandemic, and approximately 95% of our total workforce
continues to successfully
transitioned to workingwork from home,
either on a fully-remote or hybrid basis. We intend to continue these flexible work arrangements, seeking to take advantage of the engagement and productivity benefits associated with
minimal business disruption. Numerous initiatives designed to connect, recognizeincreased flexibility, as well as opportunities for connectedness and
engage our workforce in a virtual work environment were implemented, including providing the necessary new technology, support and lines of communications for our associates to be successful in their roles in this unique environment. Recognizing the importance of health andsocial interaction. Other associate wellbeing
on an associate’s ability to do their best work, we provided timely reminders and access to numerous existing and new resources
and support, includinginclude mental health awareness and counselling
support, financial education and wellness
courses;courses, a variety of
online fitness and meditation classes, a
fitnesswellbeing cost reimbursement program and other benefits to promote mental and physical health
and overallsupportive of holistic wellbeing.
Additionally, during
2020,2022 we
took steps to improvefurther improved the competitiveness of our associate
benefit offerings, including: (i) enhancements to our medical benefits,
includingsuch as the removal of a
comprehensive review30-day waiting period for new hires to enroll and
update of associate and executive compensation and bonus structures, the addition of
travel benefits for reproductive and other fertility services; (ii) improvements to our paid time off and flex time off policies; (iii) the addition of two new paid holidays
(bringing the total to 11); and
improved parental leave plans.(iv) expanded mental health services, including increased access to free therapy sessions, dedicated care navigators and mental health medication management services.
Despite various challenges associated with the pandemic, we
Associate Experience and Engagement
Delivering an exceptional experience for our customers relies on our ability to cultivate an engaging and rewarding experience for our associates. We maintained high levels of associate engagement and retention as well as successin 2022 and were successful with talent acquisition, hiring several top industry leaders in key positions that further supported our transformation initiatives and business priorities. For 2020,As discussed further below, in 2022 we recorded acontinued to focus on developing our internal talent to increase lateral movement across the organization, with 34% of the 592 new associate acquisition ratejobs posted in 2022 being ultimately filled by internal candidates. We continue to listen to and act on feedback from our associates, including through our annual Associate Survey and other more frequent surveys and communications. Each year after the results of approximately 10%, calculated as total external hires divided by average associate headcount, with voluntary turnover at approximately 13%, calculated as total voluntary terminations divided by average associate headcount, across both professionalthe annual Associate Survey have been tabulated, our senior management presents those results to our Compensation & Human Capital Committee and care center operations. During 2020,our Board of Directors, including discussion regarding trends observed and actions to be taken in response to the recruitment team focused on reducing geographic barriers inresults.Input from our Board helps inform our human capital strategies and objectives going forward; our global themes for 2023 include promoting career opportunities for our associates, further optimizing our future work environment and ensuring associates have the talent acquisition process, yielding a greater talent poolappropriate tools, resources and technology to fill roles that require specific skills in the competitive market.work effectively, whether in-office or remote.
Workforce Readiness, Growth and Advancement
As part of our broader multi-year business transformation,
we formed aour “future workforce” steering committee, comprised of senior human resources, technology and operations management,
continued to develop and execute human capital-intensive strategies to ensure our workforce
readiness. New initiatives intended to attract talent, as well as maintain engaged, equipped and empowered associates, include “talent mobility” strategies designed to identify, nurture and grow promising talent in existing channels and identifying cross-functional or non-traditional opportunities for careerreadiness, growth and advancement.
During the year we completed our second-annual, six-month apprenticeship program, which created a feeder pipeline from roles in our Care Centers to other non-Care Center opportunities across the organization, with 22 U.S. associates (or 96% of program participants) transitioning to new roles at the conclusion of their apprenticeships. Robust training and development remains central to our human capital
strategy. Duestrategy, and in 2022 we expanded our training programs to
the pandemic, all learninginclude a more advanced mentorship program that matches associates with an internal mentor who will help further their unique career journey and development
courses were moved to a virtual environment, which increased the rate of associate participation.needs. In addition to career-oriented training and development, we require
certain annual associate training to ensure ongoing adherence to responsible business practices and ethical
conduct.conduct, and all associates must certify annually that they have read and will adhere to our Code of Ethics. We believe these efforts resonated with our associates, as we saw a 3% improvement in associates’ perceptions of the professional growth and development initiatives taken by us, reflected in our 2022 annual Associate Survey.
Diversity, Equity and Inclusion
We are committed to creating an inclusive culture that attracts and values diversity - of thought, experience, background, skills and ideas. Over the past few years, we have renewed and accelerated our actions and activities in support of DE&I. In 2020,2021, we undertook significant steps to improve our commitment toappointed a Chief Diversity Officer (CDO), hired a Vice President of DE&I starting withand appointed an associate-led DE&I Council. Together, these actions resulted in establishing a formal process initiated byDiversity, Equity and Inclusion Office, solidifying our president and Chief Executive Officer. Specific actions taken have included executive leadership involvement and accountability; and formationfocus on these efforts. Additionally our eight Business Resource Groups, made up of over 700 associate members, act as a DE&I steering committee with clear objectives, including identifyingcatalyst for ensuring a fully inclusive and engaging a third-party, minority-owned DE&I consulting firm to guide our development of a comprehensive, integratedwork environment.
Our DE&I strategy is embedded into our overall governance process and measurement framework. Significantbusiness model, demonstrating our elevated commitment and accountability to this imperative. The strategy describes what we seek to accomplish and how we will measure progress made over the back half of 2020 includes associate surveys,across four focus groupsareas: (i) Workforce - creating pathways for hiring and numerous associate “listening sessions”promotions that map to provide important input on
our approachmarket availability; (ii) Workplace - promoting an inclusive, engaged culture that empowers associates through opportunities to improving our long-termgrow, develop and lead; (iii) Marketplace - infusing DE&I commitments. Our entire executive leadership team underwent unconscious bias awareness training,into our growth strategy, product delivery, customer experience and new tools were introduced insupply chain; and (iv) Community – building strategic partnerships that empower our recruitingcommunities and hiring practices to further improve our processes in this area. advance business priorities.
As of December 31, 2020,2022, approximately 62%67% of our total work force and 44% of our senior leaders were female, while approximately 43%47% of our total work force and 16%15% of our senior leaders were minorities. ESG Strategy
We are committed to sustainability, including integrating ESG principles into our business strategy in ways that optimize opportunities to make positive impacts while advancing long-term financial and reputational goals. As part of our business transformation, in 2021, our Board approved an enhanced and modernized ESG strategy intended to drive additional progress on initiatives that promote sustainability, diversity, equity and inclusion, and increased transparency in our disclosures. We continue to advance the integration of ESG into our overall governance and risk management practices.
Additional information regarding our ESG strategy and initiatives can be found in our annual ESG reports, which are published on our corporate website at: https://investor.breadfinancial.com/sustainability/. No information from this website is incorporated by reference herein. Please also see “Human Capital” above.
Our corporate headquarters are located at
30753095 Loyalty Circle, Columbus, Ohio 43219, where our telephone number is 614-729-4000.
We file or furnish annual, quarterly and current reports, proxy statements and other information with the SEC. Our SEC filings are available to the public at the SEC’s website at www.sec.gov. You may also obtain copies of our annual, quarterly and current reports, proxy statements and certain other information filed or furnished with the SEC, as well as amendments thereto, free of charge from our website, www.AllianceData.comwww.BreadFinancial.com. No information from this website is incorporated by reference herein. These documents are posted to our website as soon as reasonably practicable after we have filed or furnished these documents with the SEC. We post our audit committee, compensation committeeAudit Committee, Risk Committee, Compensation & Human Capital Committee and nominatingNominating and corporate governance committeeCorporate Governance Committee charters, our corporate governance guidelines, and our code of ethics, code of ethics for senior financial officers, and code of ethics for boardBoard members on our website. These documents are available free of charge to any stockholder upon request.
This section should be carefully reviewed, in addition to the other information appearing in this Form 10-K, including the sections entitled “Risk Management” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes, for important information regarding risks and uncertainties that affect us. The following summaryrisks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our principal risks provides an overviewbusiness.If any of the inherent uncertainty investing in us presents. following risks actually occur, our business, financial condition, results of operations, and future prospects could be materially and adversely affected.
Summary
This
risk factor summary is qualified in its entirety by reference to the complete description of our risk factors set forth immediately below.
With regard to strategic business risks and our competitive environment, we caution that the impacts of COVID-19 on the macroeconomic environment will continue to heighten all of our risks for an indeterminate duration.Risks related to our macroeconomic, global, strategic, business and competitive environment include client concentration, newinclude:
•Market conditions, inflation, rising interest rates, unemployment levels and the increased probability of a recessionor prolonged economic slowdown, and the related impact on consumer spending behavior, payments, debt levels, savings rates and other behavior, could have a material adverse effect on our business.
•Global political, market, public health and social events or conditions, including the ongoing war in Ukraine and the continuing effects of the COVID-19 pandemic, may harm our business.
•Our unsecured loans make us reliant on the future credit performance of our customers, and if customers are unable to repay our loans, our level of future delinquency and write-off rates will increase.
•A significant percentage of our revenue is generated through relationships with a limited number of partners, and a decrease in business from, or the loss profiles, charge-off experience, fraudulent activity, competitionof, any of these partners, could have an adverse effect on our business.
•Our business is heavily concentrated in U.S. consumer credit, and therefore our results are more susceptible to fluctuations in the U.S. consumer credit market than a more diversified company.
•The amount of our Allowance for newcredit losses could adversely affect our business and changesmay be insufficient to cover actual losses on our loans.
•We may be unable to successfully identify, complete or successfully integrate or disaggregate business acquisitions, divestitures and other strategic initiatives, including failure to realize the intended benefits of the spinoff of our former LoyaltyOne segment.
•Competition in consumer behavior. | ● | Our ten largest clients represented nearly half of our consolidated revenue in 2020. |
| ● | Underwriting performance of acquired or new lending programs may not be consistent with existing experience. |
| ● | Unsecured consumer and business lending leads to losses from bankruptcies and inability to collect from borrowers. |
| ● | Access to credit provides the opportunity for fraudulent activity. |
| ● | Opportunities to grow our business may be limited by aggressive pricing or capital-intensive regulatory requirements. |
| ● | Loss of clients or business by our brand partners or changes in collector redemption amounts or patterns may reduce both growth and profitability. |
our industry is intense.
•Our results of operations and growth depend on our ability to retain existing partners and attract new partners, and our results are impacted, to a significant extent, on the active and effective promotion and support of our products by our partners and on the financial performance of our partners.
•We rely extensively on models in managing many aspects of our business, and if they are not accurate or are misinterpreted, such factors could have a material adverse effect on our business and results of operations.
•Underwriting performance of acquired or new lending programs may not be consistent with existing experience.
Risks related to our liquidity, market and credit risk include difficulties accessing capitalinclude:
•Adverse financial market conditions or equity markets dueour inability to macroeconomic or other factors, competition for funding sources, regulatory restrictions, high levels of indebtedness, limitations imposed by existing indebtedness and market interest and exchange rates. | ● | Inability to effectively access the securitization or other capital markets limitseffectively manage our funding opportunities for receivables and other business opportunities. |
| ● | Competition for deposits and regulatory restrictions on deposit products can impact availability and cost of funds. |
| ● | High levels of indebtedness restrict our ability to compete and grow our business. |
| ● | Fluctuations in interest rates impact our profitability while volatility in foreign exchange rates impacts our financial results. |
| ● | Our market valuation has been volatile, and returns to stockholders have been impacted by a lower dividend rate, cessation of share repurchase programs and issuance of shares for acquisitions. |
Risks related to our regulatory environment include existing and potential limitations on various aspects of our business model as a non-Bank holding company.
| ● | Regulations promulgated by the FDIC, CFPB and other federal and state authorities, limit the products and services our banks offer and the manner in which they do. |
| ● | Consumer protection, data protection and data privacy laws restrict functionality that enhances loyalty and marketing program capabilities. |
| ● | Financial institution capital requirements may limit cash available for business operations, growth and returns to stockholders. |
| ● | Failure to remain exempt from the Bank Holding Company Act would further limit business opportunities, requiring us to cease all non-banking activities. Inability to effectively access the securitization or other capital markets limits our funding opportunities for credit card and loan receivables and other business opportunities. |
Risks related to our operations and other considerations include reliance on third party providers, potential for data breach or other service failures, exposure to both complex and underdeveloped global legal and regulatory systems and strategic restrictions.
| ● | Reliance on third-party vendors and current efforts to transition to multiple strategic outsourcing partners may result in service failures outside our control. |
| ● | Failures in data protection, cyber and information security and intellectual property rights could critically impair our products, services and ability to conduct business. |
| ● | Complex international laws as well as operating in jurisdictions lacking developed regulatory and legal systems requires extensive effort to manage compliance. |
| ● | Our charter documents and Delaware law both restrict certain strategic activity that may be beneficial to our stockholders. |
Strategic Business Risk and Competitive Environment
Impacts related to the COVID-19 pandemic are expected to continue to pose risks to our business for the foreseeable future, heighten many of our known risks and may have a material adverse impact on our results of operations, financial condition and liquidity.
In the first quarter of 2020, the WHO declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have instituted certain preventative measures, including border closures, travel bans, prohibitions on group events and gatherings, shutdowns or other operational restrictions on certain businesses, curfews, shelter-in-place orders, quarantines and recommendations to practice social distancing. Certain jurisdictions have begun reopening only to return to more stringent restrictions where increases in COVID-19 cases occur. These restrictions have continued to disrupt economic activity worldwide, resulting in volatility in the global capital markets, instability in the credit and financial markets, reduced commercial and consumer confidence and spending, widespread furloughs and layoffs, closure or restricted operating conditions for retail stores, labor shortages, regulatory recommendations to provide relief for impacted consumer borrowers and depositors, disruption in supply chains (including availability of raw materials, ability to manufacture goods and delivery of finished products to suppliers and retailers), and near complete cessation of many hospitality and travel industry operations. Even as vaccines are introduced and administered, governmental restrictions are lifted and economies gradually reopen, the ongoing economic impacts, including government economic stimulus, and health concerns associated with the pandemic and the availability and efficacy of those vaccines, may continue to affect consumer behavior, spending levels and retail preferences.
Specific impacts on our operations and financial results include, but are not limited to, the following:
| ● | Short and long-term difficulties of our retail partners in consumer-based businesses due to restricted foot traffic, any inability to convert in-store sales to e-commerce, trouble maintaining supply chain integrity for both availability of desired products and delivery to end consumers, and reduced consumer confidence and spending may result in increased bankruptcy risk for our retail partners, decreased retail credit sales and decreases in our credit card and loan receivables balances. |
| ● | Decreased retail credit sales reduces the usage of our private label and co-brand credit cards and installment lending platform, which reduces our revenue from finance charges and other servicing fees. |
| ● | Rising unemployment, the potential for rising consumer bankruptcies and the expectation that we will offer, for a temporary period of time, forbearance programs for impacted cardholders both reduces or delays our revenue from finance charges and other servicing fees and increases our exposure to rising delinquencies, net charge-offs in credit card and loan receivables and increases to our allowance for loan loss. |
| ● | Deferral of short-term loyalty programs or the inability to source or deliver rewards for these programs across borders may reduce or defer revenue or increase our costs of operations. |
| ● | Reduced demand for hospitality, airline and other travel-related rewards within our AIR MILES Reward Program due to the various COVID-19 restrictions negatively impacts redemption revenue as collectors both changed existing reward travel and are unable to schedule future reward travel with any certainty as to the duration of restrictions. |
| ● | Volatility in the financial markets may increase our cost of capital and/or limit its availability, and prolonged periods of increased financial stress enhance the potential for a rating downgrade on our asset-backed debt, the occurrence of early amortization events as well as non-compliance with financial covenants or other events of default across our significant asset-backed and other indebtedness. |
| ● | Increased operational risk, including impacts to our data, customer care center, digital and installment lending platform and other network integrity and availability in addition to heightened cybercriminal activity and other payment fraud risk in this environment of e-commerce and online banking reliance, may affect our ability to timely and effectively meet the needs of our clients, cardholders, collectors or other consumers across our lines of business. |
| ● | Increased risks to the health and safety of our associates and that of our third-party vendors may impact our ability to maintain service levels for our partners. |
Despite the emergence of vaccines, surges in COVID-19 cases, including variants of the strain, such as those recently experienced in Europe and the United States, may cause people to self-quarantine or governments to shut down nonessential businesses again. 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. To the extent the COVID-19 pandemic continues to adversely affect our business, results of operations, financial condition and liquidity many of the other risks described in the “Risk Factors” section of this Annual Report may also be heightened.
Our 10 largest clients represented 48% and 44%, respectively, of our consolidated revenue for the years ended December 31, 2020 and 2019, and the loss of any of these clients could cause a significant drop in our revenue.
We depend on a limited number of large clients for a significant portion of our consolidated revenue. Our 10 largest clients represented approximately 48% and 44%, respectively, of our consolidated revenue during the years ended December 31, 2020 and 2019. L Brands and its retail affiliates represented approximately 10% and 11% of our consolidated revenue during these same respective periods. Our contract with L Brands and its retail affiliates expires in 2026, subject to contract terms. A decrease in revenue from any of our significant clients for any reason, including a decrease in pricing or activity, or a decision either to utilize another service provider or to no longer outsource some or all of the services we provide,risk could have a material adverse effect on our consolidated revenue.
business, liquidity and ability to meet our debt service requirements and other obligations.
•Our inability to effectively access the securitization or other capital markets could limit our funding opportunities for loans and other business opportunities.
•Competition for deposits and regulatory restrictions on deposit products can impact availability and cost of funds.
•Our level of indebtedness may restrict our ability to compete and grow our business.
•Our market valuation has been, and may continue to be, volatile, and returns to stockholders may be limited.
•We expectare a holding company and depend on dividends and other payments from our Banks, which are subject to various legal and regulatory restrictions.
Risks related to our legal, regulatory and compliance environment include:
•We face various risks related to the extensive government regulation and supervision of our business, including by the FDIC, CFPB and other federal and state authorities. These risks include pending and future laws and
regulations that may adversely impact our business, such as the CFPB’s recent proposed rulemaking with respect to late fees, as well as supervisory and other actions that may be taken against us by our regulators.
•Pending and future litigation could subject us to significant fines, penalties, judgments and/or requirements.
•Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
•Financial institution capital requirements may limit cash available for business operations, growth inand returns to stockholders.
Risks related to cybersecurity, technology and third-party vendors include:
•We rely on third-party vendors, and we could be adversely impacted if such vendors fail to fulfill their obligations.
•Impacts arising from or relating to the transition of our Card Services segment to result from new and acquired credit card processing services to strategic outsourcing providers that we completed in 2022 have, and may continue, to adversely affect our business.
•Failures in data protection, cybersecurity and information security, as well as business interruptions to our data centers and other installmentsystems, could critically impair our products, services and ability to conduct business.
•Our industry is subject to rapid and significant technological changes, and we may be unable to successfully develop and commercialize new or enhanced products and services.
Risks related to the spinoff of our former LoyaltyOne segment include potential tax liability, disputes or other adverse impacts.
Macroeconomic, Strategic, Business and Competitive Risks
Weakness and instability in the macroeconomic environment could have a material adverse effect on our business, results of operations and financial condition.
Macroeconomic conditions historically have affected our business, results of operations and financial condition and will continue to affect them in the future. We offer an array of payment, lending programs whose credit card and loan receivables performancesaving solutions to consumers, and a prolonged period of economic weakness, including a recession or economic slowdown, economic and market volatility, and other adverse economic conditions, including inflation, increased interest rates and high levels of unemployment, could result in increased portfolio losseshave a material adverse effect on our business, results of operations and financial condition, as these macroeconomic conditions may reduce consumer confidence and negatively impact customers’ payment and spending behavior. Some of the specific risks we face as a result of these conditions include the following:
•Adverse impacts on our profitability.customers’ ability and willingness to pay amounts owed to us, increasing delinquencies, defaults, bankruptcies, charge-offs and Allowances for credit losses, and decreasing recoveries; •Decreased consumer spending, changes in payment patterns, lower demand for credit and shifts in consumer payment behavior towards avoiding late fees, finance charges and other fees;
•Decreased reliability of the process and models we use to estimate our Allowance for credit losses, particularly if unexpected variations in key inputs and assumptions cause actual losses to diverge from the projections of our models and our estimates become increasingly subject to management’s judgment; and
•Limitations on our ability to replace maturing liabilities and to access the capital markets to meet liquidity needs.
As an illustration of the potential impact of an economic downturn on our business, our Delinquency and Net loss rates peaked in 2009 during the financial crisis at 6.2% and 10.0%, respectively. As of December 31, 2022 our Delinquency rate was 5.5% and our full-year Net loss rate was 5.4% for the year ended December 31, 2022.
We expect an important sourcecontinue to closely monitor economic conditions and indicators, including inflation, interest rates, housing values, consumer wages, consumer saving rates and debt levels, including student loan debt, unemployment, concerns about the level of growthU.S. government debt, as well as economic and political conditions in the U.S. and global markets, but the outcome of any of these conditions and indicators remains difficult to predict. During 2022, our Provision for credit losses increased relative to 2021 due to, in part, the economic scenario weightings in our Card Services segment to come from the acquisitioncredit reserve modeling reflecting an increasing probability of existing credit card programs and initiating credit card and other installment lending programs with retailers and other merchants who either do not currently offer a private label or co-brand credit card or are initiating or transitioning from another installment lending platform. Although we believe our pricing and models for determining credit risk are designed to evaluate the credit risk of existing programsrecession, high inflation, and the credit risk we are willingincreased cost of overall consumer debt. A recession or prolonged period of economic weakness would likely, among other things, adversely affect consumer discretionary spending levels and the ability and willingness of customers to assume for acquired and start-up programs, we cannot be assured that the loss experience on acquired and start-up programs will be consistent with our more established programs. The failurepay amounts owed to successfully underwrite these new or acquired credit card or installment lending programs may result in defaults greater than our expectationsus, and could have a material adverse impacteffect on usour business, key credit trends, results of operations and financial condition.
Global economic, political, market, health and social events or conditions, including the war in Ukraine and the ongoing effects of the COVID-19 pandemic, may harm our
profitability.business.
Our revenues are largely dependent on the number and volume of credit transactions by consumers, whose spending patterns may be affected by economic, political, market, health and social events or conditions. As described above, adverse macroeconomic conditions within the U.S. or internationally, including but not limited to recessions, inflation, rising interest rates, high unemployment, currency fluctuations, actual or anticipated large-scale defaults or failures, volatility in net charge-offs couldenergy prices, a slowdown of global trade, and reduced consumer and business spending, have a negativedirect impact on our net incomeloan volumes and profitability.revenues. Furthermore, in efforts to deal with adverse macroeconomic conditions, governments may introduce new or additional initiatives or requests to reduce or eliminate late fees or other charges, which could result in additional financial pressures on our business.
In addition, outbreaks of illnesses, pandemics like COVID-19, or other local or global health issues, political uncertainties, international hostilities, armed conflict, war (such as the ongoing war in Ukraine), civil unrest, climate-related events, including the increasing frequency of extreme weather events, impacts to the power grid, and natural disasters have, to varying degrees, negatively impacted our operations, brand partners, service providers, activities, and consumer spending.
The ongoing effects of the COVID-19 pandemic remain difficult to predict due to numerous uncertainties, including the transmissibility, severity, duration and resurgence of the virus; the emergence of new variants of the virus; the uptake and effectiveness of health and safety measures or actions that are voluntarily adopted by the public or required by governments or public health authorities; the availability, effectiveness and consumer acceptance of vaccines and treatments; the indirect impact of the pandemic on global economic activity; the impact of the reopening of borders and the resumption of international travel; increased logistics costs; a continued competitive labor market; and the impact of the global COVID-19 pandemic on our employees, our operations, and the business of our brand partners and suppliers.
The Russia-Ukraine conflict has had, and could continue to have, significant negative effects on regional and global economic and financial markets, including increased volatility, reduced liquidity, supply chain concerns and overall uncertainty. Russia may take additional counter measures or retaliatory actions (including cyberattacks), which could exacerbate negative consequences on global financial markets and stability. The duration of ongoing hostilities and corresponding sanctions and related events cannot be predicted.
A decline in economic, political, market, health and social conditions could impact our brand partners as well, and their decisions could reduce the number of cards, accounts, and credit lines of their customers, which would ultimately impact our revenues. Our brand partners may implement cost-reduction initiatives that reduce or eliminate marketing budgets, and decrease spending on optional or enhanced value added services from us. Any events or conditions that impair the functioning of the financial markets, tighten the credit market, or lead to a downgrade of any present or future credit rating of ours could increase our future borrowing costs and impair our ability to access the capital and credit markets on favorable terms, which could affect our liquidity and capital resources, or significantly increase our cost of capital.
Finally, as governments, investors and other stakeholders face additional pressures to accelerate actions to address climate change and other environmental, social and governance topics, governments are implementing regulations and investors and other stakeholders, whether by stockholder proposals, public campaigns, proxy solicitations or otherwise, are imposing new expectations on, or focusing investments in ways that may cause significant shifts in, disclosure, commerce and consumption behaviors.Any of these developments may increase our operating costs and otherwise negatively impact our business. In addition, our inability to timely address these new and evolving requirements or pressures may result in regulatory enforcement actions or stockholder litigation, and otherwise damage our reputation. See “-Damage to our reputation could damage our business.”
The loans we make are unsecured, and we may not be able to ultimately collect from customers that default on their loans.
The primary risk associated with unsecured consumer lending is the risk of default or bankruptcy of the borrower, resulting in the borrower’s balance being charged-offwritten-off as uncollectible. We rely principally on the borrower’s creditworthiness for repayment of the loan and therefore have no other recourse for collection. We may not be able to successfully identify and evaluate the creditworthiness of borrowers to minimize delinquencies and losses. The models and approaches we use to manage our credit risk, including our automated proprietary scoring technology and verification procedures for new account holders, establishing or adjusting their credit limits and applying our risk-based pricing, may not accurately predict future write-offs for various reasons discussed elsewhere in these Risk Factors, including see “Our risk management
policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.” below. While we monitor credit quality on a regular and consistent basis, utilizing internal algorithms and external credit bureau risk scores and other data, these algorithms and data sources may be inaccurate or incomplete, including as a result of certain customers’ credit profiles not fully reflecting their credit risk due to the less-regulated reporting requirements for many fintechs. An increase in defaults or net charge-offsprincipal losses could result in a reduction in netNet income. General economic factors, such as the rate ofconditions, including a recession or prolonged economic slowdown, inflation, unemployment levels andrising interest rates, high unemployment or volatility in energy prices, may result in greater delinquencies that lead to greater credit losses. In addition to being affected by general economic conditions and the success of our collection and recovery efforts, the stability of our delinquencyDelinquency and net charge-offNet loss rates are affected by the credit risk ofinherent in our creditCredit card and loan receivablesother loans portfolio, and the average agevintage of the accounts in our various credit card account portfolios. Further, our pricing strategy may not offset the negative impact on profitability caused by increases in delinquencies and losses, thus any material increases in delinquencies and losses beyond our current estimates could have a material adverse impact on us. For 2020,2022, our net charge-offNet principal loss rate was 6.6%5.4%, compared to 6.1%with 4.6% and 6.1%6.6% for 20192021 and 2018,2020, respectively. Our Delinquency rates were 5.5% of Credit card and other loans as of December 31, 2022, compared with 3.9% and 4.4% as of principalDecember 31, 2021 and 2020, respectively.
A significant percentage of our Total net interest and non-interest income, or revenue, is generated through our
relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.
We depend on a limited number of large partner relationships for a significant portion of our revenue. As of and for the year ended December 31, 2022, our five largest credit card programs accounted for approximately 47% of our Total net interest and non-interest income and 41% of our End-of-period credit card and loan receivables atother loans. In particular, our programs with (alphabetically) Ulta Beauty and Victoria’s Secret & Co. and its retail affiliates each accounted for more than 10% of our Total net interest and non-interest income for the year ended December 31, 2020, compared to 5.8% at2022. A decrease in business from, or the loss of, any of our significant partners for any reason, could have a material adverse effect on our business. We previously announced the non-renewal of our contract with BJ’s Wholesale Club (BJ’s) and the sale of the BJ’s portfolio, which closed in late February 2023.For the year ended December 31, 2019.2022, BJ’s branded co-brand accounts generated approximately 10% of our Total net interest and non-interest income. As of December 31, 2022, BJ’s branded co-brand accounts were responsible for approximately 11% of our Total credit card and other loans.
Our business is heavily concentrated in U.S. consumer credit, and therefore our results are more susceptible to fluctuations in that market than a more diversified company.
Our business is heavily concentrated in U.S. consumer credit. As a result, we are more susceptible to fluctuations and risks particular to U.S. consumer credit than a more diversified company. For example, our business is particularly sensitive to macroeconomic conditions that affect the U.S. economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we offer (including promotional financing). Our business concentration could have an adverse effect on our results of operations.
We expect growth to result, in part, from new and acquired credit card and buy now, pay later (BNPL) programs whose credit card and other loans performance could result in increased portfolio losses and negatively impact our profitability.
We expect an important source of our growth to come from the acquisition of existing credit card programs and initiating credit card and BNPL programs with retailers and other merchants who either do not currently offer a private label or co-brand credit card or are initiating or transitioning from another BNPL platform. We believe that our pricing and models for determining credit risk are designed to effectively evaluate the credit risk of existing programs and ascertain the credit risk that we are willing to assume for acquired programs as well as those we initiate. We cannot be assured that the loss experience on acquired and initiated programs will be consistent with our more established programs, or that the cost to provide service to these new programs will not be higher than anticipated. The failure to successfully underwrite these acquired and initiated credit card or BNPL programs may result in defaults greater than our expectations and could have a material adverse impact on us and our profitability. See “Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.”. Moreover, under the CECL accounting rules, the acquisition of an existing credit card or BNPL portfolio typically has a negative impact on certain key financial metrics in the near-term, including net income and earnings per share, because we are required to include a reserve build in our Provision for credit losses for the estimated credit losses to be experienced over the life of the acquired portfolio. The amount of this reserve build (which is included in the reporting period in which the portfolio is obtained) is
often large relative to the amount of revenue generated through such date by the newly-acquired portfolio. See also “–The amount of our Allowance for credit losses could adversely affect our business and may prove to be insufficient to cover actual losses on our loans.” below.
Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.
Our risk management framework that seeks to identify and mitigate current or future risks and appropriately balance risk and return may not be comprehensive or fully effective. As regulations and competition continue to evolve, our risk management framework may not always keep sufficient pace with those changes. If our risk management framework does not effectively identify or mitigate our risks, we could suffer unexpected losses and could be materially adversely affected.
We rely extensively on models in managing many aspects of our business, including liquidity and capital planning (including stress testing), customer selection, credit and other risk management, pricing, reserving and collections management. The models may prove in practice to be less predictive than we expect for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including, models being calibrated on historical cycles and correlations which may not be predictive of the future, or failures to update assumptions appropriately or in a timely manner). Our assumptions may be inaccurate for many reasons including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions, including continued elevated inflation, low unemployment, increasing consumer debt levels and weakening in macroeconomic indicators, and their impact on partner and customer behaviors) and they often involve complex interactions between a number of dependent and independent variables, factors and other assumptions. The errors or inaccuracies in our models may be material, and could lead us to make poor or sub-optimal decisions in managing our business, and this could have a material adverse effect on our business, results of operations and financial condition.
Fraudulent activity associated with our products and services could negatively impact our operating results, brand and reputation and cause the use of our products and services to decrease and our fraud losses to increase.
We are subject to the risk of fraudulent activity associated with retailers, clients,partners, other merchant parties or third-party service providers handling consumer information. Our fraud-related operational losses were $140.8$73 million, $194.7$71 million and $144.9$141 million for the years ended December 31, 2020, 20192022, 2021 and 2018,2020, respectively. Our products are
susceptible to application fraud, because among other things, we provide immediate access to credit at the time of approval. In addition, digital sales on the internet and through mobile channels are becoming a larger part of our business and fraudulent activity is higher as a percentage of sales in those channels than in stores. Private label and general purpose co-branded credit cardsThe different financial products that we offer, including deposit products, are susceptible to different types of fraud, and, depending on our product mix and channel mix, we may continue to experience variations in, or levels of, fraud-related expense that are different from or higher than thatthose experienced by some of our competitors or the industry generally. The risk of fraud continues to increase for the financial services industry, and credit card and deposit fraud, identity theft and related crimes are likely to continue to be prevalent, with perpetrators increasingly sophisticated.sophisticated perpetrators. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. High profile fraudulent activity could also negatively impact our brand and reputation, which could negatively impact the use of our services, leading to a material adverse effect on our results of operations. In addition, significant increases in fraudulent activity could lead to regulatory intervention, including, but not limited to, additional consumer notification requirements, increasing our costs and negatively impacting our operating results, net income and profitability.
A new accounting standard required us to increase
The amount of our allowanceAllowance for loan losscredit losses could adversely affect our business and may have a material adverse effectprove to be insufficient to cover actual losses on our financial condition, results of operations and opportunity to pursue new business.loans.
The Financial Accounting Standards Board has adopted a newBoard’s CECL accounting standard that became effective for us on January 1, 2020. This standard, referred to as Current Expected Credit Loss, or CECL,2020 and requires us to determine periodic estimates of the lifetime expected credit losses on loans, and recognize thereserve for those expected credit losses through an allowance for credit losses against the loans. In addition, as allowancesmentioned above, for portfolios we may acquire when we enter into new partner program agreements, we are required to establish at the time of acquisition such an allowance. Any subsequent deterioration in the performance of a purchased portfolio after acquisition results in incremental credit loss reserves. Growth in our loan loss. The adoption of this standard resulted inportfolio generally would also lead to an increase in our allowanceAllowance for loan losscredit losses.
The process for establishing an Allowance for credit losses is critical to our results of the adoptionoperations and financial condition, and requires complex models and judgments, including forecasts of CECL, see “Recently Issued Accounting Standards” under Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements.economic conditions. The ongoing impact of CECL will be significantly influenced by the composition, characteristics and quality of our creditCredit card and loan portfolio,other loans, as well as the prevailing economic conditions and forecasts utilized. For additional information regarding the adoption of CECL and its impact, see Note 3, “Allowance for Credit Losses” to our Consolidated Financial Statements included as part of this Annual Report on Form 10-K.
The CECL model may create more volatility in the level of our
allowanceAllowance for
loan loss.credit losses. If we are required
(as a result of any review, update, regulatory guidance or otherwise) to materially increase our level of
allowanceAllowance for
loan loss,credit losses, such increase could adversely affect
or our business, financial condition, results of operations and opportunity to pursue new business.
If Moreover, we fail to identify suitable acquisitions, dispositions or new business opportunities, or to effectively integrate the businessesmay underestimate our expected credit losses, and we acquire or disaggregate the businesses we divest, it could negatively affectcannot assure that our business.
We believe that acquisitions and the identification and pursuit of new business opportunitiescredit loss reserves will be a key component of our growth strategy. However, wesufficient to cover actual losses.
We may not be successful in realizing the benefits associated with our acquisitions, dispositions and strategic investments, and our business and reputation could be materially adversely affected.
Historically, we have acquired a number of businesses, as well as made strategic investments in businesses, products, technologies, platforms or other ventures, and we expect to continue to evaluate potential acquisitions, investments and other transactions in the future. There is no assurance that we will be able to
locate and secure future acquisitionsuccessfully identify suitable candidates
for any such opportunities, value any such opportunities accurately, negotiate favorable terms for any such opportunities, or
to identify and implement new business opportunities on terms and conditions that are acceptable to us.successfully complete any such proposed transactions. If we are unable to identify attractive acquisition candidates or accretive new business opportunities, our growth could be limited.
Similarly, we may evaluate the potential disposition of, or elect to divest, assets or
businessesportfolios that no longer complement our long-term strategic
objectives.objectives, as we did in November 2021, when we completed the spinoff of our LoyaltyOne segment. When a determination is made to divest assets or
businesses,portfolios, we may encounter difficulty attaining buyers or effecting desired exit strategies in a timely manner or on acceptable terms and may be subject to market forces leading to a divestiture on less than optimal price or other terms.
In addition, there are numerous risks associated with acquisitions, dispositions and the implementation of new
businesses,business opportunities, including, but not limited to:
| ● | the difficulty and expense that we incur in connection with the acquisition, disposition or new business opportunity; |
| ● | the inability to satisfy pre-closing conditions preventing consummation of the acquisition, disposition or new business opportunity; |
| ● | the potential for adverse consequences when conforming the acquired company’s accounting policies to ours; |
| ● | the diversion of management’s attention from other business concerns; |
| ● | the potential loss of customers or key employees of the acquired company; |
| ● | the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations; |
•the inability to satisfy pre-closing conditions preventing consummation of the acquisition, disposition or new business opportunity;
•the potential for adverse consequences when conforming the acquired company’s accounting policies to ours;
| ● | the acceptance of continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations; |
| ● | the assumption of unknown liabilities of the acquired company; |
| ● | the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies; |
| ● | the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of additional debt; |
| ● | the requirement to provide transition services in connection with a disposition resulting in the diversion of resources and focus; and |
| ● | the difficulty retaining and motivating key personnel from acquisitions or in connection with dispositions. |
•
the potential loss of customers or key employees of the acquired company;
•the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations;
•continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;
•the assumption of unknown liabilities of the acquired company;
•the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies;
•the inability to integrate systems, personnel or technologies from our acquisitions and strategic investments;
•unforeseen legal, regulatory or other challenges that we may not be able to manage effectively;
•the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of additional debt;
•the requirement to provide transition services in connection with a disposition resulting in the diversion of resources and focus; and
•the difficulty retaining and motivating key personnel from acquisitions or in connection with dispositions.
For example, upon the disposition of Epsilon in July 2019, we agreed to indemnify Publicis Groupe S.A. for the matter included in Note
18,15, “Commitments and
Contingencies,” ofContingencies” to the
Notes to Consolidated Financial Statements, which
to date has resulted in a $150.0 million
loss contingencycharge associated with Epsilon’s deferred prosecution agreement with the United States Department of Justice requiring two $75.0 million payments in January 2021 and January 2022, respectively.
In connection with the spinoff of our former LoyaltyOne segment into a standalone company, LVI, we retained a 19% ownership stake in LVI.
During 2022, LVI’s stock price decreased significantly, and, as a result, we wrote down the value of our 19% shareholding in LVI from $50 million as of December 31, 2021 to $6 million as of December 31, 2022, and there can be no assurance that we will not experience further write-downs or other adverse impacts going forward. See “Risks Related to the LoyaltyOne Spinoff.” below.
Furthermore, if the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or to impair the value of some or all of the assets of the acquired or new business.
If actual redemptions by AIR MILES Reward Program collectors are greater than expected, or if the costs related to redemption of AIR MILES reward miles increase, our profitability could be adversely affected.
A portion of our revenue is based on our estimate of the number of AIR MILES reward miles that will go unused by the collector base. The percentage of AIR MILES reward miles not expected to be redeemed is known as “breakage.”
Breakage is based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure, the introduction of new program options and changes to rewards offered. Any significant change in or failure by management to reasonably estimate breakage, or if actual redemptions are greater than our estimates, our profitability could be adversely affected.
Our AIR MILES Reward Program also exposes us to risks arising from potentially increasing reward costs. Our profitability could be adversely affected if costs related to redemption of AIR MILES reward miles increase. A 10% increase in the cost of redemptions would have resulted in a decrease in pre-tax income of $21.6 million for the year ended December 31, 2020.
The loss of our most active AIR MILES Reward Program collectors could adversely affect our growth and profitability.
Our most active AIR MILES Reward Program collectors drive a disproportionately large percentage of our AIR MILES Reward Program revenue. The loss of a significant portion of these collectors, for any reason, could impact our ability to generate significant revenue from sponsors. The continued attractiveness of our loyalty and rewards programs will depend in large part on our ability to remain affiliated with sponsors that are desirable to collectors and to offer rewards that are both attainable and attractive.
Airline or travel industry disruptions, such as an airline insolvency, could negatively affect the AIR MILES Reward Program, our revenues and profitability.
Air travel is one of the appeals of the AIR MILES Reward Program to collectors. If one of our existing airline suppliers sharply reduces its fleet capacity and route network, we may not be able to satisfy our collectors’ demands for airline tickets. Tickets or other travel arrangements, if available, could be more expensive than a comparable airline ticket under our current supply agreements with existing suppliers, and the routes offered by other airlines or travel services may be inadequate, inconvenient or undesirable to the redeeming collectors. As a result, we may experience
higher air travel redemption costs, and collector satisfaction with the AIR MILES Reward Program might be adversely affected.
As a result of airline or travel industry disruptions, including, but not limited to, the current impacts of COVID-19, political instability, terrorist acts or war, some collectors could determine that air travel is too dangerous or burdensome. Consequently, collectors might forego redeeming AIR MILES reward miles for air travel and therefore might not participate in the AIR MILES Reward Program to the extent they previously did, which could adversely affect our revenue from the program.
The markets for the services that we offer may contract or fail to expand and competition in our industriesindustry is intense, each of which could negatively impact our growth and profitability.
The markets for our products and services are highly competitive, and we expect
the continued evolution of financial and loyalty products and services andthis competition to
provide the same to intensify in each of those markets.intensify. Our growth and continued profitability depend on continued acceptance or adoption of the products and services
that we offer.
SomeWe compete with a wide range of businesses, and some of our current competitors have longer operating histories, stronger brand names and greater financial, technical, marketing and other resources than we do.
Our clients may not continueMoreover, the consumer credit and payments industry is highly competitive and we face an increasingly dynamic industry as emerging technologies enter the marketplace. For a more detailed discussion regarding the manner in which we compete with respect to
use the financial products and services, or loyalty programs that we offer. Changes in technology may enable merchants and retail companies to directly process transactions in a cost-efficient manner without the useeach of our
services.product categories, see “Item 1. Business—Competition” of this Form 10-K above. Additionally, downturns in the economy or the performance of
retailers,our retail or other partners, including
as a result of macroeconomic conditions, geopolitical events or global health events such as the
impact of COVID-19
pandemic, may result in a decrease in the demand for our products and services. Our ability to generate significant revenue from
clientspartners and
partnersconsumers will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our programs to consumers.
WeIf we are not able to differentiate our products and services from those of our competitors, drive value for our partners and their customers, or effectively and efficiently align our resources with our goals and objectives, we may not be able to
continue to compete
successfully against our current and emerging competitors.effectively in the market. Any decrease in the demand for our products and services for the reasons discussed above or any other reasons could have a material adverse effect on our growth, revenue and operating results.
Our results of operations and growth depend on our ability to retain existing partners and attract new partners.
Following the disposition of our Epsilon business and the spinoff of our LoyaltyOne segment, the majority of our revenue is generated from the credit products we provide to customers of our partners pursuant to program agreements that we enter into with our partners. As a result, our results of operations and growth depend on our ability to retain existing partners and attract new partners. Historically, there has been turnover in our partners, and we expect this will continue in the future. See also, “A significant percentage of our Total net interest and non-interest income, or revenue, is generated through our relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.”.
Credit card program agreements with our brand partners typically are for multi-year terms. These program agreements generally provide each party with certain early termination rights, i.e., events or circumstances that would permit the party to terminate the agreement prior to its scheduled termination date in accordance with the conditions specified in the applicable agreement. For example, in some cases, a brand partner may have the right to terminate if we fail to meet certain service levels as set forth in the applicable brand partner agreement. Generally, a brand partner would not have the right to terminate until providing us formal notice and an opportunity to cure the service level failure. As a result of the transition of our credit card processing services to our strategic outsourcing providers in late June 2022, we failed to meet certain service levels in a number of our credit card program agreements due to periods of unavailability of our customer support and account servicing functions, which could, in certain circumstances, have given rise to a termination right by an impacted brand partner. To date, no brand partner has sought to exercise any such termination right, and many other such rights have either been formally waived or lapsed pursuant to the terms of the applicable brand partner agreement.We cannot provide assurance that a brand partner from which we did not receive such a waiver will not attempt to terminate its program agreement or that future service level failures will not occur.
There is significant competition for our existing partners, and our failure to retain our existing larger partner relationships upon the expiration of a contractual arrangement or our earlier loss of a relationship upon the exercise of a partner’s early termination rights, or the expiration or termination of a substantial number of smaller partner contracts or relationships, could have a material adverse effect on our results of operations (including growth rates) and financial condition to the extent we do not acquire new partners of similar size and profitability or otherwise grow our business. In addition, existing relationships may be renewed with less favorable terms to us in response to increased competition for such relationships.
The competition for new partners is also significant, and our failure to attract new partners could adversely affect our ability to grow.
Our results depend, to a significant extent, on the active and effective promotion and support of our products by our brand partners.
Our partners generally accept most major credit cards and various other forms of payment; therefore our success depends, in part, on their active and effective promotion of our products to their customers. We depend on our partners to integrate the use of our credit products into their operations, including into their in-store and online shopping experiences and loyalty programs. We rely on our partners to train their sales and call center associates about our products and to have their associates encourage customers to apply for, and use, our products and otherwise effectively market our products. If our partners do not effectively promote and support our products, or if they make changes in their business models that negatively impact card usage, these actions could have a material adverse effect on our business and results of operations. Partners may also implement or fail to implement changes in their systems and technologies that may disrupt the integration between their systems and technologies and ours, any of which could disrupt the use of our products. In addition, if our partners engage in improper business practices, do not adhere to the terms of our program agreements or other contractual arrangements or standards, or otherwise diminish the value of our brand, we may suffer reputational damage and customers may be less likely to use our products, which could have a material adverse effect on our business and results of operations.
Our results are impacted, to a significant extent, by the financial performance of our partners.
Our ability to originate new credit card accounts, generate new loans, and earn interest and fees and other income is dependent, in part, upon sales of merchandise and services by our partners. The retail and other industries in which our partners operate are intensely competitive. Our partners’ sales may decrease or may not increase as we anticipate for various reasons, some of which are in the partners’ control and some of which are not. For example, partner sales have been, and in the future may be adversely affected by the COVID-19 pandemic or other macroeconomic conditions having a national, regional or more local effect on consumer spending, business conditions affecting the general retail environment, such as supply chain distributions or the ability to maintain sufficient staffing levels, or a particular partner or industry, or natural disasters or other catastrophes affecting broad or more discrete geographic areas. If our partners’ sales decline for any reason, it generally results in lower credit sales, and therefore lower loan volume and associated interest and fees and other income for us from our customers. In addition, if a partner closes some or all of its stores or becomes subject to a voluntary or involuntary bankruptcy proceeding (or if there is a perception that such an event may occur), its customers who have used our financing products may have less incentive to pay their outstanding balances to us, which could result in higher charge-off rates than anticipated and our costs for servicing its customers’ accounts may increase. This risk is particularly acute with respect to our largest partners that account for a significant amount of our interest and fees on loans. See “A significant percentage of our Total net interest and non-interest income, or revenue, is generated through our relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.”. Moreover, if the financial condition of a partner deteriorates significantly or a partner becomes subject to a bankruptcy proceeding, we may not be able to recover customer returns, customer payments made in partner stores or other amounts due to us from the partner. A decrease in sales by our partners for any reason or a bankruptcy proceeding involving any of them could have a material adverse impact on our business and results of operations.
We may not be successful in our efforts to promote usage of our proprietary cards, or to effectively control the costs associated with such promotion, both of which may materially impact our profitability.
We have been investing in promoting the usage of our proprietary cards, including our Bread CashbackTM American Express® Credit Card that we launched in 2022, but there can be no assurance that our investments to acquire cardholders, provide differentiated features and services and increase usage of our proprietary cards will be effective, particularly with increasing competition from other card issuers and fintechs, as well as changing consumer and business behaviors. In addition, if we develop new products or offers that attract customers looking for short-term incentives rather than incentivizing long-term loyalty, cardholder attrition and costs could increase. Moreover, we may not be able to cost-effectively manage and expand cardholder benefits, including controlling the growth of marketing, promotion, rewards and cardholder services expenses in the future.
Reductions in interchange fees may reduce the competitive advantages our private label credit card products currently have by virtue of not charging interchange fees and would reduce our income earned from those fees on co-brand and general purpose credit card transactions.
Interchange is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure and payment facilitation, and which are paid to credit card issuers to compensate them for the risk they bear in lending money to customers. We earn interchange fees on co-brand and general purpose credit card transactions, but we typically do not charge or earn interchange fees from our partners or customers on our private label credit card products.
Merchants, trying to decrease their operating expenses, have sought to, and have had some success at, lowering interchange rates. Several recent events and actions indicate a continuing increase in focus on interchange by both regulators and merchants. In 2022, for example, legislation was introduced in the U.S. House of Representatives and Senate, which, among other things, would require large issuing banks to offer a choice of at least two unaffiliated networks over which electronic transactions may be processed. Furthermore, beyond pursuing litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing costs. To the extent interchange fees are reduced, one of our current competitive advantages with our partners—that we typically do not charge interchange fees when our private label credit card products are used to purchase our partners’ goods and services—may be reduced. Moreover, to the extent interchange fees are reduced, our income from those fees will be lower on co-brand and general purpose credit card transactions. As a result, a reduction in interchange fees could have a material adverse effect on our business and results of operations. In addition, for our co-brand and general purpose credit cards, we are subject to the operating regulations and procedures set forth by the interchange network, and our failure to comply with these operating regulations, which may change from time to time, could subject us to various penalties or fees, or the termination of our license to use the interchange network, all of which could have a material adverse effect on our business and results of operations
We may not be able to retain and/or attract and hire a highly qualified and diverse workforce or maintain our corporate culture, and having a large segment of our workforce working from home may exacerbate these risks and cause new risks.
Our performance largely depends on the talents and efforts of our employees, particularly our key personnel and senior management. We may be unable to retain or to attract highly qualified employees. The market for key personnel is highly competitive, particularly in technology and other skill areas significant to our business. Failure to attract, hire, develop, motivate and retain highly qualified and diverse employee talent, or to maintain a corporate culture that fosters innovation, creativity and teamwork could harm our overall business and results of operations. We rely on key personnel to lead with integrity and decency. To the extent our leaders behave in a manner that is not consistent with our values, we could experience significant impact to our brand and reputation, as well as to our corporate culture.
Moreover, in connection with the COVID-19 pandemic, we transitioned nearly all of our workforce to work remotely, and a significant portion of our workforce continues to work in a mostly remote environment. Remote work by a majority of our employee population may impact our culture, and employee engagement with our company, which could affect productivity and our ability to retain employees who are critical to our operations and may increase our costs and impact our financial results of operations. In addition, an increase in work from home by other companies may create more job opportunities for employees and make it more difficult for us to attract and retain key talent, especially in light of changing worker expectations and talent marketplace variability regarding flexible work models.In addition, employees who work from home rely on residential communication networks and internet providers that may not be as resilient as commercial networks and providers and may be more susceptible to service interruptions and cyberattacks than commercial systems. Our business continuity and disaster recovery plans, which have been historically developed and tested with a focus on centralized delivery locations, may not work as effectively in a distributed work from home model, where weather impacts, network and power grid downtime may be difficult to manage. In addition, we may not be effective in timely updating our existing operating and administrative controls nor implementing new controls tailored to the work from home environment. If we are unable to manage the work from home environment effectively to address these and other risks, our reputation and results of operations may be impacted.
Damage to our reputation could damage our business.
In recent years, financial services companies have experienced increased reputational risk as consumers protest and regulators scrutinize business and compliance practices of such companies. Maintaining a positive reputation is critical to attracting and retaining partners, customers, investors and employees. Damage to our reputation can therefore cause
significant harm to our business and prospects. Harm to our reputation can arise from numerous sources, including, among others, employee misconduct; a breach of our, or our service providers’ cybersecurity defenses; service outages, such as those many of our customers experienced in 2022 in connection with the transition of our credit card processing services to strategic outsourcing providers, or otherwise; litigation or regulatory outcomes; stockholder activism; failing to deliver minimum standards of service and quality; compliance failures; the use of our, or our partners’ products to facilitate legal, but controversial, products and services, including adult content, cryptocurrencies, firearms and gambling activity; and the activities of customers, business partners and counterparties. Social media also can cause harm to our reputation. By its very nature, social media can reach a wide audience in a very short amount of time, which presents unique challenges for corporate communications. Negative or otherwise undesirable publicity generated through unexpected social media coverage can damage our reputation and brand. Negative publicity regarding us, whether or not true, may result in customer attrition and other harm to our business prospects. There has also been increased focus on topics related to environmental, social and governance policies, and criticism of our policies in these areas could also harm our reputation and/or potentially limit our access to some forms of capital or liquidity.
Liquidity, Market and Credit
RiskRisks
Adverse financial market conditions or our inability to effectively manage our funding and liquidity risk could have a material adverse effect on our business, liquidity and ability to meet our debt service requirements and other obligations.
We need to effectively manage our funding and liquidity in order to meet our cash requirements such as day-to-day operating expenses, extensions of credit to our customers, investments to grow our business, payments of principal and interest on our borrowings and payments on our other obligations. Our primary sources of funding and liquidity are collections from our customers, deposits, funds from securitized financings and proceeds from unsecured borrowings, including our credit facility and outstanding senior notes. If we do not have sufficient liquidity, we may not be able to meet our debt service requirements and other obligations, particularly during a liquidity stress event. If we maintain or are required to maintain too much liquidity, it could be costly and reduce our financial flexibility.
We will need additional financing in the future to repay or refinance our existing debt at maturity or otherwise and to fund our growth. As of December 31, 2022, we had $556 million of terms loans outstanding under our parent credit agreement, which matures in July 2024, as well as $850 million of 4.750% senior notes due in December 2024 and $500 million of 7.000% senior notes due in January 2026.The availability of additional financing will depend on a variety of factors such as financial market conditions generally, including the availability of credit to the financial services industry and our lender counterparties’ willingness to lend to us, consumers’ willingness to place money on deposit with us, our performance and credit ratings and the performance of our securitized portfolios. Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the uncertainty and volatility experienced in the capital and credit markets during recessions and periods of financial stress, inflation, rising interest rates, high levels of unemployment, other economic and political conditions in the global markets and concern over the level of U.S. government debt and fiscal measures that may be taken over the longer term to address these matters, may limit our ability to obtain additional financing or refinance maturing liabilities on desired terms (including funding costs) in a timely manner, or at all. As a result, we may be forced to delay obtaining funding or be forced to issue or raise funding on undesirable terms, which could significantly reduce our financial flexibility and cause us to contract or not grow our business, all of which could have a material adverse effect on our results of operations and financial condition.
Given the current rising interest rate environment and other recessionary pressures, the debt markets are volatile, and there can be no assurance that significant disruptions, uncertainties and volatility will not occur in the future.Specifically, availability of capital from the non-investment grade debt markets is currently subject to significant volatility, and there can be no assurance that we will be able to access those markets at attractive rates, or at all. Given the maturities of our current outstanding debt and the current macroeconomic conditions, it is possible that we will be required to repay or refinance some or all of our maturing debt in volatile and/or unfavorable markets. If we are unable to continue to fund our business operations, access capital markets for debt refinancings and otherwise, and attract deposits on favorable terms and in a timely manner, or if we experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our results of operations and financial condition may be materially adversely affected.
If we are unable to securitize our credit card and loan receivablesloans due to changes in the market or other circumstances or events, we may not be able to fund new credit card receivables,loans, which would have a negative impactmaterial adverse effect on our operations and profitability.
A significant source of funding is our securitization of credit card loans, which involves the transfer of credit card loans to a trust, and the issuance by the trust of notes to third-party investors collateralized by the beneficial interest in the transferred credit card loans. A number of factors affect our ability to fund our credit card
and loan receivablesloans in the securitization market, some of which are beyond our control, including:
• | ● | conditions in the securities markets in general and the asset-backed securitization market in particular; •availability of loans for securitization; • |
| ● | conformity in the quality of our credit card receivables to rating agency requirements and changes in that quality or those requirements; and |
| ● | ability to fund required overcollateralizations or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing cost. |
In addition, on August 27, 2014, the SEC adopted a number of rules that changed the disclosure, reporting and offering process for publicly registered offerings of asset-backed securities, including those offered under our credit card securitization program. The adopted rules finalize rulesloans to rating agency requirements and changes in that were originally proposed on April 7, 2010 and re-proposed on July 26, 2011. A numberquality or those requirements;
•costs of rules proposed by the SEC in 2010 and 2011, such as requiring group-level data for the underlying assets insecuritizing our credit card securitizations, were not adoptedloans;
•ability to fund required over-collateralization or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing cost; and
•the final rulemaking but may be adopted by the SEC in the future withlegal, regulatory, accounting or without further modifications. The adoption of furthertax rules affecting disclosure, reportingsecuritization transactions and the offering process for publicly registered offerings of asset-backed securities, may impact our ability or desire to issue asset-backed securities in the future.generally.
Regulations adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandate a minimum five percent risk retention requirement for securitizations issued on and after December 24, 2016. Such risk retention requirements may limit our liquidity by restricting the amount of asset-backed securities we are able to issue or affecting the timing of future issuances of asset-backed securities; we satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.
Early amortization events may occur as a result of certain adverse events specified for each asset-backed securitization transaction, including, among others, deteriorating asset performance or material servicing defaults. In
addition, certain series of funding securities issued by our securitization trusts are subject to early amortization based on triggers relating to the bankruptcy of one or more retailers. Deteriorating economic conditions and increased competition in the retail industry, among other factors, may lead to an increase in bankruptcies among retailers who have entered into credit card programs with us. The bankruptcy of one or more retailers could lead to a decline in the amount of new receivables and could lead to increased delinquencies and defaults on the associated receivables. Any of these effects of a retailer bankruptcy could result in the commencement of an early amortization for one or more series of such funding securities, particularly if such an event were to occur with respect to a retailer relating to a large percentage of such securitization trust’s assets. The occurrence of an early amortization event may significantly limit our ability to securitize additional receivables.
AsMoreover, as a result of Basel III, which refers generally to a set of regulatory reforms adopted in the U.S. and internationally that are meant to address issues that arose in the banking sector during the 2008-2010 financial crisis, banks have become subject to more stringent capital, liquidity and leverage requirements. In response to Basel III, investorscertain lenders of private placement commitments within our securitization trusts’ funding securitiestrusts have sought and obtained amendments to their respective transaction documents permitting them to delay disbursement of funding increases by up to 35 days. Although funding may be requested from other investorslenders who have not delayed their funding, access to financing could be disrupted if all of the investorslenders implement such delays or if the lending capacities of those who did not do so were insufficient to make up the shortfall. In addition, excess spread may be affected if the issuing entity’s borrowing costs increase as a result of Basel III. Such cost increases may result, for example, because the investors are entitled to indemnification for increased costs resulting from such regulatory changes.
The inability to securitize
credit card
receivablesloans due to changes in the market, regulatory proposals, the unavailability of credit enhancements, or any other circumstance or event would have a material adverse effect on our operations,
cost of funds and
profitability.overall financial condition.
The occurrence of events that result in the early amortization of our existing credit card securitization transactions or an inability to delay the accumulation of principal collections for our existing credit card securitization transactions would materially adversely affect our liquidity.
Our liquidity and cost of funds would be materially adversely affected by the occurrence of events that could result in the early amortization of our existing credit card securitization transactions. Early amortization events may occur as a result of certain adverse events specified for each asset-backed securitization transaction, including, among others, deteriorating asset performance or material servicing defaults. In addition, certain series of funding securities issued by our securitization trusts are subject to early amortization based on triggers relating to the bankruptcy of one or more retailers or other partners. Deteriorating economic conditions and increased competition in the retail industry, among other factors, may lead to an increase in bankruptcies among retailers who have entered into credit card programs with us. The bankruptcy of one or more retailers or other partners could lead to a decline in the amount of new loans and could lead to increased delinquencies and defaults on the associated loans. Any of these effects of a partner bankruptcy could result in the commencement of an early amortization for one or more series of such funding securities, particularly if such an event were to occur with respect to a retailer or other partner relating to a large percentage of such securitization trust’s assets. The occurrence of an early amortization event may significantly limit our ability to securitize additional loans and materially adversely affect our liquidity.
Lower payment rates on our securitized credit card loans could materially adversely affect our liquidity and financial condition.
Certain collections from our securitized credit card loans come back to us through our subsidiaries, and we use these collections to fund our purchase of newly originated loans to collateralize our securitized financings. If payment rates on our securitized credit card loans are lower than they have historically been, fewer collections will be remitted to us on an ongoing basis. Further, certain series of our asset-backed securities include a requirement that we accumulate principal
collections in a restricted account for a specified number of months prior to the applicable security’s maturity date. We are required under the program documents to lengthen this accumulation period to the extent we expect the payment rates to be low enough that the current length of the accumulation period is inadequate to fully fund the restricted account by the applicable security’s maturity date. Lower payment rates, and in particular payment rates that are low enough that we are required to lengthen our accumulation periods, could materially adversely affect our liquidity and financial condition.
Inability to grow or maintain our depositsdeposit levels in the future could have a material adverse effect on our liquidity, ability to grow our business and profitability.
A significant source of our funds is customer deposits, primarily in the form of certificates of deposit and other savings products. We obtain deposits directly from retail and commercial customers or through brokerage firms that offer our deposit products to their customers.
In recent years, deposits have become an increasingly important source of funds for us, with, for example, our retail deposits growing 72% from $3.2 billion as of December 31, 2021 to $5.5 billion as of December 31, 2022, accounting for 26% of our funding base. Our funding strategy includes continued growth of our liquidity through deposits. The deposit business continues to experience intense competition in attracting and retaining deposits. We compete on the basis of the rates we pay on deposits, the quality of our customer service and the competitiveness of our digital banking capabilities. Our ability to
originateattract and maintain retail deposits remains highly dependent on the
products we offer, the strength of our
bank subsidiaries,Banks, the reputability of our business practices and our financial health. Adverse perceptions regarding our lending practices, regulatory compliance, protection of customer information or sales and marketing practices, or actions taken by regulators or others with respect to our
bank subsidiaries,Banks, could impede our competitive position in the deposits market.
The demand for the deposit products we offer may also be reduced due to a variety of factors, including
macroeconomic events, changes in interest rates, changes in consumers’ preferences, demographics or discretionary income, regulatory actions that decrease consumer access to particular products or the development or availability of competing products. Competition from other financial services firms and others that use deposit funding products may affect deposit renewal rates, costs or availability.
AdjustmentsConversely, any adjustments we make to the rates offered on our deposit products to remain competitive may adversely affect
conversely our liquidity or our profitability.
The Federal Deposit Insurance Act, or FDIA prohibits an insured bank from accepting brokered deposits or offering interest rates on any deposits that significantly higher than theexceed rates in its prevailing rate in the bank’s normal market, area or nationally (depending upon where the deposits are solicited), unless it is “well capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC.. A bank that is “adequatelyless than “well capitalized” and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. There are no such restrictions under the FDIA on a bank that is “well capitalized” and atas of December 31, 2020,2022, each of our bank subsidiariesBanks met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA. However, there can be no assurance that our bank subsidiariesBanks will continue to meet those requirements. Any limitation on the interest rates our Banks can pay on deposits may competitively disadvantage us in attracting and retaining deposits, resulting in a material adverse effect on our business.
The FDIA also prohibits an insured bank from accepting brokered deposits, unless it is “well capitalized” or it is “adequately capitalized” and receives a waiver from the FDIC. Limitations on our bank subsidiaries’Banks’ ability to accept brokered deposits for any reason (including regulatory limitations on the amount of brokered deposits in total or as a percentage of total assets) in the future could materially adversely impact our liquidity, funding costs and profitability. For example, effective April 21, 2021, with an extended compliance date of January 1, 2022,In December 2020, the FDIC amendedupdated its regulations relatingthat implement Section 29 of the FDIA to the brokered deposits and interest rate restrictions
that apply to “less than well capitalized” insured depository institutions, including (1) providingestablish a new framework for analyzing whether certain provisionsdeposit arrangements qualify as brokered deposits. This brokered deposit rule establishes bright-line standards for determining whether an entity meets the statutory definition of “deposit broker” and a consistent process for application of the “deposit broker” definitionprimary purpose exception. All deposits on the Consolidated Balance Sheets of our Banks categorized as non-brokered in accordance with respect to “facilitating” and “primary purpose” to narrow the categoriesupdated regulations mentioned above comply with all application requirements of deposits that may be deemed brokered; and (2) for the interest rate restrictions, amending its methodology for calculating the national rate, the national rate cap, and the local market rate cap, in each case, to account for economic cycles and differing deposits products offered.those regulations. Any limitation on the interest ratesability of our bank subsidiaries can pay onBanks to participate in the gathering of brokered deposits may competitively disadvantage us in attractingmeeting our funding goals and retaining deposits, resultingresult in a material adverse effect on our business.
As of December 31, 2020,2022, we had $9.8$13.8 billion in deposits, with approximately $3.8$6.7 billion in money marketnon-maturity savings deposits that are redeemable on demand and approximately $6.0$7.1 billion in certificates of deposit. If, for whatever reason, we are unable to grow or maintain our deposit levels, our liquidity, ability to grow our business and profitability could be materially adversely affected.
Our level of indebtedness could materially adversely affect our ability to generate sufficient cash to repay our outstanding debt, and our ability to react to changes in our business and our ability to incurincurrence of additional indebtedness to fund future needs.needs could exacerbate these risks.
Our level of indebtedness
which requires a high level of interest and principal payments. Subject to the limits contained in our credit agreement, the indentures governing our senior notes and our other debt instruments, we may be able to incur substantial additional indebtedness from
time to timetime-to-time to finance working capital, capital expenditures, investments or acquisitions, or for other purposes. If we do so, the risks related to our level of indebtedness could intensify. Our level of indebtedness increases the possibility that we may be unable to generate cash sufficient to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness. Our
higher level of indebtedness, combined with our other financial obligations and contractual commitments, could:
• | ● | make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under our credit agreement, the indentures governing our senior notes and the agreements governing our other indebtedness; |
| ● | require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions or other new business and other corporate purposes; |
| ● | increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage or require us to dispose of assets to raise funds if needed for working capital; |
| ● | limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate; |
| ● | limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other new business and other corporate purposes; |
| ● | delay investments and capital expenditures; |
| ● | cause any refinancing of our indebtedness to be at higher interest rates and require us to comply with more onerous covenants, which could further restrict our business operations; and |
| ● | prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control. |
make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations under any of our debt instruments, including restrictive covenants, could result in an event of default under our credit agreement, the indentures governing our senior notes and the agreements governing our other indebtedness;
•require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing funds available for working capital, capital expenditures, acquisitions or other new business and other corporate purposes;
•increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage or require us to dispose of assets to raise funds if needed for working capital or to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness;
•limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we and our brand partners operate;
•limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other new business and other corporate purposes;
•delay or abandon investments and capital expenditures;
•cause any refinancing of our indebtedness to be at higher interest rates and require us to comply with more onerous covenants, which could further restrict our business operations; and
•prevent us from raising the funds necessary to repurchase all senior notes tendered to us upon the occurrence of certain changes of control.
Restrictions imposed by the indentures governing our senior notes, our credit agreement and our other outstanding or future indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.
