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Item 9A. Controls and Procedures

2022-02-25 compared with 2021-02-26 · 1236 added, 1640 removed, 677 unchanged (81% of the section changed)

1 unchanged sentence

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

As of December 31, 2020, we carried out an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15 of the Securities Exchange Act of 1934.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of December 31, 2020, our disclosure controls and procedures are effective.

Disclosure controls and procedures are controls and procedures designed to ensure that 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 time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information we are required to disclose in such reports is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

As of December 31, 2021 our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that as of December 31, 2021, our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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 2021 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 controls over financial reporting are 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 in the United States.

Our 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 accounting principles generally accepted in the United 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;

● 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 the acquisition of Lon Inc., operating under the trademark Bread.

Because of the timing of the acquisition, Bread was excluded from our evaluation of and conclusion on the effectiveness of 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% of 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, with the participation of the Chief Executive Officer and Chief Financial Officer, concluded that our internal control over financial reporting was effective as of December 31, 2020.

The effectiveness of internal control over financial reporting as of December 31, 2020 has been audited by Deloitte & Touche LLP, the independent registered public accounting firm who also audited our consolidated financial statements.

Deloitte & Touche’s attestation report on the effectiveness of our internal control over financial reporting appears on page F-5.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, assessed the effectiveness of our internal control over financial reporting as of December 31, 2021.

In making this assessment, our 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 those criteria and management’s assessment, with the participation of the Chief Executive Officer and Chief Financial Officer, we conclude that our internal control over financial reporting was effective as of December 31, 2021.

The effectiveness of internal control over financial reporting as of December 31, 2021 has been audited by Deloitte & Touche LLP, our independent registered public accounting firm who also audited our Consolidated Financial Statements;

their attestation report on the effectiveness of our internal control over financial reporting appears on page F-4.

Other Information .

Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.

Not applicable.

Directors, Executive Officer s and Corporate Governance.

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Exhibits, Financial Statement Schedules .

a) The following documents are filed as part of this report:

a) The following documents are filed as part of this Annual Report:

(1) Financial Statements

(2) Financial Statement Schedule

(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.

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Form of Time-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan.

Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant EBT).

Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant rTSR).

Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant Strategic)

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

Form of Non-employee Director Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2010 Omnibus Incentive Plan.

Incorporated by Reference

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Alliance Data Systems Corporation 2015 Employee Stock Purchase Plan, effective July 1, 2015.

LoyaltyOne, Inc.

Registered Retirement Savings Plan, as amended.

LoyaltyOne, Inc.

Deferred Profit Sharing Plan, as amended.

LoyaltyOne, Inc.

Canadian Supplemental Executive Retirement Plan, effective as of January 1, 2009.

Separation Agreement, dated as of June 22, 2020, by and among LoyaltyOne, Co., Alliance Data Systems Corporation and Bryan 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).

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.

Executive General Release and Enhanced Severance Agreement, dated as of May 11, 2021, by and between ADS Alliance Data Systems, Inc.

and Tim King.

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.

Incorporated by Reference

Fulfillment, Inc., Far West Factoring, LLC, Puerto Rico Store Operations LLC, and Comenity Bank.

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 Fulfillment, Inc., Far West Factoring, LLC, Puerto Rico Store Operations LLC, and Comenity Bank.

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.

Third Amendment to Private Label Credit Card Program Agreement, dated as of August 1, 2021, by and between Victoria’s Secret Stores, LLC, VS Service Company, LLC by change of name and organizational form from L Brands Direct Marketing, Inc., L Brands Direct Fulfillment, LLC by change of organizational form from L Brands Direct Fulfillment, Inc., VSPR Store Operations, LLC by change of name from Puerto Rico Store Operations, LLC, and Comenity Bank.

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.

Incorporated by Reference

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.

5 unchanged sentences

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.

Incorporated by Reference

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.

2 unchanged sentences

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.

Incorporated by Reference

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.

6 unchanged sentences

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.

Incorporated by Reference

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.

1 unchanged sentence

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.

Incorporated by Reference

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.

7 unchanged sentences

Third Amendment to Receivables Purchase Agreement, dated as of July 6, 2016, between Comenity Bank and WFN Credit Company, LLC.

Incorporated by Reference

Fourth Amendment to Receivables Purchase Agreement, dated as of June 11, 2020, between Comenity Bank and WFN Credit Company, LLC.

3 unchanged sentences

1, dated as of August 13, 2003, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company.

Incorporated by Reference

Supplemental Indenture No.

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Omnibus Amendment, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.

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.

Incorporated by Reference

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.

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.

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.

Omnibus Amendment, dated as of May 3, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.

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.

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.

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.

Agreement of Resignation, Appointment and Acceptance, dated as of May 25, 2021, by and among WFN Credit Company, LLC, U.S.

Bank Trust National Association and Citicorp Trust Delaware, National Association.

Succession Agreement, dated as of June 18, 2021, by and among Comenity Bank, World Financial Network Credit Card Master Note Trust, MUFG Union Bank, N.A.

Bank National Association.

Succession Agreement, dated as of June 18, 2021, among WFN Credit Company, LLC, MUFG Union Bank, N.A.

Bank National Association.

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.

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.

Incorporated by Reference

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.

Amended and Restated Trust Agreement, dated as of August 1, 2001, between WFN Credit Company, LLC and Chase Manhattan Bank USA, National Association.

First Amendment to Amended and Restated Trust Agreement, dated as of May 25, 2021, between WFN Credit Company, LLC and Citicorp Trust Delaware, National Association.

Administration Agreement, dated as of August 1, 2001, between World Financial Network Credit Card Master Note Trust and World Financial Network National Bank.

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.

Incorporated by Reference

Third Amended and Restated Service Agreement, dated as of April 23, 2019, between Comenity Servicing LLC and Comenity Bank.

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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.

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

Incorporated by Reference

Fifth Addendum to Appendix A and First Addendum to Appendix B of Third Amended and Restated Service Agreement, as Amended, dated as of April 30, 2021, between Comenity Servicing LLC and Comenity Bank.

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

Seventh Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of January 1, 2022, between Comenity Servicing LLC and Comenity Bank.

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.

4 unchanged sentences

Third Amendment to Receivables Purchase Agreement, dated as of September 30, 2011, between World Financial Network Bank and WFN Credit Company, LLC.

Incorporated by Reference

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.

1 unchanged sentence

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

Incorporated by Reference

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.

9 unchanged sentences

Receivables Purchase Agreement, dated as of September 29, 2008, between World Financial Capital Bank and World Financial Capital Credit Company, LLC.

Incorporated by Reference

Amendment No.

5 unchanged sentences

Bank National Association, together with Supplemental Indenture Nos.

Incorporated by Reference

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.

5 unchanged sentences

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.

Seventh Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 10, 2020, between World

Incorporated by Reference

Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.

Seventh Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 10, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.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.

3 unchanged sentences

Bank National Association (successor to Deutsche Bank Trust Company Americas).

Incorporated by Reference

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.

7 unchanged sentences

Bank National Association (successor to Deutsche Bank Trust Company Americas).

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).

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.

Incorporated by Reference

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.

2 unchanged sentences

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.

Incorporated by Reference

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.

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.

Seventh Amendment to Amended and Restated Credit Agreement, dated as of July 9, 2021, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.

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).

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

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).

Separation and Distribution Agreement, dated as of November 3, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.

Transition Services Agreement, dated as of November 5, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.

Tax Matters Agreement, dated as of November 5, 2021, between Alliance Data Systems Corporation and Loyalty Ventures Inc.

Employee Matters Agreement, dated as of November 5, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.

First Amendment to Employee Matters Agreement, dated as of December 6, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.

Incorporated by Reference

Registration Rights Agreement, dated as of November 5, 2021, by and among Alliance Data Systems Corporation and Loyalty Ventures Inc.

Subsidiaries of the Registrant

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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.

Incorporated by Reference

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.

12 unchanged sentences

Securities and Exchange Commission.

< Pursuant to Item 601 (b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and considered confidential non-public personal information.

Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K.

Registrant hereby undertakes to furnish supplementally an unredacted copy of the exhibit or a copy of any omitted schedule upon request by the U.S.

Securities and Exchange Commission.

(a) Alliance Data Systems Corporation

6 unchanged sentences

ALLIANCE DATA SYSTEMS CORPORATION AND SUBSIDIARIES

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets as of December 31, 2020 and 2019

Reports of Independent Registered Public Accounting Firm (PCAOB ID:

Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019

Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019

4 unchanged sentences

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Alliance Data Systems Corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash 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 15 (collectively referred to as the “financial statements”).

We have audited the accompanying consolidated balance sheets of Alliance Data Systems Corporation and subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021 and the related notes listed in the index at Item 15 (collectively referred to as the "financial statements").

In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

1 unchanged sentence

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.

As discussed in Note 1 to the financial statements, the Company adopted ASC 326, Measurement of Credit Losses on Financial Instruments (“CECL”), using the modified retrospective approach on January 1, 2020.

Emphasis of Matter

As discussed in Note 22 to the financial statements, the Company’s financial statements have been presented with its former LoyaltyOne segment as a discontinued operation.

Further, the Company has adjusted the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.”

Basis for Opinion

9 unchanged sentences

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Loss — Refer to Notes 2 and 8 to the financial statements

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates 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 matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses — Refer to Notes 1 and 4 to the financial statements

Critical Audit Matter Description

Starting with the January 1, 2020 adoption of CECL, the Company recognizes an allowance for loan loss immediately upon the origination of a loan and reassesses that estimate in each subsequent reporting period.

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.

In estimating its allowance for loan loss, the Company segregates its credit card receivables into four groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score.

The Company then determines the estimated life of each group of 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 .

In addition to the quantitative estimate of expected credit losses, management also applies significant judgment by incorporating 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, and other relevant factors to ensure the allowance for loan loss reflects the Company’s best estimate of current expected credit losses.

Given the significant judgments made by management in estimating its allowance for loan loss, performing audit procedures to evaluate the reasonableness of the estimated allowance for loan loss, 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.

Effective January 1, 2020, the Company adopted ASC 326 on a modified retrospective approach and applied a Current Expected Credit Loss (“CECL”) model to determine its allowance for credit losses.

Under CECL, the allowance for credit losses is an estimate of expected credit losses, measured over the estimated life of its credit card and other loans that considers forecasts of future economic conditions in addition to information about past events and current conditions.

The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and other loans, as well as the prevailing economic conditions and forecasts utilized.

In estimating its allowance for credit losses, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors.

These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance.

The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors.

The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, with no reversion period.

In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects the Company’s best estimate of current expected credit losses.

At December 31, 2021, the total allowance for credit losses was $1.8 billion.

Given the significant judgments made by management in estimating its allowance for credit losses related to credit card loans, performing audit procedures to evaluate the reasonableness of the estimated allowance for 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 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 the discount rate required a high degree of auditor judgment and an increased extent of effort, including involvement of our fair value specialists.

How the Critical Audit Matter Was Addressed in the Audit

● 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 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:

– Historical results.

– 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.

● We evaluated whether judgments have been applied consistently to the model and that any qualitative adjustments to the output of the model are consistent with the measurement objective of the applicable financial reporting framework and are appropriate in the circumstances.

● We considered any contradictory evidence that arose while performing our procedures, and whether or not this evidence was indicative of management bias.

/s/ Deloitte & Touche LLP

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In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.

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.

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.

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, 2021, of the Company and our report dated February 25, 2022 expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s adoption of the Accounting Standards Codification ASC 326, Measurement of Credit Losses on Financial Instruments and an emphasis of matter paragraph regarding the discontinued operations and adjustments related to the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.”

Basis for Opinion

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ALLIANCE DATA SYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEET S

(in millions, except per share amounts)

Cash and cash equivalents

Accounts receivable, net, less allowance for doubtful accounts ($ 4.0 and $ 3.4 at December 31, 2020 and 2019, respectively)

Credit card and loan receivables:

Credit card and loan receivables – restricted for securitization investors

Other credit card and loan receivables

Total credit card and loan receivables

Allowance for loan loss

Credit card and loan receivables, net

Credit card receivables held for sale

Inventories, net

Other current assets

Redemption settlement assets, restricted

Total current assets

Property and equipment, net

Right of use assets - operating

Deferred tax asset, net

Intangible assets, net

Other non-current assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable

Accrued expenses

Current operating lease liabilities

Current portion of deposits

Current portion of non-recourse borrowings of consolidated securitization entities

Current portion of long-term and other debt

Other current liabilities

Deferred revenue

Total current liabilities

Deferred revenue

Deferred tax liability, net

Long-term operating lease liabilities

Non-recourse borrowings of consolidated securitization entities

Long-term and other debt

Other liabilities

Total liabilities

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

Additional paid-in capital

Treasury stock, at cost, 67.4 shares at each of December 31, 2020 and 2019

Retained earnings

Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

See accompanying notes to consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF INCOM E

1 unchanged sentence

(in millions, except per share amounts)

Redemption, net

Finance charges, net

Total revenue

Operating expenses

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

Provision for loan loss

General and administrative

Depreciation and other amortization

Amortization of purchased intangibles

Loss on extinguishment of debt

Total operating expenses

Operating income

Interest income

Interest and fees on loans

Interest on cash and investment securities

Total interest income

Interest expense

Securitization funding costs

Interest expense on deposits

Interest expense on long-term and other debt, net

Total interest expense, net

Interest on deposits

Interest on borrowings

Total interest expense

Net interest income

Non-interest income

Interchange revenue, net of retailer share arrangements

Total non-interest income

Total net interest and non-interest income

Provision for credit losses

Total net interest and non-interest income, after provision for credit losses

Non-interest expenses

Employee compensation and benefits

Card and processing expenses

Information processing and communication

Marketing expenses

Depreciation and amortization

Total non-interest expenses

Income from continuing operations before income taxes

1 unchanged sentence

Income from continuing operations

(Loss) income from discontinued operations, net of taxes

Basic income (loss) per share (Note 4):

Income (loss) from discontinued operations, net of income taxes

Basic income per share (Note 20):

Income from continuing operations

(Loss) income from discontinued operations

Income (loss) from discontinued operations

Net income per share

Diluted income (loss) per share (Note 4):

Diluted income per share (Note 20):

Income from continuing operations

(Loss) income from discontinued operations

Income (loss) from discontinued operations

Net income per share

Weighted average shares (Note 20):

See accompanying notes to consolidated financial statements.