The terms of the indentures governing our senior notes, our credit agreement and agreements governing our other debt instruments limit us and our subsidiaries from engaging in specified types of transactions. These covenants limit our and our subsidiaries’ ability, among other things, to:
| ● | declare or pay dividends, redeem stock or make other distributions to stockholders; |
| ● | create liens or use assets as security in other transactions; |
| ● | merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; |
•declare or pay dividends, redeem stock or make other distributions to stockholders;
•make investments;
•merge or consolidate, or sell, transfer, lease or dispose of Contentssubstantially all of our assets;
| ● | enter into transactions with affiliates; |
| ● | sell or transfer certain assets; and |
| ● | enter into any consensual encumbrance or restriction on the ability of certain of our subsidiaries to pay dividends or make loans or sell assets to us. |
•
enter into transactions with affiliates;
•sell or transfer certain assets; and
•enter into any consensual encumbrance or restriction on the ability of certain of our subsidiaries to pay dividends or make loans or sell assets to us.
As a result of these covenants and restrictions, we may be limited in how we conduct our business and we may be unable to raise additional indebtedness to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure
you that we will be able to maintain compliance with these covenants in the
future and, iffuture. If we fail to
do so, thatcomply with such covenants, we
willmay not be able to obtain waivers
of non-compliance from the lenders and/or amend the
covenants.covenants so that we are in compliance therewith.
Changes in market interest rates could negatively affect our profitability.
Changes in market interest rates cause our finance charges, net and our interest expense, net to increase or decrease, as certain of our assets and liabilities carry interest rates that fluctuate with market benchmarks. At December 31, 2020, 21% of our credit card and loan receivables were priced at a fixed interest rate to the accountholder, with the remaining 79% at a floating interest rate. We fund credit card and loan receivablesother
loans with a combination of fixed rate and floating rate funding sources that include deposits and
asset-backed securities, of which 68% were fixed and 32% were floating at December 31, 2020.securitized financings. We also have unsecured term debt that is subject to variable interest
rates, and we may in the future incur additional debt or issue preferred equity that rely on variable interest rates.
Beginning in March 2022, the Federal Reserve Board began raising the federal funds rate in an effort to curb inflation, and we expect further interest rate increases by the Federal Reserve in 2023.
The interest rate benchmark for most of our floating rate assets is the primePrime rate, and the interest rate benchmark for our floating rate liabilities is generally either the London interbank offered rate (LIBOR)Secured Overnight Financing Rate (SOFR) or the federalFederal funds rate. The primePrime rate and LIBORSOFR or the federalFederal funds rate could reset at different times or could diverge, leading to mismatches in the interest rates on our floating rate assets and floating rate liabilities. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products, and policies of various governmental and regulatory agencies, in particular the U.S. Federal Reserve. Changes in monetary policy, including changes in interest rate controls being applied by the U.S. Federal Reserve, could influence the amount of interest we receive on our creditCredit card and loan receivablesother loans and the amount of interest we pay on deposits and borrowings.
On July 27, 2017, the U.K. Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends Further, we have only recently begun indexing our variable rate debt to stop compelling banks to submit rates for the calculation of LIBOR after 2021. It is unclear whether new methods of calculating LIBOR will be established or if LIBOR continues to exist after 2021. The U.S. Federal Reserve, in conjunction with the Alternative Reference Rates Committee, is considering replacing U.S. dollar LIBOR with the Secured Overnight Financing Rate, or SOFR. The selection of SOFR as a result of the alternativediscontinuation of the London Interbank Offered Rate (LIBOR) beginning in 2021. SOFR is a relatively new reference rate, however, currently presents certain market concerns becausehas a term structure forvery limited history and is based on short-term repurchase agreements, backed by Treasury securities. Changes in SOFR has not yet developed,can be volatile and difficult to predict, and there is not yetcan be no assurance that SOFR will perform similarly to the way LIBOR would have performed at any time. As a generally accepted methodology for adjusting SOFR. To facilitate an orderly transition away from LIBOR,result, the amount of interest we have established an enterprise-wide initiative to assess and implement necessary changes to our contracts, systems, processes, documentation, and models. These changes may introduce operational challenges and have a negative impactpay on our interest expense and profitability.
credit facilities is difficult to predict.
If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on our creditCredit card and loan receivables,other loans, our profitability would be adversely affected. Conversely, our profitability could also be adversely affected if the interest we receive on our creditCredit card and loan receivablesother loans falls more quickly than the interest we pay on deposits and other borrowings.While the interest rate increases to date have resulted in a nominal benefit on our results, there can be no assurance that future rate increases will not impact us negatively. We recognize that a customers’ ability and willingness to repay us can be negatively impacted by factors such as inflation, which may result in greater delinquencies that lead to greater credit losses, as reflected in our increased Allowance for credit losses. If the efforts to control inflation in the U.S. and globally are not successful and inflationary pressures persist, they could magnify the slowdown in the domestic and global economies and increase the risk of a recession or prolonged economic slowdown, which may adversely impact our business, results of operations and financial condition.
Future sales of our common stock, or the perception that future sales could occur, may adversely affect our common stock price.
As of February 18, 2021,22, 2023, we had an aggregate of 79,016,657144,986,708 shares of our common stock authorized but unissued and not reserved for specific purposes. In general, we may issue all of these shares without any action or approval by our stockholders. We have reserved 4,058,6255,329,044 shares of our common stock for issuance under our employee stock purchase plan and our long-term incentive plans, of which 514,112672,776 shares have been issued and 1,007,3641,927,320 shares are issuable upon vesting of restricted stock awards and restricted stock units. We have reserved for issuance 1,500,000 shares of our common stock, 341,096241,603 of which remain issuable, under our 401(k) and Retirement Savings Plan as of December 31, 2020.2022. In addition, we may issue shares of our common stock in connection with acquisitions. For example, on December 3, 2020, we issued 1,903,868 shares of our common stock in a private placement completed with our acquisition of Lon
Inc. Sales or issuances of a substantial number of shares of common stock, or the perception that such salestransactions could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the ownership interests of existing stockholders.
The market price and trading volume of our common stock may be volatile and our stock price could decline.
The trading price of shares of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations. The trading price of our common stock may be affected by a number of factors, including our operating results, changes in our earnings estimates, additions or departures of key personnel, our financial condition, legislative and regulatory changes, general conditions in the industries in which we and our brand partners operate, general economic conditions, and general conditions in the securities markets.Other risks described in this reportAnnual Report on Form 10-K could also materially and adversely affect our share price.
There is no guarantee that we will pay future dividends or repurchase shares at a level anticipated by stockholders, which could reduce returns to our stockholders. Decisions to declare future dividends on, or repurchase, our common stock will be at the discretion of our boardBoard of directorsDirectors based upon a review of relevant considerations.
Since October 2016, our
boardBoard of
directorsDirectors has declared quarterly cash dividend payments on our outstanding common stock. Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our
boardBoard of
directors. In the approximately 20 years since our initial public offering, our board of directors has approved various share repurchase programs resulting in the repurchase of approximately 67.4 million shares of our common stock, although there is no active share repurchase program at this time.Directors. The
board’sBoard’s determination to declare dividends on, or repurchase shares of, our common stock will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable
lawlaws and regulations, including those governing our Banks’ ability to pay dividends and make distributions or other payments to us, and other factors that the
boardBoard of
directorsDirectors deems relevant. For example, beginning with the second quarter of 2020, our
boardBoard of
directorsDirectors reduced our quarterly dividend payment by 67% from $0.63 to $0.21 per quarter. Based on an evaluation of these factors, the
boardBoard of
directorsDirectors may determine
in the future not to declare
future dividends at all, to declare
future dividends at a reduced amount, not to repurchase shares or to repurchase shares at reduced levels compared to historical levels, any or all of which could reduce returns to our stockholders.
We are a holding company and depend on payments from our subsidiaries.
Bread Financial Holdings, Inc., our parent holding company, depends on dividends, distributions and other payments from subsidiaries, particularly our Banks, to fund dividend payments, any potential share repurchases, payment obligations, including debt obligations, and to provide funding and capital, as needed, to our other operating subsidiaries. Banking laws and regulations and our banking regulators may limit or prohibit our transfer of funds freely, either to or from our subsidiaries, at any time. These laws, regulations and rules may hinder our ability to access funds that we may need to make payments on our obligations or otherwise achieve strategic objectives. For more information, see “Business — Supervision and Regulation”.
In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.
We make assumptions, judgments and estimates in determining the allowance for credit losses, accruals for employee-related liabilities, accruals for uncertain tax positions, valuation allowances on deferred tax assets and legal contingencies. We also make assumptions, judgments and estimates for items such as the fair value of financial instruments, goodwill, long-lived assets and other intangible assets, impairment, the fair value of stock awards, as well as the recognition of revenue. These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the Consolidated Financial Statements. Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.
Legal, Regulatory and Compliance Risks
Our reportedbusiness is subject to extensive government regulation and supervision, which could materially adversely affect our results of operations and financial informationcondition.
We, primarily through our Banks and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision. Banking and consumer financial protection regulations are intended to protect consumers, depositors’ funds, the DIF, and the safety and soundness of the banking system as a whole, not stockholders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Federal and state legislative bodies and regulatory agencies continually review banking laws, regulations and policies for possible changes. Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations, as well as increased intensity in supervision, often impose additional compliance costs. The scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years, initially in response to the financial crisis, and more recently in light of other factors such as technological and market changes. Regulatory enforcement and fines have also increased across the banking and financial services sector. Further, the scope of regulation and the intensity of supervision will be affected by fluctuationslikely remain high in the exchange rate betweencurrent regulatory environment, including with respect to late fees, interchange fees and other matters. Such changes could subject us to additional costs, limit the U.S.types of financial services and products we may offer, and/or limit what we may charge for certain banking services, among other things. Most recently, in February 2023, the CFPB published a proposed rule with request for public comment that would: (i) decrease the safe harbor dollar amount for credit card late fees to $8 and eliminate a higher safe harbor dollar amount for subsequent late payments; (ii) eliminate the annual inflation adjustments that currently exist for the late fee safe harbor dollar amounts; and (iii) require that late fees not exceed 25% of the consumer’s required minimum payment. The “safe harbor” dollar amounts
referenced in the CFPB’s proposed rulemaking refer to the amounts that credit card issuers may charge as late fees under the CARD Act. Under the CARD Act, as implemented, these safe harbor amounts have been subject to annual adjustment based on changes in the consumer price index, and the safe harbor amounts are currently set at $30 for an initial late fee and $41 for subsequent late fees in one of the next six billing cycles. Accordingly, the proposed $8 safe harbor amount on late fees (and proposed elimination of the annual inflation-based adjustment thereto) would represent a significant decrease from the current safe harbor amounts. In addition, the proposed rulemaking seeks comment on whether late fees should be prohibited if the applicable payment is made within 15 days of the due date and whether, as a condition to utilizing the safe harbor, credit card issuers should be required to offer automatic payment options and/or provide certain foreign currencies.notifications of upcoming payment due dates. We are closely monitoring the content and timing of the CFPB’s proposed rulemaking and its impact on our business.
We expect that we, like the rest of the banking sector, will remain subject to increased regulation and supervision of our industry by bank regulatory agencies and that there may be additional and changing requirements and conditions imposed on us, any of which could increase our costs, require increased management attention, and adversely impact our results of operations.
In connection with their continuous supervision and examinations of us, the FDIC, CFPB and/or other regulatory agencies may require changes in our business or operations, are exposedand any such changes may be judicially enforceable or impractical for us to foreign exchange rate fluctuations.contest. We are exposed primarilymay also become subject to fluctuationsformal or informal enforcement and other supervisory actions, including memoranda of understanding, written agreements, cease-and-desist orders, and prompt-corrective-action or safety-and-soundness directives. Supervisory actions could entail significant restrictions on our existing business, our ability to develop new business, our flexibility in conducting operations, and our ability to pay dividends or utilize capital. Enforcement and other supervisory actions also can result in the exchange rate betweenimposition of civil monetary penalties or injunctions, related litigation by private plaintiffs, damage to our reputation, and a loss of customer or investor confidence. We could be required, as well, to dispose of specified assets and liabilities within a prescribed period of time. As a result, any enforcement or other supervisory action could have an adverse effect on our business, results of operations, financial condition and prospects.
In addition, changes in the
U.S.regulatory and
Canadian dollarssupervisory environments could adversely affect us in substantial and
unpredictable ways, including by limiting the
exchange rate betweentypes of financial services and products we may offer, enhancing the
U.S. dollarability of others to offer more competitive financial services and
the Euro. Upon translation, operating results may differ fromproducts, restricting our
expectations. For the year ended December 31, 2020, foreign currency movements relativeability to
the U.S. dollar positively impacted our revenue by approximately $6.5 millionmake acquisitions or pursue other profitable opportunities, and negatively
impactedimpacting our
income from continuingresults of operations
before income taxes by approximately $1.7 million.
Regulatory Environment
Current and proposed regulationfinancial condition. Changes in the prevailing interpretations of federal or state laws and legislation relatingrelated regulations could also invalidate or call into question the legality of certain of our services and business practices.
Our failure to our card servicescomply with the laws, regulations, and supervisory actions to which we are subject, even if the failure is inadvertent or reflects a difference in interpretation, could limitsubject us to fines, other penalties, and restrictions on our business activities, product offeringsany of which could adversely affect our business, results of operations, financial condition, cash flows, capital base, and/or the price of our securities.
See “Business — Supervision and fees chargedRegulation” for more information about certain laws and regulations to which we are subject and their impact on us.
Litigation and other actions and disputes could subject us to significant fines, penalties, judgments and/or requirements resulting in significantly increased expenses, damage to our reputation and/or a material adverse effect on our business.
Businesses in the financial services and payments industry has historically been, and continue to be, subject to significant legal actions, including class action lawsuits. Many of these actions have included claims for substantial compensatory or punitive damages. While we have historically relied on our arbitration clause (which includes a class action waiver) in agreements with customers to limit our exposure to class action litigation, there can be no assurance that we will always be successful in enforcing our arbitration clause in the future. There may have aalso be legislative, regulatory or other efforts to limit or eliminate the use of arbitration clauses or class action waivers, and if our arbitration provisions are found to be unenforceable or are otherwise limited or eliminated, our exposure to class action litigation could increase significantly. Further, even if our arbitration clause remains enforceable, we may be subject to mass arbitrations in which large groups of consumers bring arbitrations against us simultaneously. The continued focus of merchants on issues relating to the acceptance of various forms of payment may lead to additional litigation and other legal actions. Given the inherent uncertainties involved in litigation, and the very large or indeterminate damages sought in some matters asserted against us, there is significant impactuncertainty as to the ultimate liability we may incur from litigation.
In addition to litigation and regulatory matters, from time to time, through our operational and compliance controls, we identify compliance issues that require us to make operational changes and, depending on the nature of the issue, result in financial remediation to impacted cardholders. These self-identified issues and voluntary remediation payments could be significant depending on the issue and the number of cardholders impacted. They also could generate litigation or regulatory investigations that subject us to additional adverse effects on our business, results of operations and financial condition.
The Dodd-Frank Wall Street Reform
Our Banks are subject to extensive federal and Consumer Protection Act (the “Dodd-Frank Act”), among other things, includes a sweeping reformstate regulation that may restrict their ability to make cash available to us and may require us to make capital contributions to them.
Federal and state laws and regulations extensively regulate the operations of our Banks, including to limit the ability of the regulationBanks to pay dividends or make other distributions to us. Many of these laws and supervisionregulations are intended to maintain the safety and soundness of our Banks, and they impose significant restraints on them to which other non-regulated entities are not subject.
Our Banks must maintain minimum amounts of regulatory capital. If the Banks do not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our liquidity, ability to grow our business and financial condition. To pay any dividend, the Banks must each maintain adequate capital above regulatory guidelines. Accordingly, neither CB nor CCB may be able to make any of their cash or other assets available to us, including to service our indebtedness. If either of our Banks were to fail to meet any of the capital requirements to which it is subject, we may be required to provide them with additional capital, which could also impair our ability to service our indebtedness.
In addition, under the “source of strength” requirement, we are required to serve as a source of financial
institutions, as well as ofstrength to our Banks and may not conduct our operations in an unsafe or unsound manner. Under these requirements, in the
regulation of derivatives and capital market activities.
The full impact offuture, we could be required to provide financial assistance to our Banks if the Dodd-Frank ActBanks experience financial distress. This support may be required at times when we might otherwise have determined not to provide it or when doing so is not yet known because someotherwise in our interests or the interests of our stockholders or creditors.
If legislative attempts to amend the final implementing regulationsBHC Act to eliminate the exclusion of credit card banks or industrial loan companies from the definition of “bank” are successful, or if we voluntarily take such action that results in the Parent Company becoming a federally-regulated BHC, we would become subject to additional regulation applicable to BHCs, which could increase our compliance and regulatory costs and have not yet been issued by the requisite federal agencies. In addition, theother effects that could be materially adverse to our business.
The Dodd-Frank Act mandates multiple studies, which could result in future legislative or regulatory action. In particular, the Government Accountability Office issued its study on whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system of the United States, to eliminate the exemptions to the definition of “bank” under the Bank Holding CompanyBHC Act for certain institutions including limited purpose credit card banks and industrial loan companies. The study did not recommend the elimination of these exemptions. However, iflegislation is periodically introduced that would eliminate this exception for industrial loan companies and other “non-bank banks”. If such legislation were enacted to eliminate these
exemptions without any grandfathering of or accommodations for existing institutions, we could be required to become a bank holding companyBHC.
As a BHC, we and
cease certain of our
activities that are not permissible for bank holding companies or divest our credit card bank subsidiary, Comenity Bank, or our industrial bank subsidiary, Comenity Capital Bank.
The Dodd-Frank Act created the CFPB, a federal consumer protection regulator with authoritynon-bank subsidiaries would be subject to make further changes to the federal consumer protection lawssupervision, regulation and regulations. The CFPB assumed rulemaking authority under the existing federal consumer financial protection laws, and enforces those laws against and examines certain non-depository institutions and insured depository institutions with total assets greater than $10 billion and their affiliates.
Since October 2016, both Comenity Bank and Comenity Capital Bank are under the CFPB’s supervision and the CFPB may, from time to time, conduct reviews of their practices. In addition, the CFPB’s broad rulemaking authority is expected to impact their operations, including with respect to deferred interest products. For example, the CFPB’s rulemaking authority may allow it to change regulations adopted in the pastexamination by other regulators including regulations issued under the Truth in Lending Act by the Board of Governors of the Federal Reserve System. The CFPB’s abilityBoard. We would be required to rescind, modify or interpret pastprovide annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHC Act, and applicable regulations. In addition, we would be subject to consolidated regulatory guidance could increase our compliance costscapital requirements.
Pursuant to provisions of the BHC Act and
litigation exposure. Further, the CFPB has broad authority to prevent “unfair, deceptive or abusive” acts or practices and has taken enforcement action against other credit card issuers and financial services companies. Evolution of these standards could result in changes to pricing, practices, procedures and other activities relating to our credit card accounts in ways that could reduce the associated return. While the CFPB has taken public positions on certain matters, it is unclear what additional changes may beregulations promulgated by the
CFPB and what effect, if any, such changes would have on our credit accounts.
The Dodd-Frank Act authorizes certain state officials to enforce regulations issuedFederal Reserve Board thereunder, a BHC may only engage in, or own companies that engage in, activities deemed by the CFPBFederal Reserve Board to be permissible for BHCs or financial holding companies. Activities permissible for BHCs are those that are so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto. Permissible activities for financial holding companies include those “so closely related to banking as to be a proper incident thereto” as well as certain additional activities deemed “financial in nature or incidental to such financial activity” or complementary to a financial activity and that do not pose a substantial risk to enforce the Dodd-Frank Act’s general prohibition against unfair, deceptivesafety and soundness of the depository institution or abusive practices. To the extent that states enact requirements that differ from federal standards or courts adopt interpretations of federal consumer laws that differ from those adopted by the federal banking agencies,financial system. If we were required to become a BHC, we may be required to alter productsmodify or services offered in some jurisdictions or cease offering products, which will increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide.
Various federal and state laws and regulations significantly limit the retail credit card services activities in which we are permitted to engage. Such laws and regulations, among other things, limit the fees and other charges that we can impose on consumers, limit or proscribediscontinue certain other terms of our productsbusiness activities, which may materially adversely affect our results of operations and services, require specified disclosures to consumers, or require that we maintain certain licenses, qualifications and minimum capital levels. In some cases, the precise applicationfinancial condition.
Increases in FDIC insurance premiums may have a material adverse effect on our profitabilityresults of operations.
We are generally unable to control the amount of premiums that are required to be paid for FDIC insurance. If there are bank or
further restrict the manner in which we conduct our activities. The CARD Act, as implemented by regulations issued under the Truth in Lending Act, acts to limit or modify certain credit card practices and requires increased disclosures to consumers. The credit card practices addressed by the rules include, but are not limited to, restrictions on the application of rate increases to existing and new balances, payment allocation, default pricing, imposition of late fees and two-cycle billing. The failure to comply with, or adverse changes in, the laws or regulations to which our business is subject, or adverse changes in their interpretation, could have a material adverse effect on our ability to collect our receivables and generate fees on the receivables, thereby adversely affecting our profitability.
In the normal course of business, from time to time, Comenity Bank and Comenity Capital Bank have been named as defendants in various legal actions, including arbitrations, class actions and other litigation arising in connection with their business activities. While historically the arbitration provision in each bank’s customer agreement has generally limited such bank’s exposure to consumer class action litigation, there can be no assurance that the banks will be successful in enforcing the arbitration clause in the future. There may also be legislative, administrative or regulatory efforts to directly or indirectly prohibit the use of pre-dispute arbitration clauses.
Comenity Bank and Comenity Capital Bank are also involved, from time to time, in reviews, investigations, and proceedings (both formal and informal) by governmental agencies regarding the banks’ business, which could subject the banks to significant fines, penalties, obligations to change its business practices or other requirements. In September 2015, each bank entered into a consent order with the FDIC in settlement of the FDIC’s review regarding the marketing, promotion and sale of certain add-on products; these consent orders were terminated in August 2018.
On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the FDIC seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in connection with the proposed merger. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the outcome or timing of such review.
The effect of the Dodd-Frank Act on our business and operations, which will depend upon final implementing regulations, the actions of our competitors, the behavior of other marketplace participants and its interpretation and enforcement by federal or state officials or regulators, could be significant. In addition,financial institution failures, we may be required to invest significant management timepay significantly higher premiums than the levels currently imposed or additional special assessments or taxes that could adversely affect our earnings. Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.
Noncompliance with the Bank Secrecy Act and resources to address the provisions of the Dodd-Frankother anti-money laundering statutes and regulations could cause us material financial loss.
The Bank Secrecy Act and the regulations that are required to be issued under it. The Dodd-FrankPATRIOT Act and any related legislation or regulations and their interpretation and enforcement may have a material impact on our business, results of operationscontain anti-money laundering and financial condition.
Legislation relatingtransparency provisions intended to consumer privacydetect and security may affect our ability to collect data that we use in providing our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients’ needs.
Data protection and consumer privacy laws and regulations continue to evolve, increasing restrictions on our ability to collect and disseminate customer information. In addition,prevent the enactment of new or amended legislation or industry regulations pertaining to consumer, public or private sector privacy issues could have a material adverse impact on our marketing services, including placing restrictions upon the collection, sharing and use of information that is currently legally available. There are also a number of specific lawsthe U.S. financial system for money laundering and regulations governing the collection and use of certain types of consumer data primarily in connection with financial services transactions that are relevant to our various businesses and services. In the United States, federal laws such as the Gramm-Leach-Bliley Act, or GLBA, and the Fair Credit Reportingterrorist financing activities. The Bank Secrecy Act, as amended by the FairPATRIOT Act, requires depository institutions and Accurate Credit Transactionstheir holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of partners and customers, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies. The Financial Crimes Enforcement Network (FinCEN), a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of 2003,those requirements and has recently engaged in coordinated enforcement efforts with the
Federal Banking Agencies, as well as similarthe U.S. Department of Justice, Drug Enforcement Administration, and applicable state laws, make it more difficult to collect, shareInternal Revenue Service (IRS).
Regulation in the areas of privacy, data protection, data governance, account access and use information that has previously been legally available and maycyber security could increase our costs of collecting some data. These laws give bank customers, including cardholders and depositors, the ability to “opt out” of having certain information generated by their applicable financial services transactions shared with other affiliatedaffect or limit our business opportunities and unaffiliated parties how we collect and/or the public. Our ability to gather, shareuse personal information.
Legislators and
utilize this data will be adversely affected if a significant percentage of the consumers whose purchasing behavior we track elect to “opt out,” thereby precluding us and our affiliates from using their data.
In the United States, the federal Do-Not-Call Implementation Act makes it more difficult to telephonically communicate with prospective and existing customers. Similar measures were implementedregulators in Canada beginning September 1, 2008. Regulations in both the United States and Canada give consumersother countries are increasingly adopting or revising privacy, data protection, data governance, account access, and information and cyber security laws, including data localization, authentication and notification laws. As such laws are interpreted and applied (in some cases, with significant differences or conflicting requirements across jurisdictions), compliance and technology costs will continue to increase, particularly in the ability to “opt out,” through a national do-not-call registrycontext of ensuring that adequate data governance, data protection, data transfer and state do-not-call registries,account access mechanisms are in place.
Compliance with current or future privacy, data protection, data governance, account access, and information and cyber security laws could significantly impact our collection, use, sharing, retention and safeguarding of
having telephone solicitations placed to them by companies that do not have an existing business relationship with the consumer. In addition, regulations require companies to maintain an internal do-not-call list for those who do not want the companies to solicit them through telemarketing. These regulationsconsumer and/or employee information and could
limitrestrict our ability to provide
certain products and services,
which could materially and
information to our clients. Failure to comply with these regulations could have a negative impact on our reputation and subject us to significant penalties. Further, the Federal Communications Commission has approved interpretations of rules related to the Telephone Consumer Protection Act defining robo-calls broadly, which mayadversely affect our
ability to contact customers and may increase our litigation exposure.
In the United States, the federal Controlling the Assault of Non-Solicited Pornography and Marketing Act of 2003 restricts our ability to send commercial electronic mail messages, the primary purpose of which is advertising or promoting a commercial product or service, to our customers and prospective customers. The act requires that a commercial electronic mail message provide the customers with an opportunity to opt-out from receiving future commercial electronic mail messages from the sender.
In the United States, California enacted the California Consumer Privacy Act, or CCPA, which went into effect on January 1, 2020. The CCPA provides individual privacy rights for California consumers and places increased privacy and security obligations on entities handling certain personal data of consumers and households. The CCPA requires disclosures to consumers about companies’ data collection, use and sharing practices; provides consumers ways to opt-out of certain sales or transfers of personal information; and provides consumers with additional causes of action. The CCPA prohibits companies from discriminating against consumers who have opted out of the sale of their personal
information, subject to a narrow exception. The CCPA provides for certain monetary penalties and for enforcement of the statute by the California Attorney General or by consumers whose rights under the law are not observed. It also provides for damages, as well as injunctive or declaratory relief, if there has been unauthorized access, theft or disclosure of personal information due to failure to implement reasonable security procedures. The CCPA contains several exemptions, including a provision to the effect that the CCPA does not apply where the information is collected, processed, sold or disclosed pursuant to the GLBA if the GLBA is in conflict with the CCPA.
In November 2020, California voters passed Proposition 24, known as the California Privacy Rights Act or CPRA. CPRA, which will amend existing CCPA requirements effective January 2023 with a one-year lookback period, includes limitations on the sharing of personal information for cross-context behavioral advertising and the use of “sensitive” personal information; the creation of a new correction right; and the establishment of a new agency to enforce California privacy law.
Further, there continues to be an increased interest in privacy laws at the federal and state levels where legislators are reviewing or proposing the need for greater regulation of the collection, processing, sharing and use of consumer data for marketing purposes or otherwise, including two federal privacy regulations introduced in late 2020.
In Canada, the Personal Information Protection and Electronic Documents Act, or PIPEDA, requires an organization to obtain a consumer’s consent to collect, use or disclose personal information. Under this act, consumer personal information may be used only for the purposes for which it was collected. We allow our customers to voluntarily “opt out” from receiving either one or both promotional and marketing mail or promotional and marketing electronic mail. Heightened consumer awareness of, and concern about, privacy may result in customers “opting out” at higher rates than they have historically. This would mean that a reduced number of customers would receive bonus and promotional offers and therefore those customers may collect fewer AIR MILES reward miles. The Government of Canada has created a Digital Charter providing new rights and expectations, including expected changes to PIPEDA.
Canada’s Anti-Spam Legislation, or CASL, may restrict our ability to send “commercial electronic messages,” defined to include text, sound, voice and image messages to email, or similar accounts, where the primary purpose is advertising or promoting a commercial product or service to our customers and prospective customers. CASL requires, in part, that a sender have consent to send a commercial electronic message, and provide the customers with an opportunity to opt out from receiving future commercial electronic email messages from the sender.
On May 25, 2018, The General Data Protection Regulation, or GDPR, a European Union-wide legal framework to govern data collection, use and sharing and related consumer privacy rights came into force. The GDPR replaced the European Union Directive 95/46/EC and applies to and binds the EU Member States and the European Economic Area countries, which includes a total of 30 countries. The GDPR details greater compliance obligations on organizations, including the implementation of a number of processes and policies around data collection and use. These, and other terms of the GDPR, could limit our ability to provide services and information to our customers. In addition, the GDPR includes significant penalties for non-compliance.
In general, GDPR, and other European Union and Member State specific privacy and data governance laws, could also lead to adaptation of our technologies or practices to satisfy local privacy requirements and standards that may be more stringent than in the U.S. Similarly, it is possible that in the future, U.S. and foreign jurisdictions may adopt legislation or regulations that impair our ability to effectively track consumers’ use of our advertising services, such as the FTC’s proposed “Do-Not-Track” standard or other legislation or regulations similar to EU Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” which directs EU Member States to ensure that accessing personal information on an internet user’s computer, such as through a cookie, is allowed only if the internet user has given his or her consent. In July 2020, the Court of Justice of the European Union, or CJEU, ruled the EU-US Privacy Shield Framework invalid, but noted the use of standard contractual clauses for data transfers is still valid.On January 31, 2020, the United Kingdom left the European Union and entered into a Brexit transition period. Effective January 1, 2021, the EU and UK have adopted a new agreement providing that all transfers of personal data between stakeholders subject to GDPR and UK entities will not be considered as transfers to a third country provided that the UK’s current data protection scheme stays in place for the designated maximum period of six months through June 30, 2021. It is not yet known what the data protection landscape will look like at the end of the transition period.
In addition to the jurisdictions noted above, there is also rapid development of new privacy laws and regulations elsewhere around the globe, including amendments of existing data protection laws, to the scope of such laws and
penalties for noncompliance. Failure to comply with these international data protection laws and regulations could have a negative impact on our reputation and subject us to significant penalties.
While all 50 U.S. states and the District of Columbia have enacted data breach notification laws, there is no such U.S. federal law generally applicable to our businesses. Data breach notification legislation and regulations relating to mandatory reporting came into force in Canada on November 1, 2018. Data breach notification laws have been proposed widely and exist in other specific countries and jurisdictions in which we conduct business. Legislative and regulatory measures, such as mandatory breach notification provisions, impose, among other elements, strict requirements on reporting time frames and providing notice to individuals.
Legislation relating to consumer protection may affect our ability to provide our loyalty and marketing services, which, among other things, could negatively affect our ability to satisfy our clients’ needs.
The enactment of new or amended legislation or industry regulations pertaining to consumer protection, or anyprofitability. Our failure to comply with such changes, could have a material adverse impact on our loyalty and marketing services. Such changeslaws could result in a negative impactpotentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring, customer attrition, decreases in the use or acceptance of our cards and damage to our reputation an adverse effectand our brand.
For more information on
our profitability or an increaseregulatory and legislative activity in
our litigation exposure.
For example, Ontario’s Protecting Rewards Points Act (Consumerthis area, see “Privacy and Data Protection Amendment), 2016, and additional related regulations, prohibit suppliers from entering into or amending consumer agreements to provide for the expiry of rewards points due to the passage of time alone, while permitting the expiry of rewards points if the underlying consumer agreement is terminated and that agreement provides that reward points expire upon termination. Similar legislation pertaining to the expiry of rewards points due to the passage of time alone is also in effect in Quebec.
Our bank subsidiaries are subject to extensive federal and state regulation that may require us to make capital contributions to them, and that may restrict the ability of these subsidiaries to make cash available to us.
Federal and state laws and regulations extensively regulate the operations of Comenity Bank, as well as Comenity Capital Bank. Many of these laws and regulations are intended to maintain the safety and soundness of Comenity Bank and Comenity Capital Bank, and they impose significant restraints on them to which other non-regulated entities are not subject. As a state bank, Comenity Bank is subject to overlapping supervision by the State of Delaware and the FDIC. As a Utah industrial bank, Comenity Capital Bank is subject to overlapping supervision by the FDIC and the State of Utah. Comenity Bank and Comenity Capital Bank must maintain minimum amounts of regulatory capital. If Comenity Bank and Comenity Capital Bank do not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our financial statements. Comenity Bank and Comenity Capital Bank, as institutions insured by the FDIC, must maintain certain capital ratios, paid-in capital minimums and adequate allowances for loan loss. If either Comenity Bank or Comenity Capital Bank were to fail to meet any of the capital requirements to which it is subject, we may be required to provide them with additional capital, which could impair our ability to service our indebtedness. To pay any dividend, Comenity Bank and Comenity Capital Bank must each maintain adequate capital above regulatory guidelines. Accordingly, neither Comenity Bank nor Comenity Capital Bank may be able to make any of its cash or other assets available to us, including to service our indebtedness.
If our bank subsidiaries fail to meet certain criteria, we may become subject to regulation under the Bank Holding Company Act, which could force us to cease all of our non-banking activities and lead to a drastic reduction in our revenue and profitability.
If either of our depository institution subsidiaries failed to meet the criteria for the exemption from the definition of “bank” in the Bank Holding Company Act under which it operates (which exemptions are described below), and if we did not divest such depository institution upon such an occurrence, we would become subject to regulation under the Bank Holding Company Act. This would require us to cease certain of our activities that are not permissible for companies that are subject to regulation under the Bank Holding Company Act. One of our depository institution subsidiaries, Comenity Bank, is a Delaware State FDIC-insured bank and a limited-purpose credit card bank located in Delaware. Comenity Bank will not be a “bank” as defined under the Bank Holding Company Act so long as it remains in compliance with the following requirements:
| ● | it engages only in credit card operations; |
Regulation” above.
| ● | it does not accept demand deposits or deposits that the depositorWe may withdraw by check or similar means for payment to third parties; |
| ● | it does not accept any savings or time deposits of less than $100,000, except for deposits pledged as collateral for its extensions of credit; |
| ● | it maintains only one office that accepts deposits; and |
| ● | it does not engage in the business of making commercial loans (except small business loans). |
Our other depository institution subsidiary, Comenity Capital Bank, is a Utah industrial bank that is authorized to do business by the State of Utah and the FDIC. Comenity Capital Bank will not be a “bank” as defined under the Bank Holding Company Act so long as it remains an industrial bank in compliance with the following requirements:
| ● | it is an institution organized under the laws of a state which, on March 5, 1987, had in effect or had under consideration in such state’s legislature a statute which required or would require such institution to obtain insurance under the Federal Deposit Insurance Act; and |
| ● | it does not accept demand deposits that the depositor may withdraw by check or similar means for payment to third parties. |
Operational and Other Risk
We rely on third party vendors to provide products and services and are transitioning additional services to strategic outsourcing partners. Our business operations, reputation and profitability could be adversely impacted if our vendors fail to fulfill their obligations.
The failure of our suppliers to deliver products and services at contracted service levels or standards or in sufficient quantities and in a timely manner could adversely affect our business. These impacts arise from and include, but are not limited to, closures or restricted operating conditions and supply chain disruptions resulting from the current impacts of COVID-19. If our significant vendors were unable or unwilling to fulfill or renew our existing contracts on current terms, we might not be able to replaceeffectively manage the related productoperational and compliance risks to which we are exposed.
Operational risk is the risk arising from inadequate or service at the same cost, in a timely fashion,failed internal processes or at all, any of which could negatively impact our profitability. In addition, if a third party vendor failssystems, human errors or misconduct, or adverse external events. Operational losses result from internal fraud; external fraud; inadequate or inappropriate employment practices and workplace safety; failure to meet contractual requirements,professional obligations involving partners, products, and business practices; damage to physical assets; business disruption and systems failures; and/or failures in execution, delivery, and process management. As processes or organizations are changed, or new products and services are introduced, we may not fully appreciate or identify new operational risks that may arise from such as compliance withchanges. Through human error, fraud or malfeasance, conduct risk can result in harm to customers, broader markets and the company and its employees.
Compliance risk arises from the failure to adhere to applicable laws,
rules, regulations and
regulations,internal policies and procedures. We need to continually update and enhance our
business operations could suffer economiccontrol environment to address operational and compliance risks. Operational and compliance failures or
deficiencies in our control environment can expose us to reputational
harm that could have a material adverse impact on our business and
results of operations.
Further, in 2020, we have selected to transition our credit card processing,legal risks as well as certain printfines, civil money penalties or payment of damages and mailcan lead to diminished business opportunities and remittance processing functions associated with our Card Services segment, to strategic outsourcing partners, with targeted completion in 2022. Transitioning these services from our legacy platforms to strategic partners with established systems and functionality presents significant risks, including, but not limited to, potential losses or corruption of data, changes in security processes, implementation delays and cost overruns, resistance from current clients and account holders, disruption to operations, loss of customization or functionality, reliability issues with legacy systems prior to cutover and incurrence of outsized consulting costs to complete the transition. In addition, the pursuit of multiple new product integrations and outsourcing transitions simultaneously could increase the complexity and risk, as well as magnify the unintended consequences, including an inability to retain or replace key personnel during the transition as well as the incurrence of unexpected expenses as we adopt new processes for managing these service providers and establish controls and procedures to ensure regulatory compliance. Any transition or implementation delays, errors or difficulties may result in operational challenges, security failures, increased costs or reputational harm, any of which could materially adversely impact our profitability.
Failure to safeguard our data and consumer privacy could affect our reputation among our clients and their customers, and may expose us to legal claims.
Although we have extensive physical and cyber security controls and associated procedures, our data has in the past been and in the future may be subject to unauthorized access. In such instances of unauthorized access, the integrity of our data has in the past been and may in the future be affected. Security and privacy concerns may cause consumers to resist providing the personal data necessary to support our loyalty and marketing programs. Information security risks for large financial institutions have increased with the adoption of new technologies, including those used on mobile devices, to conduct financial and other business transactions, and the increased sophistication and activity level of threat actors. The use of our loyalty, marketing services or credit card programs could decline if any compromise of physical or
cyber security occurred. In addition, any unauthorized release of customer information or any public perception that we released consumer information without authorization, could subject us to legal claims from our clients or their customers, consumers or regulatory enforcement actions, which may adversely affect our client relationships.
Loss of data center capacity, interruption due to cyber-attacks, loss of network connectivity or inability to utilize proprietary software of third party vendors could affect ourdiminished ability to timely meet the needsexpand key operations.
Table of our clients and their customers.Contents
Our ability, and that of our third-party service providers, to protect our data centers against damage, loss or performance degradation from fire, power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, and other disasters is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data as well as periodically expand and upgrade our technology capabilities. Any damage to our data centers, or those of our third-party service providers, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our clients’ needs and their confidence in utilizing us for future services.
Our failure to protect our intellectual property rights and use of open source software may harm our competitive position, and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly, any of which could negatively impact our business, results of operations and profitability.
Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business,
operating results or financial
condition or operating results.condition. The actions we take to protect our trademarks and other proprietary rights may not be adequate. Litigation may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Any infringement or misappropriation could harm any competitive advantage we currently derive or may derive from our proprietary rights. Third parties may also assert infringement claims against us. Any claims and an adverse determination in any resulting litigation could subject us to significant liability for damages and require us to either design around a third party’s patent or license alternative technology from another party. In addition, litigation is time consuming and expensive to defend and could result in the diversion of our time and resources. Further, our competitors or other third parties may independently design around or develop similar technology, or otherwise duplicate our services or products in a way that would preclude us from asserting our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property or confidential and proprietary information, or provide an adequate remedy in the event of an unauthorized disclosure.
Aspects of our platform include software covered by open source licenses. United States courts have not interpreted the terms of various open source licenses, but could interpret them in a manner that imposes unanticipated conditions or restrictions on our platform. If portions of our proprietary software are determined to be subject to an open source license, we could also be required to, under certain circumstances, publicly release or license, at no cost, our products that incorporate the open source software or the affected portions of our source code. In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or other contractual protections regarding infringement, misappropriation, security vulnerabilities, defects or errors in the code or other violations, any of which could result in liability to us and negatively impact our business, results of operations,
profitability and financial
condition and profitability.condition.
We have international operations acquisitions and personnelthat subject us to complexvarious international risks as well as increased compliance and regulatory risks and costs.
We have international operations, primarily in India, and some of our third-party service providers provide services to us from other countries, all of which subject us to a number of international risks, including, among other things, sovereign volatility and socio-political instability. Any future social or political instability in the countries in which we operate could have a material adverse effect on our business. U.S. regulations also govern various aspects of the international activities of domestic corporations and internationalincrease our compliance and regulatory risks and costs. Any failure on our part or the part of our service providers to comply with applicable U.S. regulations, as well as the regulations in the countries and markets in which we or they operate, could result in fines, penalties, injunctions or other similar restrictions, any of which could have a material adverse effect on our business, results of operations and financial condition.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We are subject to tax laws and regulations
in U.S. federal, state, local and foreign jurisdictions. From time to time legislative initiatives may be proposed, which, if
violatedenacted, may impact our effective tax rate and could
subject us to penaltiesadversely affect our deferred tax assets, tax positions and/or our tax liabilities. In addition, U.S. federal, state, local, and
other adverse consequences.
Our operations, acquisitions and employment of personnel outside the United States require us to comply with numerous complexforeign tax laws and regulations of the U.S. governmentare extremely complex and the various international jurisdictions where we do business. These laws and regulations may apply to our company, or our individual directors, officers, employees or agents, and may restrict our operations, investment decisions or other activities. Specifically, we are subject to anti-corruption and anti-bribery laws and regulations, including, but not limited to, the U.S. Foreign Corrupt Practices Act, or FCPA; the U.K. Bribery Act 2010, or UKBA; and Canada’s Corruption of Foreign Public Officials Act, or CFPOA. These laws generally prohibit providing anything of value to foreign officials for the purpose of influencing official decisions, obtaining or retaining business, or obtaining preferential treatment, and require us to maintain books and
records that fairly and accurately reflect transactions and maintain an adequate system of internal accounting controls. As part of our business, we or our partners may do business with state-owned enterprises, the employees and representatives of which may be considered foreign officials for purposes of the FCPA, UKBA or CFPOA.varying interpretations. There can be no assurance that our policies, procedures, training and compliance programshistorical tax positions will effectively prevent violation of all U.S. and international laws and regulationsnot be challenged by the relevant taxing authorities, or that we would be successful in defending our positions in connection with which we are required to comply. Violations ofany such laws and regulations could subject us to penalties that could adversely affect our reputation, business, financial condition or results of operations. In addition, some international jurisdictions in which we operate could subject us to other obstacles, including lack of a developed legal system, elevated levels of corruption, strict currency controls, adverse tax consequences or foreign ownership requirements, difficult or lengthy regulatory approvals, or lack of enforcement for non-compete agreements.
challenge.
Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent or delay change of control transactions or attempts by our stockholders to replace or remove our current management.
Delaware law, as well as provisions of our certificate of incorporation, including those relating to our board’sBoard’s authority to issue series of preferred stock without further stockholder approval, our bylaws and our existing and future debt
instruments, could discourage unsolicited proposals to acquire us, even though such proposals may be beneficial to our stockholders.
In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock. These and other provisions in our certificate of incorporation, bylaws and Delaware law could make it more difficult for stockholders or potential acquirers to obtain control of our boardBoard of directorsDirectors or initiate actions that are opposed by our then-current boardBoard of directors,Directors, including a merger, tender offer or proxy contest involving us. Any delay or prevention of a change of control transaction or changes in our boardBoard of directorsDirectors could cause the market price of our common stock to decline or delay or prevent our stockholders from receiving a premium over the market price of our common stock that they might otherwise receive.
Cybersecurity, Technology and Vendor Risks
We rely on third-party vendors to provide various products and services that are important to our operations, and our business could be adversely impacted if our vendors fail to fulfill their obligations.
Some services important to our business are outsourced to third-party vendors, and we contract with numerous other third-party vendors for a range of products and services. The inability or failure of these vendors to deliver products and services at contracted service levels or standards and in a timely manner could adversely affect our business. In addition, if a third-party vendor fails to meet other contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyberattack or other security breach, our business operations could suffer economic or reputational harm that could have a material adverse impact on our business and results of operations. Further, if our significant vendors are unable or unwilling to fulfill or renew our existing contracts on current terms, we might not be able to replace the related product or service at the same cost, in a timely fashion, or at all, any of which could negatively impact our profitability, business and operations, in some cases materially.
We recently completed the transition of our credit card processing services to strategic outsourcing partners.The transition was a significant and complex undertaking, which resulted in unanticipated platform stability issues and related impacts that have adversely impacted, and may continue to adversely impact, our business, results of operations, reputation and brand.
In late June 2022, we completed the transition of our credit card processing services to strategic outsourcing partners, including Fiserv for our core processing services and Microsoft for related cloud infrastructure services. As we described in our 2021 Annual Report on Form 10-K, transitioning these services from our legacy platforms to strategic partners with established systems and functionality presented significant risks, including, but not limited to, potential losses or corruption of data, changes in security processes, implementation delays and cost overruns, resistance from current partners and account holders, disruption to operations, loss of customization or functionality, reliability issues with legacy systems prior to cutover and incurrence of outsized consulting costs to complete the transition. In addition, as previously disclosed, the pursuit of multiple new product integrations and outsourcing transitions simultaneously increased the complexity and risk, as well as magnified the potential for the unintended consequences, including an inability to retain or replace key personnel during the transition as well as the incurrence of unexpected expenses as we adopted new processes for managing these service providers and established controls and procedures to ensure regulatory compliance. In connection with the transition, we experienced unanticipated issues with platform stability, which resulted in outages and interruptions in our call center operations and online customer service platforms. These outages and interruptions resulted in a number of adverse impacts, including customer complaints, negative social media postings, reputational damage, regulatory scrutiny, lost potential revenue, remediation costs, timing-related impacts to our Delinquency rate and Net loss rate data, and increased consulting and professional fees.These challenges associated with the transition have adversely impacted, and may continue to adversely impact, our business, results of operations, financial condition, and result in damage to our reputation and our brand. Moreover, now that we have completed this transition, it would be difficult and disruptive for us to replace certain of these third-party vendors, particularly Fiserv, in a timely or seamless manner if they were unwilling or unable to continue to provide us with these services in the future (as a result of their financial or business conditions or otherwise), which could materially impact our business and operations.
Failure to safeguard our data and consumer privacy could affect our reputation among our partners and their customers, and may expose us to legal claims.
Although we have extensive physical and cyber security controls and associated procedures, our data has in the past been and in the future may be subject to unauthorized access. In such instances of unauthorized access, we may have data loss
that could harm our customers and brand partners. This in turn could lead to reputational risk as concerns with security and privacy of data may result in consumers not wanting to participate in our product offerings. We also have arrangements in place with our partners and other third parties through which we share and receive information about their customers who are or may become our customers, which magnifies certain information security issues. Information security risks for large financial institutions have increased with the adoption of new technologies, including those used on mobile devices, to conduct financial and other business transactions, and the increased sophistication and activity level of threat actors. The use of our products and services could decline if any compromise of physical or cyber security occurred. In addition, any unauthorized release of customer information or any public perception that we released customer information without authorization, could subject us to legal claims from our partners or their customers, consumers or regulatory enforcement actions, which may adversely affect our partner relationships and result in damage to our reputation and our brand. We cannot be certain that our cybersecurity insurance coverage will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.
Business interruptions, including loss of data center capacity, interruption due to cyber-attacks, loss of network connectivity or inability to utilize proprietary software of third party vendors, could affect our ability to timely meet the needs of our partners and customers and harm our business.
Our ability, and that of our third-party service providers and brand partners, to protect our data centers and other facilities and systems against damage, loss or performance degradation from power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, insider threats, hardware and software defects or malfunctions, human error, computer viruses or other malware, public health crises, disruptions in telecommunications services, fraud, fires and other disasters and other events is critical. In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data, as well as periodically expand and upgrade our technology capabilities. Any damage to our data centers or other facilities and systems, or those of our third-party service providers or brand partners, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our partners’ and customers’ needs and their confidence in utilizing us for future services. In addition, any failure to successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies in a timely manner could have an adverse impact on our business if we are not able to be competitive with other financial services companies, and could also adversely impact our internal controls (including internal controls over financial reporting), results of operations, and financial condition.
If we are not able to invest successfully in, and compete at the leading edge of, technological developments in our industry, our revenue and profitability could be materially adversely affected.
Our industry is subject to rapid and significant technological changes. In order to compete in our industry, we need to continue to invest in technology across all areas of our business, including in access management, vulnerability management, transaction processing, data management and analytics, machine learning and artificial intelligence, customer interactions and communications, alternative payment and financing mechanisms, authentication technologies and digital identification, tokenization, real-time settlement, and risk management and compliance systems. Incorporating new technologies into our products and services, including developing the appropriate governance and controls consistent with regulatory expectations, requires substantial expenditures and takes considerable time, and ultimately may not be successful. We expect that new technologies in the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, our existing technology.
The process of developing new products and services, enhancing existing products and services and adapting to technological changes and evolving industry standards is complex, costly and uncertain, and any failure by us to anticipate partners’ and customers’ changing needs and emerging technological trends accurately could significantly impede our ability to compete effectively. Partner and customer adoption is a key competitive factor and our competitors may develop products, platforms or technologies that become more widely adopted than ours. In addition, we may underestimate the time and expense we must invest in new products and services before they generate significant revenues, if at all. Our use of artificial intelligence and machine learning is subject to risks related to flaws in our algorithms and datasets that may be insufficient or contain biased information. These deficiencies could undermine the decisions based on impact to data quality, predictions or analysis such technologies produce, subjecting us to competitive harm, legal liability, and harm to our reputation or brand.
Our ability to develop, acquire or access competitive technologies or business processes on acceptable terms may also be limited by intellectual property rights that third parties, including those that current and potential competitors, may assert. In addition, our ability to adopt new technologies may be inhibited by the emergence of industry-wide standards, a changing legislative and regulatory environment, an inability to develop appropriate governance and controls, a lack of internal product and engineering expertise, resistance to change from partners or consumers, lack of appropriate change management processes or the complexity of our systems.
Risks Related to the LoyaltyOne Spinoff
The LoyaltyOne spinoff could result in substantial tax liability to us and our stockholders, and more generally we could be adversely affected by the performance of, or disputes involving, LVI.
In November 2021, we completed the spinoff of our former LoyaltyOne segment, consisting of the Canadian AIR MILES® Reward Program and the Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, LVI. As part of the spinoff, we retained 19% of the outstanding shares of common stock of LVI.
We received a private letter ruling, or PLR, from the IRS and an opinion from our tax advisor to the effect that the spinoff of our former LoyaltyOne segment qualified as tax-free for U.S. federal income tax purposes for us and our stockholders (except for cash received in lieu of fractional shares). However, if the factual assumptions or representations made by us in connection with the delivery of the PLR opinion are inaccurate or incomplete in any material respect, including those relating to the past and future conduct of our business, we may not be able to rely on the PLR opinion. Furthermore, the PLR does not address all the issues that are relevant to determining whether the spinoff qualified for tax-free treatment, and the opinion from our tax advisor is not binding on the IRS or the courts. If, notwithstanding receipt of the PLR and the opinion from our tax advisor, the spinoff transaction and certain related transactions are determined to be taxable, we would be subject to a substantial tax liability. In addition, if the spinoff transaction is taxable, each holder of our common stock who received shares of LVI in connection with the spinoff would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares received.
Even if the spinoff otherwise qualifies as a tax-free transaction, the distribution would be taxable to us (but not to our stockholders) in certain circumstances if future significant acquisitions of our stock or the stock of LVI are deemed to be part of a plan or series of related transactions that included the spinoff. In this event, the resulting tax liability could be substantial, and could discourage, delay or prevent a change of control of us. In connection with the spinoff, we entered into a tax matters agreement with LVI, pursuant to which LVI agreed to not enter into any transaction that could cause any portion of the spinoff to be taxable to us without our consent and to indemnify us for any tax liability resulting from any such transaction. Subsequently, we agreed to accommodate LVI’s potential disposition of certain assets. While we believe that such disposition should not affect the qualification of the spinoff as a tax-free transaction, it is possible the IRS could disagree and successfully assert that the spinoff should be taxable to us and our shareholders that received LVI shares in the spinoff. In addition, it is possible that the IRS could view this disposition as inconsistent with the PLR and, as a result, the IRS could take the position that we cannot rely on the PLR.
More generally, we could continue to be adversely affected by the performance of LVI. During 2022, LVI’s stock price decreased significantly and, as a result, we wrote down the value of our 19% shareholding in LVI from $50 million as of December 31, 2021 to $6 million as of December 31, 2022. While we had intended to divest our ownership position in LVI in a tax-efficient manner within 12 months of the spinoff, market conditions and other factors prevented us from doing so. As such, we may be unable to divest our ownership position in LVI a timely manner and may be required to write down further the value of our position. Also, our post-spinoff arrangements and relationships with LVI may be impacted by the performance of LVI.
Moreover, though we believe that our process and decision-making with respect to the spinoff transaction were entirely appropriate, we could become involved in disputes with LVI or other third parties relating to the spinoff. Any dispute relating to the spinoff could distract management, result in legal and other costs, and otherwise adversely impact our financial position, results of operations and financial condition.
RISK MANAGEMENT
Our Enterprise Risk Management (ERM) program is designed to ensure that all significant risks are identified, measured, monitored and addressed. Our ERM program reflects our risk appetite, governance, culture and reporting. We manage enterprise risk using our Board-approved Enterprise Risk Management Framework, which includes Board-level oversight, risk management committees, and a dedicated risk management team led by our Chief Risk Officer (CRO). Our Board and executive management determine the level of risk the Company is willing to accept in pursuit of its objectives through the ERM program and the well-defined risk appetite statements developed thereunder. We utilize the “three lines of defense” risk management model to assign roles, responsibilities and accountabilities in the Company for taking and managing risk.
Governance and Accountability
Board and Board Committees
Our Board of Directors, as a whole and through its committees, maintains responsibilities for the oversight of risk management, including monitoring the “tone at the top,” and our risk culture and overseeing emerging and strategic risks. While our Board’s Risk Committee has primary responsibility for oversight of enterprise risk management, the Audit, Compensation & Human Capital and Nominating & Corporate Governance Committees also oversee risks within their respective areas of responsibilities. Each of these Board Committees consists entirely of independent directors and provides regular reports to the full Board regarding matters reviewed at their Committee meetings.
Risk Management Roles and Responsibilities
In addition to our Board and Board Committees, responsibility for risk management also flows to other individuals and entities throughout the Company, including various management committees and executive management. Our ERM Framework defines our “three lines of defense” risk management model, which includes the following:
•The “first line of defense” is comprised of the business areas that engage in activities that generate revenue or provide operational support or services that introduce risk to the Company. As the business owner, the first line of defense is responsible for, among other things, identifying, owning, managing and controlling key risks associated with their activities, timely addressing issues and remediation, and implementing processes and procedures to strengthen the risk and control environment. The first line of defense identifies and manages key risk indicators and risks and controls consistent with the Company’s risk appetite. The executive officers who serve as leaders in the “first line of defense,” are responsible for ensuring that their respective functions operate within established risk limits, in accordance with our risk appetite. These leaders are also responsible for identifying risks, considering risk when developing strategic plans, budgets and new products, and implementing appropriate risk controls when pursuing business strategies and objectives. In addition, these leaders are responsible for deploying sufficient financial resources and qualified personnel to manage the risks inherent in our business activities.
•The “second line of defense” consists of an independent risk management team charged with oversight and monitoring of risk within the business. The second line of defense is responsible for, among other things, formulating our ERM Framework and related policies and procedures, challenging the first line of defense and identifying, monitoring and reporting on aggregate risks of the business and support functions.
Our risk management team, which is led by our CRO and includes compliance, provides oversight of our risk profile and is responsible for maintaining a compliance program that includes compliance risk assessment, policy development, testing and reporting activities.
The CRO manages our risk management team and is responsible for establishing and implementing standards for the identification, management, measurement, monitoring and reporting of risk on an Enterprise-wide basis. The CRO is responsible for developing an appropriate risk appetite with corresponding limits that aligns with supervisory expectations, and proposing our risk appetite to the Board of Directors. The CRO regularly reports to the Risk Committee as well as the Banks’ Risk and Compliance Committees on risk management matters.
•The “third line of defense” is comprised of the Global Audit organization. The third line of defense provides an independent review and objective assessment of the design and operating effectiveness of the first and second lines of defense, governance, policies, procedures, processes and internal controls, and reports its findings to executive management and the Board, through the Audit Committee. Global Audit is responsible for performing periodic, independent reviews and testing compliance with the Company’s and the Banks’ risk management policies and standards, as well as with regulatory guidance and industry best practices. Global Audit also assesses
the design of the Company'’ and the Banks’ policies and standards and validates the effectiveness of risk management controls, and reports the results of such reviews to the Audit Committee.
Management Committees
The Company operates several internal management committees, including at each of our Banks a Bank Risk Management Committee (BRMC) and, effective January 2023, an IT Governance Committee (ITGC). The BRMCs and ITGCs are the highest-level management committees at the Banks to oversee risks and are responsible for risk governance, risk oversight and making recommendations on the Banks’ risk appetite. The BRMCs and ITGC’s monitor compliance with limits and related escalation requirements, and oversee implementation of risk policies.
In addition to the BRMCs, we maintain the following risk management committees at each of our Banks to oversee the risks listed below: the Credit Risk Management Committee; Compliance Risk Management Committee; Operational Risk Management Committee; Model Risk Management Committee; and the Asset & Liability Management Committee. Each of these Committees is responsible for one or more of the Banks’ eight risk categories, which are described in greater detail below under the heading “Risk Categories”. For its risk category(ies) of responsibility, each Committee provides risk governance, risk oversight and monitoring. Each Committee reviews key risk exposures, trends and significant compliance matters, and provides guidance on steps to monitor, control and escalate significant risks. We include the risk information provided by the BRMCs and the ITGC, and these management risk committees, along with additional risk information that is identified at the Parent Company level in our determination and assessment of the risks that are presented to and discussed with our Board and Board Committees.
Risk Categories
We have divided risk into the following eight categories: credit, market, liquidity, operational, compliance, model, strategic and reputational risk. We evaluate the potential impact of a risk event on us (including our subsidiaries) by assessing the customer, partner, financial, reputational, and legal and regulatory impacts.
Credit Risk
Credit Risk is the risk arising from an obligor’s failure to meet the terms of any contract or otherwise perform as agreed. Credit Risk is found in all activities in which settlement or repayment depends on counterparty, issuer, or borrower performance.
We are exposed to credit risk relating to the credit card, installment or other loans we make to our customers. Our credit risk relates to the risk that consumers using the private label, co-brand, general purpose or business credit cards or installment or other loans that we issue will not repay their loan balances. To minimize our risk of credit card, installment or other loan write-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting accountholder credit limits and applying our risk-based pricing. The credit risk on our credit card, installment or other loans is quantified through our Allowance for credit losses which is recorded net with Credit card and other loans on our Consolidated Balance Sheets. Credit risk is overseen and monitored by the Credit Risk Management Committee.
Market Risk
Market Risk includes interest rate risk which is the risk arising from movements in interest rates. Interest rate risk results from:
•differences between the timing of rate changes and the timing of cash flows (repricing risk);
•changing rate relationships among different yield curves affecting an organization’s activities (basis risk);
•hanging rate relationships across the spectrum of maturities (yield curve risk); and
•interest-related options embedded in certain products (options risk).
Our principal market risk exposures arise from volatility in interest rates and their impact on economic value, capitalization levels and earnings. We use various market risk measurement techniques and analyses to measure, assess and manage the impact of changes in interest rates on our Net interest income. The approach we use to quantify interest rate risk is a sensitivity analysis, which we believe best reflects the risk inherent in our business. This approach calculates the impact on Net interest income from an instantaneous and sustained 100 basis point increase or decrease in interest rates. Due to the mix of fixed and floating rate assets and liabilities on our Consolidated Balance Sheet as of December 31, 2022, this
hypothetical instantaneous 100 basis point increase or decrease in interest rates would have an insignificant impact on our annual Net interest income. Actual changes in our Net interest income will depend on many factors, and therefore may differ from our estimated risk to changes in interest rates. The Asset & Liability Management Committee assists the Banks’ Board of Directors and Bank Management in overseeing, reviewing, and monitoring market risk.
Liquidity Risk
Liquidity Risk is the risk arising from an inability to meet obligations when they come due. Liquidity Risk includes the inability to access funding sources or manage fluctuations in funding levels. Liquidity Risk also results from an organization’s failure to recognize or address changes in market conditions. The primary liquidity objective is to maintain a liquidity profile that will enable us, even in times of stress or market disruption, to fund our existing assets and meet liabilities in a timely manner and at an acceptable cost. Policy and risk appetite limits require the Company and the Banks to ensure that sufficient liquid assets are available to survive liquidity stresses over a specified time period. The Asset & Liability Management Committee assists the Banks Board of Directors and Bank Management in overseeing, reviewing, and monitoring liquidity risk.
Operational Risk
Operational Risk is the risk arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events. Operational losses result from internal fraud; external fraud; inadequate or inappropriate employment practices and workplace safety; failure to meet obligations involving customers, partners, products, and business practices; damage to physical assets; business disruption and systems failures; and/or failures in execution, delivery, and process management.
Operational risk is inherent in all business activities and can impact us through direct or indirect financial loss, brand damage, customer dissatisfaction, and legal and regulatory penalties. The Company has implemented a comprehensive operational risk framework that is defined in the Operational Risk Management Policy. The Operational Risk Management Committee, chaired by our Chief Operational Risk Officer, oversees and monitors operational risk exposures, including escalating issues and recommending policies, procedures and practices to manage operational risks.
As part of our Operational Risk Program, we maintain an information and cyber security program, which is led by our Chief Information Security Officer and is designed to protect the confidentiality, integrity, and availability of information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction. The Program is built upon a foundation of advanced security technology, a well-staffed and highly trained team of experts, and robust operations based on the National Institute of Standards and Technology Cybersecurity Framework. This consists of controls designed to identify, protect, detect, respond and recover from information and cyber security incidents. We continue to invest in enhancements to cyber security capabilities and engage in industry and government forums to promote advancements to the broader financial services cyber security ecosystem.
Compliance Risk
Compliance Risk is the risk arising from violations of laws or regulations, or from nonconformance with prescribed practices, internal policies and procedures, or ethical standards. This risk exposes organizations to fines, payment of damages, and the voiding of contracts. Our Compliance organization is responsible for establishing and maintaining our Compliance Risk Management Program. Pursuant to this Program, we seek to manage and mitigate compliance risk by assessing, controlling, monitoring, measuring and reporting the legal and regulatory risks to which we are exposed. The Compliance Risk Management Committee, chaired by the Chief Compliance Officer, oversees the implementation and execution of the Compliance Management System and monitors compliance exposures to manage compliance risks.
Model Risk
Model Risk is the risk arising from decisions based on incorrect or misused model outputs and reports. Model risk occurs primarily for three reasons: (1) a model may have fundamental errors and produce inaccurate outputs when viewed against its design objective and intended business uses; (2) a model may be used incorrectly or inappropriately, or there may be a misunderstanding about its limitations and assumptions; or (3) the model produces results that are not compliant with fair lending or other laws and regulations.
We manage model risk through a comprehensive model governance framework, including policies and procedures for model development, maintenance and performance monitoring activities, independent model validation and change management capabilities. We also assess model performance on an ongoing basis. Model Risk oversight and monitoring is conducted by the Model Risk Management Committee.
Strategic Risk
Strategic Risk is the risk arising from adverse business decisions, poor implementation of business decisions, or lack of responsiveness to changes in the industry and operating environment. This risk is a function of an organization’s strategic goals, business strategies, resources, and quality of implementation. Strategic decisions are reviewed and approved by business leaders and various committees and must be aligned with our Company policies. We seek to manage strategic and business risks through risk controls embedded in these processes, as well as overall risk management oversight over business goals. Existing product performance is reviewed periodically by various of our Committees and executive management.
Reputational Risk
Reputational Risk is the risk arising from negative public opinion. This risk may impair our competitiveness by affecting our ability to establish new relationships or services, or continue servicing existing relationships. Reputational Risk is inherent in all activities and requires us to exercise caution in dealing with stakeholders, such as customers, counterparties, correspondents, investors, regulators, employees, and the community. Executive management is responsible for considering the reputational risk implications of business activities and strategies, and ensuring the relevant subject matter experts are engaged as needed.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31,
2020,2022, we
lease approximately 45leased 14 general office properties,
worldwide, comprised of approximately
three1 million square feet. These facilities are used to carry out our operational, sales and administrative functions. Our principal facilities are as follows:
| | | | | | | | | | | | | | | | Location | | Approximate
Square Footage | | Lease Expiration Date | | Chadds Ford, Pennsylvania | | 9,853 | | April 30, 2027 | | Coeur D'Alene, Idaho | | 114,000 | | July 31, 2038 | | Columbus, Ohio | | 326,354 | (1) | September 12, 2032 | | Columbus, Ohio | | 103,161 | | June 30, 2024 | | Draper, Utah | | 22,869 | (1) | August 31, 2031 | | New York, New York | | 18,500 | | January 31, 2026 | | Plano, Texas | | 27,925 | (1) | June 30, 2026 | | Wilmington, Delaware | | 5,198 | | June 30, 2023 |
______________________________(1) | | | | | | | | |
|
|
|
| Approximate
|
|
|
|
|
Location
|
| Segment
|
| Square Footage
|
|
| Lease Expiration Date
|
|
Columbus, Ohio
| | Corporate, Card Services
| | 567,006
| | | September 12, 2032
|
|
Toronto, Ontario, Canada
| | LoyaltyOne
| | 205,525
| | | March 31, 2033
|
|
Mississauga, Ontario, Canada
| | LoyaltyOne
| | 13,699
| | | February 28, 2025
|
|
Den Bosch, Netherlands
| | LoyaltyOne
| | 132,482
| | | December 31, 2033
|
|
Maasbree, Netherlands
| | LoyaltyOne
| | 668,923
| | | September 1, 2033
|
|
New York, New York
|
| Card Services
|
| 18,500
|
|
| January 31, 2023
|
|
Draper, Utah
|
| Card Services
|
| 22,869
| (1)
|
| August 31, 2031
|
|
Columbus, Ohio
| | Card Services
| | 103,161
| | | December 31, 2027
|
|
Wilmington, Delaware
| | Card Services
| | 5,198
|
| | June 30, 2021
|
|
(1)Excludes square footage of subleased portion.
We believe our current facilities are suitable to our businesses and that we will be able to lease, purchase or newly construct additional facilities as needed.
Item 3. Legal Proceedings.