See Notes to Consolidated Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

2 unchanged sentences

(in millions)

Other comprehensive income:

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

Tax (expense) benefit

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

Unrealized (loss) gain on cash flow hedges

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

Other comprehensive income (loss):

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

Tax benefit (expense)

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

Unrealized gain (loss) on cash flow hedges

Tax benefit (expense)

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

Unrealized gain on net investment hedge

Unrealized gain on net investment hedge, net of tax

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)

Foreign currency translation adjustments (inclusive of deconsolidation of $ 54 million, $ 4 million and $ 27 million for the years ended December 31, 2021, 2020 and 2019, respectively, related to the disposition of businesses)

Other comprehensive income, net of tax

Total comprehensive income, net of tax

See accompanying notes to consolidated financial statements.

See Notes to Consolidated Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

CONSOLIDATED BALANCE SHEET S

(in millions, except per share amounts)

Cash and cash equivalents

Credit card and other loans:

Total credit card and other loans (includes loans available to settle obligations of consolidated variable interest entities:

2021, $ 11,215 ;

2020, $ 11,208 )

Allowance for credit losses

Credit card and other loans, net

Available-for-sale securities

Property and equipment, net

Goodwill and intangible assets, net

Assets of discontinued operations

LIABILITIES AND STOCKHOLDERS' EQUITY

Debt issued by consolidated variable interest entities

Long-term and other debt

Other liabilities

Liabilities of discontinued operations

Total liabilities

Commitments and contingencies (Note 15)

Stockholders’ equity:

Common stock, $ 0.01 par value;

authorized, 200.0 million shares;

issued, 49.9 million and 117.1 million shares at December 31, 2021 and December 31, 2020, respectively

Additional paid-in capital

Treasury stock, at cost, no shares and 67.4 million shares at December 31, 2021 and December 31, 2020, respectively

(Accumulated deficit) retained earnings

Accumulated other comprehensive loss

Total stockholders’ equity

Total liabilities and stockholders’ equity

See Notes to Consolidated Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT Y

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Stock-based compensation

Issuance of preferred stock

Conversion of preferred stock to common stock

Repurchases of common stock

Dividends and dividend equivalent rights declared ($ 2.52 per common share)

Cumulative effect adjustment to retained earnings in accordance with ASC 606 adoption

Cumulative effect adjustment to retained earnings in accordance with ASU 2016-01 adoption

Issuance of shares to employees, net of shares withheld for employee taxes

December 31, 2019

Cumulative effect of change in accounting principle — Allowance for credit losses

Other comprehensive income

Stock-based compensation

Issuance of preferred stock

Conversion of preferred stock to common stock

Repurchases of common stock

Common stock issued as consideration for acquired business

Dividends and dividend equivalent rights declared ($ 1.26 per common share)

Issuance of shares to employees, net of shares withheld for employee taxes

December 31, 2020

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

Other comprehensive income

Stock-based compensation

Common stock issued as consideration for acquired business

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)

Dividends and dividend equivalent rights declared ($ 0.84 per common share)

Retirement of treasury stock

Spinoff of Loyalty Ventures Inc.

Issuance of shares to employees, net of shares withheld for employee taxes

December 31, 2021

See accompanying notes to consolidated financial statements.

See Notes to Consolidated Financial Statements.

ALLIANCE DATA SYSTEMS CORPORATION

4 unchanged sentences

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

Provision for credit losses

Depreciation and amortization

Deferred income taxes

Provision for loan loss

Non-cash stock compensation

3 unchanged sentences

Asset impairment charges

Change in other operating assets and liabilities, net of acquisitions and sales of businesses:

Change in deferred revenue

Change in accounts receivable

Change in accounts payable and accrued expenses

Amortization of deferred origination costs and other charges

Change in other operating assets and liabilities, net of acquisitions and dispositions

Change in other assets

Change in other liabilities

Originations of credit card and loan receivables held for sale

Sales of credit card and loan receivables held for sale

Net cash provided by operating activities

CASH FLOWS FROM INVESTING ACTIVITIES:

Change in credit card and other loans

Change in redemption settlement assets

Change in credit card and loan receivables

Proceeds from sale of businesses

Proceeds from sale of business

Payments for acquired businesses, net of cash and restricted cash

Proceeds from sale of credit card portfolios

Purchase of credit card portfolios

Proceeds from sale of real estate

Proceeds from sale of credit card loan portfolio

Purchase of credit card loan portfolios

Capital expenditures

Purchases of other investments

Maturities/sales of other investments

Net cash provided by (used in) investing activities

Purchases of available-for-sale securities

Maturities of available-for-sale securities

Net cash (used in) provided by investing activities

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under debt agreements

Repayments of borrowings

Non-recourse borrowings of consolidated securitization entities

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

Net (decrease) increase in deposits

Unsecured borrowings under debt agreements

Repayments/maturities of unsecured borrowings under debt agreements

Debt issued by consolidated variable interest entities

Repayments/maturities of debt issued by consolidated variable interest entities

Net increase (decrease) in deposits

Debt proceeds from spinoff of Loyalty Ventures Inc.

Transfers to Loyalty Ventures Inc.

related to spinoff

Payment of debt extinguishment costs

3 unchanged sentences

Purchase of treasury shares

Net cash used in financing activities

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

Net cash provided by (used in) financing activities

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

Change in cash, cash equivalents and restricted cash

2 unchanged sentences

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid

Income taxes paid, net

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.

See accompanying notes to consolidated financial statements .

Cash paid during the year for interest

Cash paid during the year for income taxes, net

The Consolidated Statements of Cash Flows are presented with the combined cash flows from continuing and discontinued operations.

See Notes to Consolidated Financial Statements .

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DESCRIPTION OF BUSINES S AND BASIS OF PRESENTATION

Description of the Business —Alliance Data Systems Corporation (“ADSC” or, including its consolidated subsidiaries and variable interest entities, the “Company”) is a leading provider of data-driven marketing, loyalty and payment solutions serving large, consumer-based industries.

The Company creates and deploys customized solutions that measurably change consumer behavior while driving business growth and profitability for our clients and brand partners.

The Company operates in two 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”).

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.

Basis of Presentation —The Company’s financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

DESCRIPTION OF THE BUSINESS

Alliance Data Systems Corporation (ADSC or, including its consolidated subsidiaries and variable interest entities, the Company) is a leading provider of tech-forward payment and lending solutions, serving customers and consumer-based industries in North America.