Refer to Part I, Item 1A, “Risk Factors—Legal, Regulatory and Compliance Risks” and Note 15 “Commitments and Contingencies” to our Consolidated Financial Statements, which is incorporated herein by reference.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 3.
| Legal Proceedings.
|
From time 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 effect on our business or financial condition, including claims and lawsuits alleging breaches of our contractual obligations. See Indemnification in Note 18, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements.
Item 4.
| Mine Safety Disclosures.
|
Not applicable.
PART II
Item 5.
| Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
|
Our common stock is listed on the
New York Stock Exchange, or NYSE, and trades under the symbol
“ADS.”“BFH”.
As of February
18, 2021,22, 2023, the closing price of our common stock was
$83.70$40.23 per share, there were
49,695,05150,115,421 shares of our common stock outstanding, and there were
9799 holders of record of our common stock.
Payment of future dividends is subject to declaration by our boardBoard of directors.Directors. Factors considered in determining dividends include, but are not limited to, our profitability, expected capital needs and legal, regulatory and contractual restrictions. See also “Risk Factors—There is no guarantee that we will pay future dividends or repurchase shares at a level anticipated by stockholders, which could reduce returns to our stockholders.”. Subject to these qualifications, we presently expect to continue to pay dividends on a quarterly basis. On January
28, 2021,26, 2023, our
boardBoard of
directorsDirectors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on March
18, 202117, 2023, to stockholders of record at the close of business on February
12, 2021.10, 2023.
Issuer Purchases of Equity Securities
The following table presents information with respect to purchases of our common stock made during the three months ended December 31,
2020:
| | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar |
| | | | | | | Shares Purchased as | | Value of Shares that |
| | | | | | | Part of Publicly | | May Yet Be |
| | Total Number of | | Average Price Paid | | Announced Plans or | | Purchased Under the |
Period | | Shares Purchased (1) | | per Share | | Programs | | Plans or Programs (2) |
| | | | | | | | | (Dollars in millions) |
During 2020: | | | | | | | | | | |
October 1-31 | | 8,058 | | $ | 51.55 | | — | | $ | — |
November 1-30 | | 2,742 | | | 66.66 | | — | | | — |
December 1-31 | | 6,976 | | | 75.05 | | — | | | — |
Total | | 17,776 | | $ | 63.10 | | — | | $ | — |
(1) | During the period represented by the table, 17,776 shares of our common stock were purchased by the administrator of our 401(k) and Retirement Saving Plan for the benefit of the employees who participated in that portion of the plan. |
(2) | The Company’s stock repurchase program expired on June 30, 2020. |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased (1) | | Average Price Paid
per Share | | Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs | | Approximate Dollar
Value of Shares that
May Yet Be
Purchased Under the
Plans or Programs |
| | | | | | | | ( Millions) |
| October 1-31 | | 4,076 | | $ | 30.61 | | | — | | $ | — | |
| November 1-30 | | 3,651 | | 36.75 | | | — | | — | |
| December 1-31 | | 3,816 | | 38.22 | | | — | | — | |
| Total | | 11,543 | | $ | 35.07 | | | — | | $ | — | |
(1)During the periods presented, 11,543 shares of our common stock were purchased by the administrator of our Bread Financial 401(k) Plan for the benefit of the employees who participated in that portion of the Plan.
The following
graph comparesStock Performance Graph shows the
yearly percentage change in cumulative total stockholder return on our common stock
sincecompared to an overall stock market index, the S&P Composite 500 Stock Index (S&P 500 Index), and a published industry index, the S&P Financial Composite Index (S&P Financial Index), over the five-year period commencing December 31,
2015,2017 and ended December 31, 2022. As described under the heading “Business Strategy & Transformation” in “Part I—Item 1. Business” above, through a series of strategic initiatives and transactions, we have simplified our business model as a tech-forward financial services company. In connection with
the cumulative total return over the same period of (1)this transformation, we have elected to use the S&P
500Financial Index
and (2) a peer groupas our selected index under Item 201(e)(1)(ii) of
fifteen companies selected by us and utilized inRegulation S-K for purposes of this Stock Performance Graph. In our
prior Annual Report on Form 10-K
whichfor the year ended December 31, 2021, we
will refer to as the 2019 Peer Group Index, and (3)included a
new peer group
index as our selected index under Item 201(e)(1)(ii). Accordingly, as required under Item 201(e)(4) of
fifteen companies selected by us, whichRegulation S-K, we
will refer to ashave also included the
2020 Peer Group Index.
The fifteen companiesa peer group in the 2019 Peer Group Index areStock Performance Graph below, which consists of the following companies: PayPal Holdings, Inc., MasterCard Incorporated, Synchrony Financial, Discover Financial Services, Fifth Third Bancorp, Key Corp, Citizens Financial Group, Inc., Ally Financial Inc., M&T Bank Corporation, Regions Financial Corporation, Huntington Bancshares Incorporated, Santander Consumer USA Holdings Inc., Comerica Incorporated, SVB Financial Group and Popular, Inc.
The fifteen companies in the 2020 Peer Group Index are PayPal Holdings, Inc., MasterCard Incorporated, Synchrony Financial, Discover Financial Services, Fifth Third Bancorp, Key Corp, Citizens Financial Group, Inc., Ally Financial Inc., M&T Bank Corporation, Regions Financial Corporation, Huntington Bancshares Incorporated, Santander Consumer USA Holdings Inc., Comerica Incorporated, SVB Financial Group and Capital One
Financial Corporation.
Pursuant to rules This peer group is the same as the peer group used in our Annual Report on Form 10-K for the year ended December 31, 2021, except for the removal of Santander Consumer USA Holdings Inc., which was the SEC, the comparisonsubject of a take-private transaction in January 2022.
The Stock Performance Graph assumes
that $100 was invested
on December 31, 2015 in our common stock and
in each
index, and that all dividends were reinvested. For the purpose of this Stock Performance Graph, historical stock prices have been adjusted to reflect the impact of the
indices and assumes reinvestmentspinoff of
dividends, if any. Also pursuant to SEC rules,LVI on November 5, 2021. The stock price performance on the
returns of each of the companies in the peer group are weighted according to the respective company’s stock market capitalization at the beginning of each period for which a returngraph below is
indicated. Historical stock prices are not
necessarily indicative of future
stock price performance.
Effective March 23, 2022, we changed our corporate name to Bread Financial Holdings, Inc. from Alliance Data Systems Corporation, and on April 4, 2022, we changed our ticker to “BFH” from “ADS” on the NYSE.
| | | | | | | | | | | | | |
| | Alliance Data | | | | | | | | | | |
| | Systems | | | | | 2019 Peer | | 2020 Peer | |
| | Corporation | | S&P 500 | | Group Index | | Group Index | |
December 31, 2015 | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 | | $ | 100.00 | |
December 31, 2016 | | | 82.83 | | | 111.96 | | | 120.83 | | | 120.85 | |
December 31, 2017 | | | 92.72 | | | 136.40 | | | 163.13 | | | 161.51 | |
December 31, 2018 | | | 55.62 | | | 130.42 | | | 164.03 | | | 158.55 | |
December 31, 2019 | | | 42.38 | | | 171.49 | | | 236.41 | | | 228.14 | |
December 31, 2020 | | | 28.54 | | | 203.04 | | | 312.95 | | | 297.06 | |
Copyright© 2022 Standard & Poor’s, a division of S&P Global. All rights reserved
| | | | | | | | | | | | | | | | | | | | | | | |
| Bread Financial Holdings, Inc. | | S&P 500 Index | | S&P Financial Index | | 2022 Peer Group Index |
| December 31, 2017 | $ | 100.00 | | | $ | 100.00 | | | $ | 100.00 | | | $ | 100.00 | |
| December 31, 2018 | 59.98 | | | 95.62 | | | 86.97 | | | 98.31 | |
| December 31, 2019 | 45.92 | | | 125.72 | | | 114.91 | | | 141.60 | |
| December 31, 2020 | 31.08 | | | 148.85 | | | 112.96 | | | 184.87 | |
| December 31, 2021 | 35.39 | | | 191.58 | | | 152.54 | | | 196.11 | |
| December 31, 2022 | 20.37 | | | 156.89 | | | 136.48 | | | 145.48 | |
Our future filings with the SEC may “incorporate information by reference,” including this
Annual Report on Form 10-K. Unless we specifically state otherwise, this
Stock Performance Graph shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.
Item 6. [Reserved]
Item 6.
| Selected Financial Data.
|
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING INFORMATION
The following table sets forth our summary historical consolidated financial information for the periods ended and as of the dates indicated. You should read the following historical consolidated financial information along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in this Form 10-K.
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
|
| | (in millions, except per share amounts) |
Income statement data | | | | | | | | | | | | | | | |
Total revenue | | $ | 4,521.4 | | $ | 5,581.3 | | $ | 5,666.6 | | $ | 5,474.7 | | $ | 5,013.2 |
Cost of operations (exclusive of amortization and depreciation disclosed separately below) | | | 2,077.3 | | | 2,687.8 | | | 2,537.2 | | | 2,469.5 | | | 2,600.3 |
Provision for loan loss | | | 1,266.2 | | | 1,187.5 | | | 1,016.0 | | | 1,140.1 | | | 940.5 |
General and administrative | | | 105.7 | | | 150.6 | | | 162.5 | | | 159.3 | | | 135.6 |
Depreciation and other amortization | | | 98.5 | | | 79.9 | | | 80.7 | | | 73.7 | | | 67.3 |
Amortization of purchased intangibles | | | 85.3 | | | 96.2 | | | 112.9 | | | 114.2 | | | 119.6 |
Loss on extinguishment of debt | | | — | | | 71.9 | | | — | | | — | | | — |
Total operating expenses | | | 3,633.0 | | | 4,273.9 | | | 3,909.3 | | | 3,956.8 | | | 3,863.3 |
Operating income | | | 888.4 | | | 1,307.4 | | | 1,757.3 | | | 1,517.9 | | | 1,149.9 |
Interest expense, net | | | 493.9 | | | 569.0 | | | 542.3 | | | 455.4 | | | 370.9 |
Income from continuing operations before income taxes | | | 394.5 | | | 738.4 | | | 1,215.0 | | | 1,062.5 | | | 779.0 |
Provision for income taxes | | | 99.5 | | | 165.8 | | | 269.5 | | | 293.3 | | | 298.8 |
Income from continuing operations | | $ | 295.0 | | $ | 572.6 | | $ | 945.5 | | $ | 769.2 | | $ | 480.2 |
(Loss) income from discontinued operations, net of taxes | | | (81.3) | | | (294.6) | | | 17.6 | | | 19.5 | | | 37.4 |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 | | $ | 517.6 |
Less: Net income attributable to non-controlling interest | | | — | | | — | | | — | | | — | | | 1.8 |
Net income attributable to common stockholders | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 | | $ | 788.7 | | $ | 515.8 |
��� | | | | | | | | | | | | | | | |
Basic income attributable to common stockholders per share: | | | | | | | | | | | | | | |
Income from continuing operations | | $ | 6.17 | | $ | 11.25 | | $ | 17.24 | | $ | 13.82 | | $ | 6.73 |
(Loss) income from discontinued operations | | $ | (1.70) | | $ | (5.89) | | $ | 0.32 | | $ | 0.35 | | $ | 0.64 |
Net income attributable to common stockholders per share | | $ | 4.47 | | $ | 5.36 | | $ | 17.56 | | $ | 14.17 | | $ | 7.37 |
| | | | | | | | | | | | | | | |
Diluted income attributable to common stockholders per share: | | | | | | | | | | | | | |
Income from continuing operations | | $ | 6.16 | | $ | 11.24 | | $ | 17.17 | | $ | 13.75 | | $ | 6.71 |
(Loss) income from discontinued operations | | $ | (1.70) | | $ | (5.78) | | $ | 0.32 | | $ | 0.35 | | $ | 0.63 |
Net income attributable to common stockholders per share | | $ | 4.46 | | $ | 5.46 | | $ | 17.49 | | $ | 14.10 | | $ | 7.34 |
| | | | | | | | | | | | | | | |
Weighted average shares: | | | | | | | | | | | | | | | |
Basic | | | 47.8 | | | 50.0 | | | 54.9 | | | 55.7 | | | 58.6 |
Diluted | | | 47.9 | | | 50.9 | | | 55.1 | | | 55.9 | | | 58.9 |
| | | | | | | | | | | | | | | |
Dividends declared per share: | | $ | 1.26 | | $ | 2.52 | | $ | 2.28 | | $ | 2.08 | | $ | 0.52 |
| | | | | | | | | | | | | | | |
| | As of December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
|
| | (in millions) |
Balance sheet data | | | | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 14,776.4 | | $ | 18,292.0 | | $ | 16,816.7 | | $ | 17,494.5 | | $ | 15,595.9 |
Redemption settlement assets, restricted | | | 693.5 | | | 600.8 | | | 558.6 | | | 589.5 | | | 324.4 |
Total assets | | | 22,547.1 | | | 26,494.8 | | | 30,387.7 | | | 30,684.8 | | | 25,514.1 |
Deferred revenue | | | 1,004.0 | | | 922.0 | | | 875.3 | | | 966.9 | | | 931.5 |
Deposits | | | 9,792.6 | | | 12,151.7 | | | 11,793.7 | | | 10,930.9 | | | 8,391.9 |
Non-recourse borrowings of consolidated securitization entities | | | 5,709.9 | | | 7,284.0 | | | 7,651.7 | | | 8,807.3 | | | 6,955.4 |
Long-term and other debt, including current maturities | | | 2,805.7 | | | 2,849.9 | | | 5,725.4 | | | 6,070.9 | | | 5,595.4 |
Total liabilities | | | 21,025.5 | | | 24,906.5 | | | 28,055.6 | | | 28,829.5 | | | 23,855.9 |
Total stockholders’ equity | | | 1,521.6 | | | 1,588.3 | | | 2,332.1 | | | 1,855.3 | | | 1,658.2 |
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
|
| | (in millions) |
Cash flow data | | | | | | | | | | | | | | | |
Cash flows from operating activities | | $ | 1,882.7 | | $ | 1,217.7 | | $ | 2,754.9 | | $ | 2,599.1 | | $ | 2,127.2 |
Cash flows from investing activities | | $ | 1,774.3 | | $ | 2,860.8 | | $ | (1,872.0) | | $ | (4,268.1) | | $ | (4,291.5) |
Cash flows from financing activities | | $ | (4,166.5) | | $ | (4,091.7) | | $ | (1,217.9) | | $ | 4,004.9 | | $ | 2,637.4 |
| | | | | | | | | | | | | | | |
Non-GAAP Financial Measures | | | | | | | | | | | | | | | |
Adjusted EBITDA | | $ | 1,156.9 | | $ | 1,710.3 | | $ | 1,995.3 | | $ | 1,747.1 | | $ | 1,620.0 |
Adjusted EBITDA, net | | $ | 771.5 | | $ | 1,271.3 | | $ | 1,609.4 | | $ | 1,465.4 | | $ | 1,404.2 |
| | | | | | | | | | | | | | | |
Segment operating data | | | | | | | | | | | | | | | |
Credit card statements generated | | | 235.0 | | | 281.1 | | | 300.7 | | | 296.7 | | | 279.4 |
Credit sales | | $ | 24,707.3 | | $ | 30,986.9 | | $ | 30,702.3 | | $ | 31,001.6 | | $ | 29,271.3 |
Average credit card and loan receivables | | $ | 16,367.3 | | $ | 17,298.2 | | $ | 17,412.1 | | $ | 16,185.5 | | $ | 14,085.8 |
Normalized average credit card and loan receivables (1) | $ | 16,468.0 | | $ | 18,941.5 | | $ | 18,728.8 | | $ | 16,775.1 | | $ | 14,417.6 |
AIR MILES reward miles issued | | | 4,963.8 | | | 5,511.1 | | | 5,500.0 | | | 5,524.2 | | | 5,772.3 |
AIR MILES reward miles redeemed | | | 3,127.8 | | | 4,415.7 | | | 4,482.0 | | | 4,552.1 | | | 7,071.6 |
(1) Normalized average credit card and loan receivables includes held for sale receivables.
Use of Non-GAAP Financial Measures
Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on accounting principles generally accepted in the United States of America, or GAAP, plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and the amortization of purchased intangibles. Adjusted EBITDA excludes the gain on the sale of Precima, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, asset impairments, and restructuring and other charges. In 2019, adjusted EBITDA also excluded loss related to the extinguishment of debt in July 2019. In 2016, adjusted EBITDA excluded the impact of the cancellation of the AIR MILES Reward Program’s five-year expiry policy on December 1, 2016. These costs, as well as stock compensation expense, were not included in the measurement of segment adjusted EBITDA as the chief operating decision maker did not factor these expenses for purposes of assessing segment performance and decision making with respect to resource allocations.
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs, interest expense on deposits and adjusted EBITDA attributable to the non-controlling interest. Effective April 1, 2016, we acquired the remaining 20% interest in BrandLoyalty, which increased our ownership percentage to 100%.
We use adjusted EBITDA and adjusted EBITDA, net as an integral part of our internal reporting to measure the performance of our reportable segments and to evaluate the performance of our senior management, and we believe it
provides useful information to our investors regarding our performance and overall results of operations. Adjusted EBITDA and adjusted EBITDA, net are each considered an important indicator of the operational strength of our businesses. Adjusted EBITDA eliminates the uneven effect across all business segments of considerable amounts of non-cash depreciation of tangible assets and amortization of intangible assets, including certain intangible assets that were recognized in business combinations. A limitation of this measure, however, is that it does not reflect the periodic costs of certain capitalized tangible and intangible assets used in generating revenues in our businesses. Management evaluates the costs of such tangible and intangible assets, such as capital expenditures, investment spending and return on capital and therefore the effects are excluded from adjusted EBITDA. Adjusted EBITDA also eliminates the non-cash effect of stock compensation expense.
Adjusted EBITDA and adjusted EBITDA, net are not intended to be performance measures that should be regarded as an alternative to, or more meaningful than, either income from continuing operations or net income as indicators of operating performance or to cash flows from operating activities as a measure of liquidity. In addition, adjusted EBITDA and adjusted EBITDA, net are not intended to represent funds available for dividends, reinvestment or other discretionary uses, and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP.
The adjusted EBITDA and adjusted EBITDA, net measures presented in this Annual Report on Form 10-K may not be comparable to similarly titled measures presented by other companies, and may not be identical to corresponding measures used in our various agreements.
| | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
|
| | (in millions) |
Income from continuing operations | | $ | 295.0 | | $ | 572.6 | | $ | 945.5 | | $ | 769.2 | | $ | 480.2 |
Stock compensation expense | | | 21.3 | | | 25.1 | | | 44.4 | | | 41.3 | | | 41.5 |
Provision for income taxes | | | 99.5 | | | 165.8 | | | 269.5 | | | 293.3 | | | 298.8 |
Interest expense, net | | | 493.9 | | | 569.0 | | | 542.3 | | | 455.4 | | | 370.9 |
Depreciation and other amortization | | | 98.5 | | | 79.9 | | | 80.7 | | | 73.7 | | | 67.3 |
Amortization of purchased intangibles | | | 85.3 | | | 96.2 | | | 112.9 | | | 114.2 | | | 119.6 |
Impact of expiry (1) | | | — | | | — | | | — | | | — | | | 241.7 |
Gain on sale of business, net of strategic transaction costs (2) | | | (8.0) | | | — | | | — | | | — | | | — |
Strategic transaction costs (3) | | | 15.9 | | | 11.7 | | | — | | | — | | | — |
Asset impairments (4) | | | 63.7 | | | — | | | — | | | — | | | — |
Restructuring and other charges (5) | | | (8.2) | | | 118.1 | | | — | | | — | | | — |
Loss on extinguishment of debt (6) | | | — | | | 71.9 | | | — | | | — | | | — |
Adjusted EBITDA | | $ | 1,156.9 | | $ | 1,710.3 | | $ | 1,995.3 | | $ | 1,747.1 | | $ | 1,620.0 |
Less: Securitization funding costs | | | 165.9 | | | 213.4 | | | 220.2 | | | 156.6 | | | 125.6 |
Less: Interest expense on deposits | | | 219.5 | | | 225.6 | | | 165.7 | | | 125.1 | | | 84.7 |
Less: Adjusted EBITDA attributable to non-controlling interest | | | — | | | — | | | — | | | — | | | 5.5 |
Adjusted EBITDA, net | | $ | 771.5 | | $ | 1,271.3 | | $ | 1,609.4 | | $ | 1,465.4 | | $ | 1,404.2 |
(1) | Represents the impact of the cancellation of the AIR MILES Reward Program’s five-year expiry policy on December 1, 2016. |
(2) | Represents gain on sale of Precima in January 2020, net of strategic transaction costs. Precima was included in the Company’s LoyaltyOne segment. See Note 6, “Disposition,” of the Notes to Consolidated Financial Statements for more information. |
(3) | Represents costs for professional services associated with strategic initiatives. |
(4) | Represents asset impairment charges related to certain deferred contract costs, fixed assets and right of use assets. See Note 3, “Revenue,” Note 12, “Leases,” and Note 13, “Property and Equipment,” of the Notes to Consolidated Financial Statements for more information. |
(5) | Represents costs associated with restructuring or other exit activities. See Note 15, “Restructuring and Other Charges,” of the Notes to Consolidated Financial Statements for more information. |
(6) | Represents loss on extinguishment of debt resulting from the redemption price of senior notes and the write-off of deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion of outstanding senior notes and the amendment to the credit agreement, which was effective upon the consummation of the sale of Epsilon. |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
Overview
We are a leading provider of data-driven marketing, loyalty and payment solutions serving large, consumer-based industries. We create and deploy customized solutions that measurably change consumer behavior while driving business growth and profitability for some of today’s most recognizable brands. We help our partners create and increase customer loyalty across multiple touch points using traditional, digital, mobile and emerging technologies. We operate under two segments—LoyaltyOne and Card Services. Our LoyaltyOne business owns and operates the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of tailor-made loyalty programs for grocers. Our Card Services business is a comprehensive provider of market-leading private label, co-brand, general purpose and business credit card programs, digital payments, including Bread, and Comenity-branded financial services. Effective March 31, 2019, our Epsilon segment was treated as a discontinued operation, and was subsequently sold on July 1, 2019.
Year in Review
| ● | Effective January 1, 2020, we adopted Accounting Standards Codification, or ASC, 326, “Financial Instruments—Credit Losses,” and applied a current expected credit loss, or CECL, model to determine our allowance for loan loss, which is measured over the estimated life of the credit card and loan receivable. Our adoption of CECL on January 1, 2020 resulted in an increase in our allowance for loan loss at adoption of $644.0 million, which was recorded through a cumulative-effect adjustment to retained earnings, net of taxes. See Note 8, “Credit Card and Loan Receivables,” of the Notes to Consolidated Financial Statements for more information. |
| ● | In January 2020, we sold Precima, a provider of retail strategy and customer data applications and analytics, for total consideration of approximately $43.8 million. Precima was included in our LoyaltyOne segment. |
| ● | During 2020, we paid dividends and dividend equivalent rights of $60.6 million. |
| ● | During 2020, we sold one credit card portfolio for cash consideration of $289.5 million. |
| ● | We launched our direct-to-consumer Comenity-branded general purpose credit card, the Comenity CardSM, which provides Alliance Data with an additional product to both attract and retain our cardholders. |
| ● | In October 2020, we entered into an agreement to transition hosting of our credit card processing services to Fiserv, a leading global provider of payments and financial services technology solutions. |
| ● | In December 2020, we completed the acquisition of Bread for aggregate consideration of approximately $491.0 million, net of cash and restricted cash acquired, subject to closing purchase price adjustments. Bread provides technology solutions for merchants to provide digital purchase financing options to customers in the form of installment credit as well as credit and debit multi-pay solutions. Bread is included in our Card Services segment. |
COVID-19 Update
In the first quarter of 2020, the WHO declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have imposed varying degrees of restrictions on social and commercial activity in an effort to improve health and safety. In response to the COVID-19 pandemic, first and foremost, we have prioritized the health and safety of our associates. Effective teleworking protocols are in place for approximately 95% of our associates.
COVID-19 restrictions have adversely impacted and continue to adversely impact our associates, our business partners, and our customers, which has negatively impacted our financial performance, as revenue and adjusted EBITDA, net significantly declined from the prior year. In response to the COVID-19 pandemic, the Company offered forbearance programs, which provide 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. However, in the third and fourth quarter of 2020, we began to experience a gradual recovery in the economy coupled with the holiday season. Credit sales and AIR
MILES reward miles issued and redeemed all increased sequentially in the third and fourth quarter of 2020. Further, credit metrics remained resilient, reflecting strong payment trends across our consumer borrower base, which may have benefitted from government economic stimulus programs, and delinquency rates improved in the second half of the year. Nonetheless, we continue to monitor the evolving situation and guidance from international, provincial, federal, state and local government and public health authorities. Despite the emergence of vaccines, surges in COVID-19 cases, including variants of the strain, such as those recently experienced in Europe and the United States, may cause people to self-quarantine or governments to shut down nonessential businesses again. 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
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | |
| | | | | | | | | | | 2020 | | 2019 | |
| | 2020 | | 2019 | | 2018 | | to 2019 | | to 2018 | |
|
| | (in millions, except percentages) | |
Revenues | | | | | | | | | | | | | | |
Services | | $ | 116.9 | | $ | 215.5 | | $ | 295.4 | | (46) | % | (27) | % |
Redemption, net | | | 473.1 | | | 637.3 | | | 676.3 | | (26) | | (6) | |
Finance charges, net | | | 3,931.4 | | | 4,728.5 | | | 4,694.9 | | (17) | | 1 | |
Total revenue | | | 4,521.4 | | | 5,581.3 | | | 5,666.6 | | (19) | | (2) | |
Operating expenses | | | | | | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 2,077.3 | | | 2,687.8 | | | 2,537.2 | | (23) | | 6 | |
Provision for loan loss | | | 1,266.2 | | | 1,187.5 | | | 1,016.0 | | 7 | | 17 | |
General and administrative | | | 105.7 | | | 150.6 | | | 162.5 | | (30) | | (7) | |
Depreciation and other amortization | | | 98.5 | | | 79.9 | | | 80.7 | | 23 | | (1) | |
Amortization of purchased intangibles | | | 85.3 | | | 96.2 | | | 112.9 | | (11) | | (15) | |
Loss on extinguishment of debt | | | — | | | 71.9 | | | — | | (100) | | 100 | |
Total operating expenses | | | 3,633.0 | | | 4,273.9 | | | 3,909.3 | | (15) | | 9 | |
Operating income | | | 888.4 | | | 1,307.4 | | | 1,757.3 | | (32) | | (26) | |
Interest expense | | | | | | | | | | | | | | |
Securitization funding costs | | | 165.9 | | | 213.4 | | | 220.2 | | (22) | | (3) | |
Interest expense on deposits | | | 219.5 | | | 225.6 | | | 165.7 | | (3) | | 36 | |
Interest expense on long-term and other debt, net | | | 108.5 | | | 130.0 | | | 156.4 | | (16) | | (17) | |
Total interest expense, net | | | 493.9 | | | 569.0 | | | 542.3 | | (13) | | 5 | |
Income from continuing operations before income taxes | | | 394.5 | | | 738.4 | | | 1,215.0 | | (47) | | (39) | |
Provision for income taxes | | | 99.5 | | | 165.8 | | | 269.5 | | (40) | | (38) | |
Income from continuing operations | | | 295.0 | | | 572.6 | | | 945.5 | | (48) | | (39) | |
(Loss) income from discontinued operations, net of taxes | | | (81.3) | | | (294.6) | | | 17.6 | | (72) | | nm | * |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 | | (23) | % | (71) | % |
| | | | | | | | | | | | | | |
Key Operating Metrics: | | | | | | | | | | | | | | |
Credit card statements generated | | | 235.0 | | | 281.1 | | | 300.7 | | (16) | % | (7) | % |
Credit sales | | $ | 24,707.3 | | $ | 30,986.9 | | $ | 30,702.3 | | (20) | % | 1 | % |
Average credit card and loan receivables | | $ | 16,367.3 | | $ | 17,298.2 | | $ | 17,412.1 | | (5) | % | (1) | % |
Normalized average credit card and loan receivables | | $ | 16,468.0 | | $ | 18,941.5 | | $ | 18,728.8 | | (13) | % | 1 | % |
AIR MILES reward miles issued | | | 4,963.8 | | | 5,511.1 | | | 5,500.0 | | (10) | % | — | % |
AIR MILES reward miles redeemed | | | 3,127.8 | | | 4,415.7 | | | 4,482.0 | | (29) | % | (1) | % |
Year ended December 31, 2020 compared to the year ended December 31, 2019
Revenue. Total revenue decreased $1,059.9 million, or 19%, to $4,521.4 million for the year ended December 31, 2020 from $5,581.3 million for the year ended December 31, 2019. The net decrease was due to the following:
| ● | Services. Revenue decreased $98.6 million, or 46%, to $116.9 million for the year ended December 31, 2020 primarily due to the sale of Precima in January 2020, which resulted in a $79.3 million decrease in revenue as compared to the prior year. Service revenue also declined by $43.4 million due to lower volumes. These decreases were offset in part by a $32.6 million increase in merchant fee revenue due to decreased royalty payments to our retailers. |
| ● | Redemption. Revenue decreased $164.2 million, or 26%, to $473.1 million for the year ended December 31, 2020 as redemption revenue from our short-term loyalty programs decreased $158.1 million due to a decline in |
| | programs in markets across most regions due to the impact of COVID-19. In response to COVID-19, certain of our customers have delayed their short-term loyalty programs. |
| ● | Finance charges, net. Revenue decreased $797.1 million, or 17%, to $3,931.4 million for the year ended December 31, 2020. The decline was due to a 13% decrease in normalized average receivables that decreased revenue by $617.5 million, and an approximate 110 basis point decrease in finance charge yield, which decreased revenue by $179.6 million. The decrease in normalized average receivables was due to a 20% decline in credit sales compared to the prior year due to COVID-19 and sales of credit card portfolios. The decrease in finance charge yield was due primarily to forbearance programs offered, including waivers of late fees, in response to COVID-19, as well as the lowering of market interest rates. |
Cost of operations. Cost of operations decreased $610.5 million, or 23%, to $2,077.3 million for the year ended December 31, 2020 as compared to $2,687.8 million for the year ended December 31, 2019. The net decrease was due to the following:
| ● | Within the LoyaltyOne segment, cost of operations decreased $270.8 million, including a $149.9 million decrease in cost of redemptions due to the decline in redemption revenue discussed above and restructuring and other charges incurred in the prior year. Additionally, the sale of Precima in January 2020 resulted in a $78.4 million decrease in cost of operations excluding the gain on sale, and cost of operations decreased due to cost saving initiatives executed in 2019 and 2020, with a reduction of expenses across several categories. |
| ● | Within the Card Services segment, cost of operations decreased $339.6 million, including a $182.2 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale, a $92.1 million decrease in payroll and benefits costs due to cost saving initiatives executed in the fourth quarter of 2019 and in 2020, a $61.3 million decrease in marketing expense due to the decline in volumes, and a $81.7 million decline in various other credit card costs due to reductions in volume, including a reduction in fraud losses, and cost saving initiatives. These decreases were offset in part by a $23.5 million decrease in gains recognized on sales of credit card portfolios as compared to the prior year and $63.7 million in asset impairment charges recorded in 2020, related to certain deferred contract costs, fixed assets and right of use assets. |
Provision for loan loss. Provision for loan loss increased $78.7 million, or 7%, to $1,266.2 million for the year ended December 31, 2020 as compared to $1,187.5 million for the year ended December 31, 2019, due to a higher allowance for loan loss related to estimated lifetime losses under the CECL model, including the projected impacts of COVID-19. This was offset in part by the decline in credit card and loan receivables of $2.7 billion.
General and administrative. General and administrative expenses decreased $44.9 million, or 30%, to $105.7 million for the year ended December 31, 2020 as compared to $150.6 million for the year ended December 31, 2019, due to cost saving initiatives implemented in 2019 and 2020, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs. In addition, the prior year was impacted by $37.9 million in restructuring charges incurred related to our Corporate reorganization.
Depreciation and other amortization. Depreciation and other amortization increased $18.6 million, or 23%, to $98.5 million for the year ended December 31, 2020, as compared to $79.9 million for the year ended December 31, 2019, due to $24.7 million in accelerated depreciation expense of fixed assets associated with certain real estate properties that have ceased use but intend to sublease. See Note 13, “Property and Equipment,” of the Notes to Consolidated Financial Statements for more information. This increase was offset in part by certain fully amortized capitalized software.
Amortization of purchased intangibles. Amortization of purchased intangibles decreased $10.9 million, or 11%, to $85.3 million for the year ended December 31, 2020, as compared to $96.2 million for the year ended December 31, 2019, primarily due to certain fully amortized intangible assets, including portfolio premiums.
Loss on extinguishment of debt. For the year ended December 31, 2019, we recorded a $71.9 million loss on extinguishment of debt resulting from the $49.9 million redemption price of the senior notes and the write-off of $22.0 million of deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion of outstanding senior notes and an amendment to the credit agreement that was effective upon the consummation of the sale of Epsilon.
Interest expense, net. Total interest expense, net decreased $75.1 million, or 13%, to $493.9 million for the year ended December 31, 2020 as compared to $569.0 million for the year ended December 31, 2019. The net decrease was due to the following:
| ● | Securitization funding costs. Securitization funding costs decreased $47.5 million due to lower average borrowings, which decreased funding costs by approximately $55.9 million, offset in part by higher average interest rates, due to the timing of asset-backed debt maturities, which increased funding costs by approximately $8.4 million. |
| ● | Interest expense on deposits. Interest expense on deposits decreased $6.1 million due to lower average balances outstanding, which decreased funding costs by approximately $19.4 million, offset in part by higher average interest rates, due to the maturity of lower rate deposits, which increased funding costs by approximately $13.3 million. |
| ● | Interest expense on long-term and other debt, net. Interest expense on long-term and other debt, net decreased $21.5 million primarily due to a $72.4 million decrease in interest expense on term debt due to lower average borrowings, as well as a result of an amendment to the credit agreement, which included a $493.8 million repayment in September 2020. This decrease was offset in part by a $48.8 million increase in interest expense due to the issuance of senior notes in December 2019 and September 2020. |
Taxes. Provision for income taxes decreased $66.3 million, or 40%, to $99.5 million for the year ended December 31, 2020 from $165.8 million for the year ended December 31, 2019, primarily related to a $343.9 million reduction in earnings before taxes in the current year. The effective tax rate for the current year was 25.2% as compared to 22.5% for the prior year. The lower effective tax rate in the prior year included a decrease in tax reserves resulting from a change in accounting method for tax purposes. See Note 22, “Income Taxes,” of the Notes to Consolidated Financial Statements for more information.
Loss from discontinued operations, net of taxes. Loss from discontinued operations, net of taxes was $81.3 million for the year ended December 31, 2020 due to resolution of a loss contingency as described in Note 18, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements. Loss from discontinued operations, net of taxes was $294.6 million for the year ended December 31, 2019, due to the after-tax loss on the sale of Epsilon completed July 1, 2019 and a $32.9 million initial estimate for the loss contingency referenced above.
Year ended December 31, 2019 compared to the year ended December 31, 2018
Refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations”Operations (MD&A).
The following discussion and analysis of our 2019 results of operations and financial condition should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K particularly under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Unless otherwise specified, references to Notes to our Consolidated Financial Statements are to the Notes to our audited Consolidated Financial Statements as of December 31, 2022 and 2021 and for years ended December 31, 2022, 2021 and 2020.
OVERVIEW
We are a tech-forward financial services company that provides 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 and buy now, pay later products such as installment loans and our “split-pay” offerings. We also offer direct-to-consumer solutions that give customers more access, choice and freedom through our branded Bread CashbackTM American Express® Credit Card and Bread SavingsTM products.
Effective March 23, 2022, we changed our corporate name to Bread Financial Holdings, Inc. from Alliance Data Systems Corporation, and on April 4, 2022, we changed our ticker to “BFH” from “ADS” on the NYSE. Neither the name change nor the NYSE ticker change affected our legal entity structure, nor did either change have an impact on our Consolidated Financial Statements. On November 5, 2021, our former 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. Our primary source of revenue is from Interest and fees on loans from our various credit card and other loan products, and to a lesser extent from contractual relationships with our brand partners.
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 Annual Report on Form 10-K, constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies. In particular, 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 provide additional clarity in understanding our results of operations and trends. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, please see “Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures” that follows.
BUSINESS ENVIRONMENT
This Business Environment section provides an overview of our results of operations and financial position for 2022, as well as our related outlook for 2023 and certain of the uncertainties associated with achieving that outlook. This section should be read in conjunction with the other information appearing in this Annual Report on Form 10-K, including “Consolidated Results of Operations”, “Risk Factors”, and “Cautionary Note Regarding Forward-Looking Statements”, which provides further discussion of
variances in our
2019 results
compared to 2018, which discussion is incorporated by reference herein.
Segment Revenueof operations over the years of comparison, along with other factors that could impact future results and Adjusted EBITDA, net
the Company achieving its outlook.
| | | | | | | | | | | | | | |
| | Years Ended December 31, | | % Change | |
| | | | | | | | | | | 2020 | | 2019 | |
| | 2020 | | 2019 | | 2018 | | to 2019 | | to 2018 | |
|
| | (in millions, except percentages) | |
Revenue: | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 764.8 | | $ | 1,033.1 | | $ | 1,068.4 | | (26) | % | (3) | % |
Card Services | | | 3,756.5 | | | 4,547.8 | | | 4,597.6 | | (17) | | (1) | |
Corporate/Other | | | 0.1 | | | 0.4 | | | 0.6 | | nm | * | nm | * |
Total | | $ | 4,521.4 | | $ | 5,581.3 | | $ | 5,666.6 | | (19) | % | (2) | % |
Adjusted EBITDA, net: | | | | | | | | | | | | | | |
LoyaltyOne | | $ | 186.2 | | $ | 244.5 | | $ | 254.2 | | (24) | % | (4) | % |
Card Services | | | 667.0 | | | 1,119.7 | | | 1,496.0 | | (40) | | (25) | |
Corporate/Other | | | (81.7) | | | (92.9) | | | (140.8) | | (12) | | (34) | |
Total | | $ | 771.5 | | $ | 1,271.3 | | $ | 1,609.4 | | (39) | % | (21) | % |
Year ended2022 was a transformational year in which we rebranded to Bread Financial Holdings, Inc. in March, and executed on our strategic objectives, including expanding our product offerings with the launch of the Bread CashbackTM American Express® Credit Card, securing new diverse program agreements and long-term renewals with iconic brands, and advancing our technology modernization through major enhancements to our core platform and surrounding digital assets.
Credit sales of $32.9 billion were up 11% when compared with 2021, driven by organic growth from our existing brand partners, as well as the addition of our new brand partners and new product offerings. Average credit card and other loans of $17.8 billion grew 13%, with End-of-period loan balances up 23%. Growth in Total net interest and non-interest income of 17% exceeded the growth in average Credit card and other loans, compared with 2021; in particular Total interest income increased from the prior year due to higher average loan balances and improved loan yields. Interchange revenue, net of retailer share arrangements increased year-over-year due in part to cardholder and brand partner engagement initiatives, as well as increases in our brand partners’ share of the economics under new retailer share arrangements, while Other non-interest income decreased primarily due to the write-down of our equity method investment in LVI. Total non-interest expenses increased 15%, driven by portfolio growth and ongoing investments in technology modernization, digital advancement, marketing and product innovation.
Provision for credit losses increased relative to 2021 as a result of a reserve build due to the increase in End-of-period loan balances, including through the acquisition of new portfolios in the year, increased net principal losses and a higher reserve rate. Our Allowance for credit losses increased, with a reserve rate of 11.5% as of December 31, 20202022, relative to 10.5% as of December 31, 2021. The reserve rate increased due to continued elevated inflation, increasing consumer debt levels and weakening in macroeconomic indicators, negatively affecting our base case scenario outlook, which was partially offset by the addition of higher quality portfolios throughout the year.
Overall, Income from continuing operations of $224 million was down 72% compared with 2021, reflecting a higher Provision for credit losses as discussed previously. We remained disciplined, generating more than 200 basis points of operating leverage for the year, as we managed our expenses in alignment with our revenue and growth outlook, while continuing to invest in our future. We also strengthened our balance sheet and bolstered our financial resilience through greater product and funding diversification, and growth in capital and increased tangible book value.
Our 2023 financial outlook assumes a more challenging macroeconomic landscape. We are closely monitoring the impact of inflation, rising interest rates and other macroeconomic factors on our consumers and partners, which remain difficult to predict and therefore could have an impact on our 2023 outlook. We are experiencing a shift toward non-discretionary spending with payment rates approaching pre-pandemic levels and expecting the unemployment rate to gradually move to the mid-to-upper 4% range by year-end 2023. Our outlook assumes additional interest rate increases by the Federal Reserve Board which will result in a nominal benefit to Net interest income.
Our outlook for growth in Average credit card and other loans in 2023, based on our new and renewed brand partner announcements, visibility into our pipeline, the sale of BJ’s, and the current economic outlook, is in the mid-single digit range relative to 2022. For the year ended December 31,
2019
Revenue.2022, BJ’s branded co-brand accounts generated approximately 10% of Total net interest and non-interest income. As of December 31, 2022, BJ’s branded co-brand accounts were responsible for approximately 11% of Total credit card and other loans. We expect Total net interest and non-interest income growth for 2023, excluding the BJ’s portfolio gain on sale, to be aligned with growth in Average credit card and other loans; with a full year 2023 Net interest margin expected to be consistent with the 2022 full year rate of 19.2%.
In 2023, as a result of ongoing investments in technology modernization, digital advancement, marketing, and product innovation, along with continued portfolio growth, we anticipate an increase in Total non-interest expenses relative to 2022. We remain focused on delivering nominal positive operating leverage for 2023 as we manage the pace and timing of our investments to align with our full year revenue decreased $1,059.9 million, or 19%and growth outlook.
Our 2023 financial outlook also assumes a net loss rate of approximately 7%, inclusive of impacts from the 2022 transition of our credit card processing services as well as continued pressure on consumers’ ability to $4,521.4 millionpay due to persistent inflation.
Although we recognize the more challenging macroeconomic landscape, we remain focused on executing on our strategic priorities and making the investments that position us to drive sustainable, profitable growth.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion provides commentary on the variances in our results of operations for the year ended December 31,
2020 from $5,581.3 million for2022, compared with the year ended December 31,
2019. The decrease was due2021, as presented in the accompanying tables. This discussion should be read in conjunction with the discussion under “Business Environment”, above. For a discussion of the financial condition and results of operations for 2021 compared with 2020, please refer to
the following: | ● | LoyaltyOne. Revenue decreased $268.3 million, or 26%, to $764.8 million for the year ended December 31, 2020 as revenue from our short-term loyalty programs decreased $161.4 million due to a decline in programs in markets across most regions due to the impact of COVID-19. Additionally, the sale of Precima in January 2020 resulted in a $79.3 million decrease in revenue. Redemption revenue and servicing revenue in our coalition loyalty program were negatively impacted by a 10% decline in AIR MILES reward miles issued and a 29% decline in AIR MILES reward miles redeemed. |
| ● | Card Services. Revenue decreased $791.3 million, or 17%, to $3,756.5 million for the year ended December 31, 2020, driven by a $797.1 million decrease in finance charges, net due to a decline in credit card and loan receivables due to lower sales volumes resulting from COVID-19 and portfolios sold in 2019 and 2020, and a decrease in yield due to forbearance programs offered in response to COVID-19 and interest rate cuts. |
Adjusted EBITDA, net. Adjusted EBITDA, net decreased $499.8 million, or 39%, to $771.5 million for the year ended December 31, 2020 from $1,271.3 million for the year ended December 31, 2019. The net decrease was due to the following:
| ● | LoyaltyOne. Adjusted EBITDA, net decreased $58.3 million, or 24%, to $186.2 million for the year ended December 31, 2020, due to lost margin on the revenue declines discussed above, offset in part by improved expense management, including cost saving initiatives executed in 2019. For the year ended December 31, 2020, the $8.0 million gain on the sale of Precima, net of transaction costs was excluded from adjusted EBITDA, net. For the year ended December 31, 2019, restructuring and other charges of $50.8 million were excluded from adjusted EBITDA, net. |
| ● | Card Services. Adjusted EBITDA, net decreased $452.7 million, or 40%, to $667.0 million for the year ended December 31, 2020 primarily due to the decrease in revenue as discussed above and a $78.7 million increase in provision for loan loss due to the impact of COVID-19, as well as the implementation of the CECL model, offset in part by a $2.7 billion decline in credit card and loan receivables. These decreases were offset in part by a $182.2 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale and reductions in cost of operations due to cost saving initiatives executed in the fourth quarter of 2019 and in 2020. For the year ended December 31, 2020, asset impairments of $63.7 million were excluded from adjusted EBITDA, net. For the year ended December 31, 2019, restructuring and other charges of $29.4 million were excluded from adjusted EBITDA, net. |
| ● | Corporate/Other. Adjusted EBITDA, net improved $11.2 million to a loss of $81.7 million for the year ended December 31, 2020 due to cost saving initiatives implemented in 2019 and 2020, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs. For the year ended December 31, 2020, strategic transaction costs of $15.2 million were excluded from adjusted EBITDA, net. For the year ended December 31, 2019, loss on extinguishment of debt of $71.9 million, restructuring and other charges of $37.9 million and strategic transaction costs of $10.7 million were excluded from adjusted EBITDA, net. |
Year ended December 31, 2019 compared to the year ended December 31, 2018
Refer to “ItemPart II, Item 7. Management’s“Management's Discussion and Analysis of Financial Condition and Results of Operations” ofOperations (MD&A)” in our 2019 Annual Report on Form 10-K for a discussion of our 2019 segment results compared to 2018,the year ended December 31, 2021, filed with the SEC on February 25, 2022, which discussion is incorporated herein by reference herein.reference.
Table 1: Summary of Our Financial Performance
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | $ Change | | % Change |
| 2022 | | 2021 | | 2020 | | 2022
to 2021 | | 2021
to 2020 | | 2022
to 2021 | | 2021
to 2020 |
| (Millions, except per share amounts and percentages) |
| Total net interest and non-interest income | $ | 3,826 | | | $ | 3,272 | | | $ | 3,298 | | | $ | 554 | | | $ | (26) | | | 17 | | | (1) | |
| Provision for credit losses | 1,594 | | | 544 | | | 1,266 | | | 1,050 | | | (722) | | | 193 | | | (57) | |
| Total non-interest expenses | 1,932 | | | 1,684 | | | 1,731 | | | 248 | | | (47) | | | 15 | | | (3) | |
| Income from continuing operations before income taxes | 300 | | | 1,044 | | | 301 | | | (744) | | | 743 | | | (71) | | | nm |
| Provision for income taxes | 76 | | | 247 | | | 93 | | | (171) | | | 154 | | | (69) | | | 168 | |
| Income from continuing operations | 224 | | | 797 | | | 208 | | | (573) | | | 589 | | | (72) | | | nm |
| (Loss) income from discontinued operations, net of income taxes | (1) | | | 4 | | | 6 | | | (5) | | | (2) | | | (111) | | | (38) | |
| Net income | 223 | | | 801 | | | 214 | | | (578) | | | 587 | | | (72) | | | nm |
| | | | | | | | | | | | | |
| Net income per diluted share | $ | 4.46 | | | $ | 16.02 | | | $ | 4.46 | | | $ | (11.56) | | | $ | 11.56 | | | (72) | | | nm |
| Income from continuing operations per diluted share | $ | 4.47 | | | $ | 15.95 | | | $ | 4.35 | | | $ | (11.48) | | | $ | 11.60 | | | (72) | | | nm |
Net interest margin (1) | 19.2 | % | | 18.2 | % | | 16.8 | % | | | | | | 1.0 | | | 1.4 | |
Return on average equity (2) | 9.8 | % | | 40.7 | % | | 16.7 | % | | | | | | (30.9) | | | 24.0 | |
| Effective income tax rate - continuing operations | 25.4 | % | | 23.7 | % | | 30.7 | % | | | | | | 1.7 | | | (7.0) | |
(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.
(nm) Not meaningful
Table 2: Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | $ Change | | % Change |
| 2022 | | 2021 | | 2020 | | 2022
to 2021 | | 2021
to 2020 | | 2022
to 2021 | | 2021
to 2020 |
| (Millions, except percentages) | |
| Interest income | | | | | | | | | | | | | |
| Interest and fees on loans | $ | 4,615 | | | $ | 3,861 | | | $ | 3,931 | | | $ | 754 | | | $ | (70) | | | 20 | | | (2) | |
| Interest on cash and investment securities | 69 | | | 7 | | | 21 | | | 62 | | | (14) | | | nm | | (64) | |
| Total interest income | 4,684 | | | 3,868 | | | 3,952 | | | 816 | | | (84) | | | 21 | | | (2) | |
| Interest expense | | | | | | | | | | | | | |
| Interest on deposits | 243 | | | 167 | | | 238 | | | 76 | | | (71) | | | 46 | | | (30) | |
| Interest on borrowings | 260 | | | 216 | | | 261 | | | 44 | | | (45) | | | 20 | | | (18) | |
| Total interest expense | 503 | | | 383 | | | 499 | | | 120 | | | (116) | | | 31 | | | (23) | |
| Net interest income | 4,181 | | | 3,485 | | | 3,453 | | | 696 | | | 32 | | | 20 | | | 1 | |
| Non-interest income | | | | | | | | | | | | | |
| Interchange revenue, net of retailer share arrangements | (469) | | | (369) | | | (332) | | | (100) | | | (37) | | | 27 | | | 11 | |
| Other | 114 | | | 156 | | | 177 | | | (42) | | | (21) | | | (27) | | | (12) | |
| Total non-interest income | (355) | | | (213) | | | (155) | | | (142) | | | (58) | | | 66 | | | 38 | |
| Total net interest and non-interest income | 3,826 | | | 3,272 | | | 3,298 | | | 554 | | | (26) | | | 17 | | | (1) | |
| Provision for credit losses | 1,594 | | | 544 | | | 1,266 | | | 1,050 | | | (722) | | | 193 | | | (57) | |
| Total net interest and non-interest income, after provision for credit losses | $ | 2,232 | | | $ | 2,728 | | | $ | 2,032 | | | $ | (496) | | | $ | 696 | | | (18) | | | 34 | |
(nm) Not meaningful
Total Net Interest and Non-interest Income, After Provision for Credit Losses
Interest income: Total interest income increased for the year ended December 31, 2022, primarily resulting from Interest and fees on loans. The increase during the period, relative to the prior year, was due to increases in Average credit card and other loans driven by new originations and moderation in the consumer payment rate, as well as an increase in finance charge yields of approximately 131 basis points.
Interest expense: Total interest expense increased for the year ended December 31, 2022, due to the following:
•Interest on deposits increased $76 million due to higher average interest rates which increased interest expense by approximately $72 million, as well as higher average balances which increased interest expense by $4 million.
•Interest on borrowings increased $44 million due to higher interest rates which increased funding costs $72 million, offset by lower average borrowings which decreased funding costs by approximately $28 million.
Non-interest income: Total non-interest income increased for the year ended December 31, 2022, due to the following:
•Interchange revenue, net of retailer share arrangements increased due to cardholder and brand partner engagement initiatives, as well as increases in our brand partners’ share of the economics under new retailer share arrangements, partially offset by fees earned from increased credit sales.
•Other decreased primarily due to the write-down of our equity method investment in LVI of $44 million.
Provision for credit losses increased for the year ended December 31, 2022, due primarily to a reserve build of $626 million, driven by a 23% higher End-of-period loan balance, higher net principal losses, and a higher reserve rate due to economic scenario weightings in our credit reserve modeling as a result of weakening in macroeconomic indicators, elevated inflation, and the increased cost of overall consumer debt.
Table 3: Summary of Total Non-interest Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | $ Change | | % Change |
| 2022 | | 2021 | | 2020 | | 2022
to 2021 | | 2021
to 2020 | | 2022
to 2021 | | 2021
to 2020 |
| (Millions, except percentages) | |
| Non-interest expenses | | | | | | | | | | | | | |
| Employee compensation and benefits | $ | 779 | | | $ | 671 | | | $ | 609 | | | $ | 108 | | | $ | 62 | | | 16 | | | 10 | |
| Card and processing expenses | 359 | | | 323 | | | 396 | | | 36 | | | (73) | | | 11 | | | (18) | |
| Information processing and communication | 274 | | | 216 | | | 191 | | | 58 | | | 25 | | | 27 | | | 13 | |
| Marketing expenses | 180 | | | 160 | | | 143 | | | 20 | | | 17 | | | 13 | | | 12 | |
| Depreciation and amortization | 113 | | | 92 | | | 106 | | | 21 | | | (14) | | | 23 | | | (13) | |
| Other | 227 | | | 222 | | | 286 | | | 5 | | | (64) | | | 2 | | | (23) | |
| Total non-interest expenses | $ | 1,932 | | | $ | 1,684 | | | $ | 1,731 | | | $ | 248 | | | $ | (47) | | | 15 | | | (3) | |
Total Non-interest Expenses
Non-interest expenses: Total non-interest expenses increased for the year ended December 31, 2022, due to the following:
•Employee compensation and benefits increased due to increased salaries, contract labor, which itself was driven by continued digital and technology modernization-related hiring, and incentive compensation, as well as higher volume-related staffing levels.
•Card and processing expenses increased due to higher volumes, primarily related to the acquisition of the AAA credit card portfolio, and higher fraud losses.
•Information processing and communication increased due to an increase in data processing expense driven by the transition of our credit card processing services.
•Marketing expenses increased due to increased spending associated with higher sales and brand partner joint marketing campaigns, as well as on expanding our new brand, products and direct-to-consumer offerings.
•Depreciation and amortization increased due to increased amortization for developed technology associated with the Lon Inc. acquisition, which was completed in December 2020.
Income Taxes
Provision for income taxes decreased for the year ended December 31, 2022, primarily related to a $744 million decrease in Income from continuing operations before income taxes in 2022. The effective tax rate for the year ended December 31, 2022 was 25.4% as compared to 23.7% for the year ended December 31, 2021. The 2022 effective tax rate was unfavorably impacted by lower Income from continuing operations before income taxes and an increase to the deferred tax asset valuation allowance, offset by favorable settlements with tax authorities. The lower effective tax rate in 2021 included a discrete tax benefit related to a favorable settlement with a state tax authority and a discrete tax benefit triggered by the divestiture of our former LoyaltyOne segment.
Table 4: Summary Financial Highlights – Continuing Operations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of or for the Years Ended December 31, | | % Change |
| 2022 | | 2021 | | 2020 | | 2022
to 2021 | | 2021
to 2020 |
| (Millions, except per share amounts and percentages) | |
| Credit sales | $ | 32,883 | | | $ | 29,603 | | | $ | 24,707 | | | 11 | | | 20 | |
PPNR(1) | 1,894 | | | 1,588 | | | 1,567 | | | 19 | | | 1 | |
| Average credit card and other loans | 17,768 | | | 15,656 | | | 16,367 | | | 13 | | | (4) | |
| End-of-period credit card and other loans | 21,365 | | | 17,399 | | | 16,784 | | | 23 | | | 4 | |
| End-of-period direct-to-consumer deposits | 5,466 | | | 3,180 | | | 1,700 | | | 72 | | | 87 | |
| | | | | | | | | |
Return on average assets(2) | 1.0 | % | | 3.6 | % | | 0.9 | % | | (2.6) | | | 2.7 | |
Return on average equity(3) | 9.8 | % | | 40.7 | % | | 16.7 | % | | (30.9) | | | 24.0 | |
| | | | | | | | | |
Net interest margin(4) | 19.2 | % | | 18.2 | % | | 16.8 | % | | 1.0 | | | 1.4 | |
Loan yield(5) | 26.0 | % | | 24.7 | % | | 24.0 | % | | 1.3 | | | 0.7 | |
| | | | | | | | | |
Efficiency ratio(6) | 50.5 | % | | 51.5 | % | | 52.5 | % | | (1.0) | | | (1.0) | |
| | | | | | | | | |
Tangible common equity / Tangible assets ratio (TCE/TA)(7) | 6.0 | % | | 6.6 | % | | 3.7 | % | | (0.6) | | | 2.9 | |
Tangible book value per common share (8) | $ | 29.42 | | | $ | 28.09 | | | $ | 16.34 | | | 4.7 | | | 71.9 | |
| Cash dividend per common share | $ | 0.84 | | | $ | 0.84 | | | $ | 1.26 | | | — | | | (33.3) | |
| | | | | | | | | |
Payment rate(9) | 16.4 | % | | 17.2 | % | | 16.2 | % | | (0.8) | | | 1.0 | |
| | | | | | | | | |
Delinquency rate(10) | 5.5 | % | | 3.9 | % | | 4.4 | % | | 1.6 | | | (0.5) | |
Net loss rate(10) | 5.4 | % | | 4.6 | % | | 6.6 | % | | 0.8 | | | (2.0) | |
| Reserve rate | 11.5 | % | | 10.5 | % | | 12.0 | % | | 1.0 | | | (1.5) | |
(1)PPNR, is calculated by increasing/decreasing Income from continuing operations before income taxes by the net provision/release in Provision for credit losses. PPNR is a non-GAAP financial measure. See “Non-GAAP Financial Measures” and 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 “Non-GAAP Financial Measures” and 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 “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
(9)Payment rate represents consumer payments during the last month of the period, divided by the beginning-of-month credit card and other loans, including held for sale in applicable periods.
(10)Delinquency and Net loss rates as of or for the year ended December 31, 2022 were impacted by the transition of our credit card processing services.
Table 5: Net Interest Margin
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2022 |
| Average Balance* | | Interest Income / Expense | | Average Yield / Rate |
| (Millions, except percentages) | |
| Cash and investment securities | $ | 3,954 | | | $ | 69 | | | 1.75 | % |
| Credit card and other loans | 17,768 | | | 4,615 | | | 25.97 | % |
| Total interest-earning assets | 21,722 | | | 4,684 | | | 21.56 | % |
| | | | | |
| Direct-to-consumer (retail) deposits | 4,342 | | | 81 | | | 1.87 | % |
| Wholesale deposits | 7,358 | | | 162 | | | 2.21 | % |
| Interest-bearing deposits | 11,700 | | | 243 | | | 2.08 | % |
| | | | | |
| Secured borrowings | 5,089 | | | 153 | | | 2.99 | % |
| Unsecured borrowings | 1,966 | | | 107 | | | 5.46 | % |
| Interest-bearing borrowings | 7,055 | | | 260 | | | 3.68 | % |
| Total interest-bearing liabilities | 18,755 | | | 503 | | | 2.68 | % |
| | | | | |
| Net interest income | | | $ | 4,181 | | | |
| | | | | |
Net interest margin (NIM)(1) | | | 19.2 | % | | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2021 |
| Average Balance* | | Interest Income / Expense | | Average Yield / Rate |
| (Millions, except percentages) | |
| Cash and investment securities | $ | 3,480 | | | $ | 7 | | | 0.21 | % |
| Credit card and other loans | 15,656 | | | 3,861 | | | 24.66 | % |
| Total interest-earning assets | 19,136 | | | 3,868 | | | 20.21 | % |
| | | | | |
| Direct-to-consumer deposits (retail) | 2,490 | | | 23 | | | 0.91 | % |
| Wholesale deposits | 7,509 | | | 144 | | | 1.92 | % |
| Interest-bearing deposits | 9,999 | | | 167 | | | 1.67 | % |
| | | | | |
| Secured borrowings | 4,596 | | | 112 | | | 2.43 | % |
| Unsecured borrowings | 2,699 | | | 104 | | | 3.84 | % |
| Interest-bearing borrowings | 7,295 | | | 216 | | | 2.95 | % |
| Total interest-bearing liabilities | 17,294 | | | 383 | | | 2.21 | % |
| | | | | |
| Net interest income | | | $ | 3,485 | | | |
| | | | | |
Net interest margin (NIM)(1) | | | 18.2 | % | | |
(1)Net interest margin represents annualized Net interest income divided by average Total interest-earning assets.
Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31, | | % Change |
| 2022 | | 2021 | | 2020 | | 2022
to 2021 | | 2021
to 2020 |
| (Millions, except percentages) | |
| Pretax pre-provision earnings (PPNR) | | | | | | | | | |
| Income from continuing operations before income taxes | $ | 300 | | | $ | 1,044 | | | $ | 301 | | | (71) | | | nm |
| Provision for credit losses | 1,594 | | | 544 | | | 1,266 | | | 193 | | | (57) | |
| Pretax pre-provision earnings (PPNR) | $ | 1,894 | | | $ | 1,588 | | | $ | 1,567 | | | 19 | | | 1 | |
| | | | | | | | | |
| Tangible common equity (TCE) | | | | | | | | | |
| Total stockholders’ equity | $ | 2,265 | | | $ | 2,086 | | | $ | 1,522 | | | 9 | | | 37 | |
| Less: Goodwill and intangible assets, net | (799) | | | (687) | | | (710) | | | 16 | | | (3) | |
| Tangible common equity (TCE) | $ | 1,466 | | | $ | 1,399 | | | $ | 812 | | | 5 | | | 72 | |
| | | | | | | | | |
| Tangible assets (TA) | | | | | | | | | |
| Total assets | $ | 25,407 | | | $ | 21,746 | | | $ | 22,547 | | | 17 | | | (4) | |
| Less: Goodwill and intangible assets, net | (799) | | | (687) | | | (710) | | | 16 | | | (3) | |
| Tangible assets (TA) | $ | 24,608 | | | $ | 21,059 | | | $ | 21,837 | | | 17 | | | (4) | |
______________________________(nm) Not meaningful
Table
Given the nature of Contents
Asset Quality
Our delinquencyour business, the quality of our assets, in particular our Credit card and net charge-offother loans, is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to our Credit card and other loans portfolio, we closely monitor two metrics – Delinquency rates and Net principal loss rates – which reflect, among other factors, our underwriting, the inherent credit risk ofin our credit card and loan receivables,portfolio, the success of our collection and recovery efforts, and more broadly, the general economicmacroeconomic 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 other fees are paid or charged-off, typically at 180 days delinquent for credit card receivables and 120 days delinquent for installment loan receivables.charged-off. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommendsdelinquent; based upon the level of risk indicated, a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account.is deployed. If we are unable to make a collection after exhausting all in-house collection efforts we are unable to collect on the account, we may engage collection agencies andor outside attorneys to continue those efforts.efforts, or sell the charged-off balances.
The Delinquency rate is calculated by dividing outstanding balances that are contractually delinquent (i.e., balances greater than 30 days past due) as of the end of the period, by the outstanding principal amount of credit cards and other loans as of the same period-end.
The following table presents the delinquency trends ofon our creditCredit card and loan receivablesother loans portfolio based on the principal balances outstanding as of December 31:
Table 7: Delinquency Trends on Credit Card and Other Loans
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | % of
Total | | 2021 | | % of
Total |
| (Millions, except percentages) | |
| Credit card and other loans outstanding ─ principal | $ | 20,107 | | | 100.0 | % | | $ | 16,590 | | | 100.0 | % |
Outstanding balances contractually delinquent:(1) | | | | | | | |
| 31 to 60 days | $ | 366 | | | 1.8 | % | | $ | 219 | | | 1.3 | % |
| 61 to 90 days | 231 | | | 1.2 | | | 147 | | | 0.9 | |
| 91 or more days | 515 | | | 2.6 | | | 281 | | | 1.7 | |
| Total | $ | 1,112 | | | 5.5 | % | | $ | 647 | | | 3.9 | % |
(1)As of December 31, 2022 the Outstanding balances contractually delinquent, and the related % of Total (i.e., the Delinquency rate), were impacted by the transition of our credit card processing services.
As part of our collections strategy, we may offer temporary, short term (six-months or less) loan modifications in order to improve the likelihood of collections and
loan receivables:
| | | | | | | | | | | |
| | December 31, | | % of | | December 31, | | % of | |
| | 2020 | | Total | | 2019 | | Total | |
|
| | (in millions, except percentages) | |
Receivables outstanding ─ principal | | $ | 15,963.3 | | 100.0 | % | $ | 18,413.1 | | 100.0 | % |
Principal receivables balances contractually delinquent: | | | | | | | | | | | |
31 to 60 days | | $ | 229.9 | | 1.4 | % | $ | 337.4 | | 1.8 | % |
61 to 90 days | | | 162.8 | | 1.0 | | | 233.6 | | 1.3 | |
91 or more days | | | 315.2 | | 2.0 | | | 496.5 | | 2.7 | |
Total | | $ | 707.9 | | 4.4 | % | $ | 1,067.5 | | 5.8 | % |
In response tomeet the COVID-19 pandemic, weneeds of our customers. Our modifications for customers who have offered forbearance programs, which provide for short-term modificationsrequested assistance and meet certain qualifying requirements, come in the form of reduced or deferred payment deferralsrequirements, interest rate reductions and late fee waivers to borrowers who were current aswaivers. We do not offer programs involving the forgiveness of their most recent billing cycle prior toprincipal. These temporary loan modifications may assist in cases where we believe the announcement ofcustomer will recover from the short-term hardship and resume scheduled payments. Under these forbearance programs. Thosemodification programs, those accounts receiving forbearance relief may not advance to the next delinquency cycle, including eventually to charge-off, in the same timeframetime frame that would have occurred had the forbearance 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 the Consolidated Financial Statements.
Net Charge-Offs. Principal Losses: Our net charge-offsprincipal losses include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and third-party fraud losses.losses (including synthetic fraud). Charged-off interest and fees reduce finance charges, netInterest and fees on loans while third-party fraud losses are recorded as an expense.in Card and processing expenses. Credit card receivables,loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days contractually past due, exceptdue. BNPL loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptciesbankruptcy or death. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due. Creditdeath, credit card receivables,and other loans, including unpaid interest and fees, associated with customer bankruptcies or deathas applicable, are charged-off in each month subsequent to 60 days after the receipt of the notification of the bankruptcy or death, but in anyno case not laterlonger than the 180-day contractual time frame.180 days past due for credit card loans and 120 days past due for BNPL loans.
The net charge-offprincipal loss rate is calculated by dividing net charge-offs of principal receivableslosses for the period by the averageAverage credit card and loan receivablesother loans for the same period. Average credit card and loan receivablesother loans represent the average balance of the cardholder receivablesloans at the beginning and end of each month, inaveraged over the periods indicated. The following table presents our net charge-offsprincipal losses for the periods indicated:years ended December 31:
Table 8: Net Principal Losses on Credit Card and Other Loans
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions, except percentages) | |
| Average credit card and other loans | $ | 17,768 | | | $ | 15,656 | | | $ | 16,367 | |
| Net principal losses | 968 | | | 720 | | | 1,083 | |
Net principal losses as a percentage of average credit card and other loans(1) | 5.4 | % | | 4.6 | % | | 6.6 | % |
(1) | | | | | | | | | | |
| | | | | | | | | | |
| | Years Ended December 31, | |
| | 2020 | | 2019 | | 2018 | |
|
| | (in millions, except percentages) | |
Average credit card and loan receivables | | $ | 16,367.3 | | $ | 17,298.2 | | $ | 17,412.1 | |
Net charge-offs of principal receivables | | | 1,083.3 | | | 1,054.7 | | | 1,067.2 | |
Net charge-offs as a percentage of average credit card and loan receivables | | | 6.6 | % | | 6.1 | % | | 6.1 | % |
Net principal losses as a percentage of Average credit card and other loans for the year ended December 31, 2022 was impacted by the transition of our credit card processing services.
LiquidityCONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
We maintain a strong focus on liquidity and
Capital Resourcescapital. 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 related to our secured financings, and meet our regulatory and policy requirements (including capital and leverage ratio requirements applicable to CB and CCB under 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 agreementsCredit Agreement and issuances of debt
or equity securities,
and our securitization programs and deposits issued by
Comenity Bank and Comenity Capital Bank. Inthe Banks, in addition to our
ongoing efforts to renew and expand our
current liquidityvarious sources
we continue to seek new funding sources.of liquidity.
Our primary uses of
cashliquidity are for ongoing
businessand varied lending operations,
repaymentsscheduled payments of
principal and interest on our debt,
operational expenses, capital expenditures,
investments or acquisitions, any stock repurchasesincluding digital and
product innovation and technology enhancements, and dividends.
We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges
if any, willwould depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and may be funded through the issuance of debt securities. The amounts involved may be material.
We will also need additional financing in the future to repay or refinance the existing debt at maturity or otherwise and to fund our growth. Given the maturities of our current outstanding debt and the current macroeconomic conditions, it is possible that we will be required to repay or refinance some or all of our maturing debt in volatile and/or unfavorable markets.
Because of the alternatives available to us as discussed above, we believe
that internally generated fundsour short-term and
otherlong-term sources of liquidity
discussed below will be sufficientare adequate to
meet working capital needs, capital expenditures,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
business requirements for at leastamounts that may ultimately be paid in connection with contingencies. However, the
next 12 months. However, continuedadequacy of our liquidity could be impacted by various factors, including macroeconomic conditions and volatility in the financial and capital markets,
due to COVID-19 may limitlimiting our access to or
increaseincreasing our cost of capital,
orwhich could make capital unavailable
or available on terms
acceptablethat are unfavorable to
us. These factors could significantly reduce our financial flexibility and cause us
to contract or
at all.
Cash Flow Activity
Operating Activities. We generated cash flow from operating activitiesnot grow our business, which could have a material adverse effect on our results of $1,882.7 millionoperations and $1,217.7 million for the years endedfinancial condition.
Funding Sources
Credit Agreement
Parent Company, as borrower, and certain of our non-Bank wholly-owned subsidiaries, as guarantors, are party to our Credit Agreement with various agents and lenders dated June 14, 2017, as amended.
As of December 31,
2020 and 2019, respectively. The year-over-year increase in operating cash flows of $665.0 million was due to an increase in working capital and the impact of the sale of Epsilon.
Investing Activities. Cash provided by investing activities was $1,774.3 million and $2,860.8 million for the year ended December 31, 2020 and 2019, respectively. Significant components of investing activities are as follows:
| ● | Credit card and loan receivables. Cash increased $1,783.5 million for the year ended December 31, 2020 due to a decrease in credit card and loan receivables in 2020 resulting from lower sales volumes due to COVID-19, as strong payment rates were maintained. Cash decreased $2,586.8 million for the year ended December 31, 2019 due to growth in credit card and loan receivables. |
| ● | Proceeds from sale of businesses.During the year ended December 31, 2020, we received cash consideration of $26.7 million from the sale of Precima. During the year ended December 31, 2019, we received cash consideration of $4,409.7 million from the sale of Epsilon. |
| ● | Payments for acquired businesses.During the year ended December 31, 2020, we paid cash consideration of $266.8 million for the acquisition of Bread on December 3, 2020. During the year ended December 31, 2019, we paid cash consideration of $6.7 million for the acquisition of Blispay on February 7, 2019. |
| ● | Purchase of credit card portfolios. During the year ended December 31, 2019, we paid cash consideration of $924.8 million to acquire four credit card portfolios. No credit card portfolios were acquired in 2020. |
| ● | Proceeds from sale of credit card portfolios.During the year ended December 31, 2020, we received cash consideration of $289.5 million from the sale of a credit card portfolio. During the year ended December 31, 2019, we received cash consideration of $2,061.8 million from the sale of thirteen credit card portfolios. |
| ● | Capital expenditures. Cash paid for capital expenditures was $54.0 million and $142.3 million for the years ended December 31, 2020 and 2019, respectively. Capital expenditures for the year ended December 31, 2019 included $55.8 million related to our divested Epsilon segment, which was presented as a discontinued operation in the prior year. We anticipate capital expenditures to continue to be less than 3% of annual revenue. |
Financing Activities. Cash used in financing activities was $4,166.5 million and $4,091.7 million for the years ended December 31, 2020 and 2019, respectively. Significant components of financing activities are as follows:
| ● | Debt.Cash decreased $44.5 million for the year ended December 31, 2020 due to 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. Cash decreased $2,870.5 million as a |
| | result of net repayments for the year ended December 31, 2019, primarily due to the July 2019 early extinguishment of $1.9 billion outstanding senior notes upon consummation of the sale of Epsilon and the mandatory payment of $500.0 million on our revolving credit facility. In December 2019, we issued $850.0 million in senior notes, of which the net proceeds of $833.0 million were used to make a prepayment of our term debt under the credit agreement. |
| ● | Non-recourse borrowings of consolidated securitization entities.Cash decreased $1,676.5 million and $367.2 million for the years ended December 31, 2020 and 2019, respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities as well as declines in credit card and loan receivables for the year ended December 31, 2020. |
| ● | Deposits. During the year ended December 31, 2020, cash decreased $2,370.0 million due to net maturities of deposits. During the year ended December 31, 2019, cash increased $355.6 million due to net issuances of deposits. The volume of deposits as of December 31, 2020 and 2019 was impacted by changes in credit card and loan receivables in the respective years. |
| ● | Dividends. Cash paid for quarterly dividends and dividend equivalents was $60.6 million and $127.4 million for the years ended December 31, 2020 and 2019, respectively. In the second quarter of 2020, the quarterly dividend was reduced from $0.63 to $0.21 per common share. |
| ● | Treasury shares.Cash paid for treasury shares was $976.1 million for the year ended December 31, 2019. We did not repurchase any shares of our outstanding common stock for the year ended December 31, 2020. |
Debt
Credit Agreement
In September 2020, we amended our credit agreement to (a) increase the maximum total leverage ratio, (b) decrease the minimum interest coverage ratio, and (c) increase the maximum permitted average delinquency ratios, for the periods ending March 31, 2021 through June 30, 2022, and to make certain other amendments. The amendment also required us to prepay the term loans upon consummation of the offering of the Senior Notes due 2026 with a prepayment in an amount equal to the net proceeds from the offering, which obligation was satisfied in full with a prepayment of $493.8 million. The prepayment was first applied to the scheduled quarterly installments payable in September 2020 and December 2020, and second, to the bullet payment of the term loans due at maturity. See Note 17, “Debt,” of the Notes to Consolidated Financial Statements for additional information.
At December 31, 2020, we had $1,484.3$556 million inaggregate principal amount of term loans outstanding and a $750.0$750 million revolving line of credit under the Credit Agreement; we had no borrowings on our revolving line of credit. The Credit Agreement matures on July 1, 2024.
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 December 31,
2020, 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 under 2.5 to 1 at December 31, 2020, as compared to the maximum covenant ratio of 3.5 to 1.
As of December 31, 2020,2022, we were in compliance with our debt covenants.
BrandLoyaltyall financial covenants under the Credit Agreement.
The Credit Agreement
In April 2020, BrandLoyalty terminated its existing facility and entered into a new credit agreement that provides for a committed revolving line of credit of €30.0 million ($36.6 million as of was amended in December 31, 2020), an uncommitted revolving line of credit of €30.0 million ($36.6 million as of December 31, 2020), and an accordion feature permitting BrandLoyalty2022 to request an increase in eitherindex borrowings to the committed or uncommitted line of credit up to €80.0 million ($97.7 million as of December 31, 2020) in aggregate. The revolving lines of credit mature in April 2023, subject to BrandLoyalty’s request to extend for two additional one-year terms atSecured Overnight Financing Rate (SOFR) with the absolute discretiondiscontinuation of the lenders at the timeLondon Interbank Offered Rate (LIBOR). SOFR is based on short-term repurchase agreements that are backed by Treasury securities.
Deposits
March 15, 2021. The Senior Notes due 2026 will mature on January 15, 2026, subject to earlier repurchase or redemption.
See Note 17, “Debt,” of the Notes to Consolidated Financial Statements for additional information regarding our debt.
Funding Sources
Deposits
We utilize money market deposits and certificatesa variety of deposit products to finance theour operating activities, including funding for our non-securitized credit card and loan receivables,other loans, and to fund the securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank. In April 2019, Comenity Capital Bank launched a consumerthe Banks. We offer both direct-to-consumer retail deposit platform, Comenity Direct™, to the public; retailproducts as well as deposits comprised approximately $1.7 billion of our $9.8 billion deposits outstanding at December 31, 2020.
Comenity Bank and Comenity Capital Bank offer non-maturity deposit programssourced through contractual arrangements with various financial counterparties. As of December 31, 2020, Comenity Bankcounterparties (often referred to as wholesale or brokered deposits). Across both our retail and Comenity Capital Bank had $3.8 billion in money marketwholesale deposits, outstanding with interest rates ranging from 0.38% to 3.50%. Money market depositsthe Banks offer various non-maturity deposit products that are generally redeemable on demand by the customer, and as such have no scheduled maturity date.
Comenity Bank and Comenity Capital Bankdate; the Banks also issue certificates of deposit with scheduled maturity dates ranging between January 2023 and December 2027, in denominations of at least $100,000$1,000, on which interest is paid either monthly or at maturity.
The following table summarizes our retail and
$1,000, respectively, in various maturities ranging between January 2021wholesale deposit products by type and
December 2025 and with effective annual interest rates ranging from 0.15% to 3.75%. Asassociated attributes, as of December 31,
2020, we had $6.0 billion of certificates of deposit outstanding. Certificate of deposit borrowings are subject to regulatory capital requirements.2022 and December 31, 2021:
Table 9: Deposits
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| (Millions, except percentages) | |
| Deposits | | | |
| Direct-to-consumer (retail) | $ | 5,466 | | | $ | 3,180 | |
| Wholesale | 8,321 | | | 7,847 | |
| | | |
| Non-maturity deposit products | | | |
| Non-maturity deposits | $ | 6,736 | | | $ | 5,586 | |
| Interest rate range | 0.70% - 4.70% | | 0.05% - 3.50% |
| Weighted-average interest rate | 2.56 | % | | 0.68 | % |
| | | |
| Certificates of deposit | | | |
| Certificates of deposit | $ | 7,051 | | | $ | 5,441 | |
| Interest rate range | 0.40% - 4.95% | | 0.20% - 3.75% |
| Weighted-average interest rate | 3.11 | % | | 1.91 | % |
Securitization Programs
and Conduit Facilities
We sell a majority of the credit card
receivablesloans originated by
Comenity Bank and Comenity Capital Bankthe Banks to certain
of our master
trusts.trusts (the Trusts). These securitization programs are a principal vehicle through which we finance
Comenity Bank’s and Comenity Capital Bank’sthe Banks’ credit card
receivables. Historically, we have used bothloans. We use a combination of public
and private term asset-backed
securitization transactions as well asnotes and 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.
this purpose. During the year ended December 31, 2020, $1.72022, $1.6 billion of asset-backed term notes matured and were repaid, of which $228.2$74 million were previously retained by us and therefore eliminated from the consolidated balance sheets.
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.
During the year ended December 31,
2020,2022, we
reduced theobtained increased lender commitments under our
private conduit facilities
by $1.5of $2.1 billion and extended the
respectivevarious maturities to
April 2022June 2023 and
October 2022.July 2023. As of December 31,
2020,2022, total capacity under the conduit facilities was
$3.2$6.5 billion, of which
$2.2$6.1 billion had been drawn and was included in
non-recourse borrowings ofDebt issued by consolidated
securitizationvariable interest entities
(VIEs) in the
consolidated balance sheets.Consolidated Balance Sheet.
In April 2022, the
World Financial Network Credit Card Master Trust III amended its 2009-VFC conduit facility, increasing the capacity from $225 million to $275 million and extending the maturity to July 2023. In addition, in April 2022, the World Financial Capital Master Note Trust amended its 2009-VFN conduit facility, increasing the capacity from $1.5 billion to $2.5 billion and extending the maturity to July 2023. In June 2022, the Comenity Capital Asset Securitization Trust was formed for the purpose of funding a portfolio acquisition
of Breadcompleted in
December 2020, we assumed two warehouse facilities usedOctober 2022. The capacity was negotiated to
fund their securitized loan receivables. In December 2020, one ofbe $1.0 billion and the
warehouse facilitiesmaturity was
terminated and we repaid $28.5 million owed under the agreement. The second warehouse facility was amended to a secured loan facility with an outstanding balance of $86.3 million at December 31, 2020. The secured loan facility accrues interest on the principal amount at the rate of LIBOR plus an applicable margin. The principal amount is due upon maturity in November 2022, with prepayment permitted.set as June 2023.
As of December 31, 2020,2022, we had approximately $11.2$15.4 billion of securitized credit card and loan receivables.loans. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivablesloans and subordinated classes. The credit enhancement is
principally based on the outstanding balances of the series issued by the trustsTrusts and by the performance of the credit card and loan receivablesloans in the trusts.Trusts.
The following table shows the maturities of borrowing commitments as of December 31, 20202022 for the trustsTrusts by year:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | 2021 | | 2022 | | 2023 | | 2024 | | Thereafter | | Total |
|
| | (in millions) |
Fixed rate asset-backed term note securities | | $ | 1,852.1 | | $ | 1,571.7 | | $ | — | | $ | — | | $ | — | | $ | 3,423.8 |
Conduit facilities (1) | | | — | | | 3,200.0 | | | — | | | — | | | — | | | 3,200.0 |
Secured loan facility | | | — | | | 86.3 | | | — | | | — | | | — | | | 86.3 |
Total (2) | | $ | 1,852.1 | | $ | 4,858.0 | | $ | — | | $ | — | | $ | — | | $ | 6,710.1 |
(1) | Amount represents borrowing capacity, not outstanding borrowings. |
(2) | Total amounts do not include $1.1 billion of debt issued by the trusts, which was retained by us and has been eliminated in the consolidated financial statements. |
Table 10: Borrowing Commitment Maturities
| | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | Thereafter | | Total |
| (Millions) | |
Conduit facilities (1) | 6,525 | | | — | | | — | | | 6,525 | |
Total (2) | $ | 6,525 | | | $ | — | | | $ | — | | | $ | 6,525 | |
(1)Amount represents borrowing capacity, not outstanding borrowings.
(2)Total amounts do not include $1.9 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 the particular
trustTrust would retain the interest in the
receivablesloans along with the excess
interest incomespread that would otherwise be paid to our
bankBank 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
and loan receivables.loans.
We have secured and continue to secure the necessary commitments to fund our credit card and
loan receivables.other loans. However, certain of these commitments are short-term in nature and subject to renewal. There is
not ano 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.
See Note 17, “Debt,” of the Notes to Consolidated Financial Statements for additional information regarding our securitized debt.
Stock Repurchase Programs
We had an authorized stock repurchase program to acquire up to $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020. At December 31, 2019, we had $347.8 million remaining under the stock repurchase program. The stock repurchase program expired on June 30, 2020, and $347.8 million of this program expired unused. During 2020, the Company did not repurchase any shares of its outstanding common stock under its authorized stock repurchase program.
Dividends
For the year ended December 31, 2020, we paid quarterly cash dividends of $0.63 per share for the three months ended March 31, 2020 and $0.21 per share for each of the three months ended June 30, 2020, September 30, 2020 and December 31, 2020 of $60.1 million and $0.5 million in cash related to dividend equivalent rights, for a total of $60.6 million.
For the year ended December 31, 2019, we paid quarterly cash dividends of $0.63 per share of $126.3 million and $1.1 million in cash related to dividend equivalent rights, for a total of $127.4 million.
On January 28, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on March 18, 2021 to stockholders of record at the close of business on February 12, 2021.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments. Our future cash payments associated with our contractual obligations and commitments to make future payments by type and period as of December 31, 2020 are summarized below:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | Thereafter | | Total |
|
| | | (in millions) |
Deposits (1) | | $ | 6,672.6 | | $ | 1,786.2 | | $ | 987.3 | | $ | 533.6 | | $ | 13.3 | | $ | — | | $ | 9,993.0 |
Non-recourse borrowings of consolidated securitization entities (1) | | | 1,958.1 | | | 3,897.3 | | | — | | | — | | | — | | | — | | | 5,855.4 |
Long-term and other debt (1) | | | 206.5 | | | 1,486.0 | | | 75.4 | | | 923.7 | | | 35.0 | | | 501.5 | | | 3,228.1 |
Operating leases | | | 38.8 | | | 41.2 | | | 38.3 | | | 36.0 | | | 35.2 | | | 209.6 | | | 399.1 |
Software licenses | | | 10.9 | | | 8.1 | | | 6.0 | | | 3.8 | | | 0.3 | | | — | | | 29.1 |
ASC 740 obligations (2) | | | — | | | — | | | — | | | — | | | — | | | — | | | — |
Purchase obligations (3) | | | 361.9 | | | 160.7 | | | 169.5 | | | 71.1 | | | 65.5 | | | 310.8 | | | 1,139.5 |
Total | | $ | 9,248.8 | | $ | 7,379.5 | | $ | 1,276.5 | | $ | 1,568.2 | | $ | 149.3 | | $ | 1,021.9 | | $ | 20,644.2 |
(1) | The deposits, non-recourse borrowings of consolidated securitization entities and long-term and other debt represent our estimated debt service obligations, including both principal and interest. Interest was based on the interest rates in effect as of December 31, 2020, applied to the contractual repayment period. |
(2) | ASC 740 obligations do not reflect unrecognized tax benefits of $314.2 million, of which the timing remains uncertain. |
(3) | Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding and specifying all significant terms, including the following: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and approximate timing of the transaction. The purchase obligation amounts disclosed above represent estimates of the minimum for which we are obligated and the time period in which cash outflows will occur. Purchase orders and authorizations to purchase that involve no firm commitment from either party are excluded from the above table. Purchase obligations include sponsor commitments under our AIR MILES Reward Program, minimum payments under support and maintenance contracts and agreements to purchase other goods and services. |
We believe that we will have access to sufficient resources to meet these commitments.
Inflation and Seasonality
Although we cannot precisely determine the impact of inflation on our operations, we do not believe that we have been significantly affected by inflation. For the most part, we have relied on operating efficiencies from scale, technology and expansion in lower cost jurisdictions in select circumstances, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses. With respect to seasonality, our revenues, earnings and cash flows are affected by increased consumer spending patterns leading up to and including the holiday shopping period in the fourth quarter and, to a lesser extent, during the first quarter as credit card and loan receivable balances 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 subject to regulatory capital requirements administered by both the FDIC and the State of Utah. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Comenity Bank and Comenity Capital Bank must meet specific capital guidelines that involve quantitative measures of its assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by these regulators about components, risk weightings and other factors. Both Comenity Bank and Comenity Capital Bank are limited in the amounts that they can pay as dividends to ADSC.
On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the FDIC seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in
connection with the proposed merger. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the outcome or timing of such review.
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 December 31, 2020 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 | | 19.0 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 20.7 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 20.7 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 22.0 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 14.8 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 15.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 15.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 16.9 | | | 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.
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; wesecurities. We satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.
Stock Repurchase Programs
On February 28, 2022, the Company’s Board of Critical Accounting EstimatesDirectors approved a stock repurchase program to acquire up to 200,000 shares of our outstanding common stock in the open market during the one-year period ending on February 28, 2023. As of March 31, 2022, we had repurchased all 200,000 shares of our common stock available under this program for an aggregate of $12 million. Following their repurchase, these 200,000 shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock.
Dividends
For the years ended December 31, 2022, 2021 and 2020, we paid $43 million, $42 million and $61 million, respectively, in dividends to our shareholders of common stock. On January 26, 2023, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on March 17, 2023, to stockholders of record at the close of business on February 10, 2023.
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 for the years indicated, followed by a discussion of the variance drivers impacting our Operating, Investing and Financing activities:
Table 11: Cash Flows
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Total cash provided by (used in): | | | | | |
| Operating activities | $ | 1,848 | | | $ | 1,543 | | | $ | 1,883 | |
| Investing activities | (5,111) | | | (1,691) | | | 1,774 | |
| Financing activities | 3,267 | | | 608 | | | (4,167) | |
| Effect of foreign currency exchange rates | — | | | — | | | 15 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 4 | | | $ | 460 | | | $ | (495) | |
Cash Flows from Operating Activities primarily include net income adjusted for (i) non-cash items included in net income, such as provision for credit losses, depreciation and amortization, deferred taxes and other non-cash items, and (ii) changes in the balances of operating assets and liabilities, which can fluctuate in the normal course of business due to the amount and timing of payments. We generated cash flows from operating activities of $1,848 million and $1,543 million for the years ended December 31, 2022 and 2021, respectively. For the years ended December 31, 2022 and 2021, 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.
Cash Flows from Investing Activities primarily include changes in Credit card and other loans. Cash used in investing activities was $5,111 million and $1,691 million for the years ended December 31, 2022 and 2021, respective. For the year ended December 31, 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 credit card loan portfolios. For the year ended December 31, 2021, the net cash used in investing activities was primarily due to growth in Credit card and other loans, partially offset by the sale of a credit card loan portfolio.
Cash Flows from Financing Activities primarily include changes in deposits and long-term debt. Cash provided by financing activities was $3,267 million and $608 million for the years ended December 31, 2022 and 2021, respectively. For the year ended December 31, 2022, the net cash provided by financing activities was primarily driven by a net increase in deposits and net borrowings under conduit facilities. For the year ended December 31, 2021, the net cash provided by financing activities was driven by a net increase in deposits, partially offset by net repayments of securitizations.
INFLATION AND SEASONALITY
Although we cannot precisely determine the impact of inflation on our operations, we do not believe, at this time, that we have been significantly affected by inflation. For the most part we have relied on operating efficiencies from scale, technology modernization and digital advancement, and expansion in lower cost jurisdictions, in select circumstances, to offset increased costs of employee compensation and other operating expenses. We also recognize that a customer’s ability and willingness to repay us has been negatively impacted by factors such as inflation, which results in greater delinquencies that could lead to greater credit losses, as reflected in our increased Allowance for credit losses. If the efforts to control inflation in the U.S. and globally are not successful and inflationary pressures continue to persist, they could magnify the slowdown in the domestic and global economies and increase the risk of a recession, which may adversely impact our business, results of operations and financial condition.
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
CB is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. CCB 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 this Annual Report on Form 10-K.
Quantitative measures, established by regulations to ensure capital adequacy, require the Banks to maintain minimum amounts and ratios of Tier 1 capital to average assets, and Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on CB’s and/or CCB’s operating activities, as well as our operating activities. Based on these regulations, as of December 31, 2022 and 2021, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized. The Banks are considered well capitalized and seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer. The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, are as follows as of December 31, 2022:
Table 12: Capital Ratios
| | | | | | | | | | | | | | | | | |
| Actual
Ratio | | Minimum Ratio for
Capital Adequacy
Purposes | | Minimum Ratio to be
Well Capitalized under
Prompt Corrective
Action Provisions |
| Comenity Bank | | | | | |
Common Equity Tier 1 capital ratio(1) | 18.4 | % | | 4.5 | % | | 6.5 | % |
Tier 1 capital ratio(2) | 18.4 | | | 6.0 | | | 8.0 | |
Total Risk-based capital ratio(3) | 19.7 | | | 8.0 | | | 10.0 | |
Tier 1 Leverage capital ratio(4) | 16.7 | | | 4.0 | | | 5.0 | |
| | | | | |
| Comenity Capital Bank | | | | | |
Common Equity Tier 1 capital ratio(1) | 16.1 | % | | 4.5 | % | | 6.5 | % |
Tier 1 capital ratio(2) | 16.1 | | | 6.0 | | | 8.0 | |
Total Risk-based capital ratio(3) | 17.4 | | | 8.0 | | | 10.0 | |
Tier 1 Leverage capital ratio(4) | 14.9 | | | 4.0 | | | 8.0 | |
| | | | | |
| Combined Banks | | | | | |
Common Equity Tier 1 capital ratio(1) | 17.0 | % | | 4.5 | % | | 6.5 | % |
Tier 1 capital ratio(2) | 17.0 | | | 6.0 | | | 8.0 | |
Total Risk-based capital ratio(3) | 18.3 | | | 8.0 | | | 10.0 | |
Tier 1 Leverage capital ratio(4) | 15.6 | | | 4.0 | | | 5.0 | |
(1)The Common Equity Tier 1 capital ratio represents common equity tier 1 capital divided by total risk-weighted assets.
(2)The Tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets.
(3)The Total Risk-based capital ratio represents total capital divided by total risk-weighted assets.
(4)The Tier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.
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. In accordance with the interim final rule, we began to phase-in these effects on January 1, 2022.
DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES
Our discussion and analysis of our
financial condition and results of operations
and overall financial condition is based upon our
consolidated financial statements,Consolidated Financial Statements, which have been prepared in accordance with
the accounting policies
that are described in
the NotesNote 1, “Description of Business and Summary of Significant Accounting Policies” to
our Consolidated Financial
Statements.Statements included as part of this Annual Report on Form 10-K. The preparation of
the consolidated financial statementsConsolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our
judgmentsestimates and
estimatesjudgments in determination of our financial
conditionposition and operating results. Estimates are based on information available as of the date of the
financial statementsConsolidated Financial Statements and, accordingly, actual results could differ from these estimates, sometimes materially. Critical accounting estimates are defined as those that are both most important to the portrayal of our financial
conditionposition and operating results, and require management’s most subjective
judgments. The primary critical accounting estimates are described below.
judgments, which for us is our Allowance for Loan Loss.
Effective January 1, 2020, we adopted ASC 326 on a modified retrospective approachcredit losses and applied a CECL model to determine our allowanceProvision for loan loss. income taxes.
Allowance for Credit Losses
The allowanceAllowance for loan losscredit losses is an estimate of expected credit losses, measured over the estimated life of our creditCredit card and loan receivablesother 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 CECL model is significantly influenced by the composition, characteristics and quality of our portfolio of creditCredit card and loan receivables,other loans portfolio, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowanceAllowance for loan losscredit losses includes an
estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts,Principal losses, net of recoveries are deducted from the allowance.Allowance. 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 allowanceAllowance is maintained through an adjustment to the provisionProvision for loan losscredit losses and is evaluated quarterly for appropriateness. Prior to January 1, 2020, our allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”
In estimating our
allowanceAllowance for
loan loss,credit losses, for each identified group,
we utilizemanagement uses various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. These models
utilizeuse historical data and applicable macroeconomic variables,
along with statistical analysis and behavioral relationships,
withto determine expected credit performance. Our quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. We consider the forecast used to be reasonable and supportable over the estimated life of the credit card and
loan receivables,other loans, with no reversion period. In addition to the quantitative estimate of expected credit losses, we also incorporate qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the
allowanceAllowance for
loan losscredit losses reflects our best estimate of current expected credit losses.
Since the implementation of the CECL standard, we have maintained a consistent approach to the forecasting of the life of loan losses for purposes of establishing the Allowance for credit losses. The approach involves the use of third-party projections of economic variables, and applies those projections to their historical correlation to losses in segments of our loan portfolio exhibiting common risk characteristics. The level of the Allowance includes qualitative overlays to the model output to address risks not inherently covered by the model output, as well as management-perceived risks in the economic environment. These overlays have changed over the periods since implementation through December 31, 2022 to reflect changes in the macroeconomic environment and the impact on our loan portfolio.
If we used different assumptions in estimating current expected credit losses, the impact
toon the
allowanceAllowance for
loan losscredit losses could have a material effect on our consolidated financial
conditionposition and results of operations. For example, a 100 basis point increase in the
allowanceAllowance as a percentage of the amortized cost of our
creditCredit card and
loan receivablesother loans could have resulted in a change of approximately
$164.9$210 million in the
allowanceAllowance for
loan loss atcredit losses as of December 31,
2020,2022, with a corresponding change in the
provisionProvision for
loan loss.credit losses.
Income Taxes
Revenue Recognition.
We recognize revenue when control
The income tax laws of the promised goods or servicesUnited States, as well as its states and municipalities in which we operate, are inherently complex; the manners in which they apply to our facts is transferredoften open to interpretation, and consequentially requires us to make judgments in establishing our Provision for income taxes.
Differences between the
customer, in an amount that reflectsConsolidated Financial Statements and tax bases of assets and liabilities give rise to deferred tax assets and liabilities, which measure the
consideration we expect to be entitled to in exchange for those goods or services. In that determination, under ASC 606, we follow a five-step model that includes: (1) determinationfuture tax effects of
whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance obligationsitems recognized in the
contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligationsConsolidated Financial Statements and require certain estimates and judgments, in
the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied.
We enter into contractsparticular with customers that may include multiple performance obligations. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. If the standalone selling price is not directly observable, we estimate the standalone selling price based on either the adjusted market assessment or cost plus a margin approach.
Certain of our contracts may provide for variable consideration. We estimate these amounts based on either the expected amount or most likely amount to be provided to the customerdeferred tax assets, in order to determine the transaction price for the contract. The estimation methodwhether it is consistent for contracts with similar terms and is applied consistently throughout each contract. The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance andmore likely than not that all information that is reasonably available.
AIR MILES Reward Program. The AIR MILES Reward Program collects fees from its sponsors based on the number of AIR MILES reward miles issued and, in limited circumstances, the number of AIR MILES reward miles redeemed. Because management has determined that the earnings process is not complete at the time an AIR MILES reward mile is issued, the recognition of redemption and service revenue is deferred. Under certain of our contracts,or a portion of the considerationbenefit of a deferred tax asset will not be realized. In evaluating our deferred tax assets on a quarterly basis as new facts and circumstances emerge, we analyze and estimate the impact of future taxable income, reversing temporary differences and available tax planning strategies. Uncertainties can lead to changes in the ultimate realization of our deferred tax assets.
A liability for unrecognized tax benefits, representing the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized in the Consolidated Financial Statements, inherently requires estimates and judgments. A tax position is paidrecognized only when it is more likely than not to usbe sustained, based purely on its technical merits after examination by the relevant taxing authority, and the amount recognized is the benefit we believe is more likely than not to be realized upon ultimate settlement. We evaluate our tax positions as new facts and circumstances become available, making adjustments to our unrecognized tax benefits as appropriate. Uncertainties can mean the issuancetax
benefits ultimately realized differ from amounts previously recognized, with any differences recorded in Provision for income taxes.
Our assessment of the technical merits and
measurement of tax benefits associated with uncertain tax positions is subject to a
portion is paid athigh degree of judgment and estimation. Actual results may differ from our current judgments due to a variety of factors, including interpretations of law by the
timerelevant taxing authorities that differ from our assessments and results of
redemption and therefore,tax examinations. We believe we
do not have
a redemption obligationadequately provided for any reasonably foreseeable outcome related to these
contracts.
Total consideration from the issuance of AIR MILES reward miles is allocatedmatters. However, our future results may include favorable or unfavorable adjustments to three performance obligations: redemption, service, and brand, based on a relative standalone selling price basis.
Theour estimated standalone selling price for the redemption and the service performance obligations are based on cost plus a reasonable margin. The estimated standalone selling price of the brand performance obligation is determined using a relief from royalty approach. Accordingly, management determines the estimated standalone selling price by considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize. The number of AIR MILES reward miles issued and redeemed are
factored into the estimates, as management estimates the standalone selling prices and volumes over the term of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base. Additionally, the estimated life of an AIR MILES reward mile impacts the timing of revenue recognition.
Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changestax liabilities in the program structure.
Forperiod the years ended December 31, 2018, 2019 and 2020, our estimated breakage rate remained 20%. Our cumulative redemption rate, which represents program to date redemptions divided by program to date issuance, is 69% asassessments are made or resolved, or when statutes of December 31, 2020. We expect the ultimate redemption rate will approximate 80% basedlimitation on our historical redemption patterns, statistical regression models, and consideration of enacted program changes, as applicable.
For the years ended December 31, 2018, 2019 and 2020, our estimated life of an AIR MILES reward mile remained 38 months. We estimate that a change to the estimated life of an AIR MILES reward mile of one month would impact revenue by approximately $4 million. Any future changes in collector behavior could result in further changes in our estimates of breakage or life of an AIR MILES reward mile.
potential assessments expire. As of December 31, 2020,2022, we had $1,004.0$282 million in deferred revenue related tounrecognized tax benefits, including interest and penalties, recorded in Other liabilities on the AIR MILES Reward Program that will be recognized in the future. Further information is provided in Note 3, “Revenue,” of the Notes to Consolidated Financial Statements.
Goodwill.
We test goodwill for impairment annually, or when events and circumstances change that would indicate the carrying value may not be recoverable.
For the 2020 annual impairment test, we performed a quantitative analysis for the Card Services reporting unit and the reporting units within the LoyaltyOne segment, identified as BrandLoyalty and LoyaltyOne excluding BrandLoyalty. The fair value of the reporting units was estimated using a discounted cash flow analysis based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate and other assumptions that are judgmental in nature. Changes in these estimates and assumptions could materially affect the results of our tests for goodwill impairment. We determined there was no impairment of goodwill on these reporting units.
As of December 31, 2020, we had goodwill of approximately $1,369.6 million. The following table presents the percentage by which fair value of the reporting units exceeded carrying value as of the 2020 annual impairment test and goodwill for each respective reporting unit as of December 31, 2020:
| | | | | | | |
| | Approximate | | | |
| | Excess Fair Value % | | Goodwill | |
Reporting Unit | | as of July 1, 2020 | | as of December 31, 2020 | |
| | | | (in millions) | |
BrandLoyalty | | | ≤ 10% | | $ | 542.7 | |
LoyaltyOne excluding BrandLoyalty | | | > 250% | | | 193.3 | |
Card Services | | | > 70% | | | 633.6 | |
Total | | | | | $ | 1,369.6 | |
As with all assumptions, there is an inherent level of uncertainty and actual results, to the extent they differ from those assumptions, could have a material impact on fair value. For example, a reduction in customer demand would impact our assumed growth rate resulting in a reduced fair value, or multiples for similar type reporting units could deteriorate due to changes in technology or a downturn in economic conditions. Potential events or circumstances could
RECENTLY ISSUED ACCOUNTING STANDARDS
have a negative effect on the estimated fair value. The loss of a major customer or program could have a significant impact on the future cash flows of the reporting unit(s).
We do not currently believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to test goodwill and other intangible assets for impairment. However, due to the COVID-19 pandemic and continuing uncertainty in the macroeconomic environment, future deterioration in the economy could adversely impact our reporting units and result in a goodwill impairment charge that could be material.
Income Taxes.
We account for uncertain tax positions in accordance with Accounting Standards Codification, or ASC, 740, “Income Taxes.” The application of income tax law is inherently complex. Laws and regulations in this area are voluminous and are often ambiguous. As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures. Interpretations of, and guidance surrounding, income tax laws and regulations change over time. Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income. See Note 22, “Income Taxes,” of the Notes to Consolidated Financial Statements for additional detail on our uncertain tax positions and further information regarding ASC 740.
Recent Accounting Pronouncements
See “Recently Issued Accounting Standards” under Note
2, “Summary1, “Description of Business and Summary of Significant Accounting
Policies,” of the NotesPolicies”, to
our Consolidated Financial
Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition, results of operations or cash flow.Statements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the risk of loss from adverse changes in market prices and rates. Our primary market risks include interest rate risk, credit risk and foreign currency exchange rate risk.
Interest Rate Risk. We have both fixed-rate and variable-rate debt, and are subject to interest rate risk in connection with the issuance of variable-rate debt. Our interest expense, net was $493.9 million for 2020. To manage our risk from market interest rates, we actively monitor interest rates and other interest sensitive components to minimize the impact that changes in interest rates have on the fair value of assets, net income and cash flow. To achieve this objective, we manage our exposure to fluctuations in market interest rates through the use of fixed-rate debt instruments to the extent that reasonably favorable rates are obtainable with such arrangements. In addition, we may enter into derivative instruments such as interest rate swaps and interest rate caps to mitigate our interest rate risk on related financial instruments or to lock the interest rate on a portion of our variable debt. We do not enter into derivative or interest rate transactions for trading or other speculative purposes.
The approach we use to quantify interest rate risk is a sensitivity analysis, which we believe best reflects the risk inherent in our business. This approach calculates the impact on pre-tax income from an instantaneous and sustained increase or decrease in interest rates of 1%. In 2020, a 1% increase or decrease in interest rates on our variable-rate debt would have resulted in a change to our interest expense of approximately $68.8 million. Our use of this methodology to quantify the market risk of financial instruments should not be construed as an endorsement of its accuracy or the appropriateness of the related assumptions.
Credit Risk. We are exposed to credit risk relating to the credit card, installment or other loans we make to our clients’ customers. Our credit risk relates to the risk that consumers using the private label, co-brand, general purpose or business credit cards or installment or other loans that we issue will not repay their revolving credit card, installment or other loan balances. To minimize our risk of credit card, installment or other loan charge-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing. We also utilize a proprietary collection scoring algorithm to assess accounts for collections efforts if they become delinquent;
after exhausting all in-house collection efforts, we may engage collection agenciesItem 8. Financial Statements and outside attorneys to continue those efforts.
Supplementary Data.
Foreign Currency Exchange Rate Risk. We are exposed to fluctuations in the exchange rate between the U.S. and the Canadian dollar and between the U.S. dollar and the Euro. For the year ended December 31, 2020, an additional 10% decrease in the strength of the Canadian dollar versus the U.S. dollar and the Euro versus the U.S. dollar would have resulted in an additional decrease in pre-tax income of approximately $12.2 million and $2.4 million, respectively. Conversely, a corresponding increase in the strength of the Canadian dollar or the Euro versus the U.S. dollar would result in a comparable increase to pre-tax income in these periods.
Item 8.
|
Our Consolidated Financial Statements and Supplementary Data. |
Our consolidated financial statements begin on page F-1 of this Annual Report on Form 10-K.
Item 9.
| Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
|
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
Item 9A.
| Controls and Procedures.
|
Item 9A. Controls and Procedures.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
As of December 31, 2020, 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
December 31, 2020,the end of such period, our disclosure controls and procedures are
effective. Disclosure controlseffective 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’sapplicable rules and forms, and
include controls and procedures designed to ensure that
information we are required to disclose in such reportsit 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.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal
controlscontrol over financial reporting
areis a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
accounting principles generally accepted
accounting principles in the United
States.States of America (GAAP), and include those policies and procedures that:
•Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect our transactions and dispositions of assets;
•Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
•Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
In December 2020, we completed
Our management, with the acquisitionparticipation of Lon Inc., operating under the trademark Bread. Because of the timing of the acquisition, Bread was excluded from our evaluation ofChief Executive Officer and conclusion onChief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. The total assets of Lon Inc., as of December 31, 2020, represented less than 3% of2022. In making this assessment, our total assets, for the respective period, and contributed less than 1% of total revenues, and less than 3% of pre-tax income, on an absolute basis, for the year ended December 31, 2020.
Under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of internal control over financial reporting. In conducting this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in
Internal Control—Integrated Framework(2013). Based on this evaluation, management,those criteria and management’s assessment, with the participation of the Chief Executive Officer and Chief Financial Officer, concludedwe conclude that, as of December 31, 2022, our internal control over financial reporting was effective as of December 31, 2020.
effective.
The effectiveness of internal control over financial reporting as of December 31,
20202022, has been audited by Deloitte & Touche LLP,
theour independent registered public accounting firm who also audited our
consolidated financial statements. Deloitte & Touche’sConsolidated Financial Statements; their attestation report on the effectiveness of our internal control over financial reporting appears on page
F-5.F-4.
There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f)
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
Item 10.
| Directors, Executive Officers and Corporate Governance.
|
Item 10. Directors, Executive Officers and Corporate Governance.
Incorporated by reference to the Proxy Statement for the
20212023 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31,
2020.2022.
Item 11.
| Executive Compensation.
|
Item 11. Executive Compensation.
Incorporated by reference to the Proxy Statement for the
20212023 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31,
2020.2022.
Item 12.
| Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
|
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Incorporated by reference to the Proxy Statement for the
20212023 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31,
2020.2022.
Item 13.
| Certain Relationships and Related Transactions, and Director Independence.
|
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Incorporated by reference to the Proxy Statement for the
20212023 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31,
2020.2022.
Item 14.
| Principal Accounting Fees and Services.
|
Item 14. Principal Accounting Fees and Services.
Incorporated by reference to the Proxy Statement for the
20212023 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31,
2020.
2022.
Item 15. Exhibits, Financial Statement
Schedules.Schedules.
a)The following documents are filed as part of this Annual Report on Form 10-K:
(1)Financial Statements
(2)Financial Statement Schedules.
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
(3)Exhibits.
The following exhibits are filed as part of this Annual Report on Form 10-K or, where indicated, were previously filed and are hereby incorporated by reference.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 3.1 | | (a) | | | | 8-K | | 3.2 | | 6/10/16 | |
| | | | | | | | | | | |
| 3.2 | | (a) | | | | 8-K | | 3.1 | | 3/24/22 | |
| | | | | | | | | | | |
| 3.3 | | (a) | | | | 8-K | | 3.1 | | 4/29/19 | |
| | | | | | | | | | | |
| 3.4 | | (a) | | | | 8-K | | 3.2 | | 3/24/22 | |
| | | | | | | | | | | |
| 4.1 | | (a) | | | | 10-Q | | 4.0 | | 8/8/03 | |
| | | | | | | | | | | |
| *4.2 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| +10.1 | | (a) | | | | 8-K | | 10.1 | | 11/24/17 | |
| | | | | | | | | | | |
| +10.2 | | (a) | | | | DEF 14A | | A | | 4/20/10 | |
| | | | | | | | | | | |
| +10.3 | | (a) | | | | DEF 14A | | B | | 4/20/15 | |
| | | | | | | | | | | |
| +10.4 | | (a) | | | | DEF 14A | | A | | 4/23/20 | |
| | | | | | | | | | | |
| +10.5 | | (a) | | | | DEF 14A | | A | | 4/13/22 | |
| | | | | | | | | | | |
| +10.6 | | (a) | | | | 8-K | | 10.1 | | 2/20/18 | |
| | | | | | | | | | | |
| +10.7 | | (a) | | | | 8-K | | 10.3 | | 2/20/20 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| +10.8 | | (a) | | | | 8-K | | 10.1 | | 2/18/21 | |
| | | | | | | | | | | |
| ^+10.9 | | (a) | | | | 8-K | | 10.2 | | 2/18/21 | |
| | | | | | | | | | | |
| *+10.10 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *^+10.11 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| +10.12 | | (a) | | | | 10-K | | 10.52 | | 2/28/13 | |
| | | | | | | | | | | |
| +10.13 | | (a) | | | | 10-Q | | 10.6 | | 8/7/17 | |
| | | | | | | | | | | |
| +10.14 | | (a) | | | | 8-K | | 10.1 | | 6/15/21 | |
| | | | | | | | | | | |
| *+10.15 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| +10.16 | | (a) | | | | 8-K | | 10.1 | | 6/9/06 | |
| | | | | | | | | | | |
| +10.17 | | (a) | | | | 10-K | | 10.18 | | 2/27/17 | |
| | | | | | | | | | | |
| +10.18 | | (a) | | | | 8-K | | 10.1 | | 6/5/15 | |
| | | | | | | | | | | |
| +10.19 | | (a) | | | | DEF 14A | | C | | 4/20/15 | |
| | | | | | | | | | | |
| 10.20 | | (b)
(c) | | | | 8-K | | 4.6 | | 8/31/01 | |
| | | | | | | | | | | |
| 10.21 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 8/4/04 | |
| | | | | | | | | | | |
| 10.22 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 4/5/05 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 10.23 | | (b)
(d) | | | | 8-K | | 4.1 | | 6/15/07 | |
| | | | | | | | | | | |
| 10.24 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 10/31/07 | |
| | | | | | | | | | | |
| 10.25 | | (b)
(d) | | | | 8-K | | 4.1 | | 5/29/08 | |
| | | | | | | | | | | |
| 10.26 | | (b)
(d) | | | | 8-K | | 4.2 | | 6/30/10 | |
| | | | | | | | | | | |
| 10.27 | | (b)
(d) | | | | 8-K | | 4.1 | | 8/12/10 | |
| | | | | | | | | | | |
| 10.28 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 11/14/11 | |
| | | | | | | | | | | |
| 10.29 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 12/2/16 | |
| | | | | | | | | | | |
| 10.30 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 8/20/18 | |
| | | | | | | | | | | |
| 10.31 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 6/16/20 | |
| | | | | | | | | | | |
| 10.32 | | (b)
(c) | | Twelfth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of October 27, 2020, among WFN Credit Company, LLC, as transferor, Comenity Bank, as servicer, and MUFG Union Bank, N.A., as trustee. | | 8-K | | 4.1 | | 10/30/20 | |
| | | | | | | | | | | |
| 10.33 | | (b)
(c)
| | | | 8-K | | 4.7 | | 8/31/01 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 10.34 | | (b)
(c) | | | | 8-K | | 4.3 | | 11/20/02 | |
| | | | | | | | | | | |
| 10.35 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 7/8/16 | |
| | | | | | | | | | | |
| 10.36 | | (b)
(c) | | | | 8-K | | 4.3 | | 8/31/01 | |
| | | | | | | | | | | |
| 10.37 | | (b)
(c) | | | | 8-K | | 4.2 | | 11/20/02 | |
| | | | | | | | | | | |
| 10.38 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 8/4/04 | |
| | | | | | | | | | | |
| 10.39 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 4/5/05 | |
| | | | | | | | | | | |
| 10.40 | | (b)
(d) | | | | 8-K | | 4.2 | | 6/15/07 | |
| | | | | | | | | | | |
| 10.41 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 10/31/07 | |
| | | | | | | | | | | |
| 10.42 | | (b)
(d) | | | | 8-K | | 4.4 | | 6/30/10 | |
| | | | | | | | | | | |
| 10.43 | | (b)
(d) | | | | 8-K | | 4.3 | | 8/12/10 | |
| | | | | | | | | | | |
| 10.44 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 6/15/11 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 10.45 | | (b)
(c)
(d) | | | | 8-K | | 4.3 | | 11/14/11 | |
| | | | | | | | | | | |
| 10.46 | | (b)
(c)
(d) | | | | 8-K | | 4.4 | | 7/8/16 | |
| | | | | | | | | | | |
| 10.47 | | (b)
(d) | | | | 8-K | | 4.8 | | 8/31/01 | |
| | | | | | | | | | | |
| 10.48 | | (b)
(d) | | | | 8-K | | 4.3 | | 6/30/10 | |
| | | | | | | | | | | |
| 10.49 | | (b)
(d) | | | | 8-K | | 4.2 | | 8/12/10 | |
| | | | | | | | | | | |
| 10.50 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 11/14/11 | |
| | | | | | | | | | | |
| 10.51 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 7/8/16 | |
| | | | | | | | | | | |
| 10.52 | | (b)
(c)
(d) | | | | 8-K | | 4.3 | | 6/16/20 | |
| | | | | | | | | | | |
| 10.53 | | (b)
(c) | | | | 8-K | | 4.1 | | 8/31/01 | |
| | | | | | | | | | | |
| 10.54 | | (b)
(c) | | | | 8-K | | 4 | | 4/22/03 | |
| | | | | | | | | | | |
| 10.55 | | (b)
(d) | | | | 8-K | | 4.2 | | 8/28/03 | |
| | | | | | | | | | | |
| 10.56 | | (b)
(d) | | | | 8-K | | 4.3 | | 6/15/07 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 10.57 | | (b
(d) | | | | 8-K | | 4.2 | | 5/29/08 | |
| | | | | | | | | | | |
| 10.58 | | (b
(d) | | | | 8-K | | 4.1 | | 6/30/10 | |
| | | | | | | | | | | |
| 10.59 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 2/22/13 | |
| | | | | | | | | | | |
| 10.60 | | (b)
(c)
(d) | | | | 8-K | | 4.3 | | 7/8/16 | |
| | | | | | | | | | | |
| 10.61 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 6/16/20 | |
| | | | | | | | | | | |
| 10.62 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 5/28/21 | |
| | | | | | | | | | | |
| 10.63 | | (b)
(c)
(d) | | | | 8-K | | 4.1 | | 6/24/21 | |
| | | | | | | | | | | |
| 10.64 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 6/24/21 | |
| | | | | | | | | | | |
| 10.65 | | (b
(d) | | | | 8-K | | 4.4 | | 8/31/01 | |
| | | | | | | | | | | |
| 10.66 | | (b)
(c)
(d) | | | | 8-K | | 4.2 | | 5/28/21 | |
| | | | | | | | | | | |
| 10.67 | | (b
(d) | | | | 8-K | | 4.5 | | 8/31/01 | |
| | | | | | | | | | | |
| 10.68 | | (b
(d) | | | | 8-K | | 4.1 | | 7/31/09 | |
| | | | | | | | | | | |
| 10.69 | | (b)
(c)
(d) | | | | 10-D | | 99.2 | | 6/15/22 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 10.70 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 8/4/22 | |
| | | | | | | | | | | |
| 10.71 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 9/7/22 | |
| | | | | | | | | | | |
| 10.72 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 10/12/22 | |
| | | | | | | | | | | |
| 10.73 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 11/2/22 | |
| | | | | | | | | | | |
| 10.74 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 12/1/22 | |
| | | | | | | | | | | |
| 10.75 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 1/12/23 | |
| | | | | | | | | | | |
| 10.76 | | (b)
(c)
(d) | | | | 8-K | | 99.1 | | 2/2/23 | |
| | | | | | | | | | | |
| 10.77 | | (b)
(c)
(d) | | | | 8-K | | 10.1 | | 7/8/16 | |
| | | | | | | | | | | |
| 10.78 | | (a) | | | | 10-Q | | 10.5 | | 11/7/08 | |
| | | | | | | | | | | |
| 10.79 | | (a) | | | | 10-K | | 10.94 | | 3/2/09 | |
| | | | | | | | | | | |
| 10.80 | | (a) | | | | 10-K | | 10.127 | | 2/28/11 | |
| | | | | | | | | | | |
| 10.81 | | (a) | | | | 10-K | | 10.128 | | 2/28/11 | |
| | | | | | | | | | | |
| 10.82 | | (a) | | | | 10-Q | | 10.4 | | 11/7/11 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 10.83 | | (a) | | | | 10-Q | | 10.6 | | 11/7/08 | |
| | | | | | | | | | | |
| 10.84 | | (a) | | | | 10-Q | | 10.7 | | 11/7/08 | |
| | | | | | | | | | | |
| 10.85 | | (a) | | | | 10-Q | | 10.8 | | 11/7/08 | |
| | | | | | | | | | | |
| 10.86 | | (a) | | | | 10-Q | | 10.9 | | 11/7/08 | |
| | | | | | | | | | | |
| 10.87 | | (a) | | | | 10-Q | | 10.9 | | 5/7/10 | |
| | | | | | | | | | | |
| 10.88 | | (a) | | | | 10-Q | | 10.3 | | 11/7/11 | |
| | | | | | | | | | | |
| 10.89 | | (a) | | | | 10-K | | 10.94 | | 2/27/17 | |
| | | | | | | | | | | |
| 10.90 | | (a) | | | | 10-K | | 10.96 | | 2/27/18 | |
| | | | | | | | | | | |
| 10.91 | | (a) | | | | 10-K | | 10.105 | | 2/26/21 | |
| | | | | | | | | | | |
| 10.92 | | (a) | | | | 10-K | | 10.134 | | 2/28/11 | |
| | | | | | | | | | | |
| 10.93 | | (a) | | | | 10-Q | | 10.3 | | 11/7/08 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 10.94 | | (a) | | | | 10-Q | | 10.11 | | 8/9/10 | |
| | | | | | | | | | | |
| 10.95 | | (a) | | | | 10-Q | | 10.4 | | 11/7/08 | |
| | | | | | | | | | | |
| 10.96 | | (a) | | | | 10-Q | | 10.12 | | 8/9/10 | |
| | | | | | | | | | | |
| 10.97 | | (a) | | | | 10-K | | 10.104 | | 2/27/18 | |
| | | | | | | | | | | |
| *10.98 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *10.99 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *10.100 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *10.101 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| 10.102 | | (a) | | | | 10-K | | 10.129 | | 2/27/15 | |
| | | | | | | | | | | |
| 10.103 | | (a) | | | | 10-Q | | 10.8 | | 8/7/17 | |
| | | | | | | | | | | |
| 10.104 | | (a) | | | | 10-K | | 10.109 | | 2/27/18 | |
| | | | | | | | | | | |
| 10.105 | | (a) | | | | 10-K | | 10.110 | | 2/26/19 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 10.106 | | (a) | | | | 10-K | | 10.111 | | 2/26/19 | |
| | | | | | | | | | | |
| 10.107 | | (a) | | | | 10-K | | 10.112 | | 2/26/19 | |
| | | | | | | | | | | |
| 10.108 | | (a) | | | | 10-K | | 10.118 | | 2/26/21 | |
| | | | | | | | | | | |
| 10.109 | | (a) | | | | 10-K | | 10.119 | | 2/26/21 | |
| | | | | | | | | | | |
| *10.110 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| 10.111 | | (a) | | | | 10-Q | | 10.7 | | 8/7/17 | |
| | | | | | | | | | | |
| 10.112 | | (a) | | | | 10-Q | | 10.4 | | 11/8/17 | |
| | | | | | | | | | | |
| 10.113 | | (a) | | | | 10-K | | 10.115 | | 2/26/19 | |
| | | | | | | | | | | |
| 10.114 | | (a) | | | | 10-K | | 10.123 | | 2/26/21 | |
| | | | | | | | | | | |
| 10.115 | | (a) | | | | 10-K | | 10.124 | | 2/26/21 | |
| | | | | | | | | | | |
| 10.116 | | (a) | | | | 10-K | | 10.102 | | 2/27/17 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| | | | | | | | | | | |
| 10.117 | | (a) | | | | 10-Q | | 10.5 | | 11/8/17 | |
| | | | | | | | | | | |
| 10.118 | | (a) | | | | 10-Q | | 10.3 | | 11/6/18 | |
| | | | | | | | | | | |
| *10.119 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| 10.120 | | (a) | | Amended and Restated Credit Agreement, dated as of June 14, 2017, by and among Bread Financial Holdings, Inc., certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other agents and lenders. | | 8-K | | 10.1 | | 6/19/17 | |
| | | | | | | | | | | |
| 10.121 | | (a) | | First Amendment to Amended and Restated Credit Agreement and Incremental Amendment, dated as of June 16, 2017, by and among Bread Financial Holdings, Inc., and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 8-K | | 10.2 | | 6/19/17 | |
| | | | | | | | | | | |
| 10.122 | | (a) | | Second Amendment to Amended and Restated Credit Agreement, dated as of July 5, 2018, by and among Bread Financial Holdings, Inc., and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 10-Q | | 10.2 | | 8/7/18 | |
| | | | | | | | | | | |
| 10.123 | | (a) | | | | 10-Q | | 10.7 | | 5/6/19 | |
| | | | | | | | | | | |
| 10.124 | | (a) | | | | 8-K | | 10.2 | | 12/23/19 | |
| | | | | | | | | | | |
| 10.125 | | (a) | | | | 10-K | | 10.125 | | 2/28/20 | |
| | | | | | | | | | | |
| 10.126 | | (a) | | | | 8-K | | 10.2 | | 9/23/20 | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Incorporated by Reference | |
| Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date | |
| 10.127 | | (a) | | | | 8-K | | 10.1 | | 7/14/21 | |
| | | | | | | | | | | |
| 10.128 | | (a) | | | | 8-K | | 10.1 | | 12/15/22 | |
| | | | | | | | | | | |
| 10.129 | | (a) | | | | 8-K | | 4.1 | | 12/23/19 | |
| | | | | | | | | | | |
| 10.130 | | (a) | | | | 10-Q | | 10.4 | | 11/3/21 | |
| | | | | | | | | | | |
| 10.131 | | (a) | | | | 8-K | | 4.1 | | 9/23/20 | |
| | | | | | | | | | | |
| ^10.132 | | (a) | | | | 10-Q | | 10.5 | | 11/3/21 | |
| | | | | | | | | | | |
| *21 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *23.1 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *31.1 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| *31.2 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| **32.1 | | (a) | | | | | | | | | |
| | | | | | | | | | | |
| **32.2 | | (a) | | | | | | | | | |
| a) | The following documents are filed as part of this report: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (2) | Financial Statement Schedule |
| (3) | The following exhibits are filed as part of this Annual Report on Form 10-K or, where indicated, were previously filed and are hereby incorporated by reference. |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
+10.11 | | (a) | | Form of Non-employee Director Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2010 Omnibus Incentive Plan. | | 10-K | | 10.52 | | 2/28/13 |
| | | | | | | | | | |
+10.12 | | (a) | | Form of Non-employee Director Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan. | | 10-Q | | 10.6 | | 8/7/17 |
| | | | | | | | | | |
+10.13 | | (a) | | Alliance Data Systems Corporation Non-Employee Director Deferred Compensation Plan. | | 8-K | | 10.1 | | 6/9/06 |
| | | | | | | | | | |
+10.14 | | (a) | | Form of Alliance Data Systems Associate Confidentiality Agreement. | | 10-K | | 10.18 | | 2/27/17 |
| | | | | | | | | | |
+10.15 | | (a) | | Form of Alliance Data Systems Corporation Indemnification Agreement for Officers and Directors. | | 8-K | | 10.1 | | 6/5/15 |
| | | | | | | | | | |
+10.16 | | (a) | | Alliance Data Systems Corporation 2015 Employee Stock Purchase Plan, effective July 1, 2015. | | DEF 14A | | C | | 4/20/15 |
| | | | | | | | | | |
+10.17 | | (a) | | LoyaltyOne, Inc. Registered Retirement Savings Plan, as amended. | | 10-Q | | 10.1 | | 5/7/10 |
| | | | | | | | | | |
+10.18 | | (a) | | LoyaltyOne, Inc. Deferred Profit Sharing Plan, as amended. | | 10-Q | | 10.2 | | 5/7/10 |
| | | | | | | | | | |
+10.19 | | (a) | | LoyaltyOne, Inc. Canadian Supplemental Executive Retirement Plan, effective as of January 1, 2009. | | 10-Q | | 10.3 | | 5/7/10 |
| | | | | | | | | | |
+10.20 | | (a) | | Separation Agreement, dated as of June 22, 2020, by and among LoyaltyOne, Co., Alliance Data Systems Corporation and Bryan A. Pearson. | | 8-K | | 10.1 | | 6/26/20 |
| | | | | | | | | | |
10.21 | | (a) | | Amended and Restated License to Use the Air Miles Trade Marks in Canada, dated as of July 24, 1998, by and between Air Miles International Holdings N.V. and Loyalty Management Group Canada Inc. (assigned by Air Miles International Holdings N.V. to Air Miles International Trading B.V. by a novation agreement dated as of July 18, 2001 and further assigned to AM Royalties Limited Partnership, a wholly owned subsidiary of Diversified Royalty Corp., in connection with an asset purchase agreement dated August 25, 2017). | | S-1 | | 10.43 | | 1/13/00 |
| | | | | | | | | | |
10.22 | | (a) | | Amended and Restated License to Use and Exploit the Air Miles Scheme in Canada, dated July 24, 1998, by and between Air Miles International Trading B.V. and Loyalty Management Group Canada Inc. as assigned by Air Miles International Trading B.V. to AM Royalties Limited Partnership, a wholly owned subsidiary of Diversified Royalty Corp., in connection with an asset purchase agreement dated August 25, 2017. | | S-1 | | 10.44 | | 1/13/00 |
| | | | | | | | | | |
#10.23 | | (a) | | Private Label Credit Card Program Agreement, dated as of June 1, 2018, by and between Victoria’s Secret Stores, LLC, Lone Mountain Factoring, LLC, L Brands Direct Marketing, Inc., L Brands Direct Fulfillment, Inc., Far West Factoring, LLC, Puerto Rico Store Operations LLC, and Comenity Bank. | | 10-K | | 10.26 | | 2/28/20 |
| | | | | | | | | | |
10.24 | | (a) | | First Amendment to Private Label Credit Card Program Agreement, dated as of July 1, 2019, by and between Victoria’s Secret Stores, LLC, Lone Mountain Factoring, LLC, L Brands Direct Marketing, Inc., L Brands Direct | | 10-K | | 10.27 | | 2/28/20 |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
| | | | Fulfillment, Inc., Far West Factoring, LLC, Puerto Rico Store Operations LLC, and Comenity Bank. | | | | | | |
| | | | | | | | | | |
#10.25 | | (a) | | Second Amendment to Private Label Credit Card Program Agreement, dated as of October 23, 2020, by and among Victoria’s Secret Stores, LLC, VS Service Company, LLC by change of name and organizational form from L Brands Direct Marketing, Inc., and L Brands Direct Fulfillment, LLC by change of organizational form from L Brands Direct Fulfillment, Inc., and VSPR Store Operations, LLC by change of name from Puerto Rico Store Operations, LLC and Comenity Bank. | | 10-Q | | 10.4 | | 11/4/20 |
| | | | | | | | | | |
10.26 | | (b) (c) | | Second Amended and Restated Pooling and Servicing Agreement, dated as of January 17, 1996 as amended and restated as of September 17, 1999 and August 1, 2001, by and among WFN Credit Company, LLC, World Financial Network National Bank, and BNY Midwest Trust Company. | | 8-K | | 4.6 | | 8/31/01 |
| | | | | | | | | | |
10.27 | | (b) (c) (d) | | Second Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of May 19, 2004, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company. | | 8-K | | 4.1 | | 8/4/04 |
| | | | | | | | | | |
10.28 | | (b) (c) (d) | | Third Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of March 30, 2005, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company. | | 8-K | | 4.1 | | 4/5/05 |
| | | | | | | | | | |
10.29 | | (b) (d) | | Fourth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of June 13, 2007, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company. | | 8-K | | 4.1 | | 6/15/07 |
| | | | | | | | | | |
10.30 | | (b) (c) (d) | | Fifth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of October 26, 2007, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company. | | 8-K | | 4.1 | | 10/31/07 |
| | | | | | | | | | |
10.31 | | (b) (d) | | Sixth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of May 27, 2008, among World Financial Network National Bank, WFN Credit Company, LLC, and The Bank of New York Trust Company, N.A. | | 8-K | | 4.1 | | 5/29/08 |
| | | | | | | | | | |
10.32 | | (b) (d) | | Seventh Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of June 28, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and The Bank of New York Mellon Trust Company, N.A. | | 8-K | | 4.2 | | 6/30/10 |
| | | | | | | | | | |
10.33 | | (b) (d) | | Supplemental Agreement to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 9, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and The Bank of New York Mellon Trust Company, N.A. | | 8-K | | 4.1 | | 8/12/10 |
| | | | | | | | | | |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
10.34 | | (b) (c) (d) | | Eighth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of November 9, 2011, among World Financial Network Bank, WFN Credit Company, LLC, and The Bank of New York Mellon Trust Company, N.A. | | 8-K | | 4.1 | | 11/14/11 |
| | | | | | | | | | |
10.35 | | (b) (c) (d) | | Ninth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of December 1, 2016, among Comenity Bank, WFN Credit Company, LLC, and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 12/2/16 |
| | | | | | | | | | |
10.36 | | (b) (c) (d) | | Tenth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 16, 2018, among Comenity Bank, WFN Credit Company, LLC, and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 8/20/18 |
| | | | | | | | | | |
10.37 | | (b) (c) (d) | | Eleventh Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of June 11, 2020, among Comenity Bank, WFN Credit Company, LLC, and MUFG Union Bank, N.A. | | 8-K | | 4.2 | | 6/16/20 |
| | | | | | | | | | |
10.38 | | (b) (c) (d) | | Twelfth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of October 27, 2020, among WFN Credit Company, LLC, as transferor, Comenity Bank, as servicer, and MUFG Union Bank, N.A., as trustee. | | 8-K | | 4.1 | | 10/30/20 |
| | | | | | | | | | |
10.39 | | (b) (c) | | Collateral Series Supplement to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 21, 2001, among WFN Credit Company, LLC, World Financial Network National Bank and BNY Midwest Trust Company. | | 8-K | | 4.7 | | 8/31/01 |
| | | | | | | | | | |
10.40 | | (b) (c) | | First Amendment to Collateral Series Supplement, dated as of November 7, 2002, among WFN Credit Company, LLC, World Financial Network National Bank and BNY Midwest Trust Company. | | 8-K | | 4.3 | | 11/20/02 |
| | | | | | | | | | |
10.41 | | (b) (c) (d) | | Second Amendment to Collateral Series Supplement, dated as of July 6, 2016, among WFN Credit Company, LLC, Comenity Bank and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 7/8/16 |
| | | | | | | | | | |
10.42 | | (b) (c) | | Transfer and Servicing Agreement, dated as of August 1, 2001, between WFN Credit Company, LLC, World Financial Network National Bank, and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.3 | | 8/31/01 |
| | | | | | | | | | |
10.43 | | (b) (c) | | First Amendment to the Transfer and Servicing Agreement, dated as of November 7, 2002, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.2 | | 11/20/02 |
| | | | | | | | | | |
10.44 | | (b) (c) (d) | | Third Amendment to the Transfer and Servicing Agreement, dated as of May 19, 2004, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.2 | | 8/4/04 |
| | | | | | | | | | |
10.45 | | (b) (c) (d) | | Fourth Amendment to the Transfer and Servicing Agreement, dated as of March 30, 2005, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.2 | | 4/5/05 |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
| | | | | | | | | | |
10.46 | | (b) (d) | | Fifth Amendment to the Transfer and Servicing Agreement, dated as of June 13, 2007, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.2 | | 6/15/07 |
| | | | | | | | | | |
10.47 | | (b) (c) (d) | | Sixth Amendment to the Transfer and Servicing Agreement, dated as of October 26, 2007, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.2 | | 10/31/07 |
| | | | | | | | | | |
10.48 | | (b) (d) | | Seventh Amendment to Transfer and Servicing Agreement, dated as of June 28, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.4 | | 6/30/10 |
| | | | | | | | | | |
10.49 | | (b) (d) | | Supplemental Agreement to Transfer and Servicing Agreement, dated as of August 9, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.3 | | 8/12/10 |
| | | | | | | | | | |
10.50 | | (b) (c) (d) | | Eighth Amendment to Transfer and Servicing Agreement, dated as of June 15, 2011, among World Financial Network National Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.1 | | 6/15/11 |
| | | | | | | | | | |
10.51 | | (b) (c) (d) | | Ninth Amendment to Transfer and Servicing Agreement, dated as of November 9, 2011, among World Financial Network Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.3 | | 11/14/11 |
| | | | | | | | | | |
10.52 | | (b) (c) (d) | | Tenth Amendment to the Transfer and Servicing Agreement, dated as of July 6, 2016, among Comenity Bank, WFN Credit Company, LLC and World Financial Network Credit Card Master Note Trust. | | 8-K | | 4.4 | | 7/8/16 |
| | | | | | | | | | |
10.53 | | (b) (c) | | Receivables Purchase Agreement, dated as of August 1, 2001, between World Financial Network National Bank and WFN Credit Company, LLC. | | 8-K | | 4.8 | | 8/31/01 |
| | | | | | | | | | |
10.54 | | (b) (d) | | First Amendment to Receivables Purchase Agreement, dated as of June 28, 2010, between World Financial Network National Bank and WFN Credit Company, LLC. | | 8-K | | 4.3 | | 6/30/10 |
| | | | | | | | | | |
10.55 | | (b) (d) | | Supplemental Agreement to Receivables Purchase Agreement, dated as of August 9, 2010, between World Financial Network National Bank and WFN Credit Company, LLC. | | 8-K | | 4.2 | | 8/12/10 |
| | | | | | | | | | |
10.56 | | (b) (c) (d) | | Second Amendment to Receivables Purchase Agreement, dated as of November 9, 2011, between World Financial Network Bank and WFN Credit Company, LLC. | | 8-K | | 4.2 | | 11/14/11 |
| | | | | | | | | | |
10.57 | | (b) (c) (d) | | Third Amendment to Receivables Purchase Agreement, dated as of July 6, 2016, between Comenity Bank and WFN Credit Company, LLC. | | 8-K | | 4.2 | | 7/8/16 |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
| | | | | | | | | | |
10.58 | | (b) (c) (d) | | Fourth Amendment to Receivables Purchase Agreement, dated as of June 11, 2020, between Comenity Bank and WFN Credit Company, LLC. | | 8-K | | 4.3 | | 6/16/20 |
| | | | | | | | | | |
10.59 | | (b) (c) | | Master Indenture, dated as of August 1, 2001, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company. | | 8-K | | 4.1 | | 8/31/01 |
| | | | | | | | | | |
10.60 | | (b) (c) | | Omnibus Amendment, dated as of March 31, 2003, among WFN Credit Company, LLC, World Financial Network Credit Card Master Trust, World Financial Network National Bank and BNY Midwest Trust Company. | | 8-K | | 4 | | 4/22/03 |
| | | | | | | | | | |
10.61 | | (b) (c) | | Supplemental Indenture No. 1, dated as of August 13, 2003, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company. | | 8-K | | 4.2 | | 8/28/03 |
| | | | | | | | | | |
10.62 | | (b) (d) | | Supplemental Indenture No. 2, dated as of June 13, 2007, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company. | | 8-K | | 4.3 | | 6/15/07 |
| | | | | | | | | | |
10.63 | | (b) (d) | | Supplemental Indenture No. 3, dated as of May 27, 2008, between World Financial Network Credit Card Master Note Trust and The Bank of New York Trust Company, N.A. | | 8-K | | 4.2 | | 5/29/08 |
| | | | | | | | | | |
10.64 | | (b (d) | | Supplemental Indenture No. 4, dated as of June 28, 2010, between World Financial Network Credit Card Master Note Trust and The Bank of New York Mellon Trust Company, N.A. | | 8-K | | 4.1 | | 6/30/10 |
| | | | | | | | | | |
10.65 | | (b) (c) (d) | | Supplemental Indenture No. 5, dated as of February 20, 2013, between World Financial Network Credit Card Master Note Trust and Union Bank, N.A. | | 8-K | | 4.2 | | 2/22/13 |
| | | | | | | | | | |
10.66 | | (b) (c) (d) | | Supplemental Indenture No. 6 to Master Indenture, dated as of July 6, 2016, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.3 | | 7/8/16 |
| | | | | | | | | | |
10.67 | | (b) (c) (d) | | Supplemental Indenture No. 7 to Master Indenture, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 6/16/20 |
| | | | | | | | | | |
10.68 | | (b) (c) (d) | | Omnibus Amendment, dated as of July 10, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 7/11/17 |
| | | | | | | | | | |
10.69 | | (b) (c) (d) | | Omnibus Amendment, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.4 | | 6/16/20 |
| | | | | | | | | | |
10.70 | | (b) (c) (d) | | Agreement of Resignation, Appointment and Acceptance, dated as of June 26, 2012, by and among World Financial Network Bank, World Financial Network Credit Card Master Note Trust, The Bank of New York Mellon Trust Company, N.A., and Union Bank, N.A. | | 8-K | | 4.1 | | 6/26/12 |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
| | | | | | | | | | |
10.71 | | (b) (c) (d) | | Agreement of Resignation, Appointment and Acceptance, dated as of June 26, 2012, by and among WFN Credit Company, LLC, The Bank of New York Mellon Trust Company, N.A., and Union Bank, N.A. | | 8-K | | 4.2 | | 6/26/12 |
| | | | | | | | | | |
10.72 | | (b) (c) (d) | | Series 2016-A Indenture Supplement, dated as of July 27, 2016, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 7/28/16 |
| | | | | | | | | | |
10.73 | | (b) (c) (d) | | Series 2018-A Indenture Supplement, dated as of February 28, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 3/5/18 |
| | | | | | | | | | |
10.74 | | (b) (c) (d) | | Omnibus Amendment, dated as of May 3, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 5/4/18 |
| | | | | | | | | | |
10.75 | | (b) (c) (d) | | Series 2018-B Indenture Supplement, dated as of September 27, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 9/28/18 |
| | | | | | | | | | |
10.76 | | (b) (c) (d) | | First Amendment to Series 2018-B Indenture Supplement, dated as of November 7, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.2 | | 11/8/18 |
| | | | | | | | | | |
10.77 | | (b) (c) (d) | | Series 2018-C Indenture Supplement, dated as of November 7, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 11/8/18 |
| | | | | | | | | | |
10.78 | | (b) (c) (d) | | Series 2019-A Indenture Supplement, dated as of February 20, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 2/21/19 |
| | | | | | | | | | |
10.79 | | (b) (c) (d) | | Series 2019-B Indenture Supplement, dated as of June 26, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 6/28/19 |
| | | | | | | | | | |
10.80 | | (b) (c) (d) | | Series 2019-C Indenture Supplement, dated as of September 18, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A. | | 8-K | | 4.1 | | 9/20/19 |
| | | | | | | | | | |
10.81 | | (b) (c) | | Amended and Restated Trust Agreement, dated as of August 1, 2001, between WFN Credit Company, LLC and Chase Manhattan Bank USA, National Association. | | 8-K | | 4.4 | | 8/31/01 |
| | | | | | | | | | |
10.82 | | (b) (c) | | Administration Agreement, dated as of August 1, 2001, between World Financial Network Credit Card Master Note Trust and World Financial Network National Bank. | | 8-K | | 4.5 | | 8/31/01 |
| | | | | | | | | | |
10.83 | | (b) (d) | | First Amendment to Administration Agreement, dated as of July 31, 2009, between World Financial Network Credit Card Master Note Trust and World Financial Network National Bank. | | 8-K | | 4.1 | | 7/31/09 |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
| | | | | | | | | | |
10.84 | | (b) (c) (d) | | Third Amended and Restated Service Agreement, dated as of April 23, 2019, between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.1 | | 4/23/19 |
| | | | | | | | | | |
10.85 | | (b) (c) (d) | | First Addendum to Appendix A of Third Amended and Restated Service Agreement, dated as of April 28, 2020, by and between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.1 | | 11/1/19 |
| | | | | | | | | | |
10.86 | | (b) (c) (d) | | Second Addendum to Appendix A of Third Amended and Restated Service Agreement, dated as of October 16, 2019, between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.2 | | 11/1/19 |
| | | | | | | | | | |
10.87 | | (b) (c) (d) | | Amendment to Third Amended and Restated Service Agreement, dated as of February 20, 2020, between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.1 | | 2/25/20 |
| | | | | | | | | | |
10.88 | | (b) (c) (d) | | First Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of April 28, 2020, by and between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.1 | | 5/4/20 |
| | | | | | | | | | |
10.89 | | (b) (c) (d) | | Second Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of August 26, 2020, between Comenity Servicing LLC and Comenity Bank. | | 10-D | | 99.2 | | 9/14/20 |
| | | | | | | | | | |
10.90 | | (b) (c) (d) | | Third Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of January 26, 2021, between Comenity Servicing LLC and Comenity Bank. | | 8-K | | 99.1 | | 1/29/21 |
| | | | | | | | | | |
10.91 | | (b) (c) (d) | | Asset Representations Review Agreement, dated as of July 6, 2016, among Comenity Bank, WFN Credit Company, LLC, World Financial Network Credit Card Master Note Trust and FTI Consulting, Inc. | | 8-K | | 10.1 | | 7/8/16 |
| | | | | | | | | | |
10.92 | | (a) | | Receivables Purchase Agreement, dated as of September 28, 2001, between World Financial Network National Bank and WFN Credit Company, LLC. | | 10-Q | | 10.5 | | 11/7/08 |
| | | | | | | | | | |
10.93 | | (a) | | First Amendment to Receivables Purchase Agreement, dated as of June 24, 2008, between World Financial Network National Bank and WFN Credit Company, LLC. | | 10-K | | 10.94 | | 3/2/09 |
| | | | | | | | | | |
10.94 | | (a) | | Second Amendment to Receivables Purchase Agreement, dated as of March 30, 2010, between World Financial Network National Bank and WFN Credit Company, LLC. | | 10-K | | 10.127 | | 2/28/11 |
| | | | | | | | | | |
10.95 | | (a) | | Supplemental Agreement to Receivables Purchase Agreement, dated as of August 9, 2010, between World Financial Network National Bank and WFN Credit Company, LLC. | | 10-K | | 10.128 | | 2/28/11 |
| | | | | | | | | | |
10.96 | | (a) | | Third Amendment to Receivables Purchase Agreement, dated as of September 30, 2011, between World Financial Network Bank and WFN Credit Company, LLC. | | 10-Q | | 10.4 | | 11/7/11 |
| | | | | | | | | | |
| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
10.97 | | (a) | | World Financial Network Credit Card Master Trust III Amended and Restated Pooling and Servicing Agreement, dated as of September 28, 2001, among WFN Credit Company, LLC, World Financial Network National Bank, and The Chase Manhattan Bank, USA, National Association. | | 10-Q | | 10.6 | | 11/7/08 |
| | | | | | | | | | |
10.98 | | (a) | | First Amendment to the Amended and Restated Pooling and Servicing Agreement, dated as of April 7, 2004, among WFN Credit Company, LLC, World Financial Network National Bank, and The Chase Manhattan Bank, USA, National Association. | | 10-Q | | 10.7 | | 11/7/08 |
| | | | | | | | | | |
10.99 | | (a) | | Second Amendment to the Amended and Restated Pooling and Servicing Agreement, dated as of March 23, 2005, among WFN Credit Company, LLC, World Financial Network National Bank, and The Chase Manhattan Bank, USA, National Association | | 10-Q | | 10.8 | | 11/7/08 |
| | | | | | | | | | |
10.100 | | (a) | | Third Amendment to the Amended and Restated Pooling and Servicing Agreement, dated as of October 26, 2007, among WFN Credit Company, LLC, World Financial Network National Bank, and Union Bank of California, N.A. (successor to JPMorgan Chase Bank, N.A.). | | 10-Q | | 10.9 | | 11/7/08 |
| | | | | | | | | | |
10.101 | | (a) | | Fourth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of March 30, 2010, among WFN Credit Company, LLC, World Financial Network National Bank, and Union Bank, N.A. | | 10-Q | | 10.9 | | 5/7/10 |
| | | | | | | | | | |
10.102 | | (a) | | Fifth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of September 30, 2011, among WFN Credit Company, LLC, World Financial Network Bank, and Union Bank, N.A. | | 10-Q | | 10.3 | | 11/7/11 |
| | | | | | | | | | |
10.103 | | (a) | | Sixth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of December 1, 2016, among WFN Credit Company, LLC, Comenity Bank, and Deutsche Bank Trust Company Americas. | | 10-K | | 10.94 | | 2/27/17 |
| | | | | | | | | | |
10.104 | | (a) | | Seventh Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of September 1, 2017, among WFN Credit Company, LLC, Comenity Bank, and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | 10-K | | 10.96 | | 2/27/18 |
| | | | | | | | | | |
*10.105 | | (a) | | Eighth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of November 16, 2020, among WFN Credit Company, LLC, Comenity Bank, and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | | | | | |
| | | | | | | | | | |
10.106 | | (a) | | Supplemental Agreement to Amended and Restated Pooling and Servicing Agreement, dated as of August 9, 2010, among WFN Credit Company, LLC, World Financial Network National Bank, and Union Bank, N.A. | | 10-K | | 10.134 | | 2/28/11 |
| | | | | | | | | | |
10.107 | | (a) | | Receivables Purchase Agreement, dated as of September 29, 2008, between World Financial Capital Bank and World Financial Capital Credit Company, LLC. | | 10-Q | | 10.3 | | 11/7/08 |
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| | | | | | | | | | |
|---|
| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
10.108 | | (a) | | Amendment No. 1 to Receivables Purchase Agreement, dated as of June 4, 2010, between World Financial Capital Bank and World Financial Capital Credit Company, LLC. | | 10-Q | | 10.11 | | 8/9/10 |
| | | | | | | | | | |
10.109 | | (a) | | Transfer and Servicing Agreement, dated as of September 29, 2008, among World Financial Capital Credit Company, LLC, World Financial Capital Bank and World Financial Capital Master Note Trust. | | 10-Q | | 10.4 | | 11/7/08 |
| | | | | | | | | | |
10.110 | | (a) | | Amendment No. 1 to Transfer and Servicing Agreement, dated as of June 4, 2010, among World Financial Capital Credit Company, LLC, World Financial Capital Bank and World Financial Capital Master Note Trust. | | 10-Q | | 10.12 | | 8/9/10 |
| | | | | | | | | | |
10.111 | | (a) | | Master Indenture, dated as of September 29, 2008, between World Financial Capital Master Note Trust and U.S. Bank National Association, together with Supplemental Indenture Nos. 1 - 3. | | 10-K | | 10.104 | | 2/27/18 |
| | | | | | | | | | |
10.112 | | (a) | | Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of February 28, 2014, between World Financial Network Credit Card Master Note Trust and Union Bank, N.A. | | 10-K | | 10.129 | | 2/27/15 |
| | | | | | | | | | |
10.113 | | (a) | | First Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of July 10, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | 10-Q | | 10.8 | | 8/7/17 |
| | | | | | | | | | |
10.114 | | (a) | | Second Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of December 1, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | 10-K | | 10.109 | | 2/27/18 |
| | | | | | | | | | |
10.115 | | (a) | | Third Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of May 3, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | 10-K | | 10.110 | | 2/26/19 |
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10.116 | | (a) | | Fourth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of August 31, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | 10-K | | 10.111 | | 2/26/19 |
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10.117 | | (a) | | Fifth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of February 1, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | 10-K | | 10.112 | | 2/26/19 |
| | | | | | | | | | |
*10.118 | | (a) | | Sixth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | | | | | |
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*10.119 | | (a) | | Seventh Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 10, 2020, between World | | | | | | |
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| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
| | | | Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A. | | | | | | |
| | | | | | | | | | |
10.120 | | (a) | | Third Amended and Restated Series 2009-VFC1 Supplement, dated as of April 28, 2017, among WFN Credit Company, LLC, Comenity Bank and Deutsche Bank Trust Company Americas. | | 10-Q | | 10.7 | | 8/7/17 |
| | | | | | | | | | |
10.121 | | (a) | | First Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of October 19, 2017, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | 10-Q | | 10.4 | | 11/8/17 |
| | | | | | | | | | |
10.122 | | (a) | | Second Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of August 31, 2018, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | 10-K | | 10.115 | | 2/26/19 |
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*10.123 | | (a) | | Third Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of June 28, 2019, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | | | | | |
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*10.124 | | (a) | | Fourth Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of April 17, 2020, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | | | | | |
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10.125 | | (a) | | Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of November 1, 2016, between World Financial Capital Master Note Trust and Deutsche Bank Trust Company Americas. | | 10-K | | 10.102 | | 2/27/17 |
| | | | | | | | | | |
10.126 | | (a) | | First Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of November 1, 2017, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | 10-Q | | 10.5 | | 11/8/17 |
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10.127 | | (a) | | Second Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 28, 2018, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas). | | 10-Q | | 10.3 | | 11/6/18 |
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#10.128 | | (a) | | Secured Facilities Agreement, dated as of April 3, 2020, by and among Brand Loyalty Group B.V. and certain subsidiaries parties thereto, as borrowers and guarantors, Deutsche Bank AG, Amsterdam Branch (as Arranger) and Coöperatieve Rabobank U.A. (as Arranger, Agent and Security Agent). | | 8-K | | 10.1 | | 4/8/20 |
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10.129 | | (a) | | Amended and Restated Credit Agreement, dated as of June 14, 2017, by and among Alliance Data Systems Corporation, certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other agents and lenders. | | 8-K | | 10.1 | | 6/19/17 |
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| | | | | | Incorporated by Reference |
|---|
Exhibit No. | | Filer | | Description | | Form | | Exhibit | | Filing Date |
|---|
10.130 | | (a) | | First Amendment to Amended and Restated Credit Agreement and Incremental Amendment, dated as of June 16, 2017, by and among Alliance Data Systems Corporation, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 8-K | | 10.2 | | 6/19/17 |
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10.131 | | (a) | | Second Amendment to Amended and Restated Credit Agreement, dated as of July 5, 2018, by and among Alliance Data Systems Corporation, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 10-Q | | 10.2 | | 8/7/18 |
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10.132 | | (a) | | Third Amendment to Amended and Restated Credit Agreement, dated as of April 30, 2019, by and among Registrant, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders. | | 10-Q | | 10.7 | | 5/6/19 |
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10.133 | | (a) | | Fourth Amendment to Amended and Restated Credit Agreement, dated as of December 20, 2019, 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 | | 10.2 | | 12/23/19 |
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10.134 | | (a) | | Fifth Amendment to Amended and Restated Credit Agreement, dated as of February 13, 2020, 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. | | 10-K | | 10.125 | | 2/28/20 |
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10.135 | | (a) | | Sixth Amendment to Amended and Restated Credit Agreement, dated as of September 22, 2020, 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 | | 10.2 | | 9/23/20 |
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10.136 | | (a) | | Indenture, dated as of December 20, 2019, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee (including the form of the Company’s 4.750% Senior Note due December 15, 2024). | | 8-K | | 4.1 | | 12/23/19 |
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˄10.137 | | (a) | | Indenture, dated as of September 22, 2020, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee (including the form of the Company’s 7.000% Senior Note due January 15, 2026). | | 8-K | | 4.1 | | 9/23/20 |
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*21 | | (a) | | Subsidiaries of the Registrant | | | | | | |
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*23.1 | | (a) | | Consent of Deloitte & Touche LLP | | | | | | |
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*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. | | | | | | |
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*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. | | | | | | |
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| Incorporated by Reference |
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Exhibit No.