Through omnichannel touch points and a comprehensive product suite that includes credit products and Bread ® digital payment solutions, the Company helps its partners drive loyalty and growth, while giving customers greater payment choices.

Through its Comenity-branded financial services, it also offers credit and savings products to consumers.

With the spinoff of its LoyaltyOne ® segment in November 2021, classified as discontinued operations herein, the Company operates in one reportable segment.

BASIS OF PRESENTATION

The Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP).

For purposes of comparability, certain prior period amounts have been reclassified to conform to the current year presentation.

The Company’s consolidated financial statements have been presented with its former Epsilon ® segment as a discontinued operation.

See Note 7, “Discontinued Operations,” for more information.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation —The accompanying consolidated financial statements include the accounts of ADSC and all subsidiaries in which the Company has a controlling financial interest.

Controlling financial interest is determined either by a majority voting interest and the absence of substantive third party participating rights or in the case of variable interest entities, by whether ADSC has power 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,” the Company is the primary beneficiary of certain trusts.

The Company, through its involvement in the activities of these trusts, has the power to direct the activities that most significantly impact the economic performance of such trusts, and the obligation (or right) to absorb losses (or receive benefits) of the trusts that could potentially be significant.

As such, the Company consolidates these trusts in its consolidated financial statements.

For investments in any entities in which the Company owns 50% or less of the outstanding voting stock but in which the Company has significant influence over 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 against 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

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 transfers of financial assets under ASC 860, “Transfers and Servicing,” as either sales or financings.

Transfers 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 the assets and provides more than a trivial benefit to 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 life 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 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.

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.

The allowance is maintained through an adjustment to the provision for loan loss and is evaluated for appropriateness.

In estimating its allowance for loan loss, for each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors.

These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance.

The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors.

The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and loan receivables, with no reversion period.

In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for loan loss reflects the Company’s best estimate of current expected credit losses.

As permitted by ASC 326, “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

In particular, as a result of the spinoff of its LoyaltyOne segment as discontinued operations, the Company has adjusted the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither the Company nor any of its subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the bank holding company presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s operations going forward and better align the Company with its peers for comparability purposes.

As noted above, the Company’s Consolidated Financial Statements have been presented with its LoyaltyOne segment as discontinued operations.

See Note 22, “Discontinued Operations and Bank Holding Company Financial Presentation,” 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 below.

Significant Accounting Policy

Credit Card and Other Loans

Allowance for Credit Losses

Transfers of Financial Assets

Securitizations

Available-for-Sale Securities

Property and Equipment

Property and Equipment, Net

Goodwill and Intangible Assets, Net

Intangible Assets, Net

Goodwill and Intangible Assets, Net

Stock Compensation Expense

Stockholders' Equity

Earnings Per Share

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of ADSC and all subsidiaries in which the Company has a controlling financial interest.

For voting interest entities, a controlling financial interest is determined when the Company is able to exercise control over the operating and financial decisions of the investee.

For variable interest entities (VIEs), which are themselves determined based on the amount and 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 party having both the power to exercise control over the activities that most significantly impact the

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.

VIE’s financial performance, as well as the obligation to absorb the losses of, or the right to receive the benefits from, the VIE that could potentially be significant to that VIE.

The Company is the primary beneficiary of its securitization trusts and therefore consolidates these trusts within its Consolidated Financial Statements.

In cases where the Company does not have a controlling financial interest, but is able to exert significant influence over the operating and financial decisions of the entity, the Company accounts for such 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 the 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, or sold, such as Epsilon, both of which are reflected as discontinued operations herein.

Amounts Based on Estimates and Judgments

The preparation of financial statements in conformity with GAAP requires management to make estimates and judgments about future events that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, as well as the reported amounts of income and expenses during the reporting periods.

The most significant of those estimates and judgments relate to the Company’s Allowance for credit losses;

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 credit agreements.

Interest and fees continue to accrue on all accounts, except in limited circumstances, until the account balance and all related interest and fees are paid or charged-off, in the month during which an account becomes 180 days past due for credit card loans or 120 days past due for installment 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 installment loans over the life of the loan, and are recorded as a reduction to Interest and fees on loans.

As of December 31, 2021 and 2020, the remaining unamortized deferred direct loan origination costs were $ 48 million and $ 38 million, respectively, and included in Total credit card and other loans.

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.

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.

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

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 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 a charge to Non-interest expenses, in the Company’s consolidated statements of income.

Amortization of contract costs recorded as a reduction to Interchange revenue, net of retailer share arrangements was $ 64 million, $ 65 million and $ 72 million for the years ended December 31, 2021, 2020 and 2019, respectively;

amortization of contract costs recorded in Non-interest expenses totaled $ 11 million, $ 12 million and $ 12 million for the years ended December 31, 2021, 2020 and 2019, respectively.

As of December 31, 2021 and 2020, the remaining unamortized contract costs were $ 364 million and $ 311 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 global 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, 2021 or 2019.

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, 2021 and 2020, cash and due from banks was $ 251 million and $ 262 million, respectively, interest-bearing cash balances were $ 2.7 billion and $ 2.5 billion, respectively, and short-term investments were $ 80 million and $ 29 million, respectively.

Restricted cash primarily represents cash restricted for principal and interest repayments of debt issued by consolidated VIE securitization trusts, and is recorded in Other assets on the Consolidated Balance Sheets.

Restricted cash totaled $ 877 million and $ 323 million at December 31, 2021 and 2020, 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.

For those derivatives designated in hedging relationships, changes in their fair values, excluding any ineffective portions, are recorded in Accumulated other comprehensive income, net of income taxes, until the hedged transactions affect net income;

the ineffective portions of the derivative financial instruments are recognized through net income.

For those derivatives not designated in hedging relationships, or economic hedges, changes in their fair values are recognized in the Consolidated Statements of Income as they occur.

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.

The Company’s derivative financial instruments were immaterial to the Consolidated Financial Statements for the periods presented.

With the spinoff of its LoyaltyOne segment in November 2021, the Company does not hold any derivative financial instruments as of December 31, 2021.

CONCENTRATIONS

We depend on a limited number of large partner relationships for a significant portion of our revenue.

The business generated through our 10 largest partners represented approximately 59 % and 65 %, respectively, of our Total net interest and non-interest income during the years ended December 31, 2021 and 2020.

Business generated through our relationship with Victoria’s Secret & Co.

and its retail affiliates represented approximately 13 % and 14 % of our Total net interest and non-interest income during these same respective periods.

We previously announced the non-renewal of our contract with BJ’s Wholesale Club (BJ’s).

For the year ended December 31, 2021, BJ’s branded co-brand accounts generated approximately 8 % of our Total net interest and non-interest income.

As of December 31, 2021, BJ’s branded co-brand accounts were responsible for approximately 11 % of our Total credit card and other loans.

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.

In March 2020, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments in this ASU apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued due to reference rate reform.

The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022.

This ASU is elective and is effective upon issuance for all entities.

The Company is evaluating the impact that adoption of ASU 2020-04 will have on its consolidated financial statements.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

This ASU is elective and is effective upon issuance for all entities, and the adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.