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| Filer
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| Description
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| Form
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| Exhibit
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| Filing Date
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*32.1
Exhibit No. |
| (a)
Filer |
| 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.Description
|
| Form
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| Exhibit
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| Filing Date
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*32.2 101 |
| (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.
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*101
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| The following financial information from Alliance Data Systems Corporation’sBread Financial Holdings, Inc.’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2022, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements. |
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*104 |
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| Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
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** Furnished herewith
+ Management contract, compensatory plan or arrangement
#∧
| Pursuant to Item 601(b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Registrant hereby undertakes to furnish supplementally an unredacted copy of the exhibit or a copy of any omitted schedule upon request by the U.S. Securities and Exchange Commission.
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˄ Certain exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Alliance DataBread Financial Holdings, Inc. hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the U.S. Securities and Exchange Commission.
(a) | Alliance Data Systems Corporation |
(c) | World Financial Network Credit Card Master Trust |
(d) | World Financial Network Credit Card Master Note Trust |
(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
Item 16. Form 10-K Summary.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
BREAD FINANCIAL HOLDINGS, INC.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Alliance Data Systems CorporationBread Financial Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying
consolidated balance sheetsConsolidated Balance Sheets of
Alliance Data Systems CorporationBread Financial Holdings, Inc. and subsidiaries (the
“Company”"Company") as of December 31,
20202022 and
2019,2021, the related
consolidated statementsConsolidated Statements of
Income, Comprehensive income,
comprehensive income, stockholders’Stockholders’ equity, and
cashCash flows for each of the three years in the period ended December 31,
2020, and the related notes and the schedule listed in the index at Item 152022 (collectively referred to as the
“financial statements”"financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31,
20202022 and
2019,2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2020,2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’sCompany's internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 2021,28, 2023, expressed an unqualified opinion on the Company’sCompany's internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company adopted Accounting Standards Codification (ASC) 842, Leases, using the modified retrospective approach on January 1, 2019, and adopted ASC 326, Measurement of Credit Losses on Financial Instruments (“CECL”), using the modified retrospective approach on January 1, 2020.
These financial statements are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company’sCompany's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit
MattersMatter
The critical audit mattersmatter communicated below are mattersis a matter arising from the current-period audit of the financial statements that werewas communicated or required to be communicated to the audit committee and that (1) relaterelates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit mattersmatter below, providing a separate opinionsopinion on the critical audit mattersmatter or on the accounts or disclosures to which they relate.it relates.
Allowance for Loan LossCredit Losses — Refer to Notes 21 and 83 to the financial statements
Critical Audit Matter Description
Starting with the January 1, 2020 adoption of CECL, the Company recognizes an allowance
The Allowance for loan loss immediately upon the origination of a loan and reassesses that estimate in each subsequent reporting period. The allowance for loan losscredit losses is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivablesother loans that
considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECLcredit 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 loan receivables,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
allowanceAllowance for
loancredit losses, for each identified group, management utilizes various models and estimation techniques based on historical loss
the Company segregates itsexperience, 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, to determine expected credit
card receivables into four groups with similar risk characteristics, on the basisperformance. The Company’s quantitative estimate of
delinquency status andexpected credit
quality risk score.losses under CECL is impacted by certain forecasted economic factors. The Company
then determinesconsiders the forecast used to be reasonable and supportable over the estimated life of
each group ofthe credit card
receivables.
Management applies significant judgment in estimating its allowance for loan loss for each identified group, utilizing various models, historical data, statistical analysis, behavioral relationships of credit performance, and forecasted economic factors.other loans, with no reversion period. In addition to the quantitative estimate of expected credit losses, managementthe Company also applies significant judgment by incorporatingincorporates 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, andor other relevant factors to ensure the allowanceAllowance for loan losscredit losses reflects the Company’s best estimate of current expected credit losses.
At December 31, 2022, the total Allowance for credit losses was $2.5 billion.
Given the significant judgments made by management in estimating its allowanceAllowance for loan loss,credit losses related to credit card loans, performing audit procedures to evaluate the reasonableness of the estimated allowanceAllowance for loan loss,credit losses, including procedures to evaluate the qualitative adjustments, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our credit modeling specialists.
How the Critical Audit Matter Was Addressed in the Audit
● | We tested the design and operating effectiveness of management’s controls over the various models and qualitative adjustments, including controls over the determination of the most significant risk characteristics for estimating expected credit losses, estimates of expected credit card payments applied to existing credit card balances, macroeconomic variables applied over the forecast period, qualitative adjustments, and changes in current economic conditions that may not be captured in the quantitatively derived results. |
● | We tested the completeness and accuracy of the historical data used in management’s models. |
•We tested the design and operating effectiveness of management’s controls over the determination and review of model methodology, significant assumptions and qualitative adjustments.
● | •We evaluated whether the method (including the model), data, and significant assumptions are appropriate in the context of the applicable financial reporting framework. •We tested the completeness and accuracy of the historical data used in management’s models. •With assistance from credit modeling specialists, we evaluated whether the model is suitable for determining the estimate, which included understanding the model methodology and logic, whether the selected method for estimating credit losses is appropriate and whether the significant assumptions were reasonable. •We evaluated the reasonableness of the selection of forecasted macroeconomic variables, considered alternative forecasted scenarios and evaluated any contradictory evidence. |
● | We evaluated the reasonableness of the qualitative adjustments for factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, and other relevant factors. |
● | We used our credit modeling specialists to assist us in evaluating the various models and management’s assumptions, including the following: |
| – | the conceptual soundness of the approach to how expected credit card payments are applied to existing credit card balances. |
| – | the reasonableness of the determination of the most significant risk characteristics for estimating expected credit losses used to segregate the credit card and loan receivables into groups. |
| – | the reasonableness of the macroeconomic variables over the forecast period used by comparing such variables to independent sources. |
Goodwill — BrandLoyalty Reporting Unit — Refer to Notes 2 and 14 to the financial statements
Critical Audit Matter Description
The Company tests goodwill of the BrandLoyalty reporting unit for impairment annually, as of July 1, or when events and circumstances change that would indicate the carrying amount may not be recoverable. The Company’s evaluation of goodwill for impairment involves the comparison of the fair value of the reporting unit to its carrying value. The Company estimated the fair value of its reporting unit using an income-based approach. The Company’s income approach utilizes a discounted cash flow model based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows. The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate, and other assumptions that are judgmental in nature. The fair value of the BrandLoyalty reporting unit exceeded its carrying value as of the measurement date by less than 10% and, therefore, no impairment was recognized.
Given the significant judgments made by management to estimate the fair value, and the difference between the fair value over carrying value of the BrandLoyalty reporting unit, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions related to the forecasts of revenue growth and profit performance and the selection of forecasted macroeconomic variables, considered alternative forecasted scenarios and evaluated any contradictory evidence.
•We evaluated whether judgments have been applied consistently to the discount rate required a high degreemodel and that any qualitative adjustments to the output of auditor judgmentthe model are consistent with the measurement objective of the applicable financial reporting framework and an increased extent of effort, including involvement of our fair value specialists.
How the Critical Audit Matter Was Addressedare appropriate in the Audit
circumstances.
•● | We tested the effectiveness of controls over goodwill, including those over the forecasts of future revenue growth and profit performance and the selection of the discount rate. |
We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of management bias.
● | We evaluated management’s ability to accurately forecast by comparing actual results to management’s historical forecasts. |
● | We evaluated the reasonableness of management’s forecasts of future revenues and profit performance, including operating margins, earnings before interest and taxes (EBIT) and earnings before interest, taxes, depreciation and amortization (EBITDA) by comparing the forecasts to: |
| – | Internal communications to management and the Board of Directors. |
| – | Forecasted information included in Company press releases, as well as analyst and industry reports for the Company and certain peer companies. |
● | We evaluated the impact of actual results of revenues, operating margins, EBIT, and EBITDA from the measurement date through year-end to the forecasted amounts. |
● | With the assistance of our fair value specialists, we evaluated the valuation methodologies and the discount rate by: |
| – | Testing the source information underlying the determination of the discount rate. |
| – | Testing the mathematical accuracy of the calculations. |
| – | Developing a range of independent estimates and comparing those to the discount rate selected by management. |
/s/ Deloitte & Touche LLP
Dallas, Texas
Columbus, Ohio
February
26, 202128, 2023
We have served as the
Company’sCompany's auditor since 1998.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of
Alliance Data Systems CorporationBread Financial Holdings, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Alliance Data Systems CorporationBread Financial Holdings, Inc. and subsidiaries (the “Company”) as of December 31, 2020,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020,2022, based on criteria established in Internal Control—Control — Integrated Framework (2013) issued by COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31,
2020,2022, of the Company and our report dated February
26, 2021,28, 2023 expressed an unqualified opinion on those financial
statements and included an explanatory paragraph regarding the Company’s adoption of new accounting standards.statements.
As described in Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Lon Inc. (“Bread”). The Company acquired the business of Bread on December 3, 2020, whose financial statements constitute less than 3% of total assets (including goodwill and intangible assets), less than 1% of revenues, and less than 3% of pre-tax income, on an absolute basis, of the consolidated financial statement amounts as of and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting at Bread.
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
Columbus, Ohio
February
26, 202128, 2023
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEETS
| | | | | | |
| | December 31, |
| | 2020 | | 2019 |
|
| | (in millions, except per share amounts) |
ASSETS | | | | | | |
Cash and cash equivalents | | $ | 3,081.5 | | $ | 3,874.4 |
Accounts receivable, net, less allowance for doubtful accounts ($4.0 and $3.4 at December 31, 2020 and 2019, respectively) | | | 383.8 | | | 451.1 |
Credit card and loan receivables: | | | | | | |
Credit card and loan receivables – restricted for securitization investors | | | 11,208.5 | | | 13,504.2 |
Other credit card and loan receivables | | | 5,575.9 | | | 5,958.9 |
Total credit card and loan receivables | | | 16,784.4 | | | 19,463.1 |
Allowance for loan loss | | | (2,008.0) | | | (1,171.1) |
Credit card and loan receivables, net | | | 14,776.4 | | | 18,292.0 |
Credit card receivables held for sale | | | — | | | 408.0 |
Inventories, net | | | 164.3 | | | 218.0 |
Other current assets | | | 534.9 | | | 268.4 |
Redemption settlement assets, restricted | | | 693.5 | | | 600.8 |
Total current assets | | | 19,634.4 | | | 24,112.7 |
Property and equipment, net | | | 310.9 | | | 282.3 |
Right of use assets - operating | | | 233.2 | | | 264.3 |
Deferred tax asset, net | | | 359.2 | | | 45.2 |
Intangible assets, net | | | 81.7 | | | 153.3 |
Goodwill | | | 1,369.6 | | | 954.9 |
Other non-current assets | | | 558.1 | | | 682.1 |
Total assets | | $ | 22,547.1 | | $ | 26,494.8 |
LIABILITIES AND STOCKHOLDERS' EQUITY | | | | | | |
Accounts payable | | $ | 328.2 | | $ | 300.8 |
Accrued expenses | | | 444.7 | | | 327.8 |
Current operating lease liabilities | | | 23.6 | | | 22.6 |
Current portion of deposits | | | 6,553.9 | | | 6,942.4 |
Current portion of non-recourse borrowings of consolidated securitization entities | | | 1,850.7 | | | 3,030.8 |
Current portion of long-term and other debt | | | 101.4 | | | 101.4 |
Other current liabilities | | | 220.9 | | | 338.3 |
Deferred revenue | | | 898.5 | | | 807.9 |
Total current liabilities | | | 10,421.9 | | | 11,872.0 |
Deferred revenue | | | 105.5 | | | 114.1 |
Deferred tax liability, net | | | — | | | 80.0 |
Long-term operating lease liabilities | | | 276.4 | | | 291.7 |
Deposits | | | 3,238.7 | | | 5,209.3 |
Non-recourse borrowings of consolidated securitization entities | | | 3,859.2 | | | 4,253.2 |
Long-term and other debt | | | 2,704.3 | | | 2,748.5 |
Other liabilities | | | 419.5 | | | 337.7 |
Total liabilities | | | 21,025.5 | | | 24,906.5 |
Commitments and contingencies (Note 18) | | | | | | |
Stockholders’ equity: | | | | | | |
Common stock, $0.01 par value; authorized, 200.0 shares; issued, 117.1 and 115.0 shares at December 31, 2020 and 2019, respectively | | | 1.2 | | | 1.1 |
Additional paid-in capital | | | 3,427.2 | | | 3,257.7 |
Treasury stock, at cost, 67.4 shares at each of December 31, 2020 and 2019 | | | (6,733.9) | | | (6,733.9) |
Retained earnings | | | 4,832.1 | | | 5,163.3 |
Accumulated other comprehensive loss | | | (5.0) | | | (99.9) |
Total stockholders’ equity | | | 1,521.6 | | | 1,588.3 |
Total liabilities and stockholders’ equity | | $ | 22,547.1 | | $ | 26,494.8 |
See accompanying notes to consolidated financial statements.
BREAD FINANCIAL HOLDINGS, INC.
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
INCOME
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions, except per share amounts) |
Revenues | | | | | | | | | |
Services | | $ | 116.9 | | $ | 215.5 | | $ | 295.4 |
Redemption, net | | | 473.1 | | | 637.3 | | | 676.3 |
Finance charges, net | | | 3,931.4 | | | 4,728.5 | | | 4,694.9 |
Total revenue | | | 4,521.4 | | | 5,581.3 | | | 5,666.6 |
Operating expenses | | | | | | | | | |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 2,077.3 | | | 2,687.8 | | | 2,537.2 |
Provision for loan loss | | | 1,266.2 | | | 1,187.5 | | | 1,016.0 |
General and administrative | | | 105.7 | | | 150.6 | | | 162.5 |
Depreciation and other amortization | | | 98.5 | | | 79.9 | | | 80.7 |
Amortization of purchased intangibles | | | 85.3 | | | 96.2 | | | 112.9 |
Loss on extinguishment of debt | | | — | | | 71.9 | | | — |
Total operating expenses | | | 3,633.0 | | | 4,273.9 | | | 3,909.3 |
Operating income | | | 888.4 | | | 1,307.4 | | | 1,757.3 |
Interest expense | | | | | | | | | |
Securitization funding costs | | | 165.9 | | | 213.4 | | | 220.2 |
Interest expense on deposits | | | 219.5 | | | 225.6 | | | 165.7 |
Interest expense on long-term and other debt, net | | | 108.5 | | | 130.0 | | | 156.4 |
Total interest expense, net | | | 493.9 | | | 569.0 | | | 542.3 |
Income from continuing operations before income taxes | | | 394.5 | | | 738.4 | | | 1,215.0 |
Provision for income taxes | | | 99.5 | | | 165.8 | | | 269.5 |
Income from continuing operations | | | 295.0 | | | 572.6 | | | 945.5 |
(Loss) income from discontinued operations, net of taxes | | | (81.3) | | | (294.6) | | | 17.6 |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 |
| | | | | | | | | |
Basic income (loss) per share (Note 4): | | | | | | | | | |
Income from continuing operations | | $ | 6.17 | | $ | 11.25 | | $ | 17.24 |
(Loss) income from discontinued operations | | $ | (1.70) | | $ | (5.89) | | $ | 0.32 |
Net income per share | | $ | 4.47 | | $ | 5.36 | | $ | 17.56 |
| | | | | | | | | |
Diluted income (loss) per share (Note 4): | | | | | | | | | |
Income from continuing operations | | $ | 6.16 | | $ | 11.24 | | $ | 17.17 |
(Loss) income from discontinued operations | | $ | (1.70) | | $ | (5.78) | | $ | 0.32 |
Net income per share | | $ | 4.46 | | $ | 5.46 | | $ | 17.49 |
| | | | | | | | | |
Weighted average shares (Note 4): | | | | | | | | | |
Basic | | | 47.8 | | | 50.0 | | | 54.9 |
Diluted | | | 47.9 | | | 50.9 | | | 55.1 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Millions, except per share amounts) | |
| Interest income | | | | | |
| Interest and fees on loans | $ | 4,615 | | | $ | 3,861 | | | $ | 3,931 | |
| Interest on cash and investment securities | 69 | | | 7 | | | 21 | |
| Total interest income | 4,684 | | | 3,868 | | | 3,952 | |
| Interest expense | | | | | |
| Interest on deposits | 243 | | | 167 | | | 238 | |
| Interest on borrowings | 260 | | | 216 | | | 261 | |
| Total interest expense | 503 | | | 383 | | | 499 | |
| Net interest income | 4,181 | | | 3,485 | | | 3,453 | |
| Non-interest income | | | | | |
| Interchange revenue, net of retailer share arrangements | (469) | | | (369) | | | (332) | |
| Other | 114 | | | 156 | | | 177 | |
| Total non-interest income | (355) | | | (213) | | | (155) | |
| Total net interest and non-interest income | 3,826 | | | 3,272 | | | 3,298 | |
| Provision for credit losses | 1,594 | | | 544 | | | 1,266 | |
| Total net interest and non-interest income, after provision for credit losses | 2,232 | | | 2,728 | | | 2,032 | |
| Non-interest expenses | | | | | |
| Employee compensation and benefits | 779 | | | 671 | | | 609 | |
| Card and processing expenses | 359 | | | 323 | | | 396 | |
| Information processing and communication | 274 | | | 216 | | | 191 | |
| Marketing expenses | 180 | | | 160 | | | 143 | |
| Depreciation and amortization | 113 | | | 92 | | | 106 | |
| Other | 227 | | | 222 | | | 286 | |
| Total non-interest expenses | 1,932 | | | 1,684 | | | 1,731 | |
| Income from continuing operations before income taxes | 300 | | | 1,044 | | | 301 | |
| Provision for income taxes | 76 | | | 247 | | | 93 | |
| Income from continuing operations | 224 | | | 797 | | | 208 | |
| (Loss) income from discontinued operations, net of income taxes | (1) | | | 4 | | | 6 | |
| Net income | $ | 223 | | | $ | 801 | | | $ | 214 | |
| | | | | |
| Basic income per share | | | | | |
| Income from continuing operations | $ | 4.48 | | | $ | 16.02 | | | $ | 4.36 | |
| (Loss) income from discontinued operations | $ | (0.01) | | | $ | 0.07 | | | $ | 0.11 | |
| Net income per share | $ | 4.47 | | | $ | 16.09 | | | $ | 4.47 | |
| | | | | |
| Diluted income per share | | | | | |
| Income from continuing operations | $ | 4.47 | | | $ | 15.95 | | | $ | 4.35 | |
| (Loss) income from discontinued operations | $ | (0.01) | | | $ | 0.07 | | | $ | 0.11 | |
| Net income per share | $ | 4.46 | | | $ | 16.02 | | | $ | 4.46 | |
| | | | | |
| Weighted average common shares outstanding | | | | | |
| Basic | 49.9 | | 49.7 | | 47.8 |
| Diluted | 50.0 | | 50.0 | | 47.9 |
See
accompanying notesNotes to
consolidated financial statements.Consolidated Financial Statements.
ALLIANCE DATA SYSTEMS CORPORATION
BREAD FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOMEINCOME
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 |
| | | | | | | | | |
Other comprehensive income: | | | | | | | | | |
Unrealized gain (loss) on securities available-for-sale | | | 22.3 | | | 15.5 | | | (3.1) |
Tax (expense) benefit | | | (1.6) | | | (2.3) | | | 1.1 |
Unrealized gain (loss) on securities available-for-sale, net of tax | | | 20.7 | | | 13.2 | | | (2.0) |
| | | | | | | | | |
Unrealized (loss) gain on cash flow hedges | | | (0.7) | | | 0.1 | | | (0.1) |
Tax benefit | | | 0.1 | | | — | | | — |
Unrealized (loss) gain on cash flow hedges, net of tax | | | (0.6) | | | 0.1 | | | (0.1) |
| | | | | | | | | |
Unrealized gain on net investment hedge | | | — | | | 6.5 | | | 39.1 |
Tax expense | | | — | | | (1.6) | | | (9.5) |
Unrealized gain on net investment hedge, net of tax | | | — | | | 4.9 | | | 29.6 |
| | | | | | | | | |
Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million and $26.8 million for the years ended December 31, 2020 and December 31, 2019, respectively, related to sale of businesses) | | | 74.8 | | | 20.0 | | | (25.4) |
| | | | | | | | | |
Other comprehensive income, net of tax | | | 94.9 | | | 38.2 | | | 2.1 |
| | | | | | | | | |
Total comprehensive income, net of tax | | $ | 308.6 | | $ | 316.2 | | $ | 965.2 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Net income | $ | 223 | | | $ | 801 | | | $ | 214 | |
| | | | | |
| Other comprehensive (loss) income | | | | | |
| Unrealized (loss) gain on available-for-sale securities | (25) | | | (24) | | | 22 | |
| Tax benefit (expense) | 6 | | | 2 | | | (1) | |
| Unrealized (loss) gain on available-for-sale securities, net of tax | (19) | | | (22) | | | 21 | |
| | | | | |
| Unrealized gain (loss) on cash flow hedges | — | | | 1 | | | (1) | |
| Tax benefit | — | | | — | | | — | |
| Unrealized gain (loss) on cash flow hedges, net of tax | — | | | 1 | | | (1) | |
| | | | | |
| Unrealized gain on net investment hedge | — | | | 20 | | | — | |
| Tax expense | — | | | (13) | | | — | |
| Unrealized gain on net investment hedge, net of tax | — | | | 7 | | | — | |
| | | | | |
| Foreign currency translation adjustments (inclusive of deconsolidation of $54 million and $4 million for the years ended December 31, 2021 and 2020, respectively, related to the disposition of businesses) | — | | | 17 | | | 75 | |
| | | | | |
| Other comprehensive (loss) income, net of tax | (19) | | | 3 | | | 95 | |
| | | | | |
| Total comprehensive income, net of tax | $ | 204 | | | $ | 804 | | | $ | 309 | |
See
accompanying notesNotes to
consolidated financial statements.Consolidated Financial Statements.
ALLIANCE DATA SYSTEMS CORPORATION
BREAD FINANCIAL HOLDINGS, INC.CONSOLIDATED BALANCE SHEETS
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Millions, except per share amounts) | |
| ASSETS | | | |
| Cash and cash equivalents | $ | 3,891 | | | $ | 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, $15,383; 2021, $11,215) | 21,365 | | | 17,399 | |
| Allowance for credit losses | (2,464) | | | (1,832) | |
| Credit card and other loans, net | 18,901 | | | 15,567 | |
| Investment securities | 221 | | | 239 | |
| Property and equipment, net | 195 | | | 215 | |
| Goodwill and intangible assets, net | 799 | | | 687 | |
| Other assets | 1,400 | | | 1,992 | |
| Total assets | $ | 25,407 | | | $ | 21,746 | |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | | |
| Deposits | $ | 13,826 | | | $ | 11,027 | |
| Debt issued by consolidated variable interest entities | 6,115 | | | 5,453 | |
| Long-term and other debt | 1,892 | | | 1,986 | |
| Other liabilities | 1,309 | | | 1,194 | |
| Total liabilities | 23,142 | | | 19,660 | |
| Commitments and contingencies (Note 15) | | | |
| Stockholders’ equity | | | |
| Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 49.9 million and 49.8 million shares as of December 31, 2022 and December 31, 2021, respectively | 1 | | | 1 | |
| Additional paid-in capital | 2,192 | | | 2,174 | |
| Retained earnings (accumulated deficit) | 93 | | | (87) | |
| Accumulated other comprehensive loss | (21) | | | (2) | |
| Total stockholders’ equity | 2,265 | | | 2,086 | |
| Total liabilities and stockholders’ equity | $ | 25,407 | | | $ | 21,746 | |
See Notes to Consolidated Financial Statements.
BREAD FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITYEQUITY
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional
Paid-In
Capital | | Treasury
Stock | | Retained Earnings (Accumulated
Deficit) | | Accumulated
Other
Comprehensive
Loss | | Total
Stockholders’
Equity |
| Shares | | Amount | | | | | |
| (Millions) | | | | | | | | | | | | | |
| January 1, 2020 | 115.0 | | $ | 1 | | | $ | 3,258 | | | $ | (6,733) | | | $ | 5,163 | | | $ | (100) | | | $ | 1,589 | |
| Net income | — | | — | | | — | | | — | | | 214 | | | — | | | 214 | |
| Cumulative effect of change in accounting principle — Allowance for credit losses | — | | — | | | — | | | — | | | (485) | | | — | | | (485) | |
| Other comprehensive income | — | | — | | | — | | | — | | | — | | | 95 | | | 95 | |
| Stock-based compensation | — | | — | | | 21 | | | — | | | — | | | — | | | 21 | |
| Common stock issued as consideration for acquired business | 1.9 | | — | | | 149 | | | — | | | — | | | — | | | 149 | |
| Dividends and dividend equivalent rights declared ($1.26 per common share) | — | | — | | | — | | | — | | | (60) | | | — | | | (60) | |
| Issuance of shares to employees, net of shares withheld for employee taxes | 0.2 | | — | | | (1) | | | — | | | — | | | — | | | (1) | |
| December 31, 2020 | 117.1 | | $ | 1 | | | $ | 3,427 | | | $ | (6,733) | | | $ | 4,832 | | | $ | (5) | | | $ | 1,522 | |
| Net income | — | | — | | | — | | | — | | | 801 | | | — | | | 801 | |
| Other comprehensive income | — | | — | | | — | | | — | | | — | | | 3 | | | 3 | |
| Stock-based compensation | — | | — | | | 29 | | | — | | | — | | | — | | | 29 | |
| Dividends and dividend equivalent rights declared ($0.84 per common share) | — | | — | | | — | | | — | | | (42) | | | — | | | (42) | |
| Retirement of treasury stock | (67) | | | — | | | (1,280) | | | 6,733 | | | (5,453) | | | — | | | — | |
| Spinoff of Loyalty Ventures Inc. | — | | — | | | — | | | — | | | (225) | | | — | | | (225) | |
| Issuance of shares to employees, net of shares withheld for employee taxes | 0.1 | | — | | | (2) | | | — | | | — | | | — | | | (2) | |
| December 31, 2021 | 49.8 | | $ | 1 | | | $ | 2,174 | | | $ | — | | | $ | (87) | | | $ | (2) | | | $ | 2,086 | |
| Net income | — | | — | | | — | | | — | | | 223 | | | — | | | 223 | |
| Other comprehensive loss | — | | — | | | — | | | — | | | — | | | (19) | | | (19) | |
| Stock-based compensation | — | | — | | | 33 | | | — | | | — | | | — | | | 33 | |
| Repurchase of common stock | (0.2) | | — | | | (12) | | | — | | | — | | | — | | | (12) | |
| Dividends and dividend equivalent rights declared ($0.84 per common share) | — | | — | | | — | | | — | | | (43) | | | — | | | (43) | |
| Issuance of shares to employees, net of shares withheld for employee taxes | 0.3 | | — | | | (3) | | | — | | | — | | | — | | | (3) | |
| December 31, 2022 | 49.9 | | $ | 1 | | | $ | 2,192 | | | $ | — | | | $ | 93 | | | $ | (21) | | | $ | 2,265 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | Accumulated | | |
| | | | | | | | | | | | Additional | | | | | | Other | | Total |
| | Common Stock | | Preferred Stock | | Paid-In | | Treasury | | Retained | | Comprehensive | | Stockholders’ |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Stock | | Earnings | | Loss | | Equity |
|
| | (in millions) |
January 1, 2018 | | 112.8 | | $ | 1.1 | | — | | $ | — | | $ | 3,099.8 | | $ | (5,272.5) | | $ | 4,167.1 | | $ | (140.2) | | $ | 1,855.3 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 963.1 | | | — | | | 963.1 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 2.1 | | | 2.1 |
Stock-based compensation | | — | | | — | | — | | | — | | | 80.8 | | | — | | | — | | | — | | | 80.8 |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (443.2) | | | — | | | — | | | (443.2) |
Dividends and dividend equivalent rights declared ($0.57 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (125.9) | | | — | | | (125.9) |
Cumulative effect adjustment to retained earnings in accordance with ASC 606 adoption | | — | | | — | | — | | | — | | | — | | | — | | | 9.6 | | | — | | | 9.6 |
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-01 adoption | | — | | | — | | — | | | — | | | — | | | — | | | (1.5) | | | — | | | (1.5) |
Other | | 0.2 | | | — | | — | | | — | | | (8.2) | | | — | | | — | | | — | | | (8.2) |
December 31, 2018 | | 113.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,172.4 | | $ | (5,715.7) | | $ | 5,012.4 | | $ | (138.1) | | $ | 2,332.1 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 278.0 | | | — | | | 278.0 |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 38.2 | | | 38.2 |
Stock-based compensation | | — | | | — | | — | | | — | | | 54.5 | | | — | | | — | | | — | | | 54.5 |
Issuance of preferred stock | | — | | | — | | 0.2 | | | — | | | 42.1 | | | (42.1) | | | — | | | — | | | — |
Conversion of preferred stock to common stock | | 1.5 | | | — | | (0.2) | | | — | | | — | | | — | | | — | | | — | | | — |
Repurchases of common stock | | — | | | — | | — | | | — | | | — | | | (976.1) | | | — | | | — | | | (976.1) |
Dividends and dividend equivalent rights declared ($0.63 per common share) | | — | | | — | | — | | | — | | | — | | | — | | | (127.1) | | | — | | | (127.1) |
Other | | 0.5 | | | — | | — | | | — | | | (11.3) | | | — | | | — | | | — | | | (11.3) |
December 31, 2019 | | 115.0 | | $ | 1.1 | | — | | $ | — | | $ | 3,257.7 | | $ | (6,733.9) | | $ | 5,163.3 | | $ | (99.9) | | $ | 1,588.3 |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 213.7 | | | — | | | 213.7 |
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13 adoption | | — | | | — | | — | | | — | | | — | | | — | | | (485.0) | | | — | | | (485.0) |
Other comprehensive income | | — | | | — | | — | | | — | | | — | | | — | | | — | | | 94.9 | | | 94.9 |
Stock-based compensation | | — | | | — | | — | | | — | | | 21.3 | | | — | | | — | | | — | | | 21.3 |
Common stock issued as consideration for acquired business | | 1.9 | | | 0.1 | | — | | | — | | | 149.1 | | | — | | | — | | | — | | | 149.2 |
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 each of the three months ended June 30, 2020, September 30, 2020 and December 31, 2020) | | — | | | — | | — | | | — | | | — | | | — | | | (59.9) | | | — | | | (59.9) |
Other | | 0.2 | | | — | | — | | | — | | | (0.9) | | | — | | | — | | | — | | | (0.9) |
December 31, 2020 | | 117.1 | | $ | 1.2 | | — | | $ | — | | $ | 3,427.2 | | $ | (6,733.9) | | $ | 4,832.1 | | $ | (5.0) | | $ | 1,521.6 |
See
accompanying notesNotes to
consolidated financial statements.
Consolidated Financial Statements
ALLIANCE DATA SYSTEMS CORPORATION
BREAD FINANCIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH
FLOWSFLOWS
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (In millions) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | | | | |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | |
Depreciation and amortization | | | 183.8 | | | 249.3 | | | 487.3 |
Deferred income taxes | | | (222.8) | | | (186.1) | | | 16.3 |
Provision for loan loss | | | 1,266.2 | | | 1,187.5 | | | 1,016.0 |
Non-cash stock compensation | | | 21.3 | | | 54.8 | | | 80.8 |
Amortization of deferred financing costs | | | 36.5 | | | 43.4 | | | 47.3 |
Gain on sale of business | | | (13.7) | | | (512.2) | | | — |
Loss on extinguishment of debt | | | — | | | 71.9 | | | — |
Asset impairment charges | | | 63.7 | | | 52.0 | | | — |
Change in other operating assets and liabilities, net of acquisitions and sales of businesses: | | | | | | | | | |
Change in deferred revenue | | | 60.8 | | | 2.9 | | | (17.5) |
Change in accounts receivable | | | 64.9 | | | 4.1 | | | (93.0) |
Change in accounts payable and accrued expenses | | | 62.1 | | | (255.0) | | | (93.7) |
Change in other assets | | | 145.4 | | | (46.8) | | | (29.8) |
Change in other liabilities | | | (50.3) | | | 32.9 | | | 49.8 |
Originations of credit card and loan receivables held for sale | | | — | | | — | | | (4,799.0) |
Sales of credit card and loan receivables held for sale | | | — | | | — | | | 4,928.8 |
Other | | | 51.1 | | | 241.0 | | | 198.5 |
Net cash provided by operating activities | | | 1,882.7 | | | 1,217.7 | | | 2,754.9 |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | | | | |
Change in redemption settlement assets | | | (40.7) | | | (9.5) | | | (42.2) |
Change in credit card and loan receivables | | | 1,783.5 | | | (2,586.8) | | | (2,749.6) |
Proceeds from sale of businesses | | | 26.7 | | | 4,409.7 | | | — |
Payments for acquired businesses, net of cash and restricted cash | | | (266.8) | | | (6.7) | | | — |
Proceeds from sale of credit card portfolios | | | 289.5 | | | 2,061.8 | | | 1,153.5 |
Purchase of credit card portfolios | | | — | | | (924.8) | | | — |
Proceeds from sale of real estate | | | — | | | 15.1 | | | — |
Capital expenditures | | | (54.0) | | | (142.3) | | | (199.8) |
Purchases of other investments | | | (40.4) | | | (20.2) | | | (89.5) |
Maturities/sales of other investments | | | 76.5 | | | 60.0 | | | 47.4 |
Other | | | — | | | 4.5 | | | 8.2 |
Net cash provided by (used in) investing activities | | | 1,774.3 | | | 2,860.8 | | | (1,872.0) |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | | | | |
Borrowings under debt agreements | | | 1,276.0 | | | 3,111.3 | | | 4,575.3 |
Repayments of borrowings | | | (1,320.5) | | | (5,981.8) | | | (4,893.0) |
Non-recourse borrowings of consolidated securitization entities | | | 2,419.2 | | | 4,851.8 | | | 3,714.6 |
Repayments/maturities of non-recourse borrowings of consolidated securitization entities | | | (4,095.7) | | | (5,219.0) | | | (4,871.0) |
Net (decrease) increase in deposits | | | (2,370.0) | | | 355.6 | | | 864.1 |
Payment of debt extinguishment costs | | | — | | | (46.1) | | | — |
Payment of deferred financing costs | | | (18.8) | | | (45.4) | | | (25.8) |
Proceeds from issuance of common stock | | | 2.8 | | | 12.4 | | | 17.6 |
Dividends paid | | | (60.6) | | | (127.4) | | | (125.2) |
Purchase of treasury shares | | | — | | | (976.1) | | | (443.2) |
Other | | | 1.1 | | | (27.0) | | | (31.3) |
Net cash used in financing activities | | | (4,166.5) | | | (4,091.7) | | | (1,217.9) |
| | | | | | | | | |
Effect of exchange rate changes on cash, cash equivalents and restricted cash | | | 14.6 | | | 3.6 | | | (12.0) |
| | | | | | | | | |
Change in cash, cash equivalents and restricted cash | | | (494.9) | | | (9.6) | | | (347.0) |
Cash, cash equivalents and restricted cash at beginning of year | | | 3,958.1 | | | 3,967.7 | | | 4,314.7 |
Cash, cash equivalents and restricted cash at end of year | | $ | 3,463.2 | | $ | 3,958.1 | | $ | 3,967.7 |
| | | | | | | | | |
SUPPLEMENTAL CASH FLOW INFORMATION: | | | | | | | | | |
Interest paid | | $ | 487.6 | | $ | 671.9 | | $ | 719.8 |
Income taxes paid, net | | $ | 267.5 | | $ | 1,070.6 | | $ | 234.0 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
| Net income | $ | 223 | | | $ | 801 | | | $ | 214 | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | |
| Provision for credit losses | 1,594 | | | 544 | | | 1,266 | |
| Depreciation and amortization | 113 | | | 123 | | | 184 | |
| Deferred income taxes | (245) | | | (15) | | | (223) | |
| Non-cash stock compensation | 33 | | | 29 | | | 21 | |
| Amortization of deferred financing costs | 24 | | | 31 | | | 36 | |
| Amortization of deferred origination costs | 86 | | | 75 | | | 74 | |
| Asset impairment charges | — | | | — | | | 64 | |
| Other | 67 | | | (4) | | | (36) | |
| Change in other operating assets and liabilities, net of acquisitions and dispositions | | | | | |
| Change in other assets | (134) | | | (30) | | | 210 | |
| Change in other liabilities | 87 | | | (11) | | | 73 | |
| Net cash provided by operating activities | 1,848 | | | 1,543 | | | 1,883 | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
| Change in credit card and other loans | (3,222) | | | (1,805) | | | 1,784 | |
| Change in redemption settlement assets | — | | | (113) | | | (41) | |
| Payments for acquired businesses, net of cash and restricted cash | — | | | (75) | | | (267) | |
| Proceeds from sale of credit card loan portfolios | — | | | 512 | | | 289 | |
| Purchase of credit card loan portfolios | (1,804) | | | (110) | | | — | |
| Capital expenditures | (68) | | | (84) | | | (54) | |
| Purchases of investment securities | (43) | | | (93) | | | (40) | |
| Maturities of investment securities | 30 | | | 73 | | | 77 | |
| Other | (4) | | | 4 | | | 26 | |
| Net cash (used in) provided by investing activities | (5,111) | | | (1,691) | | | 1,774 | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
| Unsecured borrowings under debt agreements | 218 | | | 38 | | | 1,276 | |
| Repayments/maturities of unsecured borrowings under debt agreements | (319) | | | (864) | | | (1,320) | |
| Debt issued by consolidated variable interest entities | 4,248 | | | 4,278 | | | 2,419 | |
| Repayments/maturities of debt issued by consolidated variable interest entities | (3,587) | | | (4,538) | | | (4,096) | |
| Net increase (decrease) in deposits | 2,778 | | | 1,228 | | | (2,370) | |
| Debt proceeds from spinoff of Loyalty Ventures Inc. | — | | | 652 | | | — | |
| Transfers to Loyalty Ventures Inc. related to spinoff | — | | | (127) | | | — | |
| Payment of deferred financing costs | (13) | | | (13) | | | (19) | |
| Dividends paid | (43) | | | (42) | | | (61) | |
| Other | (15) | | | (4) | | | 4 | |
| Net cash provided by (used in) financing activities | 3,267 | | | 608 | | | (4,167) | |
| | | | | |
| Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash | — | | | — | | | 15 | |
| | | | | |
| Change in cash, cash equivalents and restricted cash | 4 | | | 460 | | | (495) | |
| Cash, cash equivalents and restricted cash at beginning of period | 3,923 | | | 3,463 | | | 3,958 | |
| Cash, cash equivalents and restricted cash at end of period | $ | 3,927 | | | $ | 3,923 | | | $ | 3,463 | |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | |
| Cash paid during the year for interest | $ | 466 | | | $ | 357 | | | $ | 488 | |
| Cash paid during the year for income taxes, net | $ | 338 | | | $ | 325 | | | $ | 268 | |
The
consolidated statementsConsolidated Statements of
cash flowsCash Flows are presented with the combined cash flows from
continuing and discontinued
operations with cash flows from continuing operations within each cash flow statement category.
operations.
See
accompanying notesNotes to
consolidated financial statements.
Consolidated Financial Statements.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF
BUSINESSBUSINESS AND BASISSUMMARY OF PRESENTATIONSIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
Description of the Business
—Alliance Data Systems Corporation (“ADSC”
Bread Financial Holdings, Inc. (BFH) or, including its consolidated subsidiaries and variable interest entities (VIEs), the “Company”)Company) is a leading provider of data-driven marketing, loyaltytech-forward financial services company that provides simple, personalized payment, lending and payment solutions serving large, consumer-based industries.saving solutions. The Company creates opportunities for its customers and deploys customizedpartners 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 and buy now, pay later products such as installment loans and “split-pay” offerings. The Company also offers direct-to-consumer solutions that measurably change consumer behavior while driving business growthgive customers more access, choice and profitability for our clientsfreedom through its branded Bread CashbackTM American Express® Credit Card and brand partners. The Company operates in 2 reportable segments: LoyaltyOne® and Card Services. LoyaltyOne provides coalition and short-term loyalty programs through the Canadian AIR MILES® Reward Program and BrandLoyalty Group B.V. (“BrandLoyalty”)Bread SavingsTM products. Card Services is a comprehensive provider of market-leading private label, co-brand, general purpose and business credit card programs, digital payments, including
Effective March 23, 2022, Alliance Data Systems Corporation was renamed Bread
® Financial Holdings, Inc., and
Comenity-branded financial services.on April 4, 2022, the Company changed its New York Stock Exchange ticker 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 its Consolidated Financial Statements.
The
Company’s financial statements and accompanying notesConsolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”)(GAAP). For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year
presentation. Thepresentation, 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 Securities and Exchange Commission (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” (BHCs). While neither the Company nor any of its subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the BHC presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s
consolidated financial statementsoperations going forward and better align the Company with its peers for comparability purposes. For a discussion of the prior period reclassifications, please refer to Note 22, “Discontinued Operations and Bank Holding Company Presentation” in our Annual Report on Form 10-K for the year ended December 31, 2021. As noted above, the Company’s Consolidated Financial Statements have been presented with its
former Epsilon®LoyaltyOne segment as
a discontinued
operation. Seeoperations, see Note
7,22, “Discontinued
Operations,”Operations”, for more information.
SIGNIFICANT ACCOUNTING POLICIES
The Company presents its accounting policies within the Notes to the Consolidated Financial Statements to which they relate; the table below lists such accounting policies and the related Notes. The remaining significant accounting policies applied by the Company are included following the table.
| | | | | | | | | | | | | | |
| Significant Accounting Policy | | Note Number | | Note Title |
| Credit Card and Other Loans | | Note 2 | | Credit Card and Other Loans |
| Allowance for Credit Losses | | Note 3 | | Allowance for Credit Losses |
| Transfers of Financial Assets | | Note 4 | | Securitizations |
| Investment Securities | | Note 5 | | Investment Securities |
| Property and Equipment | | Note 6 | | Property and Equipment, Net |
| Goodwill | | Note 7 | | Goodwill and Intangible Assets, Net |
| Intangible Assets, Net | | Note 7 | | Goodwill and Intangible Assets, Net |
| Leases | | Note 9 | | Leases |
| Stock Compensation Expense | | Note 18 | | Stockholders' Equity |
| Income Taxes | | Note 19 | | Income Taxes |
| Earnings Per Share | | Note 20 | | Earnings Per Share |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Principles of Consolidation
—
The accompanying consolidated financial statements include the accounts of
ADSCBFH and all subsidiaries in which the Company has a controlling financial interest.
ControllingFor voting interest entities, a controlling financial interest is determined
either by a majority voting interestwhen the Company is able to exercise control over the operating and
financial decisions of the
absence of substantive third party participating rights or in the case ofinvestee. For variable interest entities
by whether ADSC has power(VIEs), which are themselves determined based on the amount and
potentially significant economic exposure through its direct and indirect interests. All intercompany transactions have been eliminated.
In accordance with Accounting Standards Codification (“ASC”) 860, “Transfers and Servicing,” and ASC 810, “Consolidation,”characteristics of the equity in the entity, the Company has a controlling financial interest when it is determined to be the primary beneficiary. The primary beneficiary is the primary beneficiary of certain trusts. The Company, through its involvement in the activities of these trusts, hasparty having both the power to directexercise control over the activities that most significantly impact the economicVIE’s financial performance, of such trusts, andas well as the obligation (or right) to absorb the losses (orof, or the right to receive benefits) of the trustsbenefits from, the VIE that could potentially be significant. As such,significant to that VIE. The Company is the primary beneficiary of its securitization trusts (the Trusts) and therefore consolidates these Trusts within its Consolidated Financial Statements.
In cases where the Company
consolidates these trusts in its consolidateddoes not have a controlling financial
statements.
For investments in any entities in which the Company owns 50% or less of the outstanding voting stockinterest, but in which the Company hasis able to exert significant influence over the operating and financial decisions the Company applies the equity method of accounting.
Cash and Cash Equivalents—The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Accounts Receivable, net—Accounts receivable, net consist primarily of amounts receivable from customers, which are recorded at the invoiced amount and do not bear interest. The Company maintains an allowance for doubtful accounts for estimated credit losses inherent in its accounts receivable. The Company analyzes the appropriateness of its allowance for doubtful accounts based on its assessment of various factors, including customer-specific experience, the age of the accounts receivable balance, customer creditworthiness, current economic trends, and changes in its customer payment terms and collection trends. Account balances are charged-off againstentity, the allowance after all reasonable means of collection have been exhausted and the potential for recovery is considered remote.
Credit Card and Loan Receivables— Credit card and loan receivables consist of credit card and loan receivables held for investment. The Company sells a majority of the credit card receivables originated by Comenity Bank and by Comenity Capital Bank to master trusts, which are restricted for securitization investors. All new originations of credit card and loan receivables are deemed to be held for investment at origination because management has the intent and ability to hold them for the foreseeable future. In determining what constitutes the foreseeable future, management considers the short average life and homogenous nature of the Company’s credit card and loan receivables. In assessing whether these credit card and loan receivables continue to be held for investment, management also considers capital levels and scheduled maturities of funding instruments used. Management believes that the assertion regarding its intent
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
and ability to hold credit card and loan receivables for the foreseeable future can be made with a high degree of certainty given the maturity distribution of the Company’s money market deposits, certificates of deposit and other funding instruments; the historic ability to replace maturing certificates of deposits and other borrowings with new deposits or borrowings; and historic credit card and loan payment activity. Due to the homogenous nature of the Company’s credit card and loan receivables, amounts are classified as held for investment on an individual client portfolio basis.
Credit Card and Loan Receivables Held for Sale—Credit card and loan receivables held for sale are determined on an individual client portfolio basis. The Company carries these assets at the lower of aggregate cost or fair value. The fair value of the credit card and loan receivables held for sale is determined on an aggregate basis. The Company continues to recognize finance fees on these credit card and loan receivables on the accrual basis. Cash flows associated with credit card and loan portfolios that are purchased with the intent to sell are included in cash flows from operating activities. Cash flows associated with credit card and loan receivables originated or purchased for investment are classified as investing cash flows, regardless of a subsequent change in intent.
Transfers of Financial Assets—The Company accounts for transferssuch investments under the equity method.
All intercompany transactions have been eliminated.
Currency Translation
The Company’s monetary assets and liabilities denominated in foreign currencies, for example those of subsidiaries outside of the United States of America (U.S.), are translated into U.S. dollars based on the rates of exchange in effect at the end of the reporting period, while non-monetary assets and liabilities are translated based on the rates of exchange in effect as of the date of the transaction giving rise to the asset or liability. Income and expense items are translated at the average exchange rates prevailing during the period. The resulting effects, along with any related hedge or tax impacts, are recorded in Accumulated other comprehensive loss, a component of stockholders’ equity. Translation adjustments, along with the related hedge and tax impacts, are recognized in the Consolidated Statements of Income upon the sale or substantial liquidation of an investment in a foreign subsidiary. Gains and losses resulting from transactions in currencies other than the entity’s functional currency are recognized in Other non-interest expenses in the Consolidated Statements of Income, and were insignificant for each of the periods presented. Historically, the Company’s impacts from foreign currency exchange rate fluctuations were most prevalent within businesses that have been spun off, such as LoyaltyOne.
Amounts Based on Estimates and Judgments
The preparation of financial
assets under ASC 860, “Transfersstatements in conformity with GAAP requires management to make estimates and
Servicing,” as either sales or financings. Transfersjudgments about future events that affect the reported amounts of
financial assets that result in sales accounting are those in which (1) the transfer legally isolates the transferred assets from the transferor, (2) the transferee has the right to pledge or exchange the transferred assets and
no condition both constrains the transferee’s right to pledge or exchange theliabilities, and disclosure of contingent assets and
provides more than a trivial benefit toliabilities at the
transferor and (3) the transferor does not maintain effective control over the transferred assets. If the transfer of financial assets does not meet these criteria, the transfer is accounted for as a financing. Transfers of financial assets that are treated as sales are removed from the Company’s accounts with any realized gain or loss reflected in the consolidated statements of income during the period of sale.
Allowance for Loan Loss— Effective January 1, 2020, the Company adopted Accounting Standards Update (“ASU”) 2016-13, “Measurement of Credit Losses on Financial Instruments.” Under this standard, referred to as Current Expected Credit Loss (“CECL”), the Company utilizes a financial instrument impairment model to establish an allowance based on expected losses over the lifedate of the exposure rather than a model based on an incurred loss approach, which was the Company’s historic accounting prior to January 1, 2020.
Under CECL, the allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and loan receivables,Consolidated Financial Statements, as well as the prevailing economic conditionsreported amounts of income and forecasts utilized.expenses during the reporting periods. The estimatemost significant of those estimates and judgments relate to the Company’s Allowance for credit losses and Provision for income taxes; actual results could differ.