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.

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.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The Company’s products and services are reported under two 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:

Year Ended December 31, 2020

Card Services

(in millions)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

Short-term loyalty programs

Servicing fees, net

Revenue from contracts with customers

Finance charges, net

Investment income

Year Ended December 31, 2019

Card Services

(in millions)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

Short-term loyalty programs

Servicing fees, net

Revenue from contracts with customers

Finance charges, net

Investment income

Year Ended December 31, 2018

Card Services

(in millions)

Disaggregation of Revenue by Major Source:

Coalition loyalty program

Short-term loyalty programs

Servicing fees, net

Revenue from contracts with customers

Finance charges, net

Investment income

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Year Ended December 31, 2020

Card Services

(in millions)

Disaggregation of Revenue by Geographic Region:

United States

Europe, Middle East and Africa

Year Ended December 31, 2019

Card Services

(in millions)

Disaggregation of Revenue by Geographic Region:

United States

Europe, Middle East and Africa

Year Ended December 31, 2018

Card Services

(in millions)

Disaggregation of Revenue by Geographic Region:

United States

Europe, Middle East and Africa

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 three 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 three 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

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

(in millions)

Balance at January 1, 2019

Cash proceeds

Revenue recognized (1)

Effects of foreign currency translation

Balance at December 31, 2019

Cash proceeds

Revenue recognized (1)

Effects of foreign currency translation

Balance at December 31, 2020

Amounts recognized in the consolidated balance sheets:

Deferred revenue (current)

Deferred revenue (non-current)

(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 20 21 , $ 75.1 million in 2022 , $ 29.5 million in 2023 , and $ 0.9 million in 2024 .

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

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.

No 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.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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,

(in millions, except per share amounts)

Basic income per share:

Income from continuing operations

Dividends declared on preferred stock

Allocation of undistributed earnings

Income from continuing operations - basic

(Loss) income from discontinued operations, net of tax

Net income - basic

Weighted average shares, basic

Basic income (loss) attributable to common stockholders per share:

Income from continuing operations

(Loss) income from discontinued operations

Net income per share

Diluted income per share (1) :

Income from continuing operations

(Loss) income from discontinued operations, net of tax

Weighted average shares, basic

Weighted average effect of dilutive securities:

Shares from assumed conversion of preferred stock

Net effect of dilutive stock options and unvested restricted stock (2)

Denominator for diluted calculation

Diluted income (loss) attributable to common stockholders per share:

Income from continuing operations

(Loss) income from discontinued operations

Net income per share

(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.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminated certain exceptions within Accounting Standards Codification (ASC) 740, “Income Taxes,” and clarified certain aspects of ASC 740 to promote consistency among reporting entities.

Most amendments within the standard were required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis.

The Company’s adoption of this standard on January 1, 2021 did not have a material impact on its financial position, results of operations or cash flows, and there were no significant changes to accounting policies, business processes or internal controls as a result of adopting the standard.

Effective January 1, 2020, the Company adopted the new credit reserving methodology referred to as Current Expected Credit Loss (CECL), following a modified retrospective transition which resulted in an increase to the Allowance for credit losses of $ 644 million, an increase to net deferred tax assets of $ 159 million, with the offset to the opening balance of Retained earnings, net of income taxes, of $ 485 million.

Under the CECL methodology, the Company utilizes a financial instrument impairment model to establish an allowance based on expected losses over the estimated life of the exposure, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information.

This approach differs from the Company’s historic model prior to January 1, 2020, which was based on an incurred loss approach.

Although there were no significant changes to the Company’s accounting systems or internal controls as a result of adopting the standard, the Company modified certain of its existing controls and added new controls around its loss forecasting models.

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.

2020 Acquisitions:

On September 28, 2020, the Company acquired 3.5 million preferred Series D Shares of Lon Inc., a Delaware corporation (Bread), for approximately $ 25 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;

On December 3, 2020, the Company acquired the remaining interest in Bread, and accordingly its approximate 6 % interest was remeasured at fair value;

no 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 for the 100 % ownership of Bread consisted of cash of $ 275 million, equity of $ 149 million with the issuance of 1.9 million shares of the Company’s common stock, and deferred cash consideration of approximately $ 75 million paid in December 2021.

Consideration, net of cash and restricted cash acquired, was $ 491 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:

December 3, 2020

(in millions)

Installment loan receivables

Accounts receivable

Other current assets

Property and equipment

The following table summarizes the allocation of the consideration and the respective fair values of the assets acquired and liabilities assumed in the transaction, net of cash and restricted cash acquired, as of December 3, 2020 (in millions):

Installment loans

Developed technology

6 unchanged sentences

Operating lease liabilities

Non-recourse borrowings of consolidated securitization entities

Debt issued by consolidated variable interest entities

Total liabilities assumed

Net assets acquired, net of cash and restricted cash

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 two 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.

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.

(in millions)

Total consideration (1)

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

Allocation of goodwill

Strategic transaction costs

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

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

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.

(in millions)

Consideration received (1)

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

Pre-tax gain on deconsolidation

(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.

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,

(in millions)

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

Depreciation and other amortization

Amortization of purchased intangibles

Interest expense (1)

Gain on sale of Epsilon

Income before (benefit) provision from income taxes

(Benefit) provision for income taxes

(Loss) income from discontinued operations, net of taxes

(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,

(in millions)

Depreciation and amortization

Capital expenditures

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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:

(in millions)

Credit card receivables

Installment loan receivables

Total credit card and loan receivables

Credit card and loan receivables – restricted for securitization investors

Other credit card and loan receivables

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 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, the Company evaluated multiple risk characteristics of its credit card receivables portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses.

To estimate its allowance for loan loss, the Company segregates its credit card receivables into four groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score.

These risk characteristics are evaluated on at least an annual basis, or more frequently as facts and circumstances warrant.

The Company’s credit card receivables do not have stated maturities and therefore prepayments are not factored into the determination of the estimated life of the credit card receivables.

In determining the estimated life of a credit card and loan receivable, payments were applied to the measurement date balance with no payments allocated to future purchase activity.

The Company uses a combination of First In First Out (“FIFO”) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”) methodology to model balance paydown.

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

Estimated Life

Group A (Current, risk score - high)

Group B (Current, risk score - low)

Group C (Delinquent, risk score - high)

Group D (Delinquent, risk score - low)

These models utilize historical data and applicable macroeconomic variables with statistical

Bread utilized certain statutory trusts to securitize its installment loans.

As part of the acquisition, the Company acquired $ 112 million of installment loans restricted for securitization investors.

In addition, the Company assumed two warehouse facilities totaling $ 96 million utilized to fund securitized loans, which were amended in December 2020 and repaid in full in August 2021.

See Note 11, “Borrowings of Long-term and Other Debt,” for more information.

CREDIT CARD AND OTHER LOANS

The Company’s payment and lending solutions result in the generation of credit card and other loans, which are recorded at the time a cardholder enters into a point-of-sale transaction with a merchant.