Revenue Recognition
The Company’s primary source of revenue is from Interest and fees on loans from its various credit card and other loan products, and to a lesser extent from contractual relationships with its brand partners. The following describes the Company’s recognition policies across its various sources of revenue.
Interest and fees on loans: Represent revenue earned on customer accounts owned by the Company, and is recognized in the period earned in accordance with the contractual provisions of the allowance for loan loss includes an estimate for uncollectible principal as well as unpaidcredit agreements. Interest and fees continue to accrue on all accounts, except in limited circumstances, until the account balance and all related interest and fees. Charge-offs of principal amounts, net of recoveriesfees are deducted frompaid or charged-off, in the allowance.month during which an account becomes 180 days past due for credit card loans or 120 days past due for other loans, which are buy now, pay later products such as installment loans and the Company’s “split-pay” offerings (BNPL) loans. Charge-offs for unpaid interest and fees, as well as any adjustments to the allowance associated with unpaid interest and fees, are recorded as a reduction of Interest and fees on loans. Direct loan origination costs on Credit card and other loans are deferred and amortized on a straight-line basis over a one-year period for credit card loans, or for BNPL loans over the life of the loan, and are recorded as a reduction to Interest and fees on loans. As of December 31, 2022 and 2021, the remaining unamortized deferred direct loan origination costs were $46 million and $48 million, respectively, and included in Total credit card and other loans.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Interest on cash and investment securities: Represents revenue earned on cash and cash equivalents as well as investments
in debt and equity securities, and is recognized in the period earned.
Interchange revenue, net of retailer share arrangements: Represents revenue earned from merchants, including our brand partners, and cardholders from processing and servicing accounts, and is recognized as such services are performed. Revenue earned from merchants, including our brand partners, primarily consists of merchant and interchange fees, which are transaction fees charged to the merchant for the processing of credit card transactions and are recognized at the time the cardholder transaction occurs. Our credit card program agreements may also provide for royalty payments to our brand partners based on purchased volume or if certain contractual incentives are met, such as if the economic performance of the program exceeds a contractually defined threshold, or for payments for new accounts. These amounts are recorded as a reduction of revenue in the period incurred.
Other non-interest income: Represents ancillary revenues earned from cardholders, consisting primarily of monthly fees from the purchase of certain payment protection products which are recognized based on the average cardholder account balance over time and can be cancelled at any point by the cardholder, as well as gains or losses on the sales of loan portfolios, and income or losses from equity method investments.
Contract Costs: The Company recognizes as an asset contract costs, such as up-front payments pursuant to contractual agreements with brand partners. Such costs are deferred and recognized on a straight-line basis over the term of the related agreement. Depending on the nature of the contract costs, the amortization is recorded as a reduction to Non-interest income, or as a charge to Non-interest expenses, in the Company’s Consolidated Statements of Income. Amortization of contract costs recorded as a reduction of Interchange revenue, net of retailer share arrangements was $72 million, $64 million and $65 million for the years ended December 31, 2022, 2021 and 2020, respectively; amortization of contract costs recorded in Non-interest expenses totaled $12 million, $11 million and $12 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022 and 2021, the remaining unamortized contract costs were $344 million and $364 million, respectively, and are included in Other assets on the Consolidated Balance Sheets.
The Company performs an impairment assessment when events or changes in circumstances indicate that the carrying amount of contract costs may not be recoverable. For the year ended December 31, 2020, due to the COVID-19 pandemic and resulting retail store closures and significant declines in credit sales, the Company recognized an impairment charge of $38 million in Non-interest expenses in its Consolidated Statement of Income. No impairment charges were recognized in either of the years ended December 31, 2022 or 2021.
Cash and Cash Equivalents
Cash and cash equivalents include cash and due from banks, interest-bearing cash balances such as those invested in money market funds, as well as other highly liquid short-term investments with an original maturity of three months or less, and restricted cash. As of December 31, 2022 and 2021, cash and due from banks was $288 million and $251 million, respectively, interest-bearing cash balances were $3.5 billion and $2.7 billion, respectively, and short-term investments were $130 million and $80 million, respectively.
Restricted cash primarily represents cash restricted for principal and interest repayments of debt issued by consolidated VIEs, and is recorded in Other assets on the Consolidated Balance Sheets. Restricted cash totaled $36 million and $877 million as of December 31, 2022 and 2021, respectively.
Derivative Financial Instruments
From time to time, the Company uses derivative financial instruments to manage its exposure to various financial risks; the Company does not trade or speculate in derivative financial instruments. Subject to the criteria set forth in GAAP, the Company will either designate its derivative financial instruments in hedging relationships, or as economic hedges should the criteria in GAAP not be met.
The Company’s derivative financial instruments were insignificant to the Consolidated Financial Statements for the periods presented.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
CONCENTRATIONS
The Company depends on a limited number of large partner relationships for a significant portion of its revenue. As of and for the year ended December 31, 2022, the Company’s five largest credit card programs accounted for approximately 47% of its Total net interest and non-interest income and 41% of its End-of-period credit card and other loans. In particular, the Company’s programs with (alphabetically) Ulta Beauty and Victoria’s Secret & Co. and its retail affiliates each accounted for more than 10% of its Total net interest and non-interest income for the year ended December 31, 2022. A decrease in business from, or the loss of, any of the Company’s significant partners for any reason, could have a material adverse effect on its business. The Company previously announced the non-renewal of its contract with BJ’s Wholesale Club (BJ’s) and the sale of the BJ’s portfolio, which closed in late February 2023. For the year ended December 31, 2022, BJ’s branded co-brand accounts generated approximately 10% of the Company’s Total net interest and non-interest income. As of December 31, 2022, BJ’s branded co-brand accounts were responsible for approximately 11% of the Company’s Total credit card and other loans.
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. Effective January 1, 2023, the Company adopted the guidance, with no significant impact on its financial position, results of operations and regulatory risk-based capital, or anticipated impacts on its operational processes, controls and governance in support of the new guidance.
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 borrower 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 net.and are required to make monthly payments based on pre-established amounts. Other loans, which again are BNPL products such as installment loans and the Company’s “split-pay” offerings, 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 allowanceCompany 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 (CB) and by Comenity Capital Bank (CCB), which together are referred to herein as the “Banks”, to the 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.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company’s Credit card and other loans were as follows, as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | |
| Credit card loans | $ | 21,065 | | | $ | 17,217 | |
| Installment or other loans | 300 | | | 182 | |
Total credit card and other loans (1)(2) | 21,365 | | | 17,399 | |
| Less: Allowance for credit losses | (2,464) | | | (1,832) | |
| Credit card and other loans, net | $ | 18,901 | | | $ | 15,567 | |
| | | | | |
| (1) | Includes $15.4 billion and $11.2 billion of Credit card and other loans available to settle obligations of consolidated VIEs as of December 31, 2022 and 2021, respectively. |
| | | | | |
| (2) | Includes $307 million and $224 million, of accrued interest and fees that have not yet been billed to cardholders as of December 31, 2022 and 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 December 31, 2022 | $ | 444 | | | $ | 296 | | | $ | 732 | | | $ | 1,472 | | | $ | 19,559 | | | $ | 21,031 | |
| | | | | | | | | | | |
| As of December 31, 2021 | $ | 262 | | | $ | 186 | | | $ | 401 | | | $ | 849 | | | $ | 16,284 | | | $ | 17,133 | |
(1)BNPL 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 and fees from its amortized cost basis of Credit card and other loans. As of December 31, 2022 and 2021, again, accrued interest and fees that have not yet been billed to cardholders were $307 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. For the years ended December 31, 2022, 2021 and 2020, the Company’s re-aged accounts as a percentage of total Credit card and other loans represented 1.4%, 1.7% and 2.8%, respectively. The Company’s re-aging practices comply with regulatory guidelines.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO 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 (including synthetic fraud) 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. BNPL 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 BNPL loans. The Company records the actual losses for unpaid interest and fees as a reduction to Interest and fees on loans, which were $651 million, $456 million and $717 million for the years ended December 31, 2022, 2021 and 2020, 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, late fee waiver, 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. The Company’s impaired credit card loans represented 1% and 2% of total credit card loans for year ended December 31, 2022 and 2021, respectively. As of those same dates, the Company’s recorded investment in impaired credit card loans was $257 million and $281 million, respectively, with an associated Allowance for credit losses of $70 million and $81 million, respectively. The average recorded investment in impaired credit card loans was $257 million and $383 million for the year ended December 31, 2022 and 2021, respectively.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 $15 million, $26 million and $30 million for the year ended December 31, 2022, 2021 and 2020, 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 for the years ended December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Number of
Restructurings | | Pre-
modification
Outstanding
Balance | | Post-
modification
Outstanding
Balance | | Number of
Restructurings | | Pre-
modification
Outstanding
Balance | | Post-
modification
Outstanding
Balance |
| (Millions, except for Number of restructurings) | |
| Troubled debt restructurings | 149,815 | | $ | 227 | | | $ | 227 | | | 171,993 | | $ | 254 | | | $ | 254 | |
The following table provides additional information regarding credit card loans modified as TDRs that have subsequently defaulted within 12 months of their modification dates for the years ended December 31; the probability of default is factored into the Allowance for credit losses:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Number of
Restructurings | | Outstanding
Balance | | Number of
Restructurings | | Outstanding
Balance |
| (Millions, except for Number of restructurings) | |
| Troubled debt restructurings that subsequently defaulted | 63,726 | | $ | 88 | | | 114,531 | | $ | 154 | |
Credit Quality
Credit Card Loans
As part of the Company’s credit risk management activities, the Company assesses overall credit quality by reviewing information related to the performance of a credit cardholder’s account, as well as information from credit bureaus relating to the cardholder’s broader credit performance. The Company utilizes VantageScore (Vantage) credit scores to assist in its assessment of credit quality. Vantage credit scores are obtained at origination of the account and are refreshed monthly thereafter to assist in predicting customer behavior. The Company categorizes these Vantage credit scores into the following three credit score categories: (i) 661 or higher, which are considered the strongest credits and therefore have the lowest credit risk; (ii) 601 to 660, considered to have moderate credit risk; and (iii) 600 or less, which are considered weaker credits and therefore have the highest credit risk. In certain limited circumstances there are customer accounts for which a Vantage score is not available and the Company uses alternative sources to assess credit risk and predict behavior. The table below excludes 0.6% and 0.1% of the total credit card loans balance as of December 31, 2022 and 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 as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Vantage |
| 2022 | | 2021 |
| 661 or
Higher | | 601 to
660 | | 600 or
Less | | 661 or
Higher | | 601 to
660 | | 600 or
Less |
| Credit card loans | 62 | % | | 26 | % | | 12 | % | | 62 | % | | 26 | % | | 12 | % |
BNPL Loans
The amortized cost basis of the Company’s BNPL loans totaled $299 million and $182 million as of December 31, 2022 and 2021, respectively. As of December 31, 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
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
originated with customers with FICO scores below 660. Similarly, as of December 31, 2021, approximately 84% and 16% of these loans were originated by customers with FICO scores of 660 or above, and below 660, respectively.
Unfunded Loan Commitments
The Company is active in originating private label and co-brand credit cards in the U.S. 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 U.S. and are not significantly concentrated in any one geographic 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 $128 billion and $112 billion as of December 31, 2022 and 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
In August 2021, the Company sold a credit card portfolio for cash consideration of approximately $512 million and recognized a gain of approximately $10 million on the transaction, which was recorded in Other non-interest income.
As of December 31, 2022 and December 31, 2021, there were no credit card loans held for sale and no portfolio sales were made during the year end December 31, 2022.
The Company previously announced the non-renewal of its contract with BJ’s and the sale of the BJ’s portfolio, which closed in late February 2023, for a total preliminary purchase price of approximately $2.5 billion on a loan portfolio of approximately $2.3 billion, subject to customary purchase price adjustments.
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. For Consolidated Financial Statement disclosure purposes, allocation of the purchase price to the credit card loans and intangible assets acquired is not significant.
In October 2022, the Company acquired the AAA credit card portfolio for cash consideration of approximately $1.6 billion, which primarily consisted of $1.5 billion of credit card loans, and also included $118 million of intangible assets (primarily purchased credit card relationships) and reward liabilities, and is subject to customary purchase price adjustments.
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
provisionProvision for
loan losscredit losses and is evaluated for appropriateness.
In estimating its allowanceAllowance for loan loss,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
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
behavioral relationships, withto determine expected 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 loan receivables,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 allowanceAllowance for loan losscredit losses reflects the Company’s best estimate of current expected credit losses. As permitted by ASC 326, “Financial Instruments—
Credit
Losses,” the Company excludes unbilled finance charges from its amortized cost basis of credit card and loan receivables. See Note 8, “Credit Card
and Loan Receivables,” for more information about the Company’s allowance for loan loss.
Inventories, net—Inventories, net are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the
Loans
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
Redemption Settlement Assets, Restricted—The cash and investments related to the redemption fund for the AIR MILES Reward Program are subject to a security interest which is held in trust for the benefit of funding redemptions by collectors. These assets are restricted to funding rewards for the collectors by certain of the Company’s sponsor contracts. Investments in equity securities are stated at fair value, with holding gains and losses recognized through net income. Investments in debt securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss, as the investments are classified as available-for-sale.
Property and Equipment—Furniture, equipment, computer software and development, buildings and leasehold improvements are carried at cost, less accumulated depreciation and amortization. Land is carried at cost and is not depreciated. Depreciation and amortization for furniture, equipment and buildings are computed on a straight-line basis, using estimated lives ranging from one to eleven years. Software development is capitalized in accordance with ASC 350-40, “Intangibles – Goodwill and Other – Internal–Use Software,” and is amortized on a straight-line basis over the expected benefit period, which ranges from three to seven years. Leasehold improvements are amortized over the remaining lives of the respective leases or the remaining useful lives of the improvements, whichever is shorter. Long-lived assets are tested for impairment when events or conditions indicate that the carrying value of an asset may not be fully recoverable from future cash flows. See Note 13, “Property and Equipment,” for additional information.
Goodwill—Goodwill is not amortized, but is reviewed at least annually for impairment or more frequently if circumstances indicate that an impairment is probable, using qualitative or quantitative analysis.
Intangible Assets—The Company’s identifiable intangible assets consist of both amortizable and non-amortizable intangible assets. Definite-lived intangible assets are subject to amortization and are amortized on a straight-line basis over their respective estimated useful lives. Definite-lived intangible assets are tested for impairment when events or conditions indicate that the carrying value of an asset may not be fully recoverable from future cash flows. Indefinite-lived intangible assets are not amortized, but are reviewed at least annually for impairment or more frequently if circumstances indicate that an impairment is probable, using qualitative or quantitative analysis.
Income Taxes— Income tax returns are filed in federal, state, local and foreign jurisdictions as applicable. Provisions for current income tax liabilities are calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings also include deferred income tax provisions and provisions for uncertain tax positions.
Deferred income tax assets and liabilities are computed on differences between the financial statement bases and tax bases of assets and liabilities at the enacted tax rates. Changes in deferred income tax assets and liabilities associated with components of other comprehensive income are charged or credited directly to other comprehensive income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of income tax expense. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to income tax expense in the period of enactment. Valuation allowances are established for certain deferred tax assets when realization is less than more-likely-than-not.
Liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such positions, in our judgment, do not meet a more-likely-than-not threshold based on the technical merits of the positions. Additionally, liabilities may be established for uncertain tax positions when, in our judgment, the more-likely-than-not threshold is met, but the position does not rise to the level of highly certain based upon the technical merits of the position. Estimated interest and penalties related to uncertain tax positions are included as a component of income tax expense.
The Company uses the portfolio approach relating to the release of stranded tax effects recorded in accumulated other comprehensive loss. Under the portfolio approach, the net unrealized gains or losses recorded in accumulated other comprehensive loss would be eliminated only on the date the entire portfolio of available-for-sale securities is sold or otherwise disposed of.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Derivative Instruments—The Company uses derivatives to manage its exposure to various financial risks. The Company does not enter into derivatives for trading or other speculative purposes. 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.
Derivatives Designated as Hedging Instruments—The Company assesses both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in the hedging transaction, including net investment hedges, have been highly effective in offsetting changes in the cash flows or remeasurement of the hedged items and whether the derivatives may be expected to remain highly effective in future periods. The Company discontinues hedge accounting prospectively when (1) it determines that the derivative is no longer highly effective in offsetting changes in cash flow of the hedged item; (2) the derivative expires or is sold, terminated, or exercised; (3) it is no longer probable that the forecasted transaction will occur; or (4) it determines that designating the derivative as a hedging instrument is no longer appropriate. Changes in the fair value of derivative instruments designated as hedging instruments, excluding any ineffective portion, are recorded in other comprehensive income (loss) until the hedged transactions affect net income. The ineffective portion of this hedging instrument is recognized through net income when the ineffectiveness occurs.
Derivatives not Designated as Hedging Instruments—Certain foreign currency exchange forward contracts are not designated as hedges as they do not meet the specific hedge accounting requirements of ASC 815, “Derivatives and Hedging.” Changes in the fair value of the derivative instruments not designated as hedging instruments are recorded in the consolidated statements of income as they occur.
The Company’s derivative instruments were immaterial to the consolidated balance sheets and statements of income for the periods presented.
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 consolidated balance sheets. Investments in equity securities are stated at fair value, with holding gains and losses recognized through net income. Investments in debt securities are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of accumulated other comprehensive loss, as the investments are classified as available-for-sale.
Revenue Recognition—The Company recognizes revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” The Company recognizes revenues when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. In that determination, under ASC 606, the Company follows a five-step model that includes: (1) determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when (or as) the performance obligation is satisfied.
See Note 3, “Revenue,” for more information about the Company’s revenue and the associated timing and basis of revenue recognition.
Earnings Per Share—Basic earnings per share is based only on the weighted average number of common shares outstanding, excluding any dilutive effects of options or other dilutive securities. Diluted earnings per share is based on the weighted average number of common and potentially dilutive common shares (dilutive stock options, unvested restricted stock units and other dilutive securities outstanding during the year) pursuant to the treasury stock method. For periods with participating securities, the Company computes earnings per share using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders.
Currency Translation—The assets and liabilities of the Company’s subsidiaries outside the U.S. are translated into U.S. dollars at the rates of exchange in effect at the balance sheet dates, primarily from Canadian dollars and Euros. Income and expense items are translated at the average exchange rates prevailing during the period. Gains and losses resulting from currency transactions are recognized currently in income and those resulting from translation of financial
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
statements are included in accumulated other comprehensive loss. The Company recognized net foreign transaction losses of $0.5 million for the year ended December 31, 2020, gains of $1.3 million for the year ended December 31, 2019, and gains of $0.6 million for the year ended December 31, 2018.
Leases—The Company determines if an arrangement is a lease or contains a lease at inception. Operating lease right-of-use assets and lease liabilities are recognized at commencement based on the present value of lease payments over the lease term. As the implicit rate is typically not readily determinable in the Company’s lease agreements, 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. Lease expense is recognized on a straight-line basis over the lease term. 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. As of December 31, 2020, the Company does not have any finance leases. Similar to other long-lived assets, right-of-use assets are tested for impairment when events or conditions indicate that the carrying value of an asset may not be fully recoverable from future cash flows. See Note 12, “Leases,” for additional information.
Marketing and Advertising Costs—The Company participates in various marketing and advertising programs with certain clients. The cost of marketing and advertising programs is expensed in the period incurred. The Company has recognized marketing and advertising expenses, including on behalf of its clients, of $165.7 million, $229.4 million and $244.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Stock Compensation Expense—The Company accounts for stock-based compensation in accordance with ASC 718, “Compensation – Stock Compensation.” Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized ratably over the requisite service period.
Management Estimates—The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Issued Accounting Standards
In December 2019, the Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminates certain exceptions within ASC 740, “Income Taxes,” and clarifies certain aspects of ASC 740 to promote consistency among reporting entities. ASU 2019-12 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements.
In March 2020, the FASB issued 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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, “Measurement of Credit Losses on Financial Instruments,” or ASC 326. This standard, referred to as CECL, required entities to utilize a financial instrument impairment model to establish an allowance based on expected losses over the life of the exposure rather than a model based on an incurred loss approach. Estimates of expected credit losses under the CECL model are based on relevant information about past events, current conditions, and reasonable and supportable forward-looking forecasts regarding the collectability of the loan portfolio. The Company adopted CECL on January 1, 2020 and recorded an increase in its allowance for loan loss at adoption of $644.0 million, which was recorded through a cumulative-effect adjustment to retained earnings, net of taxes. CECL also expanded the disclosure requirements regarding an entity’s assumptions, models, and methods for estimating its allowance for loan loss. See Note 8, “Credit Card and Loan Receivables,” for the Company’s CECL disclosures. In addition, CECL modified the impairment model for available-for-sale debt securities and provided for a simplified accounting model for purchased financial assets with credit deterioration since their origination. CECL impacts the Company’s valuation of its accounts receivable and available-for-sale debt securities. The Company’s adoption of CECL with respect to accounts receivable and available-for-sale debt securities did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, “Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the disclosure requirements on fair value measurements from ASC 820, “Fair Value Measurement.” The Company’s adoption of this standard on January 1, 2020 did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” ASU 2018-15 requires customers in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in ASC 350-40, “Intangibles—Goodwill and Other—Internal-Use Software,” to determine which implementation costs may be capitalized. The amendments in ASU 2018-15 can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company adopted ASU 2018-15 on January 1, 2020 on a prospective basis and the adoption did not have a material impact on its consolidated financial statements.
3. REVENUE
Under ASC 606, revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company’s contracts with its customers state the terms of sale, including the description, quantity, and price of the product or service purchased. Payment terms can vary by contract, but the period between invoicing and when payment is due is not significant. Taxes assessed on revenue-producing transactions are excluded from revenues.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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, as well as geographic region based on the location of the subsidiary that generally correlates with the location of the customer:
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Year Ended December 31, 2020 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 262.5 | | $ | — | | $ | — | | $ | 262.5 |
Short-term loyalty programs | | | 487.7 | | | — | | | — | | | 487.7 |
Servicing fees, net | | | — | | | (174.9) | | | — | | | (174.9) |
Other | | | 1.8 | | | — | | | 0.1 | | | 1.9 |
Revenue from contracts with customers | | $ | 752.0 | | $ | (174.9) | | $ | 0.1 | | $ | 577.2 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 3,931.4 | | | — | | | 3,931.4 |
Investment income | | | 12.8 | | | — | | | — | | | 12.8 |
Total | | $ | 764.8 | | $ | 3,756.5 | | $ | 0.1 | | $ | 4,521.4 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Year Ended December 31, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 290.1 | | $ | — | | $ | — | | $ | 290.1 |
Short-term loyalty programs | | | 635.5 | | | — | | | — | | | 635.5 |
Servicing fees, net | | | — | | | (180.7) | | | — | | | (180.7) |
Other | | | 94.9 | | | — | | | 0.4 | | | 95.3 |
Revenue from contracts with customers | | $ | 1,020.5 | | $ | (180.7) | | $ | 0.4 | | $ | 840.2 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 4,728.5 | | | — | | | 4,728.5 |
Investment income | | | 12.6 | | | — | | | — | | | 12.6 |
Total | | $ | 1,033.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 5,581.3 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Year Ended December 31, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Disaggregation of Revenue by Major Source: | | | | | | | | | | | | |
| | | | | | | | | | | | |
Coalition loyalty program | | $ | 352.3 | | $ | — | | $ | — | | $ | 352.3 |
Short-term loyalty programs | | | 613.8 | | | — | | | — | | | 613.8 |
Servicing fees, net | | | — | | | (97.3) | | | — | | | (97.3) |
Other | | | 90.7 | | | — | | | 0.6 | | | 91.3 |
Revenue from contracts with customers | | $ | 1,056.8 | | $ | (97.3) | | $ | 0.6 | | $ | 960.1 |
| | | | | | | | | | | | |
Finance charges, net | | | — | | | 4,694.9 | | | — | | | 4,694.9 |
Investment income | | | 11.6 | | | — | | | — | | | 11.6 |
Total | | $ | 1,068.4 | | $ | 4,597.6 | | $ | 0.6 | | $ | 5,666.6 |
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Year Ended December 31, 2020 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 11.1 | | $ | 3,756.5 | | $ | 0.1 | | $ | 3,767.7 |
Canada | | | 286.9 | | | — | | | — | | | 286.9 |
Europe, Middle East and Africa | | | 332.6 | | | — | | | — | | | 332.6 |
Asia Pacific | | | 80.5 | | | — | | | — | | | 80.5 |
Other | | | 53.7 | | | — | | | — | | | 53.7 |
Total | | $ | 764.8 | | $ | 3,756.5 | | $ | 0.1 | | $ | 4,521.4 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Year Ended December 31, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 40.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 4,588.3 |
Canada | | | 352.2 | | | — | | | — | | | 352.2 |
Europe, Middle East and Africa | | | 449.1 | | | — | | | — | | | 449.1 |
Asia Pacific | | | 121.7 | | | — | | | — | | | 121.7 |
Other | | | 70.0 | | | — | | | — | | | 70.0 |
Total | | $ | 1,033.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 5,581.3 |
| | | | | | | | | | | | |
| | | | | | | | Corporate/ | | | |
Year Ended December 31, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Disaggregation of Revenue by Geographic Region: | | | | | | | | | |
| | | | | | | | | | | | |
United States | | $ | 23.1 | | $ | 4,597.6 | | $ | 0.6 | | $ | 4,621.3 |
Canada | | | 411.3 | | | — | | | — | | | 411.3 |
Europe, Middle East and Africa | | | 463.2 | | | — | | | — | | | 463.2 |
Asia Pacific | | | 122.0 | | | — | | | — | | | 122.0 |
Other | | | 48.8 | | | — | | | — | | | 48.8 |
Total | | $ | 1,068.4 | | $ | 4,597.6 | | $ | 0.6 | | $ | 5,666.6 |
LoyaltyOne
LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty. The AIR MILES Reward Program is a coalition loyalty program for sponsors, who pay LoyaltyOne a fee per AIR MILES reward mile issued, in return for which LoyaltyOne provides all marketing, customer service, rewards and redemption management. BrandLoyalty designs, implements, conducts and evaluates innovative and tailor-made short-term loyalty programs for grocers worldwide.
Total consideration from the issuance of AIR MILES reward miles is allocated to 3 performance obligations: redemption, service, and brand, based on a relative standalone selling price basis. Because the standalone selling price is not directly observable for the 3 performance obligations, the Company estimates the standalone selling price for the redemption and the service performance obligations based on cost plus a reasonable margin. The Company estimates the standalone selling price of the brand performance obligation using a relief from royalty approach. Accordingly, management determines the estimated standalone selling price by considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize. The number of AIR MILES reward miles issued and redeemed are factored into the estimates, as management estimates the standalone selling prices and volumes over the term of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered. The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base.
Redemption revenue is recognized at a point in time, as the AIR MILES reward miles are redeemed. For the fulfillment of certain rewards where the AIR MILES Reward Program does not control the goods or services before they are transferred to the collector, revenue is recorded on a net basis. Service revenue is recognized over time using a time-elapsed output method, the estimated life of an AIR MILES reward mile. Revenue from the brand is recognized over time, using an output method, when an AIR MILES reward mile is issued. Revenue associated with both the service and brand is included in service revenue in the Company’s consolidated statements of income.
The amount of revenue recognized in a period is subject to the estimate of breakage and the estimated life of an AIR MILES reward mile. Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure. For the years ended December 31, 2018, 2019 and 2020, the Company’s breakage rate was 20%. For the years ended December 31, 2018, 2019 and 2020, the Company’s estimated life of a mile was 38 months.
The short-term loyalty programs typically last between 6 and 20 weeks, depending on the nature of the program, with contract terms usually less than one year in length. These programs are tailored for the specific retailer client and are designed to reward key customer segments based on their spending levels during defined campaign periods. Revenue is recognized at the point in time control passes from BrandLoyalty to the retailer.
Contract Liabilities. The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service and redemption of an AIR MILES reward mile and the reward products for its short-term loyalty programs.
A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:
| | | | | | | | | |
| | Deferred Revenue |
| | Service | | Redemption | | Total |
|
| | (in millions) |
Balance at January 1, 2019 | | $ | 248.0 | | $ | 627.3 | | $ | 875.3 |
Cash proceeds | | | 192.0 | | | 313.3 | | | 505.3 |
Revenue recognized (1) | | | (193.7) | | | (309.2) | | | (502.9) |
Other | | | — | | | 0.6 | | | 0.6 |
Effects of foreign currency translation | | | 12.3 | | | 31.4 | | | 43.7 |
Balance at December 31, 2019 | | $ | 258.6 | | $ | 663.4 | | $ | 922.0 |
Cash proceeds | | | 173.1 | | | 286.2 | | | 459.3 |
Revenue recognized (1) | | | (188.8) | | | (211.5) | | | (400.3) |
Other | | | — | | | 1.4 | | | 1.4 |
Effects of foreign currency translation | | | 4.3 | | | 17.3 | | | 21.6 |
Balance at December 31, 2020 | | $ | 247.2 | | $ | 756.8 | | $ | 1,004.0 |
Amounts recognized in the consolidated balance sheets: | | | | | | | | | |
Deferred revenue (current) | | $ | 141.7 | | $ | 756.8 | | $ | 898.5 |
Deferred revenue (non-current) | | $ | 105.5 | | $ | — | | $ | 105.5 |
| (1) | Reported on a gross basis herein. |
The deferred redemption obligation associated with the AIR MILES Reward Program is effectively due on demand from the collector base, thus the timing of revenue recognition is based on the redemption by the collector. Service revenue is amortized over the expected life of a mile, with the deferred revenue balance expected to be recognized into revenue in the amount of $141.7 million in 2021, $75.1 million in 2022, $29.5 million in 2023, and $0.9 million in 2024.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Additionally, contract liabilities for the Company’s short-term loyalty programs are recognized in other current liabilities in the Company’s consolidated balance sheets. In 2020, the beginning balance as of January 1, 2020 was $122.8 million and the closing balance as of December 31, 2020 was $66.9 million, with the change due to revenue recognized of approximately $375.9 million, offset in part by cash payments received in advance of program performance revenue during the year ended December 31, 2020. In 2019, the beginning balance as of January 1, 2019 was $110.2 million and the closing balance as of December 31, 2019 was $122.8 million, with the change due to cash payments received in advance of program performance, offset in part by revenue recognized of approximately $526.6 million during the year ended December 31, 2019.
Card Services
Card Services is a comprehensive provider of market-leading 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.
Finance charges, net. Finance charges, net represents revenue earned on customer accounts owned by the Company, and is recognized in the period in which it is earned. The Company recognizes earned finance charges, interest income and fees on credit card and loan receivables in accordance with the contractual provisions of the credit arrangements, which are within the scope of ASC 310, “Receivables.” Interest and fees continue to accrue on all accounts, except in limited circumstances, until the account balance and all related interest and other fees are paid or charged-off, in the month during which an account becomes 180 days delinquent for credit card receivables or 120 days for installment loan receivables. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to finance charges, net. Pursuant to ASC 310-20, “Receivables - Nonrefundable Fees and Other Costs,” direct loan origination costs on credit card receivables are deferred and amortized on a straight-line basis over a one-year period or over the life of the loan for loan receivables and recorded as a reduction to finance charges, net. As of December 31, 2020 and 2019, the remaining unamortized deferred costs related to loan origination were $38.0 million and $47.1 million, respectively.
Servicing fees, net. Servicing fees, net represents revenue earned from retailers and cardholders from processing and servicing accounts, and is recognized as such services are performed. Our credit card program agreements may also provide for payments to the retailer based on purchased volume or if certain contractual incentives are met, such as if the economic performance of the program exceeds a contractually defined threshold. These amounts are recorded as a reduction of revenue.
Revenue earned from retailers primarily consists of merchant and interchange fees, which are transaction fees charged to the merchant for the processing of credit card transactions. Merchant and interchange fees are recognized at a point in time upon the cardholder purchase.
Revenue earned from cardholders primarily consists of monthly fees from the purchase of certain payment protection products purchased by our cardholders. The fees are based on the average cardholder account balance, and these products can be cancelled at any time by the cardholder. Revenue is recognized over time using a time-elapsed output method.
Contract Costs. The Company recognizes an asset for the incremental costs of obtaining or fulfilling a contract with the retailer to the extent it expects to recover those costs, in accordance with ASC 340-40. 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 consolidated statements of income. As of December 31, 2020 and 2019, the remaining unamortized contract costs were $311.1 million and $406.8 million, respectively, and are included in other current assets and other non-current assets in the Company’s consolidated balance sheets.
Amortization of contract costs recorded as a reduction to revenue totaled $65.3 million, $71.8 million and $68.7 million for the years ended December 31, 2020, 2019 and 2018, respectively. Amortization of contract costs recorded to
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
cost of operations expense totaled $11.9 million, $11.9 million and $9.8 million for the years ended December 31, 2020, 2019 and 2018, respectively.
The Company performs an impairment assessment when events or changes in circumstances indicate that the carrying amount of contract costs may not be recoverable. Due to deteriorated economic conditions from COVID-19 resulting in retail store closures and a significant decline in credit sales, the Company’s impairment assessments for certain of its Card Services deferred contract costs resulted in asset impairment charges of $38.1 million that are included in cost of operations in its consolidated statement of income for the year ended December 31, 2020. NaN impairment related to deferred contract costs was incurred during the years ended December 31, 2019 and 2018.
Practical Expedients
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which the Company has the right to invoice for services performed.
The Company has elected the practical expedient from ASC 340-40 with respect to contract costs, and expenses the incremental costs as incurred for those costs that would otherwise be recognized with an amortization period of one year or less. These costs are recorded to cost of operations expense in the Company’s consolidated statements of income.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
4. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted net income per share of common stock for the periods indicated:
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions, except per share amounts) |
Basic income per share: | | | | | | | | | |
Numerator: | | | | | | | | | |
Income from continuing operations | | $ | 295.0 | | $ | 572.6 | | $ | 945.5 |
Less: Dividends declared on preferred stock | | | — | | | 2.8 | | | — |
Less: Allocation of undistributed earnings | | | — | | | 6.8 | | | — |
Income from continuing operations - basic | | | 295.0 | | | 563.0 | | | 945.5 |
(Loss) income from discontinued operations, net of tax | | | (81.3) | | | (294.6) | | | 17.6 |
Net income - basic | | $ | 213.7 | | $ | 268.4 | | $ | 963.1 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Weighted average shares, basic | | | 47.8 | | | 50.0 | | | 54.9 |
| | | | | | | | | |
Basic income (loss) attributable to common stockholders per share: | | | | | | | | | |
Income from continuing operations | | $ | 6.17 | | $ | 11.25 | | $ | 17.24 |
(Loss) income from discontinued operations | | $ | (1.70) | | $ | (5.89) | | $ | 0.32 |
Net income per share | | $ | 4.47 | | $ | 5.36 | | $ | 17.56 |
| | | | | | | | | |
Diluted income per share (1): | | | | | | | | | |
Numerator: | | | | | | | | | |
Income from continuing operations | | $ | 295.0 | | $ | 572.6 | | $ | 945.5 |
(Loss) income from discontinued operations, net of tax | | | (81.3) | | | (294.6) | | | 17.6 |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 |
| | | | | | | | | |
Denominator: | | | | | | | | | |
Weighted average shares, basic | | | 47.8 | | | 50.0 | | | 54.9 |
Weighted average effect of dilutive securities: | | | | | | | | | |
Shares from assumed conversion of preferred stock | | | — | | | 0.8 | | | — |
Net effect of dilutive stock options and unvested restricted stock (2) | | | 0.1 | | | 0.1 | | | 0.2 |
Denominator for diluted calculation | | | 47.9 | | | 50.9 | | | 55.1 |
| | | | | | | | | |
Diluted income (loss) attributable to common stockholders per share: | | | | | | | | | |
Income from continuing operations | | $ | 6.16 | | $ | 11.24 | | $ | 17.17 |
(Loss) income from discontinued operations | | $ | (1.70) | | $ | (5.78) | | $ | 0.32 |
Net income per share | | $ | 4.46 | | $ | 5.46 | | $ | 17.49 |
(1) | Computed using the if-converted method, as the result was more dilutive. |
(2) | For the years ended December 31, 2020, 2019 and 2018, a de minimis amount of restricted stock units was excluded from each calculation of weighted average dilutive common shares as the effect would have been anti-dilutive. |
On April 25, 2019, the Company entered into an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock for an aggregate of 150,000 shares of Series A Non-Voting Convertible Preferred Stock (“preferred stock”). In October 2019, ValueAct converted all 150,000 shares of preferred stock back to common stock.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
For the year ended December 31, 2019, the Company’s calculation of basic and diluted EPS was computed using the two-class method for those periods in which participating securities were outstanding. The two-class method is an earnings allocation that determines EPS for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings.
5. ACQUISITIONS
2020 Acquisitions:
Bread
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.
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 |
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The goodwill resulting from the acquisition was not deductible for tax purposes. Bread utilizes certain statutory trusts to securitize its installment loan receivables. As part of its acquisition, the Company acquired $111.7 million of installment loan receivables restricted for securitization investors. In addition, the Company assumed 2 warehouse facilities of $95.6 million utilized to fund securitized loan receivables. See Note 17, “Debt,” for more information.
2019 Acquisitions:
On February 7, 2019, the Company acquired certain assets as well as the assembled workforce and related office lease agreements of blispay inc. (“Blispay”), a financial technology company, for cash consideration of $6.7 million, and a $1.0 million limited guarantee was issued by the Company as part of the transaction. The acquisition was determined to constitute a business combination under ASC 805, “Business Combinations.” Total assets acquired were $7.3 million, including $5.0 million of capitalized software and $2.3 million of goodwill, with the fair value of the guarantee determined to be approximately $0.6 million on the acquisition date.
6. DISPOSITION
On January 10, 2020, the Company sold Precima®, a provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for total consideration of $43.8 million. The purchase and sale agreement provided for $10.0 million in contingent consideration based upon the occurrence of specified events and performance of the business, with two earnout determinations in September 2020 and September 2021, respectively. In September 2020, the Company received cash of $5.0 million upon the earnout determination date. At December 31, 2020, the Company estimated the fair value of the remaining contingent purchase price at approximately $1.5 million, which is included in the total consideration below. Precima was included in the Company’s LoyaltyOne segment. The pre-tax gain was recorded in cost of operations in the Company’s consolidated statements of income.
| | | |
| | 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. |
7. DISCONTINUED OPERATIONS
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon segment to Publicis Groupe S.A. for $4.4 billion in cash, subject to certain specified adjustments. Beginning in the first quarter of 2019, Epsilon met the criteria set forth in ASC 205-20, “Presentation of Financial Statements — Discontinued Operations.”
The sale of Epsilon was completed on July 1, 2019, and the pre-tax gain is shown in the table below.
| | | |
| | July 1, |
| | 2019 |
| | (in millions) |
Consideration received (1) | | $ | 4,451.9 |
Net carrying value of assets and liabilities (including other comprehensive income) | | | 3,939.7 |
Pre-tax gain on deconsolidation | | $ | 512.2 |
(1) | Consideration as defined included cash associated with the sold Epsilon entities, which was $42.2 million. |
The Company recorded transaction costs of approximately $79.0 million for the year ended December 31, 2019 and recorded an after-tax loss on sale of $252.1 million, which is included in loss from discontinued operations, net of taxes.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Following the sale of Epsilon, Card Services has continued its existing contractual relationships with Epsilon for digital marketing services.
The following table summarizes the results of discontinued operations for the periods presented:
| | | | | | | | | |
| | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Revenue | | $ | — | | $ | 999.6 | | $ | 2,175.1 |
Cost of operations (exclusive of depreciation and amortization disclosed separately below) | | | 110.0 | | | 993.9 | | | 1,744.4 |
Depreciation and other amortization | | | — | | | 29.7 | | | 115.4 |
Amortization of purchased intangibles | | | — | | | 43.5 | | | 178.3 |
Interest expense (1) | | | — | | | 64.1 | | | 128.3 |
Gain on sale of Epsilon | | | — | | | (512.2) | | | — |
Income before (benefit) provision from income taxes | | | (110.0) | | | 380.6 | | | 8.7 |
(Benefit) provision for income taxes | | | (28.7) | | | 675.2 | | | (8.9) |
(Loss) income from discontinued operations, net of taxes | | $ | (81.3) | | $ | (294.6) | | $ | 17.6 |
(1) | The Company’s credit agreement, as amended, provided that upon consummation of the sale of Epsilon, a mandatory payment of $500.0 million of the revolving credit facility was required and all of the Company’s outstanding senior notes were required to be redeemed. As such, interest expense has been allocated to discontinued operations on the basis of the Company’s $500.0 million mandatory repayment of its revolving line of credit and redemption of its $1.9 billion in senior notes outstanding. |
For the year ended December 31, 2020, loss from discontinued operations reflects a loss contingency associated with indemnification issues with the purchaser. For the years ended December 31, 2019 and 2018, loss from discontinued operations reflects the results of operations of the Company’s former Epsilon segment, direct costs identifiable to the Epsilon segment including a loss contingency associated with indemnification issues with the purchaser and the allocation of interest expense on corporate debt. See Note 18, “Commitments and Contingencies,” for additional information with respect to the loss contingency.
Depreciation and amortization and capital expenditures from discontinued operations for the periods presented are as follows:
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Depreciation and amortization | | $ | — | | $ | 73.2 | | $ | 293.7 |
Capital expenditures | | $ | — | | $ | 55.8 | | $ | 106.5 |
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
8. 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:
| | | | | | |
| | December 31, | | December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Credit card receivables | | $ | 16,376.4 | | $ | 19,047.8 |
Installment loan receivables | | | 118.0 | | | — |
Other | | | 290.0 | | | 415.3 |
Total credit card and loan receivables | | | 16,784.4 | | | 19,463.1 |
Less: Credit card and loan receivables – restricted for securitization investors | | | 11,208.5 | | | 13,504.2 |
Other credit card and loan receivables | | $ | 5,575.9 | | $ | 5,958.9 |
Allowance for Loan Loss
Effective January 1, 2020, the Company adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine its allowance for loan loss. The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of its credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s 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. Prior to January 1, 2020, the Company’s allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”
Credit Card Receivables
ASC 326 requires entities to use a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. As part of its CECL implementation, theThe Company has evaluated multiple risk characteristics ofacross its credit card receivablesloans portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its allowanceAllowance for loan loss,credit losses, the Company segregatessegments its credit card receivables into 4 groups with similar risk characteristics,loans on the basis of delinquency status, and credit quality risk score.score and product. 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 athe Company’s credit card and loan receivable,loans, payments were applied to the measurement date balance with 0no 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(CARD Act) methodologies to model balance paydown.
BNPL Loans
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 estimatingCompany measures its allowanceAllowance 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
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 utilizeson BNPL loans using a third party servicestatistical model to analyze a number of scenarios, but uses one scenario to determine the macroeconomic variables over the forecast period. 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 creditprojected 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. At December 31, 2020, unbilled finance charges were $219.4 million and included in other credit card and loan receivables in the Company’s consolidated balance sheet.
Installment Loan Receivables
As part of its acquisition of Bread, the Company acquired certain installment loan receivables, and in accordance with ASC 326, the Company established on the date of acquisition, an allowance for loan loss of approximately $5.7 million, which was recorded through the provision for loan loss. The allowance for loan loss was established by utilizing a migration model over the remaining lifeterms of the loans.loans, inclusive of an assumption for prepayments. The model segmented accountsis based on three attributes: delinquency,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 remaining term.geographic location. As of December 31, 2020,2022 and 2021, the allowance for loan loss related to installment loan receivables was $5.7 million.
Allowance for Loan Losscredit losses on BNPL loans was $21 million and $14 million, respectively.
Allowance for Credit Losses Rollforward
The following table presents the Company’s
allowanceAllowance for
loan losscredit losses for its
creditCredit card and
loan receivables forother loans. With the
years indicated.
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 (1) | | 2019 | | 2018 |
|
| | (in millions) |
Balance at beginning of year | | $ | 1,171.1 | | $ | 1,038.3 | | $ | 1,119.3 |
Adoption of ASC 326 (2) | | | 644.0 | | | — | | | — |
Provision for loan loss | | | 1,266.2 | | | 1,187.5 | | | 1,016.0 |
Allowance associated with credit card and loan receivables transferred
to held for sale | | | — | | | — | | | (54.8) |
Change in estimate for uncollectible unpaid interest and fees | | | 10.0 | | | — | | | 25.0 |
Recoveries | | | 204.6 | | | 234.5 | | | 214.2 |
Principal charge-offs | | | (1,287.9) | | | (1,289.2) | | | (1,281.4) |
Balance at end of year | | $ | 2,008.0 | | $ | 1,171.1 | | $ | 1,038.3 |
(1) | With the acquisition of Breadacquisition of Lon, Inc. 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. |
During the year ended December 31, 2020, the increaseCompany acquired certain BNPL loans which represented a separate portfolio segment; the amount of the related Allowance for credit losses was insignificant and therefore has been included in the allowancetable below. The amounts presented are 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
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
past due. 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 Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. For the years ended December 31,31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
Beginning balance(1) | $ | 1,832 | | | $ | 2,008 | | | $ | 1,815 | |
| | | | | |
Provision for credit losses(2) | 1,594 | | | 544 | | | 1,266 | |
| Change in estimate for uncollectible unpaid interest and fees | 10 | | | — | | | 10 | |
Net principal losses(3) | (972) | | | (720) | | | (1,083) | |
| Ending balance | $ | 2,464 | | | $ | 1,832 | | | $ | 2,008 | |
(1)The 2020 2019 and 2018, actual charge-offs for unpaid interest and fees were $717.4 million, $808.6 million and $803.1 million, 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 accountBeginning 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. Afterincludes an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the riskincrease 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 | | | | | | |
| | 31 to 60 days
delinquent | | 61 to 90 days
delinquent | | 91 or more days delinquent | | Total
delinquent | | Current | | Total |
|
| | (in millions) |
As of December 31, 2020 (1) | $ | 272.5 | | $ | 203.3 | | $ | 439.8 | | $ | 915.6 | | $ | 15,578.8 | | $ | 16,494.4 |
| | | | | | | | | | | | | | | | | | |
As of December 31, 2019 | $ | 399.1 | | $ | 293.9 | | $ | 698.4 | | $ | 1,391.4 | | $ | 17,656.4 | | $ | 19,047.8 |
(1) | With the acquisition of Bread in December 2020, the Company acquired certain installment loans. As the amount of the delinquencies related to installment loans was immaterial, the amounts were included in the above table. |
The practice of re-aging an account may affect credit card receivables delinquencies and charge-offs. A re-age of an account is intended to assist delinquent cardholders who have experienced financial difficulties but who demonstrate both an ability and willingness to repay the amounts due. Accounts meeting specific defined criteria are re-aged when the cardholder makes one or more consecutive payments aggregating a certain pre-defined amount of their account balance. With re-aging, the outstanding balance of a delinquent account is returned to a current status. For the years ended December 31, 2020, 2019 and 2018, the Company’s re-aged accounts represented 2.8%, 2.4% and 2.1%, respectively, of total credit card and loan receivables for each period and thus do not have a significant impact on the Company’s delinquencies or net charge-offs. The Company’s re-aging practices comply with regulatory guidelines.
Modified Credit Card Receivables
Forbearance Programs
In response to the COVID-19 pandemic, the Company offered forbearance programs, which provide 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. Specifically, the Company provided for late fee waivers and payment deferrals for up to two months for approximately $2.2 billion of credit card receivables, based on the balance in the month of enrollment, through December 31, 2020 and the extension of certain promotional plans of approximately $89.0 million for up to three months. As of December 31, 2020, the credit card receivables in these deferral forbearance programs was approximately $157.4 million. Additionally, the Company instituted 2 short-term programs with durations of three and six months,
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
which provide concessions consisting primarily of a reduced minimum payment and an interest rate reduction, the balance of which was $67.3$644 million as of December 31, 2020.
As these short-term modifications were made in responseJanuary 1, 2020, related to COVID-19 to borrowers who were current prior to any relief, these are not considered troubled debt restructurings under the Interagency Statement guidance on certain loan modifications and an interpretation of ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors.”
Troubled Debt Restructurings
The Company holds certain credit card receivables for which the terms have been modified. The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoffadoption 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 CECL methodology.
(2)three and six months with similar terms to our short-term forbearance programs, for borrowers who were not current as of their most recent billing cycle prior to April 2020. As of 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 $39.9 million.
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. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivable balance and the discounted present value of cash flows expected to be collected. Consistent with the Company’s measurement of impairment of modified credit card receivables on a pooled basis, the discount rate usedProvision for credit card receivables islosses includes a build/release for the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the poolAllowance, as well as replenishment of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivablesNet principal losses.
(3)Net principal losses are included in the general poolpresented net of credit card receivables with the allowance determined under the contingent loss modelrecoveries of ASC 450-20, “Loss Contingencies.” If the Company applied accounting under ASC 310-40, “Troubled Debt Restructurings by Creditors,” to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.
The Company had $489.8$187 million, $163 million and $308.7 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $165.8 million and $75.4 million, respectively, as of December 31, 2020 and 2019. These modified credit card receivables represented less than 3.0% of the Company’s total credit card receivables as of both December 31, 2020 and 2019.
The average recorded investment in the impaired credit card receivables was $412.4 million and $295.4$205 million for the years ended December 31, 2022, 2021 and 2020, and 2019, 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 $30.1 million, $22.6 million and $27.9 million Net principal losses for the yearsyear ended December 31, 2020, 2019 and 2018, respectively,2022 include a $5 million adjustment related to the effects of the purchase of previously written-off accounts that were sold to a third-party debt collection agency; no such adjustment was made in interest income associated with modifiedthe comparative periods.
For the year ended December 31, 2022, the factors that influenced the increase in the Allowance for credit losses are a higher End-of-period credit card
receivables duringand other loan balance, a higher reserve rate due to economic scenario weightings in the
period that such credit card receivables were impaired.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Company’s credit reserve modeling as a result of weakening in macroeconomic indicators, elevated inflation, and the increased cost of overall consumer debt.
4. SECURITIZATIONS
The
following table provides information on credit card receivablesCompany accounts for transfers of financial assets as either sales or financings. Transfers of financial assets that are
considered troubled debt restructuringsaccounted for as
described above, which entered into a modification programsales are removed from the Consolidated Balance Sheets with any realized gain or loss reflected in the Consolidated Statements of Income during the
specified periods:
| | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 | |
| | | | Pre- | | Post- | | | | Pre- | | Post- | |
| | | | modification | | modification | | | | modification | | modification | |
| | Number of | | Outstanding | | Outstanding | | Number of | | Outstanding | | Outstanding | |
| | Restructurings | | Balance | | Balance | | Restructurings | | Balance | | Balance | |
|
| | (Dollars in millions) | |
Troubled debt restructurings – credit card receivables | | 391,049 | | $ | 554.5 | | $ | 552.6 | | 259,311 | | $ | 381.4 | | $ | 380.8 | |
The table below summarizes troubled debt restructuringsperiod in which the sale occurs. Transfers of financial assets that have defaulted in the specified periods where the default occurred within 12 months of their modification date:
| | | | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
| | Number of | | Outstanding | | Number of | | Outstanding |
| | Restructurings | | Balance | | Restructurings | | Balance |
|
| | (Dollars in millions) |
Troubled debt restructurings that subsequently defaulted – credit card receivables | | 118,600 | | $ | 161.8 | | 126,476 | | $ | 170.8 |
Credit Quality
Credit Card Receivables
The Company uses proprietary scoring models developed specificallyare not accounted 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 modelssale 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 December 31, 2020 and 2019:
| | | | | | | | | | | | |
| | Amortized Cost Revolving Credit Card Receivables | |
| | December 31, 2020 | | | December 31, 2019 | |
| | | | | 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 | | $ | 204.1 | | 1.2 | % | | $ | 298.4 | | 1.6 | % |
27.1% and higher | | | 1,390.4 | | 8.5 | | | | 1,648.8 | | 8.7 | |
17.1% - 27.0% | | | 848.8 | | 5.2 | | | | 1,108.5 | | 5.8 | |
12.6% - 17.0% | | | 937.0 | | 5.7 | | | | 1,171.7 | | 6.2 | |
3.7% - 12.5% | | | 7,305.5 | | 44.6 | | | | 8,292.1 | | 43.5 | |
1.9% - 3.6% | | | 2,939.5 | | 17.9 | | | | 3,375.3 | | 17.7 | |
Lower than 1.9% | | | 2,751.1 | | 16.9 | | | | 3,153.0 | | 16.5 | |
Total | | $ | 16,376.4 | | 100.0 | % | | $ | 19,047.8 | | 100.0 | % |
Note: The Company’s credit card receivables are revolving receivables as they do not have stated maturities and are exempted from certain vintage disclosures required under ASC 326.
The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Obligor credit quality is monitored at least monthly during the life of an account.
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Installment Loan Receivables
With the December 3, 2020 acquisition of Bread, the Company acquired installment loan receivables. At origination of these loans, credit bureau scores from Fair Isaac Corporation (“FICO”) were obtained relating to the customer’s broader credit performancetreated as a tool in the underwriting process and for making credit decisions. As of December 31, 2020, the amortized cost basis of the Company’s installment loan receivables totaled $118.0 million, with approximately 86% of these loans originated by customers with FICO scores 660 or above, and approximately 14% of these loans originated by customers with FICO scores below 660.
Transfer of Financial Assets
During 2018, the Company originated loan receivables under one previous client agreement, and after origination, these loan receivables were sold to the client at par value plus accrued interest. These transfers qualified for sale treatment as they met the conditions established in ASC 860-10, “Transfers and Servicing.” Following the sale, the client owned the loan receivables, assumed the risk of loss in the event of loan defaults and was responsible for all servicing functions related to the loan receivables. Effective July 2, 2018, the Company no longer originates loan receivables for this client. Originations and sales of these loan receivables held for sale were reflected as operating activities in the Company’s consolidated statement of cash flows for the year ended December 31, 2018.
Portfolios Held for Sale
The Company had certain credit card portfolios held for sale, which are carried at the lower of cost or fair value, of $408.0 million as of December 31, 2019. As of December 31, 2020, there were 0 credit card portfolios held for sale.
During the year ended December 31, 2020, the Company sold a credit card portfolio for cash consideration of approximately $289.5 million and recognized a gain of approximately $20.4 million on the transaction, which was recorded in cost of operations in the Company’s consolidated statements of income. The Company recorded portfolio valuation adjustments, which are reflected in cost of operations, of $7.5 million for the year ended December 31, 2020. In September 2020, 1 of the Company’s credit card portfolios totaling approximately $81.9 million was transferred from held for sale to held for investment and was included in total credit card and loan receivables at December 31, 2020.
During the year ended December 31, 2019, the Company transferred 1 credit card portfolio totaling approximately $510.3 million into credit card receivables held for sale, and sold 13 credit card portfolios for cash consideration of approximately $2.1 billion and recognized approximately $43.9 million in net gains on the transactions. The Company recorded portfolio valuation adjustments of $189.8 million for the year ended December 31, 2019.
For the year ended December 31, 2019, the portfolio sales were as follows:
| ● | In April 2019, the Company sold 1 credit card portfolio for final cash consideration of approximately $356.6 million and recognized a $0.4 million loss on the transaction. |
| ● | In June 2019, the Company sold 3 credit card portfolios for final cash consideration of approximately $217.7 million and recognized approximately $2.9 million in gains on the transactions. |
| ● | In August 2019, the Company sold 1 credit card portfolio for final cash consideration of approximately $70.4 million and recognized a $1.7 million gain on the transaction. |
| ● | In September 2019, the Company sold 1 credit card portfolio for final cash consideration of approximately $334.7 million and recognized a $15.2 million gain on the transaction. |
| ● | In December 2019, the Company sold 7 credit card portfolios for final cash consideration of approximately $1,082.4 million and recognized approximately $24.5 million in net gains on the transactions. |
financing.
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Portfolio Acquisitions
During the year ended December 31, 2019, the Company acquired 4 credit card portfolios for cash consideration of approximately $924.8 million, which consisted of approximately $843.5 million of credit card receivables, $35.7 million of intangible assets and $45.6 million of other non-current assets. NaN portfolio acquisitions were made during the year ended December 31, 2020.
Securitized Credit Card and Loan Receivables
The Company regularly securitizes the majority of its credit card and loan receivablesloans through the transfer of those loans to one of its trusts.Trusts. The Company continues to own and serviceperforms the decision making for the Trusts, as well as servicing the cardholder accounts that generate the credit card and loan receivablesloans held by the trusts.Trusts. In its capacity as a servicer, eachthe Company administers the loans, collects payments and charges-off uncollectible balances. Servicing fees are earned by a subsidiary of the respective entities earns a fee fromCompany, which are eliminated in consolidation.
The Trusts are consolidated VIEs because they have insufficient equity at risk to finance their activities – being the trusts to serviceissuance of debt securities and administernotes, collateralized by the underlying credit card loans. Because the Company performs the decision making and loan receivables, collect paymentsservicing 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 charge-off uncollectible receivables. These fees are eliminatedthe 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
not reflectednon-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
consolidated statements of income for the years ended December 31, 2020, 2019 and 2018.
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.
securitization transactions. For its securitized credit card receivables,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 receivablesloans 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.
The Company is required to maintain minimum interests
in its Trusts ranging from 4% to 10% of the securitized credit card
receivables.loans. This requirement is met through
a transferor’s interest and is supplemented through excess funding
deposits. 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, although some cash collateral, restricted deposits are released only when investors have been paid in full. NaN cash collateral, restricted deposits were required to be used to cover losses onrepaid. Under the terms of the Trusts, the occurrence of certain triggering events associated with the performance of the securitized credit card
receivablesloans 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 years ended December 31,
2022, 2021 and 2020,
2019 and 2018.no such triggering events occurred.
The
following tables
below present quantitative information aboutprovide the
components of total securitized credit card
loans and
loan receivables,related delinquencies
as of December 31, and net
charge-offs:
| | | | | | |
| | December 31, | | December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Total credit card and loan receivables – restricted for securitization investors | | $ | 11,208.5 | | $ | 13,504.2 |
Principal amount of credit card and loan receivables – restricted for securitization investors, 91 days or more past due | | $ | 200.8 | | $ | 321.8 |
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Net charge-offs of securitized principal | | $ | 756.1 | | $ | 907.7 | | $ | 927.0 |
9. INVENTORIES, NET
Inventories, netprincipal losses of $164.3 million and $218.0 million at December 31, 2020 and 2019, respectively, primarily consist of finished goods to be utilized as rewards insecuritized credit card loans for the Company’s loyalty programs. For the yearyears ended December 31,
31:
F-32
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | |
| Total credit card loans – available to settle obligations of consolidated VIEs | $ | 15,383 | | | $ | 11,215 | |
| Of which: principal amount of credit card loans 91 days or more past due | $ | 307 | | | $ | 159 | |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Net principal losses of securitized credit card loans | $ | 554 | | | $ | 453 | | | $ | 756 | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
2019, asset impairment charges of $18.4 million related to the discontinuance of certain reward product lines within inventory were recorded to the LoyaltyOne segment.
5. INVESTMENT SECURITIES
10. OTHER INVESTMENTS
Other investments
The Company’s investment securities consist of
marketableavailable-for-sale (AFS) securities, which are debt securities and
U.S. Treasury bonds and are included in other current assets and other non-current assets in the Company’s consolidated balance sheets. Marketablemutual funds. The Company also holds equity securities
include available for sale debtwithin its investment securities
mutual funds and domestic certificate of deposit investments. The principal components of otherportfolio. Collectively, these investments
which are carried at fair value
are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | Amortized | | Unrealized | | Unrealized | | | | | Amortized | | Unrealized | | Unrealized | | | |
| | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
|
| | (in millions) |
Marketable securities | | $ | 219.0 | | $ | 6.4 | | $ | — | | $ | 225.4 | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 |
Total | | $ | 219.0 | | $ | 6.4 | | $ | — | | $ | 225.4 | | $ | 257.2 | | $ | 3.0 | | $ | (0.4) | | $ | 259.8 |
The following table showson the unrealized losses and fair value for those investments that wereConsolidated 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 December 31, 2019, aggregated by investment category2022 and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value | | Amortized
Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Value |
| (Millions) | |
| Available-for-sale securities | $ | 175 | | | $ | — | | | $ | (23) | | | $ | 152 | | | $ | 173 | | | $ | 4 | | | $ | (2) | | | $ | 175 | |
| Equity securities | $ | 69 | | | $ | — | | | $ | — | | | $ | 69 | | | $ | 64 | | | $ | — | | | $ | — | | | $ | 64 | |
| Total | $ | 244 | | | $ | — | | | $ | (23) | | | $ | 221 | | | $ | 237 | | | $ | 4 | | | $ | (2) | | | $ | 239 | |
The following tables provide 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. Unrealized lossesposition, as of December 31,
2020 were de minimis.2022 and December 31, 2021, respectively:
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | 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 | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) |
Total | | $ | 18.8 | | $ | (0.2) | | $ | 13.1 | | $ | (0.2) | | $ | 31.9 | | $ | (0.4) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Less than 12 months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses |
| (Millions) | |
| Available-for-sale securities | $ | 95 | | | $ | (9) | | | $ | 57 | | | $ | (14) | | | $ | 152 | | | $ | (23) | |
| Total | $ | 95 | | | $ | (9) | | | $ | 57 | | | $ | (14) | | | $ | 152 | | | $ | (23) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Less than 12 months | | 12 Months or Greater | | Total |
| Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses | | Fair Value | | Unrealized
Losses |
| (Millions) | |
| Available-for-sale securities | $ | 57 | | | $ | (1) | | | $ | 15 | | | $ | (1) | | | $ | 72 | | | $ | (2) | |
| Total | $ | 57 | | | $ | (1) | | | $ | 15 | | | $ | (1) | | | $ | 72 | | | $ | (2) | |
As of December 31, 2022, the amortized cost and estimated fair value of the
marketable securities at December 31, 2020 by contractual maturity are as follows:
| | | | | | |
| | Amortized | | Estimated |
| | Cost | | Fair Value |
|
| | (in millions) |
Due in one year or less (1) | | $ | 44.9 | | $ | 44.9 |
Due after one year through five years | | | 1.0 | | | 1.0 |
Due after five years through ten years | | | — | | | — |
Due after ten years | | | 173.1 | | | 179.5 |
Total | | $ | 219.0 | | $ | 225.4 |
(1) | Includes mutual funds, which do not have a stated maturity. |
Market values were determined for each individual security in the investment portfolio. Effective January 1, 2020, the Company adopted ASC 326, which replaced the other-than-temporary impairment model for available-for-sale debt securities. For available-for-saleCompany’s AFS debt securities, in which fair value is less than cost, ASC 326 requires that credit-related impairment, if any, be recognized through an allowance for credit losses and adjusted each period for changes in credit risk. The Company typically invests in highly-ratedare mortgage-backed securities with low probabilities of defaultno stated maturities, was $175 million 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 December 31, 2020, the Company does not consider its investments to be impaired
$152 million, respectively.
There were
0no realized gains or losses from the sale of
any investment securities for the years ended December 31,
2020, 20192022, 2021 and
2018.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
11. REDEMPTION SETTLEMENT ASSETS
6. PROPERTY AND EQUIPMENT, NET
Redemption settlement assets consist of restricted cash
Furniture, equipment, buildings 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, whichleasehold improvements are carried at
fair value,cost less accumulated depreciation, and depreciation is measured on a straight-line basis. Costs incurred during construction are
as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | | Amortized | | Unrealized | | Unrealized | | | | | | Amortized | | Unrealized | | Unrealized | | | |
| | Cost | | Gains | | Losses | | Fair Value | | Cost | | Gains | | Losses | | Fair Value |
|
| | (in millions) |
Restricted cash | | $ | 55.4 | | $ | — | | $ | — | | $ | 55.4 | | $ | 39.3 | | $ | — | | $ | — | | $ | 39.3 |
Mutual funds | | | 26.9 | | | — | | | — | | | 26.9 | | | 25.1 | | | — | | | — | | | 25.1 |
Corporate bonds | | | 592.3 | | | 19.1 | | | (0.2) | | | 611.2 | | | 536.0 | | | 2.4 | | | (2.0) | | | 536.4 |
Total | | $ | 674.6 | | $ | 19.1 | | $ | (0.2) | | $ | 693.5 | | $ | 600.4 | | $ | 2.4 | | $ | (2.0) | | $ | 600.8 |
The following tables showcapitalized; depreciation begins once the unrealized lossesasset is placed in service. As of December 31, 2022, the Company’s furniture and fair value for those investments that were in an unrealized loss positionequipment has remaining estimated useful lives ranging from less than one year to 10 years. Leasehold improvements are depreciated over the lesser of the remaining terms of the respective leases, or the economic lives of the improvements, and range from less than one year to 16 years, as of December 31, 20202022.
Costs associated with the acquisition or development of internal-use software are also capitalized and
2019, respectively, aggregated by investment categoryrecorded in Property and
equipment, net. Once the
length of time that individual securities have been ininternal-use software is ready for its intended use, the cost is amortized on a
continuous loss position:
| | | | | | | | | | | | | | | | | | |
| | 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) |
| | | | | | | | | | | | | | | | | | |
| | December 31, 2019 |
| | 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 | | $ | 166.6 | | $ | (1.3) | | $ | 155.1 | | $ | (0.7) | | $ | 321.7 | | $ | (2.0) |
Total | | $ | 166.6 | | $ | (1.3) | | $ | 155.1 | | $ | (0.7) | | $ | 321.7 | | $ | (2.0) |
The amortized cost andstraight-line basis over the software’s estimated fair value of the securities at December 31, 2020 by contractual maturity are as follows:
| | | | | | |
| | Amortized | | Estimated |
| | Cost | | Fair Value |
|
| | (in millions) |
Due in one year or less (1) | | $ | 144.9 | | $ | 146.0 |
Due after one year through five years | | | 470.2 | | | 488.0 |
Due after five year through ten years | | | 4.1 | | | 4.1 |
Total | | $ | 619.2 | | $ | 638.1 |
(1) | Includes mutual funds, which do not have a stated maturity. |
Market values were determined for each individual security in the investment portfolio. Effective January 1, 2020, the Company adopted ASC 326, which replaced the other-than-temporary impairment model for available-for-sale debt securities. For available-for-sale debt securities in which fair value is less than cost, ASC 326 requires that credit-related impairment, if any, be 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
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
ability to hold the investments until maturity, and the Company performs an assessment each period for credit-related impairment.useful life. As of December 31, 2020,2022, the Company does not consider its investmentsCompany’s internal-use software has remaining estimated useful lives ranging from less than one year to be impaired.
10 years.
There were 0 realized gains or losses from the sale of investment securities for the year ended December 31, 2020. For the years ended December 31, 2019 and 2018, realized gains and losses from the sale of investment securities were de minimis.
12. LEASES
The Company
has operating leases for general office properties, warehouses, data centers, customer care centers, automobilesreviews long-lived assets and
certain equipment. As of December 31, 2020, the Company’s leases have remaining lease terms of less than 1 year to 18 years, some of which may include renewal options.
The components of lease expense were as follows:
| | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Operating lease cost | | $ | 40.5 | | $ | 41.1 |
Short-term lease cost | | | 1.0 | | | 2.7 |
Variable lease cost | | | 6.2 | | | 6.8 |
Total | | $ | 47.7 | | $ | 50.6 |
Lease expense was $47.5 million for the year ended December 31, 2018.