Credit card loans represent revolving amounts due and have a range of terms that include credit limits, interest rates and fees, which can be revised over time based on new information about the cardholder, in accordance with applicable regulations and the governing terms and conditions.

Cardholders choosing to revolve their amounts due, instead of paying in full, are subject to finance charges and are required to make monthly payments based on pre-established amounts.

Other loans, which are primarily installment loans offered to our customers, have a range of fixed terms such as interest rates, fees and repayment periods, and borrowers are required to make pre-established monthly payments over the term of the loan in accordance with the applicable terms and conditions.

Credit card and other loans are presented on the Consolidated Balance Sheets net of the Allowance for credit losses, and include principal and any related accrued interest and fees.

The Company continues to accrue interest and fee income on all accounts, except in limited circumstances, until the related balance and all related interest and fees are paid or charged-off;

an Allowance for credit losses is established for uncollectable interest and fees.

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 utilizes a third party service 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 credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for loan loss reflects the Company’s best estimate of current expected credit losses.

As permitted by ASC 326, the Company excludes unbilled finance charges from its amortized cost basis of credit card and loan receivables.

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 life of the loans.

The model segmented accounts based on three attributes:

delinquency, risk score and remaining term.

As of December 31, 2020, the allowance for loan loss related to installment loan receivables was $ 5.7 million.

Allowance for Loan Loss Rollforward

The following table presents the Company’s allowance for loan loss for its credit card and loan receivables for the years indicated.

Years Ended December 31,

For the most part, the Company classifies its credit card and other loans as held for investment.

The Company sells a majority of its credit card loans originated by Comenity Bank and by Comenity Capital Bank, which together are referred to herein as the “Banks,” to securitization master trusts, which are themselves consolidated VIEs, and therefore these loans are restricted for securitization investors.

All new originations of credit card and other loans are determined to be held for investment at origination because the Company has the intent and ability to hold them for the foreseeable future.

In determining what constitutes the foreseeable future, the Company considers the average life and homogenous nature of its credit card and other loans.

In assessing whether its credit card and other loans continue to be held for investment, the Company also considers capital levels and scheduled maturities of funding instruments used.

The assertion regarding the intent and ability to hold credit card and other loans for the foreseeable future can be made with a high degree of certainty given the maturity distribution of the Company’s direct-to-consumer deposits and other funding instruments;

the demonstrated ability to replace maturing time-based deposits and other borrowings with new deposits or borrowings;

and historic payment activity on its credit card and other loans.

Due to the homogenous nature of the Company’s credit card loans, amounts are classified as held for investment on a brand partner portfolio basis.

From time to time certain credit card loans are classified as held for sale, as determined on a brand partner basis.

The Company carries these assets at the lower of aggregate cost or fair value, and continues to recognize finance charges on an accrual basis.

Cash flows associated with credit card and other loans originated or purchased for investment are classified as Cash flows from investing activities, regardless of any subsequent change in intent.

The Company’s credit card and other loans were as follows, as of December 31:

(in millions)

Balance at beginning of year

Adoption of ASC 326 (2)

Provision for loan loss

Allowance associated with credit card and loan receivables transferred

to held for sale

Change in estimate for uncollectible unpaid interest and fees

Principal charge-offs

Balance at end of year

(1) With the acquisition of Bread in December 2020, the Company acquired certain installment loans which represented a separate portfolio segment.

As the amount of the allowance for loan loss was immaterial, the amounts were included in the above table.

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

During the year ended December 31, 2020, the increase in the allowance for loan loss was due to a $ 644.0 million cumulative-effect adjustment for the adoption of ASC 326 as well as deterioration of the macroeconomic outlook due to COVID-19.

Net Charge-offs

Net charge-offs include the principal amount of losses that are deemed uncollectible, less recoveries and exclude charged-off interest, fees and fraud losses.

Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as a cost of operations expense.

Credit card receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death.

Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days

Credit card loans

Installment loans

Total credit card and other loans (1)(2)

Allowance for credit losses

Credit card and other loans, net

(1) Includes $ 11.2 billion of credit card and other loans available to settle obligations of consolidated VIEs as of both December 31, 2021 and 2020, respectively.

(2) Includes $ 224 million and $ 219 million, of accrued interest and fees that have not yet been billed to cardholders as of December 31, 2021 and 2020, 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, which is typically at 180 days past due for credit card loans and 120 days past due for installment loans.

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

This collection scoring algorithm then recommends a strategy for collecting on the past due account, including a contact schedule and collections priority.

If, after exhausting all in-house collection efforts, the Company is unable to make a collection it may engage collection agencies or outside attorneys to continue those efforts, or sell the charged-off balances.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 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 account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent for credit card receivables and 120 days delinquent for installment loan receivables.

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

The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account.

If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.

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

The following table presents the delinquency trends on the Company’s credit card and other loans portfolio based on the principal balances outstanding as of December 31, and excludes amounts that have not yet been billed to cardholders:

Aging Analysis of Delinquent Amortized Cost

Credit Card and Loan Receivables

Credit Card and Other Loans (1)

31 to 60 days

4 unchanged sentences

As of December 31, 2020

(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.

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

From time to time the Company may re-age cardholders’ accounts, which is intended to assist delinquent cardholders who have experienced financial difficulties but who demonstrate both an ability and willingness to repay the amounts due;

this practice affects credit card loan delinquencies and charge-offs.

Accounts meeting specific defined criteria are re-aged when the cardholder makes one or more consecutive payments aggregating to a certain pre-defined amount of their account balance.

Upon re-aging, the outstanding balance of a delinquent account is returned to Current status.

For the years ended December 31, 2021, 2020 and 2019, the Company’s re-aged accounts represented 1.7 %, 2.8 % and 2.4 %, respectively, of total credit card and other loans.

The Company’s re-aging practices comply with regulatory guidelines.

Modified Credit Card Receivables

Net Principal Charge-offs

The Company’s net charge-offs include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and fraud losses.

Charged-off interest and fees reduce Interest and fees on loans, while fraud losses are recorded in Card and processing expenses.

Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due.

Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due.

However, in the case of a customer bankruptcy or death, credit card and other loans, including unpaid interest and fees as applicable, are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case not later than 180 days past due.

The Company records the actual charge-offs for unpaid interest and fees as a reduction to Interest and fees on loans, which were $ 456 million, $ 717 million and $ 809 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Modified Credit Card Loans

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 two short-term programs with durations of three and six months ,

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 million as of December 31, 2020.

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

Troubled Debt Restructurings

The Company holds certain credit card receivables for which the terms have been modified.

The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs.

These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction.

The temporary programs’ concessions remain in place for a period no longer than twelve months , while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program.

Additionally, the Company instituted two temporary hardship programs with durations of 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 two 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 used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment.

In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model 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 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 million for the years ended December 31, 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 for the years ended December 31, 2020, 2019 and 2018, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

In response to the global COVID-19 pandemic, the Company offered forbearance programs, which provided for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current as of their most recent billing cycle, prior to the announcement of the forbearance programs.

As of December 31, 2021 and 2020, the amount of credit card loans in these forbearance programs was approximately $ 86 million and $ 157 million, respectively.

Additionally, the Company instituted two short-term forbearance programs with durations of three and six months , which provide concessions consisting primarily of a reduced minimum payment and an interest rate reduction, the balances of which were $ 12 million and $ 67 million as of December 31, 2021 and 2020, respectively.

As a result of legislation enacted by the United States that provided companies with the option to temporarily suspend (a) certain requirements under GAAP for loan modifications directly related to the global COVID-19 pandemic that would otherwise be treated as troubled debt restructurings (TDRs) and (b) any determination that a loan modified as a result of the pandemic is a TDR, these short-term modifications offered by the Company are not considered TDRs.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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

Year Ended December 31, 2020

Year Ended December 31, 2019

Credit Card Loans Modified as TDRs

The Company considers impaired loans to be loans for which it is probable that it will be unable to collect all amounts due according to the original contractual terms of the cardholder agreement, including credit card loans modified as TDRs.

In instances where cardholders are experiencing financial difficulty, the Company may modify its credit card loans with the intention of minimizing losses and improving collectability, while providing cardholders with financial relief;

such credit card loans are classified as TDRs, exclusive of forbearance programs described above.

Modifications, including for temporary hardship and permanent workout programs, include concessions consisting primarily of a reduced minimum payment and an interest rate reduction.

The temporary programs’ concessions remain in place for a period no longer than twelve months , while the permanent programs remain in place through the payoff of the credit card loans, if the cardholder complies with the terms of the program.

Additionally, the Company instituted two temporary hardship programs with durations of three and six months with similar terms to our short-term forbearance programs described above.

As of December 31, 2021 and 2020, the outstanding balance of credit card loans in these two short-term temporary hardship programs treated as troubled debt restructurings totaled approximately $ 9 million and $ 40 million, respectively.

TDR concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments, and the cardholder’s ability to make future purchases is either limited, or suspended until the cardholder successfully exits from the modification program.

In accordance with the terms of the Company’s temporary hardship and permanent workout programs, the credit agreement reverts back to its original contractual terms (including the contractual interest rate) when the customer exits the program, which is either when all payments have been made in accordance with the program, or when the customer defaults out of the program.

TDRs are collectively evaluated for impairment on a pooled basis.

In measuring the appropriate allowance for credit losses, these modified credit card loans are included in the general pool of credit card loans, with the allowance determined under a contingent loss model.

The Company’s impaired credit card loans represented less than 3 % of total credit card loans as of December 31, 2021 and 2020, respectively.

As of those same dates, the Company’s recorded investment in impaired credit card loans was $ 281 million and $ 490 million, respectively, with an associated allowance for credit losses of $ 81 million and $ 166 million, respectively.

The average recorded investment in impaired credit card loans was $ 383 million and $ 412 million for the years ended December 31, 2021 and 2020, respectively.

Interest income on these impaired credit card loans is accounted for in the same manner as other 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 $ 26 million, $ 30 million and $ 23 million for the years ended December 31, 2021, 2020 and 2019, 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:

Restructurings

1 unchanged sentence

(Dollars in millions)

Troubled debt restructurings – credit card receivables

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

Year Ended December 31, 2020

Year Ended December 31, 2019

Troubled debt restructurings

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:

Restructurings

1 unchanged sentence

(Dollars in millions)

Troubled debt restructurings that subsequently defaulted – credit card receivables

Credit Quality

Credit Card Receivables

The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality for its credit card receivables.

The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions.

The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically.

Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 91 or more days past due at any time within the next 12 months.

Obligor credit quality is monitored at least monthly during the life of an account.

The following table reflects the composition of the Company’s credit card receivables by obligor credit quality as of December 31, 2020 and 2019:

Amortized Cost Revolving Credit Card Receivables

December 31, 2020

December 31, 2019

Percentage of

Probability of an Account Becoming 91 or More Days Past

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

(in millions, except percentages)

27.1% and higher

17.1% - 27.0%

12.6% - 17.0%

Lower than 1.9%

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.

Troubled debt restructurings that subsequently defaulted

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 performance 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 no 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, one 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 one 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 one 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 three 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 one 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 one 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 seven 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.

Credit Quality

Credit Card Loans

As part of the Company’s credit risk management activities, the Company assesses overall credit quality by reviewing information related to the performance of a credit cardholder’s account, as well as information from credit bureaus relating to the cardholder’s broader credit performance.

The Company utilizes VantageScore (Vantage) credit scores to assist in its assessment of credit quality.

Vantage credit scores are obtained at origination of the account and are refreshed monthly thereafter to assist in predicting customer behavior.

The Company categorizes these Vantage credit scores into the following three credit score categories:

(i) 661 or higher, which are considered the strongest credits and therefore have the lowest credit risk;

(ii) 601 to 660, considered to have moderate credit risk;

and (iii) 600 or less, which are considered weaker credits and therefore have the highest credit risk.

In certain limited circumstances there are customer accounts for which a Vantage score is not available and the Company uses alternative sources to assess credit risk and predict behavior.

The table below excludes 0.1 % of our total credit card loans balance at each of December 31, 2021 and 2020, 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:

Credit card loans

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

Installment Loans

The amortized cost basis of the Company’s installment loans totaled $ 182 million and $ 118 million as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, approximately 84 % of these loans were originated by customers with Fair Isaac Corporation (FICO) scores of 660 or above, and approximately 16 % of these loans were originated by customers with FICO scores below 660.

Similarly, as of December 31, 2020, approximately 86 % and 14 % of these loans were originated by customers with FICO scores of 660 or above, and below 660, respectively.

Unfunded Loan Commitments

The Company is active in originating private label and co-brand credit cards in the United States.

The Company manages potential credit risk in its unfunded lending commitments by reviewing each potential customer’s credit application and evaluating the applicant’s financial history and ability and perceived willingness to repay.

Credit card loans are made primarily on an unsecured basis.

Cardholders reside throughout the United States and are not significantly concentrated in any one area.

The Company manages its potential risk in credit commitments by limiting the total amount of credit, both by individual customer and in total, by monitoring the size and maturity of its portfolios and applying consistent underwriting standards.

The Company has the unilateral ability to cancel or reduce unused credit card lines at any time.

Unused credit card lines available to cardholders totaled approximately $ 112 billion and $ 108 billion at December 31, 2021 and 2020, respectively.

While these amounts represented the total available unused credit card lines, the Company has not experienced and does not anticipate that all cardholders will access their entire available line at any given point in time.

Portfolio Sales

As of December 31, 2021 and 2020, there were no credit card loans held for sale.

During the years ended December 31, 2021 and 2020, the Company sold credit card loan portfolios for cash consideration of approximately $ 512 million

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

and $ 289 million, respectively, and recognized associated gains of approximately $ 10 million and $ 20 million, respectively, which were recorded in Other non-interest income in the Consolidated Statements of Income.