Other information related to leases was as follows:
| | | | | | |
| | December 31, | | December 31, |
| | 2020 | | 2019 |
Weighted-average remaining lease term (in years): | | | | | | |
Operating leases | | | 10.8 | | | 11.5 |
Weighted-average discount rate: | | | | | | |
Operating leases | | | 5.2% | | | 5.2% |
Supplemental cash flow information related to leases was as follows:
| | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | |
Operating cash flows from operating leases | | $ | 45.8 | | $ | 46.6 |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | |
Operating leases | | $ | 7.6 | | $ | 28.4 |
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Maturities of the lease liabilities as of December 31, 2020 were as follows:
| | | |
| | Operating |
Year | | Leases |
| | (in millions) |
2021 | | $ | 38.8 |
2022 | | | 41.2 |
2023 | | | 38.3 |
2024 | | | 36.0 |
2025 | | | 35.2 |
Thereafter | | | 209.6 |
Total undiscounted lease liabilities | | | 399.1 |
Less: Amount representing interest | | | (99.1) |
Total present value of minimum lease payments | | $ | 300.0 |
| | | |
Amounts recognized in the December 31, 2020 consolidated balance sheet: | | | |
Current operating lease liabilities | | $ | 23.6 |
Long-term operating lease liabilities | | | 276.4 |
Total | | $ | 300.0 |
The Company evaluates its right of use (“ROU”) assetsasset groups for impairment in accordance with ASC 360, “Property, Plant and Equipment,” whenwhenever events or changes in circumstances indicate that a ROU asset’stheir carrying amountamounts may not be recoverable. The Company performed anAn impairment assessment foris recognized if the ROU assets associated with its locations where it ceased use withcarrying amount is not recoverable and exceeds the intent to sublease. As a result, the Company recorded an asset impairment charge of $18.4 million in its Card Services segment. The impairment charge is included in cost of operations in the Company’s consolidated statements of income for the year ended December 31, 2020. Following the incurred impairment, the ROU assets for these locations will be amortized on an accelerated basis in accordance with ASC 842.
or asset group’s fair value.
13. PROPERTY AND EQUIPMENT
Property and equipment
consistconsists of the
following:following as of December 31:
| | | | | | |
| | December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Computer software and development | | $ | 410.5 | | $ | 327.1 |
Furniture and equipment | | | 151.0 | | | 164.3 |
Land, buildings and leasehold improvements | | | 122.7 | | | 126.0 |
Construction in progress | | | 32.9 | | | 46.2 |
Total | | | 717.1 | | | 663.6 |
Accumulated depreciation and amortization | | | (406.2) | | | (381.3) |
Property and equipment, net | | $ | 310.9 | | $ | 282.3 |
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | |
| Internal-use computer software and development | $ | 305 | | | $ | 263 | |
| Furniture and equipment | 96 | | | 107 | |
| Land and leasehold improvements | 72 | | | 76 | |
| Construction in progress | 9 | | | 25 | |
| Total | 482 | | | 471 | |
| Accumulated depreciation and amortization | (287) | | | (256) | |
| Property and equipment | $ | 195 | | | $ | 215 | |
Depreciation expense totaled
$65.5$19 million,
$40.6$26 million and
$41.2$57 million for the years ended December 31,
2020, 20192022, 2021 and
2018,2020, respectively, and includes purchased software. Amortization expense on capitalized
internal-use software
costs totaled
$35.5$68 million,
$39.3$37 million and
$39.5$15 million for the years ended December 31,
2022, 2021 and 2020,
2019 and 2018, respectively.
As of December 31,
20202022 and
2019,2021, the net amount of unamortized capitalized
internal-use software costs included in
Property and equipment, net on the
consolidated balance sheetsConsolidated Balance Sheets was
$165.5$112 million and
$74.0$113 million, respectively.
With the Bread acquisition on December 3, 2020, the Company acquired $90.7 million of developed technology, which is being amortized over a 5.0 year life. See Note 5, “Acquisitions,” for more information.
7. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill is reviewed at least annually for impairment, or more frequently if circumstances indicate that an impairment is probable, using qualitative or quantitative analysis. No goodwill impairment has been recognized during any of the years ended December 31, 2022, 2021, or 2020.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
In addition, withThe changes in the acquisitioncarrying amount of Bread, the Company determined certain capitalized software was no longer expected to be used and an impairment charge of $4.1 million was incurred, which is included in cost of operations in its consolidated statement of incomegoodwill for the yearyears ended December 31, 2020.2022 and 2021, respectively, were as follows:
| | | | | |
| (Millions) | |
| Balance as of December 31, 2020 | $ | 634 | |
| Goodwill acquired during the period | — | |
| Balance as of December 31, 2021 | $ | 634 | |
| Goodwill acquired during the period | — | |
| Balance as of December 31, 2022 | $ | 634 | |
There were no accumulated goodwill impairment losses as of 2020, theboth December 31, 2022 and 2021.
Intangible Assets, net
The Company’s identifiable intangible assets consist of both amortizable and non-amortizable intangible assets. Definite-lived intangible assets are subject to amortization and are amortized on a straight-line basis over their estimated useful lives; indefinite-lived intangible assets are not amortized. The Company
determined it would reduce its real estate footprintreviews long-lived assets and
cease use of certain properties with the intent to sublease, which triggeredasset groups, including intangible assets, for impairment whenever events and circumstances indicate their carrying amounts may not be recoverable; recognizing an impairment
analysis of certain propertyif the carrying amount is not recoverable and
equipment in accordance with ASC 360. As a resultexceeds the fair value of the
analysis,asset or asset group. No impairment of intangible assets has been recognized during any of the
Company recorded asset impairment charges of $3.0 million and accelerated depreciation expense of $24.7 million, both within its Card Services segment.
Sale of Real Estate
In October 2019, the Company sold a building and land for cash proceeds of $15.1 million and simultaneously entered into a new 15 year lease agreement for the building, with 4 consecutive tenant options to extend the lease for five-year terms. Under the criteria of ASC 842, the transaction met the definition of a sale and the Company recognized a $6.1 million gain on the transaction, which was included in cost of operations in the Company’s consolidated statement of income for the yearyears ended December 31, 2019.
2022, 2021, or 2020.
14. INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
Intangible assets consist of the
following:
| | | | | | | | | | | |
| | 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 | | |
| | | | | | | | | | | |
| | December 31, 2019 | | |
| | Gross | | Accumulated | | | | | |
| | Assets | | Amortization | | Net | | Amortization Life and Method |
|
| | (in millions) | | |
Definite-Lived Assets | | | | | | | | | | | |
Customer contracts and lists | | $ | 325.1 | | $ | (278.7) | | $ | 46.4 | | 7 years—straight line |
Premium on purchased credit card portfolios | | | 192.6 | | | (93.2) | | | 99.4 | | 1-13 years—straight line |
Collector database | | | 53.9 | | | (52.9) | | | 1.0 | | 5 years—straight line |
Tradenames | | | 31.8 | | | (26.5) | | | 5.3 | | 8-15 years—straight line |
| | $ | 603.4 | | $ | (451.3) | | $ | 152.1 | | |
Indefinite-Lived Assets | | | | | | | | | | | |
Tradename | | | 1.2 | | | — | | | 1.2 | | Indefinite life |
Total intangible assets | | $ | 604.6 | | $ | (451.3) | | $ | 153.3 | | |
With the Bread acquisition onfollowing as of December 3, 2020, the Company acquired $11.3 million of intangible assets, consisting of customer relationships of $8.8 million, a non-compete agreement of $2.2 million, and a tradename of $0.3
31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Gross
Assets | | Accumulated Amortization | | Net | | Useful Life |
| (Millions) | | | |
| Definite-Lived Assets | | | | | | | |
| Customer contracts and lists | $ | 9 | | | $ | (6) | | | $ | 3 | | | 3 years |
| Premium on purchased credit card loan portfolios | $ | 230 | | | $ | (73) | | | $ | 157 | | | 4-13 years |
| Non-compete agreements | $ | 2 | | | $ | (1) | | | $ | 1 | | | 5 years |
| $ | 241 | | | $ | (80) | | | $ | 161 | | | |
| Indefinite-Lived Assets | | | | | | | |
| Tradename | $ | 4 | | | $ | — | | | $ | 4 | | | Indefinite life |
| Total intangible assets | $ | 245 | | | $ | (80) | | | $ | 165 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Gross
Assets | | Accumulated Amortization | | Net | | Useful Life |
| (Millions) | | | |
| Definite-Lived Assets | | | | | | | |
| Customer contracts and lists | $ | 9 | | | $ | (3) | | | $ | 6 | | | 3 years |
| Premium on purchased credit card loan portfolios | 133 | | | (89) | | | 44 | | | 1-13 years |
| Non-compete agreements | 2 | | | — | | | 2 | | | 5 years |
| $ | 144 | | | $ | (92) | | | $ | 52 | | | |
| Indefinite-Lived Assets | | | | | | | |
| Tradename | 1 | | | — | | | 1 | | | Indefinite life |
| Total intangible assets | $ | 145 | | | $ | (92) | | | $ | 53 | | | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
million, which are being amortized over weighted average lives of 3.0 years, 5.0 years, and 4.0 years, respectively. See Note 5, “Acquisitions,” for more information.
As part of the portfolio acquisitions during the year ended December 31, 2019, the Company acquired $35.7 million of intangible assets, consisting of $21.8 million of customer relationships being amortized over a life of 2.7 years and $13.9 million of marketing relationships being amortized over a life of 5.9 years.
Amortization expense related to intangible assets was approximately $82.8$26 million, $96.2$29 million and $112.9$34 million for the years ended December 31, 2022, 2021 and 2020, 2019 and 2018, respectively.
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 | | $ | 25.8 |
2022 | | | 21.0 |
2023 | | | 16.1 |
2024 | | | 11.2 |
2025 | | | 2.4 |
Thereafter | | | 4.0 |
Goodwill
The changes in the carrying amount of goodwillfollows for the years endedending December 31:
| | | | | |
| (Millions) | |
| 2023 | 41 |
| 2024 | 37 |
| 2025 | 29 |
| 2026 | 24 |
| 2027 | 8 |
| Thereafter | 22 |
| 161 |
8. OTHER ASSETS
The following is a summary of Other assets as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | | | |
| Deferred tax asset, net | $ | 552 | | | $ | 302 | |
| Deferred contract costs | 344 | | | 364 | |
Accounts receivable, net (1) | 164 | | | 151 | |
| Right-of-use assets - operating | 88 | | | 97 | |
Restricted cash (2) | 36 | | | 877 | |
| Investment in Loyalty Ventures Inc. (LVI) | 6 | | | 50 | |
Other (3) | 210 | | | 151 | |
| Total other assets | $ | 1,400 | | | $ | 1,992 | |
(1)Primarily related to federal, state and foreign income tax receivables (including a tax-related receivable in the amount of $49 million, net, which the Company is entitled to receive through LVI), and amounts receivable from various brand partners.
(2)The balance as of December 31, 20202021 represents principal accumulation for the repayment of debt issued by consolidated VIEs that matured in 2022.
(3)Primarily comprised of prepaid expenses and 2019, respectively,non-income-based tax receivables.
9. LEASES
The Company has various operating leases for facilities and equipment which are
recorded as
follows:
| | | | | | | | | | |
| | | | | | | | | |
| | LoyaltyOne | | Card Services | | Total | |
|
| | (in millions) | |
Balance at January 1, 2019 | | $ | 693.1 | | $ | 261.7 | | $ | 954.8 | |
Goodwill acquired during the period | | | 0 | | | 2.3 | | | 2.3 | |
Effects of foreign currency translation | | | (2.2) | | | — | | | (2.2) | |
Balance at December 31, 2019 | | $ | 690.9 | | $ | 264.0 | | $ | 954.9 | |
Goodwill acquired during the period | | | 0 | | | 369.6 | | | 369.6 | |
Goodwill allocated to sale of Precima | | | (3.2) | | | — | | | (3.2) | |
Effects of foreign currency translation | | | 48.3 | | | — | | | 48.3 | |
Balance at December 31, 2020 | | $ | 736.0 | | $ | 633.6 | | $ | 1,369.6 | |
Approximately $3.2 millionlease-related assets (right-of-use assets) and liabilities for those leases with terms greater than 12 months. The Company does not have any finance leases. The Company determines if an arrangement is a lease or contains a lease at inception, and does not separate lease and non-lease components. Right-of-use assets are recognized as of LoyaltyOne goodwill was allocatedthe lease commencement date at amounts equal to Precimathe respective lease liabilities, adjusted for any prepaid lease payments, initial direct costs and lease incentives. The Company’s lease liabilities are recognized as of the lease commencement date, or upon salemodification of the lease, at the present value of the contractual fixed lease payments, discounted using the Company’s incremental borrowing rate as the rate implicit in January 2020, basedthe lease is typically not readily determinable. Operating lease expense is recognized on a relative fair value allocationstraight-line basis over the lease term, while variable lease payments are expensed as incurred.
As of
both December 31, 2022 and 2021, the
businesses.
As part of the acquisition of Bread in December 2020,weighted average discount rate applied by the Company acquired $369.6 million of goodwill. See Note 5, “Acquisitions,” for further information.
The Company completed annual impairment tests for goodwill on July 31, 2019 and 2018 and determined at each date that 0 impairment exists. On July 1, 2020, the Company voluntarily changed its annual goodwill impairment testing date from July 31 to July 1 to allow additional time for testing due to the COVID-19 pandemic and current uncertainty in the macroeconomic environment. Accordingly, management determined that the change in accounting principle is preferable under the circumstance. This change has been applied prospectively from July 1, 2020, as retrospective application is deemed impracticable due to the inability to objectively determine the assumptions and significant estimates used in earlier periods without the benefit of hindsight. This change was not material to the Company’s consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge.5.8%. As of December 31, 2020,2022, the Company does not believe it is more-likely-than-not that the fair value of any reporting unit isCompany’s leases have remaining lease terms ranging from less than its carrying amount. No further testingone year, up to 16 years, some of goodwill impairments will be performed until July 1, 2021, unless events occur or circumstances indicate an impairment is probable.
which may include renewal options, while the weighted average remaining lease term was 8.8 years and 9.8 years
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
15. RESTRUCTURING AND OTHER CHARGES
In 2019,as of December 31, 2022 and 2021, respectively. Leases with an initial term of 12 months or less are not recognized on the Company, underConsolidated Balance Sheets; lease expense for these leases is recognized on a straight-line basis over the directionlease term.
As with other long-lived assets, right-of-use assets are reviewed for impairment whenever events and circumstances indicate their carrying amounts may not be recoverable.
The components of lease expense were as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Operating lease cost | $ | 17 | | | $ | 23 | | | $ | 25 | |
| Short-term lease cost | — | | | — | | | 1 | |
| Variable lease cost | 3 | | | 2 | | | 2 | |
| Sublease income | (7) | | | (5) | | | (1) | |
| Total | $ | 13 | | | $ | 20 | | | $ | 27 | |
Supplemental lease-related cash flow information was as follows for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash flows from operating leases | $ | 23 | | | $ | 25 | | | $ | 28 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | |
| Operating leases | $ | — | | | $ | 5 | | | $ | 1 | |
Future, maturities of the
boardCompany’s lease liabilities, by year, were as follows as of
directors, evaluated the cost structure and executed on certain cost saving initiatives at each segment. These charges included restructuring and other exit activities related to reductions in force, terminations of certain reward product lines, reduction or closure of certain leased office space, asset impairments, changes in management structure and fundamental reorganizations that affect the nature and focus of operations. Restructuring and other charges incurred at the Corporate segment were recorded to general and administrative expense in the Company’s consolidated statements of income, and restructuring and other charges incurred in the LoyaltyOne and Card Services segments were recorded to cost of operations in the Company’s consolidated statements of income. These charges related to actions taken in 2019 did not continue in 2020. The restructuring and other charges incurred in 2020 relate to changes in the Company’s original estimate and consisted of adjustments to the Company’s liability.December 31, 2022:
The following tables summarize the restructuring and other charges incurred by reportable segment for all restructuring activities for the periods presented:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | |
Year Ended December 31, 2020 | | Benefits | | Impairments | | Termination Costs | | Exit Costs | | Total |
|
| | (in millions) |
Corporate/Other | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
LoyaltyOne | | | 0.1 | | | — | | | — | | | — | | | 0.1 |
Card Services | | | (8.3) | | | — | | | — | | | — | | | (8.3) |
Total | | $ | (8.2) | | $ | — | | $ | — | | $ | — | | $ | (8.2) |
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | |
Year Ended December 31, 2019 | | Benefits | | Impairments | | Termination Costs | | Exit Costs | | Total |
|
| | (in millions) |
Corporate/Other | | $ | 18.6 | | $ | 11.1 | | $ | 7.0 | | $ | 1.2 | | $ | 37.9 |
LoyaltyOne | | | 7.6 | | | 40.7 | | | 0.2 | | | 2.3 | | | 50.8 |
Card Services | | | 27.3 | | | 0.2 | | | 1.9 | | | — | | | 29.4 |
Total | | $ | 53.5 | | $ | 52.0 | | $ | 9.1 | | $ | 3.5 | | $ | 118.1 |
The Company’s liability for restructuring and other charges is recognized in accrued expenses and other liabilities in its consolidated balance sheets. The following table summarizes the activities related to the restructuring and other charges, as discussed above, for the periods presented:
| | | | | | | | | | | | | | | |
| | Termination | | Asset | | Lease | | Other | | |
| | Benefits | | Impairments | | Termination Costs | | Exit Costs | | Total |
|
| | (in millions) |
Liability as of January 1, 2019 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — |
Charged to expense | | | 53.5 | | | 52.0 | | | 9.1 | | | 3.5 | | | 118.1 |
Adjustments for non-cash charges | | | — | | | (52.0) | | | 0.7 | | | (0.1) | | | (51.4) |
Cash payments | | | (18.8) | | | — | | | (9.8) | | | (3.3) | | | (31.9) |
Liability as of December 31, 2019 | | $ | 34.7 | | $ | — | | $ | — | | $ | 0.1 | | $ | 34.8 |
Charged to expense | | | — | | | — | | | — | | | — | | | — |
Adjustments for non-cash charges | | | (8.2) | | | — | | | — | | | — | | | (8.2) |
Cash payments | | | (23.2) | | | — | | | — | | | (0.1) | | | (23.3) |
Liability as of December 31, 2020 | | $ | 3.3 | | $ | — | | $ | — | | $ | — | | $ | 3.3 |
The Company’s outstanding liability related to restructuring and other charges is expected to be settled by the end of 2021.
| | | | | |
| (Millions) | |
| 2023 | $ | 19 | |
| 2024 | 20 | |
| 2025 | 19 | |
| 2026 | 18 | |
| 2027 | 16 | |
| Thereafter | 70 | |
| Total undiscounted lease liabilities | 162 | |
| Less: Amount representing interest | (36) | |
| Total present value of minimum lease payments | $ | 126 | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
10. DEPOSITS
Deposits were categorized as interest-bearing or non-interest-bearing as follows, as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | | | |
| Interest-bearing | $ | 13,787 | | | $ | 11,027 | |
| Non-interest-bearing (including cardholder credit balances) | 39 | | | — | |
| Total deposits | $ | 13,826 | | | $ | 11,027 | |
Deposits by deposit type were as follows as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | | | |
| Savings accounts | | | |
| Direct-to-consumer (retail) | $ | 2,782 | | | $ | 1,713 | |
| Wholesale | 3,954 | | | 3,873 | |
| Certificates of deposit | | | |
| Direct-to-consumer (retail) | 2,684 | | | 1,467 | |
| Wholesale | 4,367 | | | 3,974 | |
| Cardholder credit balances | 39 | | | — | |
| Total deposits | $ | 13,826 | | | $ | 11,027 | |
The scheduled maturities of certificates of deposit were as follows as of December 31, 2022:
| | | | | |
| (Millions) | |
2023(1) | $ | 4,437 | |
| 2024 | 1,333 | |
| 2025 | 482 | |
| 2026 | 234 | |
| 2027 | 565 | |
| Thereafter | — | |
| Total certificates of deposit | $ | 7,051 | |
| | | | | |
| (1) | The 2023 balance includes $9 million in unamortized debt issuance costs, which are associated with the entire portfolio of certificates of deposit. |
As of December 31, 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 $822 million and $500 million, respectively.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
11. BORROWINGS OF LONG-TERM AND OTHER DEBT
Accrued expenses consist
Long-term and other debt consisted of the
following:
| | | | | | |
| | December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Accrued payroll and benefits | | $ | 116.9 | | $ | 133.4 |
Accrued taxes | | | 57.6 | | | 18.1 |
Accrued other liabilities | | | 270.2 | | | 176.3 |
Accrued expenses | | $ | 444.7 | | $ | 327.8 |
17. DEBT
Debt consistsfollowing as of the following:
| | | | | | | | | | |
| | December 31, | | December 31, | | | | |
Description | | 2020 | | 2019 | | Maturity | | Interest Rate |
|
| | (Dollars in millions) | | | | |
Long-term and other debt: | | | | | | | | | | |
2017 revolving line of credit | | $ | — | | $ | — | | December 2022 | | (1) |
2017 term loans | | | 1,484.3 | | | 2,028.8 | | December 2022 | | (2) |
BrandLoyalty credit agreement | | | — | | | — | | April 2023 | | (3) |
Senior notes due 2024 | | | 850.0 | | | 850.0 | | December 2024 | | 4.750% |
Senior notes due 2026 | | | 500.0 | | | — | | January 2026 | | 7.000% |
Total long-term and other debt | | | 2,834.3 | | | 2,878.8 | | | | |
Less: Unamortized debt issuance costs | | | 28.6 | | | 28.9 | | | | |
Less: Current portion | | | 101.4 | | | 101.4 | | | | |
Long-term portion | | $ | 2,704.3 | | $ | 2,748.5 | | | | |
| | | | | | | | | | |
Deposits: | | | | | | | | | | |
Certificates of deposit | | $ | 6,014.9 | | $ | 8,585.2 | | Various – Jan 2021 to Dec 2025 | | 0.15% to 3.75% |
Money market deposits | | | 3,790.2 | | | 3,589.8 | | Non-maturity | | (4) |
Total deposits | | | 9,805.1 | | | 12,175.0 | | | | |
Less: Unamortized debt issuance costs | | | 12.5 | | | 23.3 | | | | |
Less: Current portion | | | 6,553.9 | | | 6,942.4 | | | | |
Long-term portion | | $ | 3,238.7 | | $ | 5,209.3 | | | | |
| | | | | | | | | | |
Non-recourse borrowings of consolidated securitization entities: | | | | | | | | | | |
Fixed rate asset-backed term note securities | | $ | 3,423.8 | | $ | 4,891.0 | | Various – Feb 2021 to Sep 2022 | | 2.03% to 3.95% |
Conduit asset-backed securities | | | 2,205.1 | | | 2,405.0 | | Various – Apr 2022 to Oct 2022 | | (5) |
Secured loan facility | | | 86.3 | | | — | | November 2022 | | (6) |
Total non-recourse borrowings of consolidated securitization entities | | | 5,715.2 | | | 7,296.0 | | | | |
Less: Unamortized debt issuance costs | | | 5.3 | | | 12.0 | | | | |
Less: Current portion | | | 1,850.7 | | | 3,030.8 | | | | |
Long-term portion | | $ | 3,859.2 | | $ | 4,253.2 | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Description | | 2022 | | 2021 | | Contractual Maturities | | Interest Rates |
| (Millions, except percentages) | | | | | | |
| Long-term and other debt: | | | | | | | | |
| Revolving line of credit | | $ | — | | | $ | — | | | July 2024 | | (1) |
| Term loans | | 556 | | | 658 | | | July 2024 | | (2) |
| Senior notes due 2024 | | 850 | | | 850 | | | December 2024 | | 4.750% |
| Senior notes due 2026 | | 500 | | | 500 | | | January 2026 | | 7.000% |
| Subtotal | | 1,906 | | | 2,008 | | | | | |
| Less: Unamortized debt issuance costs | | 14 | | | 22 | | | | | |
| Total long-term and other debt | | $ | 1,892 | | | $ | 1,986 | | | | | |
| | | | | | | | |
| Debt issued by consolidated VIEs: | | | | | | | | |
| Fixed rate asset-backed term note securities | | $ | — | | | $ | 1,572 | | | | | |
| Conduit asset-backed securities | | 6,115 | | | 3,883 | | | Various – Jun 2023 to Oct 2023 | | (3) |
| Subtotal | | 6,115 | | | 5,455 | | | | | |
| Less: Unamortized debt issuance costs | | — | | | 2 | | | | | |
| Total debt issued by consolidated VIEs | | $ | 6,115 | | | $ | 5,453 | | | | | |
| | | | | | | | |
| Total borrowings of long-term and other debt | | $ | 8,007 | | | $ | 7,439 | | | | | |
| | | | | |
| (1) | The interest rate in 2022 is based upon LIBORthe Secured Overnight Financing Rate (SOFR) plus an applicable margin. The interest rate in 2021 is based upon the London Interbank Offered Rate (LIBOR) plus an applicable margin. |
| | | | | |
| (2) | The interest rate in 2022 is based upon SOFR plus an applicable margin. The interest rate in 2021 is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 1.90%3.24% and 3.30% at1.85% as of December 31, 20202022 and 2019,2021, respectively. |
| | | | | |
| (3) | The interest rate in 2022 is based upon the Euro Interbank Offered Rate plus an applicable margin. |
(4) | The interest rates are based on the Federal Funds rate plus an applicable margin. At December 31, 2020, the interest rates ranged from 0.38% to 3.50%. At December 31, 2019, the interest rates ranged from 1.84% to 3.50%. |
(5) | The interest rate is based upon LIBORSOFR, or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. AtThe interest rate in 2021 is based upon LIBOR, or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. As of December 31, 2020,2022, the interest rates ranged from 1.39%5.08% to 1.89%5.93%. AtAs of December 31, 2019,2021, the interest rates ranged from 2.79%0.89% to 2.96%0.96%. |
(6) | The interest rate is based upon LIBOR plus an applicable margin. At December 31, 2020, the weighted average interest rate for the secured loan facility was 3.90%. |
Atthe Company’s long-term debt agreements contain various restrictive financial and non-financial covenants. If the Company does not comply with these covenants, the maturity of amounts outstanding may be accelerated and become payable and the associated commitments may be terminated. As of December 31, 2020,2022, the Company was in compliance with its financialall such covenants.
Long-term and Other Debt
The Company, as borrower, and
ADS Alliance Data Systems, Inc., ADS Foreign Holdings, Inc., Alliance Data Foreign Holdings, Inc., Alliance Data International LLC, Comenity LLC and Comenity Servicing LLC,certain of its non-Bank wholly-owned subsidiaries, as guarantors, are party to a
credit agreementCredit Agreement with various agents and lenders dated June 14, 2017,
as amended (the
“2017 Credit
Agreement”)Agreement).
On April 30, 2019, the Company amended its credit agreement to provide that, upon consummation of the sale of Epsilon, the maturity date of the credit agreement would be reduced by one year from June 14, 2022 to June 14, 2021, a mandatory payment of $500.0 million of the revolving credit facility would be required, the aggregate revolving credit commitments would be reduced in the same amount (to $1,072.4 million), all of the Company’s outstanding senior notes would be required to be redeemed, net proceeds from future asset sales in excess of $50.0 million must be applied to repayment of the credit agreement and certain other minor amendments.
In July 2019, with the proceeds from the sale of Epsilon, the Company made the mandatory prepayment on the revolving credit facility and extinguished all of its then outstanding senior notes of $1.9 billion. As a result, the Company incurred a loss from the extinguishment of debt of approximately $71.9 million, resulting from the redemption price of each of the notes of $49.9 million and the write-off of deferred issuance costs of $22.0 million.
On December 20, 2019, the Company amended its credit agreement to extend the maturity date from June 14, 2021 to December 31, 2022, reduce the aggregate revolving credit commitments from $1,072.4 million to $750.0 million, add a consolidated minimum tangible net worth covenant upon certain triggering events and make certain other amendments. The amendment also required the Company to prepay the term loans to $2,028.8 million upon consummation of the offering of the $850.0Credit Agreement had $556 million aggregate principal amount of 4.750% senior notes due December 15, 2024 (“Senior Notes due 2024”), which obligation was satisfied in full with a prepayment of $833.0 million, representing the net proceeds from the offering of the Senior Notes due 2024.
At December 31, 2019, the credit agreement, as amended,term loans outstanding (the term loans) and provided for $2,028.8 million in term loans (the “2017 term loans”), subject to certain principal repayments, and a $750.0$750 million revolving credit facility (the “2017 revolving line of credit”). Total availability under the 2017 revolving linecredit) which was undrawn as of credit at December 31, 2019 was $750.0 million.
The loans under the credit agreement are scheduled to mature on December 31, 2022. The 2017 term loans provide for aggregate principal payments of 1.25% of the $2,028.8 million term loan amount, payable in equal quarterly installments beginningCredit Agreement matures on March 31, 2020. July 1, 2024.
The
credit agreement is unsecured.
The credit agreementCredit Agreement contains the usual and customary negative and affirmative covenants, for transactions of this type, including, but not limited to, restrictions on the Company’s ability and in certain instances, its subsidiaries’ ability to consolidate or merge; substantially change the nature of its business; sell, lease, or otherwise transfer any substantial part of its assets; create or incur indebtedness; create liens; and make acquisitions. The negative covenants are subject to certain exceptions as specified in the credit agreement.Credit Agreement. The credit agreementCredit Agreement also requires the Company to satisfycomply with certain financial covenants including a maximum total leverage ratio and a minimum ratio of consolidated operating EBITDA to consolidated interest expense, each as determined in accordance with the credit agreement. The credit agreement also includes customary events of default.
In September 2020, the Company amended its credit agreement to (a) increase the maximum total leverage ratio, (b) decrease the minimum interest coverage ratio, and (c) increase the maximum permitted average delinquency ratios, for the periods ending March 31, 2021 through June 30, 2022, and to make certain other amendments. The amendment also required the Company to prepay the term loans upon consummation of the offering of the Senior Notes due 2026 with a prepayment in an amount equal to the net proceeds from the offering, which obligation was satisfied in full with a
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
prepayment of $493.8 million. The prepayment was first applied to the scheduled quarterly installments payable in September 2020 and December 2020, and second, to the bullet payment of the term loans due at maturity.
As of December 31, 2020, the Company had $1,484.3 million in term loans outstanding with $750.0 million total availability under the revolving line of credit.
BrandLoyalty Credit Agreement
BrandLoyalty and certain of its subsidiaries, as borrower and guarantors, were parties to a credit agreement that provided for an A-1 term loan facility of €90.0 million and an A-2 term loan facility of €100.0 million, subject to certain principal repayments, a committed revolving line of credit of €37.5 million and an uncommitted revolving line of credit of €37.5 million. In September 2019, the Company repaid the €115.0 million in term loans outstanding under the BrandLoyalty credit agreement, originally scheduled to mature in June 2020, and repaid the €32.5 million amount outstanding under the revolving line of credit.
In April 2020, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, terminated its existing facility and entered into a new credit agreement (the “2020 BrandLoyalty Credit Agreement”) that provides for a committed revolving line of credit of €30.0 million ($36.6 million as of December 31, 2020), an uncommitted revolving line of credit of €30.0 million ($36.6 million as of December 31, 2020), and an accordion feature permitting BrandLoyalty to request an increase in either the committed or uncommitted line of credit up to €80.0 million ($97.7 million as of December 31, 2020) in aggregate. Each of the committed and uncommitted revolving line of credit are scheduled to mature on April 3, 2023, subject to BrandLoyalty’s request to extend for 2 additional one-year terms at the absolute discretion of the lenders at the time of such requests.
All advances under the 2020 BrandLoyalty Credit Agreement are denominated in Euros. The interest rate fluctuates and is equal to EURIBOR, as defined in the 2020 BrandLoyalty Credit Agreement, plus an applicable margin based on BrandLoyalty’s senior net leverage ratio. The 2020 BrandLoyalty Credit Agreement contains a senior net leverage ratio financial covenant, as well as usual andincludes customary negative covenants, representations, general and information undertakings and events of default.
The
AsCredit Agreement was amended in December 2022 to index borrowings SOFR, with the discontinuation of December 31, 2020, there were 0 amounts outstanding under the 2020 BrandLoyalty Credit Agreement.
LIBOR. SOFR is based on short-term repurchase agreements that are backed by Treasury securities.
Senior Notes
Due 2024 and 2026
The
senior notesSenior Notes set forth below are each governed by their respective indenture that includes usual and customary negative covenants and events of
default for transactions of these types.default. These
senior notesSenior Notes are unsecured and are guaranteed on a senior unsecured basis by certain of the Company’s existing and future domestic restricted subsidiaries that incurs or in any other manner becomes liable for any debt under the Company’s domestic credit facilities, including the
2017 Credit Agreement.
Due 2024December 15, 2024:
In December 2019, the Company issued and sold $850.0$850 million aggregate principal amount of 4.750% senior notesSenior Notes due December 15, 2024 (the “SeniorSenior Notes due 2024”)2024). The Senior Notes due 2024 accrue interest on the outstanding principal amount at the rate of 4.750% per annum from December 20, 2019, payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on June 15, 2020. The Senior Notes due 2024 will mature on December 15, 2024, subject to earlier repurchase or redemption.
Due 2026January 15, 2026:
In September 2020, the Company issued and sold $500.0$500 million aggregate principal amount of 7.000% senior notesSenior Notes due January 15, 2026 (the “SeniorSenior Notes due 2026”)2026). The Senior Notes due 2026 accrue interest on the outstanding principal amount at the rate of 7.000% per annum from September 22, 2020, payable semi-annually in arrears, on March 15 and
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
September 15 of each year, beginning on March 15, 2021. The Senior Notes due 2026 will mature on January 15, 2026, subject to earlier repurchase or redemption.
Deposits
Comenity Bank and Comenity Capital Bank issue certificates of deposit in denominations of at least $100,000 and $1,000, respectively, in various maturities ranging between January 2021 and December 2025 and with effective annual interest rates ranging from 0.15% to 3.75%, with a weighted average interest rate of 2.58%, at December 31, 2020. At December 31, 2019, interest rates ranged from 1.33% to 4.00%, with a weighted average interest rate of 2.66%. Interest is paid monthly and at maturity.
Comenity Bank and Comenity Capital Bank offer non-maturity deposit programs through contractual arrangements with various financial counterparties. Money market deposits are redeemable on demand
Debt Issued by
the customer and, as such, have no scheduled maturity date. As of December 31, 2020, Comenity Bank and Comenity Capital Bank had $3.8 billion in money market deposits outstanding with annual interest rates ranging from 0.38% to 3.50%, with a weighted average interest rate of 1.00%. As of December 31, 2019, Comenity Bank and Comenity Capital Bank had $3.6 billion in money market deposits outstanding with annual interest rates ranging from 1.84% to 3.50%, with a weighted average interest rate of 2.05%.
Non-Recourse Borrowings of Consolidated Securitization EntitiesVIEs
An asset-backed security is a security whose value and income payments are derived from and collateralized
(or “backed”) by a specified pool of underlying
assets.assets – in the case of the Company, its credit card loans. The sale of the pool of underlying assets to general investors is accomplished through a securitization process. The Company regularly sells its
receivablescredit card loans to its
securitization trusts,Trusts, which are consolidated
onby the
balance sheets of the Company under ASC 860 and ASC 810.Company. The liabilities of
thethese consolidated VIEs include asset-backed securities for which creditors, or beneficial interest holders, do not have recourse to the general credit of the Company.
For the year ended December 31,
2020, 02022, no asset-backed term notes were issued, and
the following$1.6 billion of asset-backed term notes matured and were
repaid: | ● | In May 2020, $450.7 million of Series 2017-A asset-backed term notes, $50.7 millionrepaid, of which $74 million were previously retained by the Company and eliminated from the Company’s consolidated balance sheets. |
| ● | In August 2020, $625.0 million of Series 2015-B asset-backed term notes, $150.0 million of which were retained by the Company and eliminated from the Company’s consolidated balance sheets. |
| ● | In October 2020, $619.7 million of Series 2017-C asset-backed term notes, $27.5 million of which were retained by the Company and eliminated from the Company’s consolidated balance sheets. |
As of December 31, 2020, the Company collected $291.8 million of principal payments made by its credit cardholders duringand therefore eliminated from the accumulation period for the repayment of the Series 2018-A notes, which matured in February 2021. The cash is restricted to the securitization investors and is reflected in other current assets in the Company’s consolidated balance sheet as of December 31, 2020.
Consolidated Balance Sheets.
The Company has access tomaintained committed undrawn capacity through 3 conduit facilitiessyndicated bank Conduit Facilities to support the funding of its credit card receivablesloans for certain of its trusts.Trusts. Borrowings outstanding under each facilityprivate Conduit Facility bear interest at a margin above LIBORSOFR, or the asset-backed commercial paper costs of each individual conduit provider.
During the year ended December 31, 2020,2022, the Company reduced theobtained increased lender commitments under its conduit facilities by $1.5Conduit Facilities of $2.1 billion and extended the respectivevarious maturities to June 2023 and July 2023. Specifically, in April 2022, the World Financial Network Credit Card Master Trust III amended its 2009-VFC Conduit Facility, increasing the capacity from $225 million to $275 million and extending the maturity to July 2023. In addition, in April 2022, the World Financial Capital Master Note Trust amended its 2009-VFN Conduit Facility, increasing the capacity from $1.5 billion to $2.5 billion and extending the maturity to July 2023. In June 2022, the Comenity Capital Asset Securitization Trust was formed for the purpose of funding a portfolio acquisition completed in October 2022. TotalThe capacity was negotiated to be $1.0 billion and the maturity was set as June 2023.
As of December 31, 2022, total capacity under the conduit facilitiesConduit Facilities was $3.2$6.5 billion, of which $2.2$6.1 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.drawn.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Secured Loan Facility
With the acquisition of Bread in December 2020, the Company assumed 2 warehouse facilities used to fund their securitized loan receivables. In December 2020, one of the warehouse facilities was terminated and the Company repaid $28.5 million owed under the agreement. The second warehouse facility was amended to a secured loan facility with an outstanding balance of $86.3 million at December 31, 2020. The secured loan facility accrues interest on the principal amount at the rate of LIBOR plus an applicable margin. The principal amount is due upon maturity at November 19, 2022, with prepayment permitted.
Maturities
The future principal payments for the Company’s long-term and other debt are as follows, as of December 31, 20202022:
| | | | | | | | | | | | | | | | | | | | |
| Year | | Long-Term and Other Debt | | Debt Issued by Consolidated VIEs | | Total |
| (Millions) | | | | |
| 2023 | | $ | 152 | | | $ | 6,115 | | | $ | 6,267 | |
| 2024 | | 1,254 | | | — | | | 1,254 | |
| 2025 | | — | | | — | | | — | |
| 2026 | | 500 | | | — | | | 500 | |
| 2027 | | — | | | — | | | — | |
| Thereafter | | — | | | — | | | — | |
| Total maturities | | 1,906 | | | 6,115 | | | 8,021 | |
| Unamortized debt issuance costs | | (14) | | | — | | | (14) | |
| | $ | 1,892 | | | $ | 6,115 | | | $ | 8,007 | |
12. OTHER LIABILITIES
The following is a summary of Other liabilities as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | |
| Accounts payable and other brand partner liabilities | $ | 398 | | | $ | 291 | |
Accrued liabilities (1) | 306 | | | 314 | |
| Long-term tax reserves | 306 | | | 313 | |
| Operating lease liabilities | 126 | | | 140 | |
Other(2) | 173 | | | 136 | |
| Total other liabilities | $ | 1,309 | | | $ | 1,194 | |
(1)Primarily related to accrued payroll and benefits, marketing, taxes and professional services expenses.
(2)Primarily comprised of long-term unearned revenue and cardholder liabilities.
13. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSES
The following table provides the components of Other non-interest income for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Payment protection products | $ | 154 | | | $ | 141 | | | $ | 156 | |
| Loss from equity method investment | (44) | | | 2 | | | — | |
| Other | 4 | | | 13 | | | 21 | |
| Total other non-interest income | $ | 114 | | | $ | 156 | | | $ | 177 | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table provides the components of Other non-interest expenses for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Professional services and regulatory fees | $ | 142 | | | $ | 136 | | | $ | 114 | |
| Asset impairment charges | — | | | — | | | 64 | |
Other (1) | 85 | | | 86 | | | 108 | |
| Total other non-interest expense | $ | 227 | | | $ | 222 | | | $ | 286 | |
| | | | | |
| (1) | Primarily related to occupancy expense and non-income based taxes. |
14. 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 follows: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.
| | | | | | | | | |
| | | | | | | | Non-Recourse |
| | | | | | | | Borrowings of |
| | Long-Term | | | | | Consolidated |
| | and | | | | | Securitization |
Year | | Other Debt | | Deposits | | Entities |
|
| | (in millions) |
2021 | | $ | 101.4 | | $ | 6,555.6 | | $ | 1,852.1 |
2022 | | | 1,382.9 | | | 1,739.6 | | | 3,863.1 |
2023 | | | — | | | 966.1 | | | — |
2024 | | | 850.0 | | | 530.6 | | | — |
2025 | | | — | | | 13.2 | | | — |
Thereafter | | | 500.0 | | | — | | | — |
Total maturities | | | 2,834.3 | | | 9,805.1 | | | 5,715.2 |
Unamortized debt issuance costs | | | (28.6) | | | (12.5) | | | (5.3) |
| | $ | 2,805.7 | | $ | 9,792.6 | | $ | 5,709.9 |
The Company monitors the market conditions and evaluates the fair value hierarchy levels quarterly. For the years ended December 31, 2022 and 2021, there were no transfers into or out of Level 3, and no 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 as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 |
| Carrying
Amount | | Fair
Value | | Carrying
Amount | | Fair
Value |
| (Millions) | |
| Financial assets | | | | | | | |
| Credit card and other loans, net | $ | 18,901 | | | $ | 21,328 | | | $ | 15,567 | | | $ | 17,989 | |
| Investment securities | 221 | | | 221 | | | 239 | | | 239 | |
| Financial liabilities | | | | | | | |
| Deposits | 13,826 | | | 13,731 | | | 11,027 | | | 11,135 | |
| Debt issued by consolidated VIEs | 6,115 | | | 6,115 | | | 5,453 | | | 5,467 | |
| Long-term and other debt | 1,892 | | | 1,759 | | | 1,986 | | | 2,053 | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 the 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 and mutual funds, as well as equity securities, and are recorded at fair value on the Consolidated Balance Sheets. Quoted prices of identical or similar investment securities in active markets are used to estimate the fair values (i.e., Level 1 or Level 2 inputs).
Deposits: Money market and other non-maturity deposits carrying values approximate their fair values because they are short-term in duration and have no defined maturity. Certificates of deposit are recorded at their historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, with fair value being estimated based on the currently observable market rates available to the Company for similar deposits with similar remaining maturities (i.e., Level 2 inputs). Interest payable is included within Other liabilities on the Consolidated Balance Sheets.
Debt issued by consolidated VIEs: The Company records debt issued by its consolidated VIEs at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. Fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction (i.e., Level 2 inputs).
Long-term and other debt: The Company records its long-term and other debt at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. The fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities, or quoted market prices for the same transaction (i.e., Level 2 inputs).
The following tables summarize the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by the fair value hierarchy described in the preceding paragraphs, as of December 31:
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Millions) | |
| Investment securities | $ | 221 | | | $ | 44 | | | $ | 177 | | | $ | — | |
| Total assets measured at fair value | $ | 221 | | | $ | 44 | | | $ | 177 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Total | | Level 1 | | Level 2 | | Level 3 |
| (Millions) | |
| Investment securities | $ | 239 | | | $ | 48 | | | $ | 191 | | | $ | — | |
| Total assets measured at fair value | $ | 239 | | | $ | 48 | | | $ | 191 | | | $ | — | |
Financial Instruments Disclosed but Not Carried at Fair Value
The following tables summarize the Company’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of December 31, 2022 and 2021. The fair values of these financial instruments are estimates as of December 31, 2022 and 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.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | | | | | | | | | | | | |
| 2022 |
| Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (Millions) | |
| Financial assets: | | | | | | | |
| Credit card and other loans, net | $ | 21,328 | | | $ | — | | | $ | — | | | $ | 21,328 | |
| Total | $ | 21,328 | | | $ | — | | | $ | — | | | $ | 21,328 | |
| | | | | | | |
| Financial liabilities: | | | | | | | |
| Deposits | $ | 13,731 | | | $ | — | | | $ | 13,731 | | | $ | — | |
| Debt issued by consolidated VIEs | 6,115 | | | — | | | 6,115 | | | — | |
| Long-term and other debt | 1,759 | | | — | | | 1,759 | | | — | |
| Total | $ | 21,605 | | | $ | — | | | $ | 21,605 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | $ | — | |
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. For the year ended December 31, 2022, the Company recognized a write-down of its equity method investment in LVI of $44 million; as of December 31, 2022, the carrying amount of its investment was $6 million and the fair value was $11 million. The Company did not have any impairments for the year ended December 31, 2021.
15. COMMITMENTS AND CONTINGENCIES
AIR MILES Reward Program
The Company has entered into contractual arrangements with certain AIR MILES Reward Program sponsors that result in fees being billed to those sponsors upon the redemption of AIR MILES reward miles issued by those sponsors. The Company has obtained letters of credit and other assurances from those sponsors for the Company’s benefit that expire at various dates. These letters of credit and other assurances totaled $150.5 million at December 31, 2020, which exceeds the amount of the Company’s estimate of its obligation to provide travel and other rewards upon the redemption of the AIR MILES reward miles issued by those sponsors.
The Company currently has an obligation to provide AIR MILES Reward Program collectors with travel and other rewards upon the redemption of AIR MILES reward miles. The Company believes that the redemption settlement assets, including the letters of credit and other assurances mentioned above, are sufficient to meet that obligation.
The Company has entered into certain long-term arrangements with airlines and other suppliers in connection with reward redemptions under the AIR MILES Reward Program. These long-term arrangements allow the Company to retain preferred pricing subject to meeting agreed upon annual volume commitments for rewards purchased.
CB is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (“FDIC”)(FDIC). Comenity Bank remains subject to regulation by the Board of the Governors of the Federal Reserve System. The Company’s industrial bank, Comenity Capital Bank,CCB, is regulated, supervised and examined by the State of Utah and the FDIC. Both Comenity Bank
The Consumer Financial Protection Bureau (CFPB) promulgates regulations for the federal consumer financial protection laws and Comenity Capital Banksupervises and examines large banks (those with more than $10 billion of total assets) with respect to those laws. Banks in a multi-bank organization, such as CB and CCB, are undersubject to supervision and examination by the CFPB with respect to the federal consumer financial protection laws if at least one bank reports total assets over $10 billion for four consecutive quarters. While the Banks were subject to supervision and examination by the CFPB with respect to the federal consumer financial protection laws between 2016 and 2021, this reverted to the FDIC in 2022. However, CCB’s total assets then exceeded $10 billion for four consecutive quarters as of September 30, 2022, and both Banks are now again subject to supervision and examination by the CFPB with respect to federal consumer protection laws.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Consumer Financial Protection Bureau (“CFPB”), a federal consumer protection regulator with authority to make further changes to the federal consumer protection laws and regulations, and the CFPB may, from time to time, conduct reviews of their practices.
Quantitative measures established by regulations to ensure capital adequacy require Comenity BankCB and Comenity Capital Bank (collectively, the “Banks”)CCB to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on CB’s and/or CCB’s operating activities, as well as those of the Company. Based on these guidelines,regulations, as of December 31, 2022 and 2021, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized. The Banks are considered well capitalized.
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, are as follows as of December 31, 2020 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 | | 19.0 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 20.7 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 20.7 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 22.0 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 14.8 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 15.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 15.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 16.9 | | | 8.0 | | | 10.0 | |
2022:
| | | | | | | | | | | | | | | | | |
| Actual
Ratio | | Minimum Ratio for
Capital Adequacy
Purposes | | Minimum Ratio to be
Well Capitalized under
Prompt Corrective
Action Provisions |
| Comenity Bank | | | | | |
Common Equity Tier 1 capital ratio(1) | 18.4 | % | | 4.5 | % | | 6.5 | % |
Tier 1 capital ratio(2) | 18.4 | | | 6.0 | | | 8.0 | |
Total Risk-based capital ratio(3) | 19.7 | | | 8.0 | | | 10.0 | |
Tier 1 Leverage capital ratio(4) | 16.7 | | | 4.0 | | | 5.0 | |
| | | | | |
| Comenity Capital Bank | | | | | |
Common Equity Tier 1 capital ratio(1) | 16.1 | % | | 4.5 | % | | 6.5 | % |
Tier 1 capital ratio(2) | 16.1 | | | 6.0 | | | 8.0 | |
Total Risk-based capital ratio(3) | 17.4 | | | 8.0 | | | 10.0 | |
Tier 1 Leverage capital ratio(4) | 14.9 | | | 4.0 | | | 8.0 | |
| | | | | |
| Combined Banks | | | | | |
Common Equity Tier 1 capital ratio(1) | 17.0 | % | | 4.5 | % | | 6.5 | % |
Tier 1 capital ratio(2) | 17.0 | | | 6.0 | | | 8.0 | |
Total Risk-based capital ratio(3) | 18.3 | | | 8.0 | | | 10.0 | |
Tier 1 Leverage capital ratio(4) | 15.6 | | | 4.0 | | | 5.0 | |
(1)The actualCommon Equity Tier 1 capital ratios and minimum ratios as of December 31, 2019 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 | | 12.9 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.6 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.6 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.9 | | | 8.0 | | | 10.0 | |
| | | | | | | | | |
Comenity Capital Bank | | | | | | | | | |
Tier 1 capital to average assets | | 11.9 | % | | 4.0 | % | | 5.0 | % |
Common Equity Tier 1 capital to risk-weighted assets | | 14.4 | | | 4.5 | | | 6.5 | |
Tier 1 capital to risk-weighted assets | | 14.4 | | | 6.0 | | | 8.0 | |
Total capital to risk-weighted assets | | 15.7 | | | 8.0 | | | 10.0 | |
ratio represents common equity tier 1 capital divided by total risk-weighted assets.
(2)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. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the outcome or timing of such review.
Tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets.
(3)Cardholders
The Company’s Card Services segment is active in originating private label and co-brand credit cards in the United States. Total Risk-based capital ratio represents total capital divided by total risk-weighted assets.
(4)The Company reviews each potential customer’s credit application and evaluates the applicant’s financial historyTier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.
Indemnification
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
Holders of credit cards issued by the Company have available lines of credit, which vary by cardholder. These lines of credit represent elements of risk in excess of the amount recognized in the financial statements. The lines of credit are subject to change or cancellation by the Company. At December 31, 2020, the Company had 45.5 million total accounts, including both active and inactive, having unused lines of credit averaging $2,367 per account.
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 StatesU.S. 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 2two equal installments, the first in January 2021 and the second in January 2022. In accordance with ASC 450,A $150 million loss contingency was recorded as of December 31, 2020. Pursuant to
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
its contractual indemnification obligation, in January 2021 the Company
records a loss contingency when a loss is probablepaid $75 million to Publicis, and
an amount can be reasonably estimated. For the year ended December 31, 2019,in January 2022 the Company
recorded a loss contingency of $40.0paid the remaining $75 million
or $32.9 million net of tax, which was included in loss from discontinued operations. For the year ended December 31, 2020, the Company recorded an additional loss contingency of $110.0 million, or $81.3 million net of tax, which was included in loss from discontinued operations.installment to Publicis.
From time to time the Company is involved in various claims and lawsuits
and other proceedings, arising in the ordinary course of business that it believes will not have a material
adverse effect on its business,
consolidated financial condition or
cash flows,liquidity, including claims and lawsuits alleging breaches of the Company’s contractual
obligations.
19. STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
During the year ended December 31, 2020,obligations, arbitrations, class actions and other litigation, arising in connection with its business activities. The Company is also involved, from time to time, in reviews, investigations, subpoenas, supervisory actions and other proceedings (both formal and informal) by governmental agencies regarding its business, which could subject the Company did 0t repurchase any shares ofto significant fines, penalties, obligations to change its common stock. During the years ended December 31, 2019business practices, significant restrictions on its existing business or ability to develop new business, cease-and-desist orders, safety-and-soundness directives or other requirements resulting in increased expenses, diminished income and 2018, the Company repurchased approximately 6.3 million and 2.2 million and shares of its common stock, respectively, for an aggregate amount of $976.1 million and $443.2 million, respectively.
2018 Authorization
On July 26, 2018, the Company’s board of directors authorized a new stock repurchase program to acquire up to $500.0 million of the Company’s outstanding common stock from August 1, 2018 through July 31, 2019.
For the year ended December 31, 2018, the Company acquired approximately 0.8 million shares of its common stock for $166.0 million under its previously authorized stock repurchase program and acquired approximately 1.4 million shares of its common stock for $277.2 million under its authorized 2018 stock repurchase program.
For the six months ended June 30, 2019, the Company acquired a total of 1.3 million shares of its common stock for $222.8 million under its stock repurchase program. As of June 30, 2019, the Company did not have any amounts remaining under its authorized stock repurchase program.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
2019 Authorization
In July 2019, the Company’s board of directors authorized a new stock repurchase program to acquire up to $1.1 billion of its outstanding common stock from July 5, 2019 through June 30, 2020.
On July 19, 2019, the Company commenced a “modified Dutch Auction” tender offer to acquire up to $750.0 million in aggregate purchase price of its issued and outstanding common stock at a price not greater than $162.00 nor less than $144.00 per share, to the seller in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions described in the Offer to Purchase dated July 19, 2019 and in the related Letter of Transmittal. The tender offer expired on August 15, 2019, and the Company repurchased 5,050,505 shares of its issued and outstanding common stock at a price of $148.50 per share, for an aggregate cost of approximately $750.0 million. Additionally, the Company incurred approximately $3.3 million of direct costs related to the repurchase, including $2.2 million in commissions, which have been recorded to treasury stock in the Company’s consolidated balance sheets.
As of December 31, 2019, the Company had $347.8 million remaining under its authorized stock repurchase program.
The stock repurchase program expired on June 30, 2020, and $347.8 million of this program expired unused.
Stock Compensation Plans
The Company has adopted equity compensation plans to advance the interests of the Company by rewarding certain employees for their contributions to the financial success of the Company and thereby motivating them to continue to make such contributions in the future.
The 2010 Omnibus Incentive Plan became effective July 1, 2010 and reserved 3,000,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants who performed services for the Company or its affiliates, with only employees eligible to receive incentive stock options. The 2010 Omnibus Incentive Plan expired on June 30, 2015.
The 2015 Omnibus Incentive Plan became effective July 1, 2015 and reserved 5,100,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants who performed services for the Company or its affiliates, with only employees eligible to receive incentive stock options. The 2015 Omnibus Incentive Plan expired on June 30, 2020.
In March 2020, the Company’s board of directors adopted the 2020 Omnibus Incentive Plan (the “2020 Plan”), which was subsequently approved by the Company’s stockholders on June 9, 2020. The 2020 Plan became effective July 1, 2020 and expires on June 30, 2030. The 2020 Plan reserves 2,400,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants performing services for the Company or its affiliates, with only employees being eligible to receive incentive stock options. The maximum amount that may be awarded to any independent member of the Company’s board of directors in any one calendar year may not exceed $1.0 million.
On June 9, 2020, the Company registered 2,400,000 shares of its common stock for issuance in accordance with the 2020 Plan pursuant to a Registration Statement on Form S-8, File No. 333-239040.
Beginning February 15, 2017, the restricted stock unit award agreements under the 2015 Plan and the 2020 Plan provide for dividend equivalent rights (“DERs”), which entitle holders of restricted stock units to the same dividend
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested restricted stock units. DERs are paid only when the underlying shares vest.
Terms of all awards under the 2020 Plan are determined by the board of directors or the compensation committee of the board of directors or its designee at the time of award.
Stock Compensation Expense
Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized ratably over the requisite service period.
Stock-based compensation expense recognized in the Company’s consolidated statements of income for the years ended December 31, 2020, 2019 and 2018, is as follows:
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Cost of operations | | $ | 12.5 | | $ | 16.5 | | $ | 23.3 |
General and administrative | | | 8.8 | | | 8.6 | | | 21.1 |
Total | | $ | 21.3 | | $ | 25.1 | | $ | 44.4 |
Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon segment to Publicis for $4.4 billion in cash, subject to certain specified adjustments. The agreement provided for certain unvested restricted stock units held by Epsilon employees to be modified, with original vesting conditions to be accelerated upon consummation of the sale of Epsilon. Additionally, the agreement provided for certain other awards held by Epsilon employees to be forfeited upon consummation of the sale of Epsilon, which occurred July 1, 2019. As a result, in April 2019 the Company recorded $19.4 million of incremental stock-based compensation expense in discontinued operations related to the modifications, net of forfeitures. Stock-based compensation expense included in loss from discontinued operations totaled $29.7 million and $36.4 million for the years ended December 31, 2019 and 2018, respectively.
The income tax benefits related to stock-based compensation expense for the years ended December 31, 2020, 2019 and 2018 were $3.0 million, $3.6 million and $7.3 million, respectively.
As the amount of stock-based compensation expense recognized is based on awards ultimately expected to vest, the amount recognized in the Company’s results of operations has been reduced for estimated forfeitures. In connection with the Company’s adoption of ASU 2016-09, the Company elected to continue to estimate forfeitures at each grant date, with forfeiture estimates to be revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Forfeitures were estimated based on the Company’s historical experience, with a forfeiture rate of 5% for the years ended December 31, 2020, 2019 and 2018.
As of December 31, 2020, there was approximately $24.7 million of unrecognized expense, adjusted for estimated forfeitures, related to non-vested, stock-based equity awards granted to employees, which is expected to be recognized over a weighted average period of approximately 1.5 years.
Restricted Stock Unit Awards
During 2020, the Company awarded 241,610 service-based, 219,186 performance-based and 20,770 market-based restricted stock units. In accordance with ASC 718, the Company recognizes the estimated stock-based compensation expense, net of estimated forfeitures, over the applicable service period.
For service-based and performance-based awards, the fair value of the restricted stock units was estimated using the Company’s closing share price on the date of grant. Service-based restricted stock unit awards typically vest ratably over a three year period. Performance-based restricted stock unit awards typically vest ratably over a three year period if specified performance measures tieddamage to the Company’s financial performance are met. For the performance-based restricted stock units awarded in 2020, the pre-defined vesting criteria typically permit a range from 0% to 150% to be
reputation.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
earned. Accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition. For the year ended December 31, 2020, stock compensation expense was not accrued for the 2020 performance-based awards, as the probable outcome was 0% achievement.
For the market-based award granted in 2020, the fair value of the restricted stock units was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation (0.52), expected volatility (32.5%) and risk-free rate (1.4%) over two-year time horizons matching the performance period. Upon determination of the market condition, the restrictions will lapse with respect to the entire award on February 15, 2022, provided that the participant is employed by the Company on such vesting date.
The following table summarizes restricted stock unit activity under the Company’s equity compensation plans:
| | | | | | | | | | | |
| | | | | | | | | | Weighted |
| | Market- | | Performance- | | Service- | | | | Average |
| | Based (1) | | Based (1) | | Based | | Total | | Fair Value |
Balance at January 1, 2018 | | 28,172 | | 450,579 | | 329,059 | | 807,810 | | $ | 207.45 |
Shares granted | | 28,057 | | 263,542 | | 138,160 | | 429,759 | | | 233.98 |
Shares vested | | — | | (188,680) | | (130,823) | | (319,503) | | | 224.62 |
Shares forfeited | | — | | (102,199) | | (18,955) | | (121,154) | | | 227.66 |
Balance at December 31, 2018 | | 56,229 | | 423,242 | | 317,441 | | 796,912 | | $ | 218.81 |
Shares granted | | 37,878 | | 420,239 | | 246,118 | | 704,235 | | | 161.05 |
Shares vested | | — | | (262,773) | | (178,730) | | (441,503) | | | 218.45 |
Shares forfeited | | (69,819) | | (350,436) | | (126,257) | | (546,512) | | | 188.40 |
Balance at December 31, 2019 | | 24,288 | | 230,272 | | 258,572 | | 513,132 | | $ | 172.06 |
Shares granted | | 20,770 | | 219,186 | | 241,610 | | 481,566 | | | 89.11 |
Shares vested | | — | | (42,097) | | (127,921) | | (170,018) | | | 175.09 |
Shares forfeited | | (22,831) | | (186,135) | | (38,447) | | (247,413) | | | 166.93 |
Balance at December 31, 2020 | | 22,227 | | 221,226 | | 333,814 | | 577,267 | | $ | 103.89 |
Outstanding and Expected to Vest | | | | | | | | 345,266 | | $ | 105.49 |
(1) | Shares granted reflects a 100% target attainment of the respective market-based or performance-based metric. Shares forfeited include those restricted stock units forfeited as a result of the Company not meeting the respective market-based or performance-based metric conditions. |
The total fair value of restricted stock units vested was $29.8 million, $96.4 million and $71.8 million for the years ended December 31, 2020, 2019 and 2018, respectively. The aggregate intrinsic value of restricted stock units outstanding and expected to vest was $25.6 million at December 31, 2020. The weighted-average remaining contractual life for unvested restricted stock units was 1.5 years at December 31, 2020.
Stock Options
Stock option awards are granted with an exercise price equal to the market price of the Company’s stock on the date of grant. Options typically vest ratably over three years and expire ten years after the date of grant. There were 0 stock options outstanding as of December 31, 2020.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table summarizes stock option activity under the Company’s equity compensation plans:
| | | | | | | | | | |
| | Outstanding | | Exercisable |
| | | | Weighted | | | | Weighted |
| | | | Average | | | | Average |
| | Options | | Exercise Price | | Options | | Exercise Price |
Balance at January 1, 2018 | | 11,859 | | $ | 23.87 | | 11,859 | | $ | 23.87 |
Options granted | | — | | | — | | | | | |
Options exercised | | (886) | | | 12.70 | | | | | |
Options forfeited | | (119) | | | 2.74 | | | | | |
Balance at December 31, 2018 | | 10,854 | | $ | 25.01 | | 10,854 | | $ | 25.01 |
Options granted | | — | | | — | | | | | |
Options exercised | | (10,854) | | | 25.01 | | | | | |
Options forfeited | | — | | | — | | | | | |
Balance at December 31, 2019 | | — | | $ | — | | — | | $ | — |
Options granted | | — | | | — | | | | | |
Options exercised | | 0 | | | — | | | | | |
Options forfeited | | — | | | — | | | | | |
Balance at December 31, 2020 | | — | | $ | — | | — | | $ | — |
Based on the market value on their respective exercise dates, the total intrinsic value of stock options exercised was approximately $1.3 million and $0.2 million for the years ended December 31, 2019 and 2018, respectively. There were 0 stock options exercised during the year ended December 31, 2020.
Dividends
During the year ended December 31, 2020, the Company declared quarterly cash dividends of $0.63 per share for the three months ended March 31, 2020 and $0.21 per share for each of the three months ended June 30, 2020, September 30, 2020 and December 31, 2020, for a total of $59.9 million. The Company paid cash dividends and dividend equivalents aggregating $60.6 million for the year ended December 31, 2020, and $0.6 million of dividend equivalents were accrued but not yet paid at December 31, 2020.
During the year ended December 31, 2019, the Company declared quarterly cash dividends of $0.63 per share, for a total of $127.1 million. The Company paid cash dividends and dividend equivalents aggregating $127.4 million for the year ended December 31, 2019, and $1.2 million of dividend equivalents were accrued but not yet paid at December 31, 2019.
During the year ended December 31, 2018, the Company declared quarterly cash dividends of $0.57 per share, for a total of $125.9 million. The Company paid cash dividends and dividend equivalents aggregating $125.2 million for the year ended December 31, 2018, and $0.7 million of dividend equivalents were accrued but not yet paid at December 31, 2018.
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, payable on March 18, 2021 to stockholders of record at the close of business on February 12, 2021.
20.16. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
In March 2015, the Company’s boardBoard of directorsDirectors adopted the 2015 Employee Stock Purchase Plan (the “2015 ESPP”)2015 ESPP), which was subsequently approved by the Company’s stockholders on June 3, 2015. The 2015 ESPP became effective July 1, 2015 with no definitive expiration date. The Company’s boardBoard of directorsDirectors may at any time and for any reason terminate or amend the 2015 ESPP. No employee may purchase more than $25,000 worth of stock under the 2015 ESPP in any calendar year, and no employee may purchase stock under the 2015 ESPP if such purchase would cause the
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
employee to own more than 5% of the voting powerrights or value of the Company’s common stock. The 2015 ESPP provides for six monthsix-month offering periods, commencing on the first trading day of the first and third calendar quarter of each year and ending on the last trading day of each subsequent calendar quarter. The purchase price of the common stock upon exercise shall beis 85% of the fair market value of shares on the applicable purchase date as determined by averaging the high and low trading prices of the last trading day of theeach six-month period.period as defined above. An employee elects to participate and have contributions deducted through payroll deductions. The 2015 ESPP provides for the issuance of any remaining shares available for issuance under the 2005 ESPP, which were 441,327 shares at June 30, 2015. The 2015 ESPP reserved an additional 1,000,000 shares of the Company’s common stock for issuance under the 2015 Plan, bringing the maximum number of shares reserved for issuance under the 2015 ESPP to 1,441,327 shares, subject to adjustment as provided in the 2015 ESPP.
On June 5, 2015, the Company registered 1,441,327 shares of its common stock for issuance in accordance with the 2015 ESPP pursuant to a Registration Statement on Form S-8, File No. 333-204759.
During the year ended December 31,
2020,2022, the Company issued
65,430100,951 shares of common stock under the 2015 ESPP at a weighted-average issue price of
$46.73.$31.48. Since its adoption on July 1, 2015,
514,112672,776 shares of common stock have been issued, with
927,215768,551 shares available for issuance under the 2015 ESPP.
401(k) Retirement Savings Plan
The Alliance Data SystemsBread Financial Holdings, Inc. 401(k) and Retirement Savings Plan (the RSP) is a defined contribution plan that is qualified under Section 401(k) of the Internal Revenue Code of 1986. The Company amended its 401(k) and Retirement Savings Planthe RSP effective December 3, 2020. The 401(k) and Retirement Savings PlanRSP is an IRS-approved safe harbor plan design that eliminates the need for most discrimination testing. Eligible employees can participate in the 401(k) and Retirement Savings PlanRSP immediately upon joining the Company and after 180 days of employment begin receiving company matching contributions. In addition,contributions; “seasonal” or “on-call” employees must complete a year of eligibility service before they may participate inparticipate. The RSP covers U.S. employees of Bread Financial Holdings, Inc. who are at least 18 years old, one of the 401(k)Company’s wholly-owned subsidiaries, and Retirement Savings Plan. any other subsidiary or affiliated organization that adopts the RSP; employees of the Company and all of its U.S. subsidiaries are currently covered.
The
401(k) and Retirement Savings PlanRSP permits eligible employees to make Roth elective deferrals, which are included in the employee’s taxable income at the time of contribution, but not when distributed. Regular, or Non-Roth elective deferrals made by employees, together with contributions by the Company to the
401(k) and Retirement Savings Plan,RSP, and income earned on these contributions, are not taxable
to employees until withdrawn from the
401(k) and Retirement Savings Plan. The 401(k) and Retirement Savings Plan covers U.S. employees, who are at least 18 years old, of ADS Alliance Data Systems, Inc., one of the Company’s wholly-owned subsidiaries, and any other subsidiary or affiliated organization that adopts this 401(k) and Retirement Savings Plan. Employees of the Company, and all of its U.S. subsidiaries, are currently covered under the 401(k) and Retirement Savings Plan.
RSP. The Company matches an employee’s contribution dollar-for-dollar up to 5five percent of the employee’s eligible compensation. All company matching contributions are immediately vested.compensation; all Company matching contributions forimmediately vest. For the years ended December 31, 2022, 2021 and 2020, 2019 and 2018Company matching contributions were $15.7$17 million, $35.3$15 million and $44.8$16 million, respectively.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Participants in the
planRSP can direct their contributions and the Company’s matching contribution to numerous investment options, including the Company’s common stock. On July 20, 2001, the Company registered 1,500,000 shares of its common stock for issuance in accordance with
its 401(k) and Retirement Savings Planthe RSP pursuant to a Registration Statement on Form S-8, File No. 333-65556. As of December 31,
2020, 341,0962022, 241,603 of such shares remain available for issuance.
Group Retirement Savings Plan and Deferred Profit Sharing Plan (LoyaltyOne)
The Company provides for its Canadian employees the Group Retirement Savings Plan of the Loyalty Group (“GRSP”), which is a group retirement savings plan registered with the Canada Revenue Agency. Contributions made by Canadian employees on their behalf or on behalf of their spouse to the GRSP, and income earned on these contributions, are not taxable to employees until withdrawn from the GRSP. Employee contributions eligible for company match may not exceed the overall maximum allowed by the Income Tax Act (Canada); the maximum tax-deductible GRSP contribution is set by the Canada Revenue Agency each year. The Deferred Profit Sharing Plan (“DPSP”) is a legal trust
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
registered with the Canada Revenue Agency. Eligible full-time employees can participate in the GRSP after three months of employment and eligible part-time employees after six months of employment. Employees become eligible to receive company matching contributions into the DPSP on the first day of the calendar quarter following twelve months of employment. Based on the eligibility guidelines, the Company matches an employee’s contribution dollar-for-dollar up to 5 percent of the employee’s eligible compensation. Contributions made to the DPSP reduce an employee’s maximum contribution amounts to the GRSP under the Income Tax Act (Canada) for the following year. All company matching contributions into the DPSP vest after receipt of one continuous year of DPSP contributions. LoyaltyOne matching and discretionary contributions were $1.7 million, $1.8 million and $1.7 million for the years ended December 31, 2020, 2019 and 2018, respectively.
Executive Deferred Compensation Plan and the Canadian Supplemental Executive Retirement Plan
The Company also maintains an Executive Deferred Compensation Plan
(“EDCP”)(EDCP). The EDCP permits a defined group of management and highly compensated employees to defer on a pre-tax basis a portion of their base salary and incentive compensation (as defined in the EDCP) payable for services rendered. Deferrals under the EDCP are unfunded and subject to the claims of the Company’s creditors. Each participant in the EDCP is 100% vested in their account, and account balances accrue interest at a rate established and adjusted periodically by the
compensation committee.
The Company provides a Canadian Supplemental Executive Retirement Plan for a defined group of management and highly compensated employees of LoyaltyOne, Co., oneCompensation & Human Capital committee of the Company’s wholly-owned subsidiaries. Similar to the EDCP, participants may defer on a pre-tax basis a portionBoard of their compensation and bonuses payable for services rendered and to receive certain employer contributions.
Directors. As of December 31, 20202022 and 2019,2021, the Company’s outstanding liability related to these plans andthe EDCP, which was included in accrued expenses inOther liabilities on the Company’s consolidated balance sheetsConsolidated Balance Sheets, was $19.9$20 million and $33.3$18 million, respectively.
17. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:
| | | | | | | | | | | | | | | |
| | | | | | | | | | | Accumulated |
| | Net Unrealized | | Net Unrealized | | Net Unrealized | | Foreign Currency | | Other |
| | Gains (Losses) on | | Gains (Losses) on | | Gains (Losses) on | | Translation | | Comprehensive |
| | Securities | | Cash Flow Hedges | | Net Investment Hedge | | Adjustments (1) | | Loss |
|
| | (in millions) |
Balance as of January 1, 2018 | | $ | (8.7) | | $ | (0.1) | | $ | (42.0) | | $ | (89.4) | | $ | (140.2) |
Changes in other comprehensive income (loss) | | | (2.0) | | | (0.1) | | | 29.6 | | | (25.4) | | | 2.1 |
Balance at December 31, 2018 | | $ | (10.7) | | $ | (0.2) | | $ | (12.4) | | $ | (114.8) | | $ | (138.1) |
Changes in other comprehensive income (loss) | | | 13.2 | | | 0.1 | | | 4.9 | | | (6.8) | | | 11.4 |
Recognition resulting from the sale of Epsilon's foreign subsidiaries | | | — | | | — | | | — | | | 26.8 | | | 26.8 |
Balance at December 31, 2019 | | $ | 2.5 | | $ | (0.1) | | $ | (7.5) | | $ | (94.8) | | $ | (99.9) |
Changes in other comprehensive income (loss) | | | 20.7 | | | (0.6) | | | — | | | 71.0 | | | 91.1 |
Recognition resulting from the sale of Precima's foreign subsidiaries | | | — | | | — | | | — | | | 3.8 | | | 3.8 |
Balance at December 31, 2020 | | $ | 23.2 | | $ | (0.7) | | $ | (7.5) | | $ | (20.0) | | $ | (5.0) |
| (1) | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Unrealized
Gains (Losses) on
AFS Securities | | Net Unrealized
Losses on
Cash Flow Hedges | | Net Unrealized
Losses on
Net Investment Hedge | | Foreign Currency Translation Losses (1) | | Accumulated
Other
Comprehensive
Loss |
| (Millions) | |
| Balance as of January 1, 2020 | $ | 2 | | | $ | — | | | $ | (7) | | | $ | (95) | | | $ | (100) | |
| Changes in other comprehensive income (loss) | 21 | | | (1) | | | — | | | 71 | | | 91 | |
| Recognition resulting from the sale of Precima's foreign subsidiaries | — | | | — | | | — | | | 4 | | | 4 | |
| Balance as of December 31, 2020 | $ | 23 | | | $ | (1) | | | $ | (7) | | | $ | (20) | | | $ | (5) | |
| Changes in other comprehensive (loss) income | (21) | | | 2 | | | — | | | (37) | | | (56) | |
| Recognition resulting from the spinoff of LoyaltyOne's foreign subsidiaries | (1) | | | (1) | | | 7 | | | 54 | | | 59 | |
| Balance as of December 31, 2021 | $ | 1 | | | $ | — | | | $ | — | | | $ | (3) | | | $ | (2) | |
| Changes in other comprehensive (loss) income | (19) | | | — | | | — | | | — | | | (19) | |
| | | | | | | | | |
| Balance as of December 31, 2022 | $ | (18) | | | $ | — | | | $ | — | | | $ | (3) | | | $ | (21) | |
(1)In accordance with ASC 830, “Foreign Currency Matters,” uponPrimarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates from the Company’s former LoyaltyOne segment, which was spun off in November 2021.
With the spinoff of the Company’s former LoyaltyOne segment on November 5, 2021, the $7 million net unrealized loss on its net investment hedge related to its net investment in BrandLoyalty was reclassified into net income. Upon the sale of Precima on January 10, 2020, $3.8$4 million of accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulatedAccumulated other comprehensive loss and included in the calculation of the gain on sale of Precima. Upon the sale of Epsilon on July 1, 2019, $26.8 million of accumulated foreign currency translation adjustments
Precima.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
attributable18. STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
On February 28, 2022, the Company’s Board of Directors approved a stock repurchase program to Epsilon’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and includedacquire up to 200,000 shares of the Company’s outstanding common stock in the calculationopen market during the one-year period ending on February 28, 2023. As of March 31, 2022, the Company had repurchased all 200,000 shares of its common stock available under this program for an aggregate of $12 million. Following their repurchase, these 200,000 shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock.
Stock Compensation Plans
The Company has adopted equity compensation plans to advance the interests of the gain/loss on sale of Epsilon segment. Additionally, as of January 1, 2018, a cumulative-effect adjustment of $1.5 million, net of tax, was reclassified from accumulated other comprehensive loss to retained earnings relatedCompany by rewarding certain employees for their contributions to the adoptionfinancial success of ASU 2016-01, “Recognitionthe Company and Measurementthereby motivating them to continue to make such contributions in the future.
The 2015 Omnibus Incentive Plan (the 2015 Plan) became effective July 1, 2015, subsequently expired on June 30, 2020, and reserved 5,100,000 shares of Financial Assetscommon stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock unit awards (RSUs), performance share awards, cash incentive awards, deferred stock units, and Financial Liabilities.” Other reclassificationsother stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants who performed services for the Company or its affiliates, with only employees eligible to receive incentive stock options.
The 2020 Omnibus Incentive Plan (the 2020 Plan) became effective July 1, 2020 and reserved 2,400,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants performing services for the Company or its affiliates, with only employees being eligible to receive incentive stock options. The 2020 Plan expires on June 30, 2030; provided that, pursuant to the terms of the 2022 Plan (as defined below), no new grants shall be made under the 2020 Plan.
In March 2022, the Company’s Board of Directors adopted the 2022 Omnibus Incentive Plan (the 2022 Plan), which was subsequently approved by the Company’s stockholders on May 24, 2022. The 2022 Plan became effective July 1, 2022 and expires on June 30, 2032. The 2022 Plan reserves 3,075,000 shares of common stock for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock, RSUs, performance share awards, cash incentive awards, deferred stock units, and other stock-based and cash-based awards to selected officers, employees, non-employee directors and consultants performing services for the Company or its affiliates, with only employees being eligible to receive incentive stock options. The maximum amount that may be awarded to any independent member of the Company’s Board of Directors in any one calendar year may not exceed $1 million. On June 22, 2022, the Company registered 3,075,000 shares of its common stock for issuance in accordance with the 2022 Plan pursuant to a Registration Statement on Form S-8, File No. 333-265771. Terms of all awards under the 2022 Plan are determined by the Board of Directors or the Compensation & Human Capital Committee of the Board of Directors or its designee at the time of award.
Stock Compensation Expense
Stock-based compensation expense is measured at the grant date of the award, based on the fair value of the award, and is recognized ratably over the requisite service period. Stock-based compensation expense recognized in Employee compensation and benefits expense in the Consolidated Statements of Income for the years ended December 31, 2022, 2021 and 2020 was $32 million, $25 million and $15 million, respectively, with corresponding income tax benefits of $5 million, $4 million and $3 million, respectively.
As the amount of stock-based compensation expense recognized is based on awards ultimately expected to vest, the amount recognized in the Company’s Consolidated Statements of Income has been reduced for estimated forfeitures. The Company estimates forfeitures at each grant date based on historical experience, with forfeiture estimates to be revised, if necessary, in subsequent periods should actual forfeitures differ from accumulated other comprehensive loss into net incomethose estimates; forfeitures were estimated at 5% for each of the periods presentedyears ended December 31, 2022, 2021 and 2020.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
As of December 31, 2022, there was approximately $55 million of unrecognized expense, adjusted for estimated forfeitures, related to non-vested, stock-based equity awards granted to employees, which is expected to be recognized over a weighted average remaining period of approximately 2.2 years.
Restricted Stock Unit Awards
The following table summarizes RSUs activity under the Company’s equity compensation plans:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Market- Based (1) | | Performance- Based (1) | | Service-
Based | | Total | | Weighted
Average
Fair Value |
| Balance as of January 1, 2020 | 24,288 | | 230,272 | | 258,572 | | 513,132 | | $ | 172.06 | |
| Shares granted | 20,770 | | 219,186 | | 241,610 | | 481,566 | | 89.11 | |
| Shares vested | — | | (42,097) | | (127,921) | | (170,018) | | 175.09 | |
| Shares forfeited | (22,831) | | (186,135) | | (38,447) | | (247,413) | | 166.93 | |
| Balance as of December 31, 2020 | 22,227 | | 221,226 | | 333,814 | | 577,267 | | $ | 103.89 | |
Shares granted (2) | 2,641 | | 111,542 | | 774,062 | | 888,245 | | 88.18 | |
| Shares vested | — | | (24,677) | | (167,723) | | (192,400) | | 118.78 | |
| Shares forfeited | (5,801) | | (216,675) | | (291,201) | | (513,677) | | 93.16 | |
| Balance as of December 31, 2021 | 19,067 | | 91,416 | | 648,952 | | 759,435 | | $ | 89.14 | |
| Shares granted | — | | 82,513 | | 766,178 | | 848,691 | | 63.22 | |
| Shares vested | — | | (8,983) | | (218,077) | | (227,060) | | 78.23 | |
| Shares forfeited | (19,067) | | — | | (89,390) | | (108,457) | | 65.83 | |
| Balance as of December 31, 2022 | — | | 164,946 | | 1,107,663 | | 1,272,609 | | $ | 68.86 | |
| Outstanding and Expected to Vest | | | | | | | 1,238,212 | | $ | 69.17 | |
| | | | | |
| (1) | Shares granted reflect a 100% target attainment of the respective market-based or performance-based metric. Shares forfeited include those restricted stock units forfeited as a result of the Company not meeting the respective market-based or performance-based metric conditions. |
| | | | | |
| (2) | Shares granted reflect a November 2021 make-whole equity adjustment to unvested shares due to the reduction in the Company’s share value resulting from the spinoff of LVI. This adjustment increased shares granted by 2,641 shares, 12,659 shares and 96,556 shares for market-based, performance-based and service-based awards, respectively. These shares were excluded from the weighted average fair value calculation. |
For performance-based and service-based awards, the fair value of the RSUs was estimated using the Company’s closing share price on the date of grant. Service-based RSUs typically vest ratably over a three year period. Performance-based RSUs typically cliff vest at the end of three years, if specified performance measures tied to the Company’s financial performance are met, which are measured annually over the three year period. For the performance-based RSUs awarded in 2022 and 2021, the pre-defined vesting criteria typically permit a range from 0% to 150% to be earned. Accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition.
The total fair value of RSUs vested was $18 million, $23 million and $30 million for the years ended December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, the aggregate intrinsic value of RSUs outstanding and expected to vest was $47 million.
Dividends
For the years ended December 31, 2022, 2021 and 2020, the Company paid $43 million, $42 million and $61 million, respectively, in dividends to its shareholders of common stock. On January 26, 2023, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share on its common stock, payable on March 17, 2023, to stockholders of record at the close of business on February 10, 2023.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 million, reduced Retained earnings by $5,453 million, reduced Additional paid-in capital by $1,280 million and reduced Common stock by an immaterial amount, with no impact to total stockholders’ equity, on the Consolidated Balance Sheets.
19. INCOME TAXES
The Company files income tax returns in federal, state, local and foreign jurisdictions, as applicable. Provisions for current income tax liabilities are calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings also include deferred income tax provisions and provisions for uncertain tax positions.
Differences between the Consolidated Financial Statements and tax bases of assets and liabilities give rise to deferred tax assets and liabilities, which measure the future tax effects of items recognized in the Consolidated Financial Statements. Changes in deferred income tax assets and liabilities associated with components of Other comprehensive (loss) income are charged or credited directly to Other comprehensive (loss) income. Otherwise, changes in deferred income tax assets and liabilities are included as a component of Provision for income taxes. The effect on deferred income tax assets and liabilities attributable to changes in enacted tax rates are charged or credited to Provision for income taxes in the period of enactment.
Deferred tax assets require certain estimates and judgments in order to determine whether it is more likely than not
material.that all or a portion of the benefit of a deferred tax asset will not be realized. In evaluating the Company’s deferred tax assets on a quarterly basis as new facts and circumstances emerge, the Company analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. Uncertainties can lead to changes in the ultimate realization of deferred tax assets. A liability for unrecognized tax benefits, representing the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized in the Consolidated Financial Statements, inherently requires estimates and judgments. A tax position is recognized only when it is more likely than not to be sustained, based purely on its technical merits after examination by the relevant taxing authority, and the amount recognized is the benefit the Company believes is more likely than not to be realized upon ultimate settlement. The Company evaluates its tax positions as new facts and circumstances become available, making adjustments to unrecognized tax benefits as appropriate. Uncertainties can mean the tax benefits ultimately realized differ from amounts previously recognized, with any differences recorded in Provision for income taxes, along with amounts for estimated interest and penalties related to uncertain tax positions.
The components of
income from continuing operations beforethe Company’s Provision for income taxes
and income tax expense areincluded in the Consolidated Statements of Income were as
follows:follows for the years ended December 31:
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Components of income from continuing operations before income taxes: | | | | | | | | | |
Domestic | | $ | 281.7 | | $ | 591.9 | | $ | 1,052.7 |
Foreign | | | 112.8 | | | 146.5 | | | 162.3 |
Total | | $ | 394.5 | | $ | 738.4 | | $ | 1,215.0 |
Components of income tax expense: | | | | | | | | | |
Current | | | | | | | | | |
Federal | | $ | 209.2 | | $ | 126.0 | | $ | 152.2 |
State | | | 36.6 | | | 35.8 | | | 58.0 |
Foreign | | | 47.8 | | | 11.5 | | | 52.8 |
Total current | | | 293.6 | | | 173.3 | | | 263.0 |
Deferred | | | | | | | | | |
Federal | | | (135.1) | | | (11.8) | | | 48.0 |
State | | | (37.6) | | | 6.7 | | | 14.7 |
Foreign | | | (21.4) | | | (2.4) | | | (56.2) |
Total deferred | | | (194.1) | | | (7.5) | | | 6.5 |
Total provision for income taxes | | $ | 99.5 | | $ | 165.8 | | $ | 269.5 |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Current | | | | | |
| Federal | $ | 280 | | | $ | 218 | | | $ | 228 | |
| State | 41 | | | 49 | | | 36 | |
| Total current income tax expense | 321 | | | 267 | | | 264 | |
| Deferred | | | | | |
| Federal | (201) | | | (13) | | | (143) | |
| State | (44) | | | (7) | | | (28) | |
| Total deferred income tax benefit | (245) | | | (20) | | | (171) | |
| Total Provision for income taxes | $ | 76 | | | $ | 247 | | | $ | 93 | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
A reconciliation of
recorded federal provision forthe Company’s expected income
taxes to the expected amounttax expense computed by applying the federal statutory rate
for all periods to income from continuing operations before income taxes,
to the recorded Provision for income taxes, is as
follows:follows for the years ended December 31:
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Expected expense at statutory rate | | $ | 82.8 | | $ | 155.1 | | $ | 255.1 |
Increase (decrease) in income taxes resulting from: | | | | | | | | | |
State income taxes, net of federal benefit | | | (0.8) | | | 33.6 | | | 57.4 |
Foreign rate differential | | | 4.1 | | | (2.3) | | | 11.6 |
Foreign restructuring | | | 3.6 | | | — | | | (48.0) |
Impact of 2017 Tax Reform | | | (2.4) | | | (30.2) | | | (29.7) |
Global intangible low-taxed income | | | (7.8) | | | 8.7 | | | 15.5 |
Non-deductible expenses (non-taxable income) | | | 8.3 | | | 9.1 | | | 3.7 |
IRC Section 199, net of tax reserves | | | 12.5 | | | — | | | (0.8) |
Other | | | (0.8) | | | (8.2) | | | 4.7 |
Total | | $ | 99.5 | | $ | 165.8 | | $ | 269.5 |
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Expected expense at statutory rate | $ | 63 | | | $ | 219 | | | $ | 63 | |
| (Decrease) increase in income taxes resulting from: | | | | | |
| State and local income taxes, net of federal benefit | (2) | | | 33 | | | 6 | |
| Impact of 2017 Tax Reform | — | | | (8) | | | (2) | |
| Non-deductible expenses | 6 | | | 4 | | | 6 | |
| IRC Section 199, net of tax reserves | 4 | | | — | | | 12 | |
| Basis difference in unconsolidated subsidiaries | (8) | | | — | | | — | |
| Valuation allowance | 16 | | | — | | | — | |
| Other | (3) | | | (1) | | | 8 | |
| Total | $ | 76 | | | $ | 247 | | | $ | 93 | |
For the year ended December 31, 2022, the Company increased its reserve for Internal Revenue Code (IRC) Section 199 deductions by approximately $4 million as a result of an unfavorable court ruling. In addition, the Company recorded an income tax benefit (deferred tax asset) of approximately $8 million related to the initial recognition of the basis difference in an unconsolidated subsidiary, against which the Company recorded a $16 million valuation allowance as of December 31, 2022.
H.R. 1, originally known as the Tax Cuts and Jobs Act of 2017 (the “20172017 Tax Reform”)Reform) was enacted on December 22, 2017. The 2017 Tax Reformand permanently reduced the corporate tax rate to 21% from 35%, effective January 1, 2018 and implemented a change2018. For the year ended December 31, 2021, the Company recorded an income tax benefit of approximately $8 million related to the 2017 Tax Reform rate differential that was released from a systemOther comprehensive (loss) income due to the divestiture of worldwide taxation with deferral to a hybrid territorial system. This system taxes excess foreign profits above a deemed routine return through the Global Intangible Low-Taxed Income (“GILTI”) regime. The Company recognizes tax on GILTI as an expense in the period incurred.Company’s former LoyaltyOne segment.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
For the year ended December 31, 2020, the Company recorded an income tax benefit of approximately $2.4$2 million related to the rate benefit for a capital loss that will be carried back to a year preceding the 2017 Tax Reform rate reduction. Additionally, the Company recorded a benefit of $7.8 million for the year ended December 31, 2020 related to the impact of the final regulations issued by the Treasury and Internal Revenue Service regarding GILTI. The Company is currently under audit with the Internal Revenue Service for years 2012-2017. For years 2012-2014, the audit is limited in scope to research and development tax credits and IRC Section 199 deductions claimed on amended returns. Asas a result of the preliminary audit findings, the Company increased its reserve for IRC Section 199 deductions by $12.5$12 million during the year ended December 31, 2020. For years ended
On August 16, 2022, the Inflation Reduction Act (the Act) was signed into law in the U.S., which includes a new 15 percent corporate minimum tax on certain large corporations and a one percent excise tax on stock repurchases made after December 31, 2019 and 2018,2022. The Company does not anticipate the Company recorded an income tax benefitAct will have a significant impact on its financial position, results of approximately $30.2 million relatedoperations or cash flows, nor does it expect significant changes to a decrease in unrecognized tax benefitsoperational processes, controls or governance as a result of a tax accounting method change required by the 2017 Tax Reform and an income tax benefitAct.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table reflects the
impactsignificant components of
the 2017 Tax Reform rate differential as a result of certain tax accounting method changes related to projects initiated in 2018, respectively.
Deferred tax assets and liabilities consistas of the following:
December 31:
| | | | | | |
| | December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Deferred tax assets | | | | | | |
Deferred revenue | | $ | 29.2 | | $ | 9.5 |
Allowance for loan loss | | | 482.3 | | | 267.6 |
Net operating loss carryforwards and other carryforwards | | | 106.2 | | | 69.0 |
Stock-based compensation and other employee benefits | | | 3.8 | | | 13.7 |
Lease liabilities | | | 74.4 | | | 74.4 |
Accrued expenses and other | | | 81.0 | | | 40.3 |
Intangible assets | | | 5.5 | | | 23.2 |
Total deferred tax assets | | | 782.4 | | | 497.7 |
Valuation allowance | | | (50.1) | | | (64.0) |
Deferred tax assets, net of valuation allowance | | | 732.3 | | | 433.7 |
Deferred tax liabilities | | | | | | |
Deferred income | | $ | 290.9 | | $ | 365.6 |
Depreciation | | | 25.2 | | | 41.8 |
Right of use assets | | | 57.0 | | | 61.1 |
Total deferred tax liabilities | | | 373.1 | | | 468.5 |
| | | | | | |
Net deferred tax asset (liability) | | $ | 359.2 | | $ | (34.8) |
| | | | | | |
Amounts recognized in the consolidated balance sheets: | | | | | | |
Non-current assets | | $ | 359.2 | | $ | 45.2 |
Non-current liabilities | | | — | | | (80.0) |
Total – Net deferred tax asset (liability) | | $ | 359.2 | | $ | (34.8) |
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | |
| Deferred tax assets | | | |
| Deferred revenue | $ | 14 | | | $ | 17 | |
| Allowance for credit losses | 598 | | | 447 | |
| Net operating loss carryforwards and other carryforwards | 39 | | | 42 | |
| Operating lease liabilities | 30 | | | 33 | |
| Accrued expenses and other | 88 | | | 65 | |
| Total deferred tax assets | 769 | | | 604 | |
| Valuation allowance | (26) | | | (8) | |
| Deferred tax assets, net of valuation allowance | 743 | | | 596 | |
| Deferred tax liabilities | | | |
| Deferred income | $ | 148 | | | $ | 221 | |
| Depreciation | 7 | | | 28 | |
| Right of use assets | 20 | | | 22 | |
| Intangible assets | 16 | | | 23 | |
| Total deferred tax liabilities | 191 | | | 294 | |
| | | |
| Net deferred tax assets | $ | 552 | | | $ | 302 | |
| | | |
| Amounts recognized on the Consolidated Balance Sheets: | | | |
| Other assets | $ | 552 | | | $ | 302 | |
As of December 31, 2020,2022, included in the Company’s U.S. tax returns are approximately $146.4$124 million of U.S. federal net operating loss carryovers (“NOLs”)(NOLs) and approximately $33.8$34 million of foreign tax credits. With the exception of NOLs generated after December 31, 2017, these attributes expire at various times through the year 2037. Pursuant to Section 382As of the Internal Revenue Code, the Company’s utilization of a portion of such NOLs is subject to an annual limitation. The Company does not believe it is more-likely-than-not that all of its NOLs will be utilized and has therefore, in accordance with ASC 740-10-30, “Income Taxes—Overall—Initial Measurement,” established a valuation allowance against a portion of the NOLs. At December 31, 2020,2022, the Company has state income tax NOLs of approximately $232.3$231 million and state credits of approximately $3.0$2 million, both available to offset future state taxable income. The Company also hasincome, and state capital losses of approximately $10.6$7 million to offset capital gains. The state NOLs, credits and capital losses and credits will expire at various times through the year 2039. 2040.
The Company believes a majorityuses the portfolio approach relating to the release of these NOLs and allstranded tax effects recorded in Accumulated other comprehensive loss. Under the portfolio approach, the net unrealized gains or losses recorded in Accumulated other comprehensive loss would be eliminated only on the date the entire portfolio of the capital losses will expire before utilization and has therefore established a valuation allowanceAvailable-for-sale investment securities is sold or otherwise disposed of.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
against those NOLs and capital losses expected to expire unutilized. The Company has $240.9 million of foreign NOLs and $6.6 million of foreign capital losses at December 31, 2020. The foreign NOLs and capital losses have an unlimited carryforward period. The Company does not believe it is more-likely-than-not that some of the NOLs or any of the capital losses will be utilized and has therefore, in accordance with ASC 740-10-30, established a valuation allowance against those unlikely to be utilized. The Company’s valuation allowance, and corresponding NOLs, decreased $13.9 million during the year ended December 31, 2020, due primarily to nondeductible expenses in foreign jurisdictions. The Company’s valuation allowance increased $27.7 million during the year ended December 31, 2019 and decreased $40.1 million during the year ended December 31, 2018.
Should certain substantialfollowing table presents changes in the Company’s ownership occur, there could be an annual limitation on the amount of carryovers and credits that can be utilized. The impact of such a limitation would likely not be significant.
At December 31, 2020, the Company did not have any excess financial reporting basis over tax basis from a U.S. federal tax perspective primarily as a result of the GILTI regime pursuant to the 2017 Tax Reform. The Company may have, in certain state or foreign jurisdictions, amounts of financial reporting basis that exceeds tax basis as of December 31, 2020. However, these amounts are immaterial and no additional state or foreign tax liability has been recorded. Finally, despite the immaterial nature, the Company intends to permanently reinvest any previously undistributed earnings of our foreign subsidiaries in the operations outside the United States to support its international growth.
Net deferred tax assets increased by $159.0 million in 2020 as a result of the adoption of CECL. This tax impact was recorded to retained earnings.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in millions):
benefits:
| | | |
Balance at January 1, 2018 | | $ | 208.3 |
Increases related to prior years’ tax positions | | | 41.3 |
Decreases related to prior years’ tax positions | | | (9.6) |
Increases related to current year tax positions | | | 61.5 |
Settlements during the period | | | (1.0) |
Lapses of applicable statutes of limitation | | | (4.2) |
Balance at December 31, 2018 | | $ | 296.3 |
Increases related to prior years’ tax positions | | | 2.7 |
Decreases related to prior years’ tax positions | | | (76.6) |
Increases related to current year tax positions | | | 58.3 |
Settlements during the period | | | (0.6) |
Lapses of applicable statutes of limitation | | | (5.8) |
Balance at December 31, 2019 | | $ | 274.3 |
Increases related to prior years’ tax positions | | | 64.7 |
Decreases related to prior years’ tax positions | | | (63.5) |
Increases related to current year tax positions | | | 10.7 |
Settlements during the period | | | (4.6) |
Lapses of applicable statutes of limitation | | | (8.3) |
Balance at December 31, 2020 | | $ | 273.3 |
| | | | | |
| (Millions) | |
| Balance as of January 1, 2020 | $ | 215 | |
| Increases related to prior years’ tax positions | 59 | |
| Decreases related to prior years’ tax positions | (23) | |
| Increases related to current year tax positions | 11 | |
| Settlements during the period | (5) | |
| Lapses of applicable statutes of limitation | (2) | |
| Balance as of December 31, 2020 | $ | 255 | |
| Increases related to prior years’ tax positions | 1 | |
| Decreases related to prior years’ tax positions | (13) | |
| Increases related to current year tax positions | 12 | |
| Settlements during the period | (8) | |
| Balance as of December 31, 2021 | $ | 247 | |
| Increases related to prior years’ tax positions | 8 | |
| Decreases related to prior years’ tax positions | (25) | |
| Increases related to current year tax positions | 14 | |
| Settlements during the period | (2) | |
| Balance as of December 31, 2022 | $ | 242 | |
Included in the balance at December 31, 2020 are tax positions reclassified from deferred income taxes. Deductibility or taxability is highly certain for these tax positions but there is uncertainty about the timing of such deductibility or taxability. Because of the impact of deferred tax accounting, other than interest and penalties, this timing uncertainty, if realized, would not have a material effect on the annual effective tax rate but could accelerate the payment of cash to the taxing authority to an earlier period.
The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in Provision for income tax expense.taxes. The Company has potential cumulative interest and penalties with respect to unrecognized tax benefits of approximately $74.7$74 million, $67.0$76 million and $66.7$69 million atas of December 31, 2020, 20192022, 2021 and 2018,2020, respectively. For the years ended December 31, 2020, 20192022, 2021 and 2018,2020, the Company recorded approximately an $7.6 million expense, a
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
$0.8 $1 million benefit and a $24.5$8 million and $9 million expense, respectively, in Provision for income taxes for potential interest and penalties with respect tofor unrecognized tax benefits.
As of December 31,
2020, 20192022, 2021 and
2018,2020, the Company had unrecognized tax benefits of approximately
$257.8$238 million,
$255.1$241 million and
$247.7$243 million, respectively, that, if recognized, would impact the effective tax rate. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.
The Company files income tax returns in the U.S. federal, jurisdiction and in many state and foreign jurisdictions.jurisdictions, as applicable. With some exceptions, the tax returns filed by the Company are no longer subject to U.S. federal income tax, and state and local examinations for the years before 2015, or foreign income tax examinations for years before 2013.2018.
23. FINANCIAL INSTRUMENTS
20. EARNINGS PER SHARE
In accordance with ASC 825, “Financial Instruments,”
Basic earnings (losses) per share (EPS) is based only on the
Company is required to disclose the fair valueweighted average number of
financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present valuecommon shares outstanding, excluding any dilutive effects of stock options, unvested restricted stock awards, or other
techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effectdilutive securities. Diluted EPS is based on the
estimated fair value amounts.
Fair Valueweighted average number of Financial Instruments—The estimated fair values ofcommon and potentially dilutive common shares (dilutive stock options, unvested restricted stock awards and other dilutive securities outstanding during the Company’s financial instruments are as follows:
| | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | Carrying | | Fair | | Carrying | | Fair |
| | Amount | | Value | | Amount | | Value |
|
| | (in millions) |
Financial assets | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 14,776.4 | | $ | 17,301.2 | | $ | 18,292.0 | | $ | 19,126.0 |
Credit card receivables held for sale | | | — | | | — | | | 408.0 | | | 436.2 |
Redemption settlement assets, restricted | | | 693.5 | | | 693.5 | | | 600.8 | | | 600.8 |
Other investments | | | 225.4 | | | 225.4 | | | 259.8 | | | 259.8 |
Derivative instruments | | | 0.4 | | | 0.4 | | | 0.2 | | | 0.2 |
Financial liabilities | | | | | | | | | | | | |
Derivative instruments | | | 1.5 | | | 1.5 | | | 0.3 | | | 0.3 |
Deposits | | | 9,792.6 | | | 10,015.9 | | | 12,151.7 | | | 12,303.6 |
Non-recourse borrowings of consolidated securitization entities | | | 5,709.9 | | | 5,783.4 | | | 7,284.0 | | | 7,333.6 |
Long-term and other debt | | | 2,805.7 | | | 2,875.1 | | | 2,849.9 | | | 2,878.8 |
The following techniques and assumptions were used byyear) pursuant to the Company in estimating fair values of financial instruments as disclosed herein:
Credit card and loan receivables, net — The Company utilizes a discounted cash flow model using unobservable inputs, including estimated yields (interest and fee income), loss rates, payment rates and discount rates to estimate the fair value measurement of the credit card and loan receivables.
Credit card receivables held for sale — The Company utilizes a discounted cash flow model using unobservable inputs, including forecasted yields and net charge-off estimates to estimate the fair value measurement of the credit card portfolios held for sale, as well as market data as applicable.
Redemption settlement assets, restricted — Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.
Treasury Stock method.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Other investments — Other investments consistThe following table sets forth the computation of marketable securitiesbasic and U.S. Treasury bondsdiluted EPS attributable to common stockholders for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions, except per share amounts) | |
| Numerator | | | | | |
| Income from continuing operations | $ | 224 | | | $ | 797 | | | $ | 208 | |
| (Loss) income from discontinued operations, net of income taxes | (1) | | | 4 | | | 6 | |
| Net income | $ | 223 | | | $ | 801 | | | $ | 214 | |
| | | | | |
| Denominator | | | | | |
| Basic: Weighted average common stock | 49.9 | | 49.7 | | 47.8 |
| Weighted average effect of dilutive securities | | | | | |
Net effect of dilutive unvested restricted stock awards (1) | 0.1 | | 0.3 | | 0.1 |
| Denominator for diluted calculation | 50.0 | | 50.0 | | 47.9 |
| | | | | |
| Basic EPS | | | | | |
| Income from continuing operations | $ | 4.48 | | | $ | 16.02 | | | $ | 4.36 | |
| (Loss) income from discontinued operations, net of income taxes | $ | (0.01) | | | $ | 0.07 | | | $ | 0.11 | |
| Net income | $ | 4.47 | | | $ | 16.09 | | | $ | 4.47 | |
| | | | | |
| Diluted EPS | | | | | |
| Income from continuing operations | $ | 4.47 | | $ | 15.95 | | $ | 4.35 |
| (Loss) income from discontinued operations, net of income taxes | $ | (0.01) | | $ | 0.07 | | $ | 0.11 | |
| Net income | $ | 4.46 | | $ | 16.02 | | $ | 4.46 |
(1)For the years ended December 31, 2022, 2021 and 2020, 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.
21. SUPPLEMENTAL CASH FLOW INFORMATION
The Consolidated Statements of Cash Flows are included in other current assetspresented with the combined cash flows from continuing and other non-current assetsdiscontinued operations. The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the consolidated balance sheets. Other investments are recorded at fair value based on quoted market pricesConsolidated Statements of Cash Flows as of December 31:
| | | | | | | | | | | |
| 2022 | | 2021 |
| (Millions) | |
| Cash and Cash Equivalents | $ | 3,891 | | | $ | 3,046 | |
| Restricted Cash included within Other Assets | 36 | | | 877 | |
| Total cash, cash equivalents and restricted cash | $ | 3,927 | | | $ | 3,923 | |
Non-cash investing and financing activities for the
same or similar securities.Deposits —year ended December 31, 2021 included the Company’s equity method investment in LVI upon spinoff, on November 5, 2021, which totaled $48 million, and the Company’s retirement of its outstanding treasury stock in July 2021. 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-termmore information, see Note 22, “Discontinued Operations”, 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.
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.
Note 18, “Stockholders’ Equity”, respectively.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
22. DISCONTINUED OPERATIONS
LoyaltyOne
On November 5, 2021, the separation of LVI 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 LVI 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 LVI common stock for every two and a half shares of the Company’s common stock. Following this distribution, LVI 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 LVI following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis asequity method of accounting. As of December 31, 20202022, the carrying amount of the Company’s ownership interest in LVI, which totaled $6 million, is included in Other assets in the Consolidated Balance Sheets, while earnings (losses) are recorded in Other non-interest income in the Consolidated Statements of Income.
The following table summarizes the results of operations of the Company’s former LoyaltyOne segment, direct costs identifiable to the former LoyaltyOne segment, and
2019:
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| | | | | December 31, 2020 Using |
| | Balance at | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2020 | | Level 1 | | Level 2 | | Level 3 |
|
| | (in millions) |
Mutual funds (1) | | $ | 26.9 | | $ | 26.9 | | $ | — | | $ | — |
Corporate bonds (1) | | | 611.2 | | | — | | | 611.2 | | | — |
Marketable securities (2) | | | 225.4 | | | 34.2 | | | 191.2 | | | — |
Derivative instruments (3) | | | 0.4 | | | — | | | 0.4 | | | — |
Total assets measured at fair value | | $ | 863.9 | | $ | 61.1 | | $ | 802.8 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 1.5 | | $ | — | | $ | 1.5 | | $ | — |
Total liabilities measured at fair value | | $ | 1.5 | | $ | — | | $ | 1.5 | | $ | — |
| | | | | | | | | | | | |
| | | | | Fair Value Measurements at |
| | | | | December 31, 2019 Using |
| | Balance at | | | | | | | | | |
| | December 31, | | | | | | | | | |
| | 2019 | | Level 1 | | Level 2 | | Level 3 |
|
| | (in millions) |
Mutual funds (1) | | $ | 25.1 | | $ | 25.1 | | $ | — | | $ | — |
Corporate bonds (1) | | | 536.4 | | | — | | | 536.4 | | | — |
Marketable securities (2) | | | 259.8 | | | 26.2 | | | 233.6 | | | — |
Derivative instruments (3) | | | 0.2 | | | — | | | 0.2 | | | — |
Total assets measured at fair value | | $ | 821.5 | | $ | 51.3 | | $ | 770.2 | | $ | — |
| | | | | | | | | | | | |
Derivative instruments (3) | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
Total liabilities measured at fair value | | $ | 0.3 | | $ | — | | $ | 0.3 | | $ | — |
(1) | Amounts are included in redemption settlement assets in the consolidated balance sheets. |
(2) | Amounts are included in other current assets and other non-current assets in the consolidated balance sheets. |
(3) | Amounts are included in other current assets and other current liabilities in the consolidated balance sheets. |
There were 0 transfers between Levels 1 and 2 within the fair value hierarchyallocation of interest expense on corporate debt, for the years ended December 31, 2020 and 2019.
31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Total interest income | $ | — | | | $ | 1 | | | $ | 1 | |
Total interest expense (1) | — | | | 11 | | | 17 | |
| Net interest income | — | | | (10) | | | (16) | |
| Total non-interest income | — | | | 574 | | | 765 | |
| Total non-interest expenses | 1 | | | 519 | | | 656 | |
| Income before provision from income taxes | (1) | | | 45 | | | 93 | |
| Provision for income taxes | — | | | 36 | | | 6 | |
| Income from discontinued operations, net of income taxes | $ | (1) | | | $ | 9 | | | $ | 87 | |
| | | | | |
| (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. |
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Financial Instruments Disclosed but Not Carried at Fair Value
The following tables providetable summarizes the depreciation and amortization, and capital expenditures of the Company’s former LoyaltyOne segment for the years ended December 31:
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Depreciation and amortization | $ | — | | | $ | 31 | | | $ | 78 | |
| Capital expenditures | $ | — | | | $ | 15 | | | $ | 24 | |
The Company did not have any assets
andor liabilities
disclosed but not carried at fair valueof its former LoyaltyOne segment as of December 31,
2020 and 2019:
| | | | | | | | | | | | |
| | 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 | | $ | — |
| | | | | | | | | | | | |
| | Fair Value Measurements at |
| | December 31, 2019 |
| | Total | | Level 1 | | Level 2 | | Level 3 |
|
| | (in millions) |
Financial assets: | | | | | | | | | | | | |
Credit card and loan receivables, net | | $ | 19,126.0 | | $ | — | | $ | — | | $ | 19,126.0 |
Credit card receivables held for sale | | | 436.2 | | | — | | | — | | | 436.2 |
Total | | $ | 19,562.2 | | $ | — | | $ | — | | $ | 19,562.2 |
| | | | | | | | | | | | |
Financial liabilities: | | | | | | | | | | | | |
Deposits | | $ | 12,303.6 | | $ | — | | $ | 12,303.6 | | $ | — |
Non-recourse borrowings of consolidated securitization entities | | | 7,333.6 | | | — | | | 7,333.6 | | | — |
Long-term and other debt | | | 2,878.8 | | | — | | | 2,878.8 | | | — |
Total | | $ | 22,516.0 | | $ | — | | $ | 22,516.0 | | $ | — |
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized2022 or disclosed at fair value on a nonrecurring basis, including property and equipment, ROU assets, deferred contract assets, goodwill, and intangible assets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, including when there is evidence of impairment. For the year ended December 31, 2020, the Company recorded asset impairment charges of $63.7 million related to certain deferred contract costs, fixed assets and ROU assets. The fair value was determined utilizing discounted cash flow models over the estimated life of each asset. The principal assumptions used in the Company’s impairment analysis were forecasted future cash flows and the discount rate, which are considered Level 3 inputs. See Note 3, “Revenue,” Note 12, “Leases,” and Note 13, “Property and Equipment,” for more information regarding asset impairments.
For the year ended December 31, 2019, as part of restructuring and other charges, the Company recorded asset impairments of $52.0 million. See Note 15, “Restructuring and Other Charges,” for more information.
2021.
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED23. PARENT COMPANY FINANCIAL STATEMENTS – (CONTINUED)
24. PARENT-ONLY FINANCIAL STATEMENTS
The following ADSCBFH financial statements are provided in accordance with the rules of the Securities and Exchange Commission,SEC, which require such disclosure when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets. Certain
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
of the Company’s subsidiaries may be restricted in distributing cash or other assets to
ADSC,BFH, which could be utilized to service its indebtedness. The stand-alone parent-only financial statements are presented below.
Parent Company – Condensed Balance Sheets
| | | | | | |
| | December 31, |
| | 2020 | | 2019 |
|
| | (in millions) |
Assets: | | | | | | |
Cash and cash equivalents | | $ | 0.2 | | $ | 0.2 |
Investment in subsidiaries | | | 5,127.0 | | | 5,326.2 |
Other assets | | | 41.8 | | | 3.4 |
Total assets | | $ | 5,169.0 | | $ | 5,329.8 |
Liabilities: | | | | | | |
Current portion of long-term and other debt | | $ | 101.4 | | $ | 101.4 |
Long-term and other debt | | | 2,704.3 | | | 2,748.5 |
Intercompany liabilities, net | | | 742.0 | | | 806.7 |
Other liabilities | | | 99.7 | | | 84.9 |
Total liabilities | | | 3,647.4 | | | 3,741.5 |
Stockholders’ equity | | | 1,521.6 | | | 1,588.3 |
Total liabilities and stockholders’ equity | | $ | 5,169.0 | | $ | 5,329.8 |
| | | | | | | | | | | |
| December 31, |
| 2022 | | 2021 |
| (Millions) | |
| Assets | | | |
| Cash and cash equivalents | $ | 5 | | | $ | — | |
| Investment in subsidiaries | 4,159 | | | 4,446 | |
| Investment in LVI | 6 | | | 50 | |
| Other assets | 119 | | | 123 | |
| Total assets | $ | 4,289 | | | $ | 4,619 | |
| Liabilities | | | |
| Long-term and other debt | $ | 1,892 | | | $ | 1,985 | |
| Intercompany liabilities, net | 86 | | | 482 | |
| Other liabilities | 46 | | | 66 | |
| Total liabilities | 2,024 | | | 2,533 | |
| Stockholders’ equity | 2,265 | | | 2,086 | |
| Total liabilities and stockholders’ equity | $ | 4,289 | | | $ | 4,619 | |
See Note 17, “Debt,” for more information regarding the Company’s long-term and other debt.
Parent Company – Condensed Statements of Income
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Interest from loans to subsidiaries | | $ | 12.6 | | $ | 19.2 | | $ | 17.9 |
Dividends from subsidiaries | | | 256.3 | | | 922.6 | | | 810.1 |
Total revenue | | | 268.9 | | | 941.8 | | | 828.0 |
Loss on extinguishment of debt | | | — | | | 71.9 | | | — |
Interest expense, net | | | 109.5 | | | 130.0 | | | 281.2 |
Other expenses, net | | | 1.7 | | | (0.7) | | | (0.4) |
Total expenses | | | 111.2 | | | 201.2 | | | 280.8 |
Income before income taxes and equity in undistributed net income (loss) of subsidiaries | | | 157.7 | | | 740.6 | | | 547.2 |
Benefit for income taxes | | | 21.2 | | | 42.1 | | | 7.0 |
Income before equity in undistributed net income (loss) of subsidiaries | | | 178.9 | | | 782.7 | | | 554.2 |
Equity in undistributed net income (loss) of subsidiaries | | | 34.8 | | | (504.7) | | | 408.9 |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Total interest income | $ | 11 | | | $ | 12 | | | $ | 13 | |
| Total interest expense | 107 | | | 103 | | | 110 | |
| Net interest expense | (96) | | | (91) | | | (97) | |
| Dividends from subsidiaries | 382 | | | 535 | | | 256 | |
| Loss from equity method investment | (44) | | | — | | | — | |
| Total net interest and non-interest income | 242 | | | 444 | | | 159 | |
| Total non-interest expenses | 1 | | | 1 | | | 1 | |
| Income before income taxes and equity in undistributed net income of subsidiaries | 241 | | | 443 | | | 158 | |
| Benefit for income taxes | 22 | | | 36 | | | 21 | |
| Income before equity in undistributed net income of subsidiaries | 263 | | | 479 | | | 179 | |
| Equity in undistributed net (loss) income of subsidiaries | (40) | | | 322 | | | 35 | |
| Net income | $ | 223 | | | $ | 801 | | | $ | 214 | |
Parent Company – Condensed Statements of Comprehensive Income
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Net income | $ | 223 | | | $ | 801 | | | $ | 214 | |
| Other comprehensive (loss) income, net of tax | (3) | | | 7 | | | — | |
| Total comprehensive income, net of tax | $ | 220 | | | $ | 808 | | | $ | 214 | |
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Statements of Comprehensive Income
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Net income | | $ | 213.7 | | $ | 278.0 | | $ | 963.1 |
Other comprehensive income, net of tax | | | — | | | 4.9 | | | 29.6 |
Total comprehensive income, net of tax | | $ | 213.7 | | $ | 282.9 | | $ | 992.7 |
Parent Company – Condensed Statements of Cash Flows
| | | | | | | | | |
| | Years Ended December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Net cash (used in) provided by operating activities | | $ | (137.6) | | $ | (1,029.1) | | $ | 82.3 |
Investing activities: | | | | | | | | | |
Investment in subsidiaries | | | (3.2) | | | (135.0) | | | — |
Proceeds from sale of business | | | — | | | 4,118.3 | | | — |
Dividends received | | | 256.3 | | | 922.6 | | | 810.1 |
Net cash provided by investing activities | | | 253.1 | | | 4,905.9 | | | 810.1 |
Financing activities: | | | | | | | | | |
Borrowings under debt agreements | | | 1,276.0 | | | 3,083.0 | | | 4,527.0 |
Repayments of borrowings | | | (1,320.5) | | | (5,778.2) | | | (4,838.3) |
Payment of debt extinguishment costs | | | — | | | (46.1) | | | — |
Payment of deferred financing costs | | | (9.1) | | | (20.7) | | | (4.6) |
Purchase of treasury shares | | | — | | | (976.1) | | | (443.2) |
Dividends paid | | | (60.6) | | | (127.4) | | | (125.2) |
Proceeds from issuance of common stock | | | 2.8 | | | 12.4 | | | 17.6 |
Other | | | (4.1) | | | (23.6) | | | (25.7) |
Net cash used in financing activities | | | (115.5) | | | (3,876.7) | | | (892.4) |
Change in cash, cash equivalents and restricted cash | | | — | | | 0.1 | | | — |
Cash, cash equivalents and restricted cash at beginning of year | | | 0.2 | | | 0.1 | | | 0.1 |
Cash, cash equivalents and restricted cash at end of year | | $ | 0.2 | | $ | 0.2 | | $ | 0.1 |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2022 | | 2021 | | 2020 |
| (Millions) | |
| Net cash used in operating activities | $ | (219) | | | $ | (398) | | | $ | (138) | |
| Investing activities: | | | | | |
| Investment in subsidiaries | — | | | — | | | (3) | |
| Dividends received | 383 | | | 533 | | | 256 | |
| Purchases of available-for-sale securities | — | | | (10) | | | — | |
| Net cash provided by investing activities | 383 | | | 523 | | | 253 | |
| Financing activities: | | | | | |
| Debt proceeds from spinoff of LVI | — | | | 750 | | | — | |
| Borrowings under debt agreements | 218 | | | 38 | | | 1,276 | |
| Repayments of borrowings | (319) | | | (864) | | | (1,320) | |
| Payment of deferred financing costs | — | | | (4) | | | (9) | |
| Dividends paid | (43) | | | (42) | | | (61) | |
| Other | (15) | | | (3) | | | (1) | |
| Net cash used in financing activities | (159) | | | (125) | | | (115) | |
| Change in cash, cash equivalents and restricted cash | 5 | | | — | | | — | |
| Cash, cash equivalents and restricted cash at beginning of year | — | | | — | | | — | |
| Cash, cash equivalents and restricted cash at end of year | $ | 5 | | | $ | — | | | $ | — | |
Non-cash investing and financing activities related to the parent-only statementParent Company – Condensed Statements of cash flowsCash Flows for the year ended December 31, 2022 included the dissolution of a subsidiary, ADS Foreign Holdings, Inc.
Non-cash investing and financing activities for the year ended December 31, 2021 included the Company’s equity method investment in LVI upon spinoff, on November 5, 2021, which totaled $48 million.
Non-cash investing and financing activities related to the Parent Company – Condensed Statements of Cash Flows for the year ended December 31, 2020, included the issuance of approximately 1.9 million shares of the Company’s common stock as non-cash consideration in the acquisition of
BreadLon Inc. on December 3, 2020.
For more information, see Note 5, “Acquisitions.”
Non-cash investing activities related to the parent-only statement of cash flows for the year ended December 31, 2019 included a $3.0 billion non-cash dividend in the form of an intercompany return of capital from ADS Alliance Data Systems, Inc. to ADSC.
25. 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.
As discussed in Note 7, “Discontinued Operations,” in the first quarter of 2019, the Company’s Epsilon segment was classified as a discontinued operation and was sold on July 1, 2019. 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 |
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| ● | 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 immaterial businesses are reported collectively as an “all other” category labeled “Corporate/Other.” Income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes and have also been included in “Corporate/Other.”
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | |
Year Ended December 31, 2020 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Revenues | | $ | 764.8 | | $ | 3,756.5 | | $ | 0.1 | | $ | 4,521.4 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 111.0 | | $ | 501.5 | | $ | (218.0) | | $ | 394.5 |
Interest expense, net | | | (0.8) | | | 385.4 | | | 109.3 | | | 493.9 |
Operating income (loss) | | | 110.2 | | | 886.9 | | | (108.7) | | | 888.4 |
Depreciation and amortization | | | 78.0 | | | 102.8 | | | 3.0 | | | 183.8 |
Stock compensation expense | | | 5.5 | | | 7.0 | | | 8.8 | | | 21.3 |
Gain on sale of business, net of strategic transaction costs | | | (8.0) | | | — | | | — | | | (8.0) |
Strategic transaction costs | | | 0.4 | | | 0.3 | | | 15.2 | | | 15.9 |
Asset impairments | | | — | | | 63.7 | | | — | | | 63.7 |
Restructuring and other charges | | | 0.1 | | | (8.3) | | | — | | | (8.2) |
Adjusted EBITDA (1) | | | 186.2 | | | 1,052.4 | | | (81.7) | | | 1,156.9 |
Less: Securitization funding costs | | | — | | | 165.9 | | | — | | | 165.9 |
Less: Interest expense on deposits | | | — | | | 219.5 | | | — | | | 219.5 |
Adjusted EBITDA, net (1) | | $ | 186.2 | | $ | 667.0 | | $ | (81.7) | | $ | 771.5 |
| | | | | | | | | | | | |
Capital expenditures | | $ | 24.3 | | $ | 29.4 | | $ | 0.3 | | $ | 54.0 |
| | | | | | | | | | | | |
| | | | | | | Corporate/ | | | |
Year Ended December 31, 2019 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Revenues | | $ | 1,033.1 | | $ | 4,547.8 | | $ | 0.4 | | $ | 5,581.3 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 103.1 | | $ | 991.7 | | $ | (356.4) | | $ | 738.4 |
Interest expense, net | | | 2.3 | | | 439.0 | | | 127.7 | | | 569.0 |
Operating income (loss) | | | 105.4 | | | 1,430.7 | | | (228.7) | | | 1,307.4 |
Depreciation and amortization | | | 80.1 | | | 89.3 | | | 6.7 | | | 176.1 |
Stock compensation expense | | | 7.2 | | | 9.3 | | | 8.6 | | | 25.1 |
Strategic transaction costs | | | 1.0 | | | — | | | 10.7 | | | 11.7 |
Restructuring and other charges | | | 50.8 | | | 29.4 | | | 37.9 | | | 118.1 |
Loss on extinguishment of debt | | | — | | | — | | | 71.9 | | | 71.9 |
Adjusted EBITDA (1) | | | 244.5 | | | 1,558.7 | | | (92.9) | | | 1,710.3 |
Less: Securitization funding costs | | | — | | | 213.4 | | | — | | | 213.4 |
Less: Interest expense on deposits | | | — | | | 225.6 | | | — | | | 225.6 |
Adjusted EBITDA, net (1) | | $ | 244.5 | | $ | 1,119.7 | | $ | (92.9) | | $ | 1,271.3 |
| | | | | | | | | | | | |
Capital expenditures | | $ | 41.5 | | $ | 44.2 | | $ | 0.8 | | $ | 86.5 |
SIGNATURES
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
| | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | Corporate/ | | | |
Year Ended December 31, 2018 | | LoyaltyOne | | Card Services | | Other | | Total |
|
| | (in millions) |
Revenues | | $ | 1,068.4 | | $ | 4,597.6 | | $ | 0.6 | | $ | 5,666.6 |
| | | | | | | | | | | | |
Income (loss) before income taxes | | $ | 153.8 | | $ | 1,381.6 | | $ | (320.4) | | $ | 1,215.0 |
Interest expense, net | | | 5.6 | | | 385.9 | | | 150.8 | | | 542.3 |
Operating income (loss) | | | 159.4 | | | 1,767.5 | | | (169.6) | | | 1,757.3 |
Depreciation and amortization | | | 84.8 | | | 101.1 | | | 7.7 | | | 193.6 |
Stock compensation expense | | | 10.0 | | | 13.3 | | | 21.1 | | | 44.4 |
Adjusted EBITDA (1) | | | 254.2 | | | 1,881.9 | | | (140.8) | | | 1,995.3 |
Less: Securitization funding costs | | | — | | | 220.2 | | | — | | | 220.2 |
Less: Interest expense on deposits | | | — | | | 165.7 | | | — | | | 165.7 |
Adjusted EBITDA, net (1) | | $ | 254.2 | | $ | 1,496.0 | | $ | (140.8) | | $ | 1,609.4 |
| | | | | | | | | | | | |
Capital expenditures | | $ | 34.0 | | $ | 53.8 | | $ | 5.5 | | $ | 93.3 |
(1) | Adjusted EBITDA is a non-GAAP financial measure equal to income from continuing operations, the most directly comparable financial measure based on GAAP plus stock compensation expense, provision for income taxes, interest expense, net, depreciation and other amortization, and amortization of purchased intangibles. Adjusted EBITDA also excludes the gain on the sale of Precima, strategic transaction costs, which represent costs for professional services associated with strategic initiatives, asset impairments, restructuring and other charges, and loss related to the Company’s extinguishment of debt in July 2019. |
Adjusted EBITDA, net is also a non-GAAP financial measure equal to adjusted EBITDA less securitization funding costs and interest expense on deposits. Adjusted EBITDA and adjusted EBITDA, net are presented in accordance with ASC 280 as they are the primary performance metrics utilized to assess performance of the segments.
The table below reconciles the reportable segments’ total assets to consolidated total assets:
| | | | | | | | | | | | |
| | | LoyaltyOne | | | Card Services | | | Corporate/ Other | | | Total |
| | | (in millions) |
Total Assets | | | | | | | | | | | | |
December 31, 2020 | | $ | 2,422.3 | | $ | 19,884.6 | | $ | 240.2 | | $ | 22,547.1 |
December 31, 2019 | | $ | 2,338.0 | | $ | 23,931.1 | | $ | 225.7 | | $ | 26,494.8 |
With respect to information concerning principal geographic areas, revenues are based on the location of the subsidiary that generally correlates with the location of the customer. Information concerning principal geographic areas is as follows:
| | | | | | | | | | | | | | | | | | |
| | | | | | | | Europe, | | | | | | | | | |
| | United | | | | | Middle East | | | | | | | | | |
| | States | | Canada | | and Africa | | Asia Pacific | | Other | | Total |
|
| | (in millions) |
Revenues | | | | | | | | | | | | | | | | | | |
Year Ended December 31, 2020 | | $ | 3,767.7 | | $ | 286.9 | | $ | 332.6 | | $ | 80.5 | | $ | 53.7 | | $ | 4,521.4 |
Year Ended December 31, 2019 | | $ | 4,588.3 | | $ | 352.2 | | $ | 449.1 | | $ | 121.7 | | $ | 70.0 | | $ | 5,581.3 |
Year Ended December 31, 2018 | | $ | 4,621.3 | | $ | 411.3 | | $ | 463.2 | | $ | 122.0 | | $ | 48.8 | | $ | 5,666.6 |
| | | | | | | | | | | | | | | | | | |
Long Lived Assets | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | $ | 1,874.9 | | $ | 310.7 | | $ | 714.3 | | $ | 11.4 | | $ | 1.4 | | $ | 2,912.7 |
December 31, 2019 | | $ | 1,361.1 | | $ | 311.1 | | $ | 696.2 | | $ | 12.8 | | $ | 0.9 | | $ | 2,382.1 |
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
As of December 31, 2020, 2019 and 2018, revenues from L Brands and its affiliates represented approximately 10.3%, 10.6% and 10.8%, respectively, of consolidated revenues and are included in the Card Services segment.
26. SUPPLEMENTAL CASH FLOW INFORMATION
The consolidated statements of cash flows are presented with the combined cash flows from discontinued operations with cash flows from continuing operations within each cash flow statement category. The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the consolidated statements of cash flows:
| | | | | | | | | |
| | December 31, | | December 31, | | December 31, |
| | 2020 | | 2019 | | 2018 |
|
| | (in millions) |
Cash and cash equivalents | | $ | 3,081.5 | | $ | 3,874.4 | | $ | 3,863.1 |
Restricted cash included within other current assets (1) | | | 326.3 | | | 44.4 | | | 60.7 |
Restricted cash included within redemption settlement assets, restricted (2) | | | 55.4 | | | 39.3 | | | 43.9 |
Total cash, cash equivalents and restricted cash | | $ | 3,463.2 | | $ | 3,958.1 | | $ | 3,967.7 |
(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 December 31, 2020, restricted cash included $291.8 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt that matured in February 2021. |
(2) | See Note 11, “Redemption Settlement Assets,” for additional information regarding the nature of restrictions on redemption settlement assets. |
Non-cash investing and financing activities for the year ended December 31, 2020 included $75.0 million of deferred consideration and the issuance of approximately 1.9 million shares of the Company’s common stock as non-cash consideration in the acquisition of Bread on December 3, 2020. For more information, see Note 5, “Acquisitions.”
Non-cash financing activities for the year ended December 31, 2019 included an exchange agreement with ValueAct Holdings, L.P. pursuant to which ValueAct exchanged an aggregate of 1,500,000 shares of the Company’s common stock for an aggregate of 150,000 shares of preferred stock, and ValueAct’s subsequent conversion of all 150,000 shares of preferred stock back to common stock.
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
27. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Unaudited quarterly results of operations for the years ended December 31, 2020 and 2019 are presented below.
| | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2020 | | 2020 | | 2020 | | 2020 |
|
| | (in millions, except per share amounts) |
Revenues | | $ | 1,381.8 | | $ | 979.3 | | $ | 1,050.5 | | $ | 1,109.8 |
Operating expenses | | | 1,217.8 | | | 804.6 | | | 759.5 | | | 851.1 |
Operating income | | | 164.0 | | | 174.7 | | | 291.0 | | | 258.7 |
Interest expense, net | | | 138.6 | | | 127.7 | | | 115.1 | | | 112.5 |
Income from continuing operations before income taxes | | | 25.4 | | | 47.0 | | | 175.9 | | | 146.2 |
Provision for income taxes | | | (4.6) | | | 8.6 | | | 42.6 | | | 52.9 |
Income from continuing operations | | | 30.0 | | | 38.4 | | | 133.3 | | | 93.3 |
Loss from discontinued operations, net of taxes | | | — | | | — | | | — | | | (81.3) |
Net income | | $ | 30.0 | | $ | 38.4 | | $ | 133.3 | | $ | 12.0 |
| | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 0.63 | | $ | 0.81 | | $ | 2.79 | | $ | 1.93 |
Loss from discontinued operations | | $ | — | | $ | — | | $ | — | | $ | (1.68) |
Net income per share | | $ | 0.63 | | $ | 0.81 | | $ | 2.79 | | $ | 0.25 |
| | | | | | | | | | | | |
Diluted income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 0.63 | | $ | 0.81 | | $ | 2.79 | | $ | 1.93 |
Loss from discontinued operations | | $ | — | | $ | — | | $ | — | | $ | (1.68) |
Net income per share | | $ | 0.63 | | $ | 0.81 | | $ | 2.79 | | $ | 0.25 |
| | | | | | | | | | | | |
| | Quarter Ended |
| | March 31, | | June 30, | | September 30, | | December 31, |
| | 2019 | | 2019 | | 2019 | | 2019 |
|
| | (in millions, except per share amounts) |
Revenues | | $ | 1,334.2 | | $ | 1,348.5 | | $ | 1,437.6 | | $ | 1,461.0 |
Operating expenses | | | 977.3 | | | 1,011.2 | | | 1,133.4 | | | 1,152.0 |
Operating income | | | 356.9 | | | 337.3 | | | 304.2 | | | 309.0 |
Interest expense, net | | | 143.9 | | | 143.5 | | | 140.0 | | | 141.6 |
Income from continuing operations before income taxes | | | 213.0 | | | 193.8 | | | 164.2 | | | 167.4 |
Provision for income taxes | | | 34.8 | | | 51.4 | | | 42.6 | | | 37.0 |
Income from continuing operations | | | 178.2 | | | 142.4 | | | 121.6 | | | 130.4 |
Loss from discontinued operations, net of taxes | | | (29.1) | | | (3.4) | | | (229.2) | | | (32.9) |
Net income (loss) | | $ | 149.1 | | $ | 139.0 | | $ | (107.6) | | $ | 97.5 |
| | | | | | | | | | | | |
Basic income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 3.36 | | $ | 2.72 | | $ | 2.47 | | $ | 2.73 |
Loss from discontinued operations | | $ | (0.55) | | $ | (0.07) | | $ | (4.69) | | $ | (0.70) |
Net income (loss) per share | | $ | 2.81 | | $ | 2.65 | | $ | (2.22) | | $ | 2.03 |
| | | | | | | | | | | | |
Diluted income (loss) per share: | | | | | | | | | | | | |
Income from continuing operations | | $ | 3.35 | | $ | 2.71 | | $ | 2.41 | | $ | 2.74 |
Loss from discontinued operations | | $ | (0.55) | | $ | (0.07) | | $ | (4.54) | | $ | (0.69) |
Net income (loss) per share | | $ | 2.80 | | $ | 2.64 | | $ | (2.13) | | $ | 2.05 |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Alliance Data Systems CorporationBread Financial Holdings, Inc. has duly caused this annual reportAnnual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
| ALLIANCE DATA SYSTEMS CORPORATION
| | | | | | | |
| Bread Financial Holdings, Inc.
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|
| By:
| |
| By: | /S/ RALPH J. ANDRETTA |
|
| Ralph J. Andretta |
|
| President and Chief Executive Officer |
DATE: February
26, 202128, 2023
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of
Alliance Data Systems CorporationBread Financial Holdings, Inc. and in the capacities and on the dates indicated.
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Name |
| Title |
| Date |
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/S/ RALPH J. ANDRETTA |
| President, Chief Executive Officer and Director |
| February 26, 2021 28, 2023 |
Ralph J. Andretta |
| Officer and Director
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/S/ TIMOTHY P. KING PERRY S. BEBERMAN |
| Executive Vice President and |
| February 26, 2021
|
Timothy P. King
|
| Chief Financial Officer |
| February 28, 2023
|
Perry S. Beberman
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/S/ LAURA SANTILLANJ. BRYAN CAMPBELL |
| Senior Vice President and |
| February 26, 2021
|
Laura Santillan
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| Chief Accounting Officer |
| February 28, 2023
|
J. Bryan Campbell
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| /S/ ROGER H. BALLOU |
| Chairman of the Board, Director |
| February 26, 2021 28, 2023 |
Roger H. Ballou |
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/S/ JOHN C. GERSPACH, JR. |
| Director |
| February 26, 2021 28, 2023 |
John C. Gerspach, Jr. |
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/S/ KARIN J. KIMBROUGH | | Director | | February 28, 2023 |
| Karin J. Kimbrough | | | | |
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| /S/ RAJESH NATARAJAN |
| Director |
| February 26, 2021 28, 2023 |
Rajesh Natarajan |
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/S/ TIMOTHY J. THERIAULT |
| Director |
| February 26, 2021 28, 2023 |
Timothy J. Theriault |
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/S/ LAURIE A. TUCKER |
| Director |
| February 26, 2021 28, 2023 |
Laurie A. Tucker |
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/S/ SHAREN J. TURNEY |
| Director |
| February 26, 2021 28, 2023 |
Sharen J. Turney |
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