Also during the year ended December 31, 2020, the Company recorded $ 8 million in portfolio valuation adjustments, which are reflected in Non-interest expenses, and as of September 2020, one of the Company’s credit card loan portfolios totaling approximately $ 82 million was transferred from held for sale to held for investment, and was included in Total credit card and other loans as of December 31, 2020.

No such valuation adjustments or transfers occurred in 2021.

Portfolio Acquisitions

During the year ended December 31, 2019, the Company acquired four 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.

During the year ended December 31, 2021, the Company acquired three credit card loan portfolios for aggregate cash consideration of approximately $ 110 million, which consisted of approximately $ 106 million of credit card loans and $ 4 million of purchased credit card relationships intangible assets.

No portfolio acquisitions were made during the year ended December 31, 2020.

Securitized Credit Card and Loan Receivables

The Company regularly securitizes its credit card and loan receivables through its trusts.

The Company continues to own and service the accounts that generate credit card and loan receivables held by the trusts.

In its capacity as a servicer, each of the respective entities earns a fee from the trusts to service and administer the credit card and loan receivables, collect payments and charge-off uncollectible receivables.

These fees are eliminated and therefore are not reflected in the 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.

For its securitized credit card receivables, during the initial phase of a securitization reinvestment period, the Company generally retains principal collections in exchange for the transfer of additional credit card receivables into the securitized pool of assets.

ALLOWANCE FOR CREDIT LOSSES

Effective January 1, 2020, the Company adopted the CECL model on a modified retrospective approach and applied a CECL model to determine its allowance for credit losses.

Reserves for reporting periods beginning after January 1, 2020 are presented using the CECL methodology, while comparative information continues to be reported in accordance with the incurred loss methodology in effect for prior periods.

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 of the allowance for credit losses includes an estimate for uncollectible principal as well as unpaid interest and fees.

Charge-offs of principal amounts, net of recoveries are deducted from the allowance.

Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans.

The allowance is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness.

In estimating its allowance for credit losses, for each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors.

These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance.

The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors.

The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, with no reversion period.

As permitted by GAAP, the Company excludes unbilled finance charges from its amortized cost basis of credit card and other loans.

As of December 31, 2021 and 2020, unbilled finance charges were $ 224 million and $ 219 million, respectively, and included in Credit card and other loans on the Consolidated Balance Sheets.

Credit Card Loans

The Company uses a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics.

As part of its CECL implementation, the Company evaluated multiple risk characteristics of its credit card loans portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses.

To estimate its allowance for credit losses, the Company segregates its credit card loans into four groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score.

These risk characteristics are evaluated on at least an annual basis, or more frequently as facts and circumstances

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

In determining the estimated life of the Company’s credit card loans, payments were applied to the measurement date balance with no payments allocated to future purchase activity.

The Company uses a combination of First In First Out (FIFO) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) methodology to model balance paydown.

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

Estimated Life

Group A (Current, risk score - high)

Group B (Current, risk score - low)

Group C (Delinquent, risk score - high)

Group D (Delinquent, risk score - low)

Installment Loans

The allowance for credit losses for installment loans utilizes a migration model over the remaining life of the loans.

The model segmented accounts based on three attributes:

delinquency, risk score and remaining term.

As of December 31, 2021 and 2020, the allowance for credit losses related to installment loans was $ 14 million and $ 6 million, respectively.

Allowance for Credit Losses Rollforward

The following table presents the Company’s allowance for credit losses for its credit card and other loans.

With the acquisition of Bread in December 2020, the Company acquired certain installment loans which represented a separate portfolio segment;

the amount of the related allowance for credit losses was insignificant and therefore has been included in the table below.

The amounts presented are for the years ended December 31:

(in millions)

Beginning balance

Provision for credit losses (1)

Change in estimate for uncollectible unpaid interest and fees

Net principal charge-offs (2)

Ending balance

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

(2) Principal charge-offs are presented net of recoveries of $ 163 million, $ 205 million and $ 234 million for the years ended December 31, 2021, 2020 and 2019, respectively.

(3) Includes an increase of $ 644 million as of January 1, 2020, related to the adoption of the CECL methodology.

During the year ended December 31, 2021, the decrease in the allowance for credit losses was due to improved credit performance, lower net charge-offs and improving macroeconomic variables.

In addition, improvements in customer payment behavior, which include the effects of government stimulus actions, have contributed to a reduction in credit card and other loans, as well as delinquencies, which also contributed to the reduction in the allowance for credit losses.

During the year ended December 31, 2020, the increase in the allowance for credit losses was due to a $ 644 million cumulative-effect adjustment for the adoption of the CECL methodology as well as deterioration of the macroeconomic outlook due to the global COVID-19 pandemic.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

SECURITIZATIONS

The Company accounts for transfers of financial assets as either sales or financings.

Transfers of financial assets that are accounted for as sales are removed from the Consolidated Balance Sheets with any realized gain or loss reflected in the Consolidated Statements of Income during the period in which the sale occurs.

Transfers of financial assets that are not accounted for as a sale are treated as a financing.

The Company regularly securitizes the majority of its credit card loans through the transfer of those loans to one of its master trusts (the Trusts).

The Company performs the decision making for the Trusts, as well as servicing the cardholder accounts that generate the credit card loans held by the Trusts.

In its capacity as a servicer, the Company administers the loans, collects payments and charges-off uncollectible balances.

Servicing fees are earned by a subsidiary of ADSC, which are eliminated in consolidation.

The Trusts are VIEs because they have insufficient equity at risk to finance their activities – being the issuance of debt securities and notes, collateralized by the underlying credit card loans.

Because the Company performs the decision making and servicing for the Trusts, it has the power to direct the activities that most significantly impact the Trusts’ economic performance (the collection of the underlying credit card loans).

In addition, the Company holds all of the variable interests in the Trusts, with the exception of the liabilities held by third-parties.

These variable interests provide the Company with the right to receive benefits and the obligation to absorb losses, which could be significant to the Trusts.

As a result of these considerations, the Company is deemed to be the primary beneficiary of the Trusts and therefore consolidates the Trusts.

The Trusts issue debt securities and notes, which are non-recourse to the Company.

The collections on the securitized credit card loans held by the Trusts are available only for payment of those debt securities and notes, or other obligations arising in the securitization transactions.

For its securitized credit card loans, during the initial phase of a securitization reinvestment period, the Company generally retains principal collections in exchange for the transfer of additional credit card loans into the securitized pool of assets.

During the amortization or accumulation period of a securitization, the investors’ share of principal collections (in certain cases, up to a maximum specified amount each month) is either distributed to the investors or held in an account until it accumulates to the total amount due, at which time it is paid to the investors in a lump sum.

The Company is required to maintain minimum interests ranging from 4 % to 10 % of the securitized credit card receivables.

This requirement is met through transferor’s interest and is supplemented through excess funding deposits.

Excess funding deposits 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.

No cash collateral, restricted deposits were required to be used to cover losses on securitized credit card receivables in the years ended December 31, 2020, 2019 and 2018.

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

The Company is required to maintain minimum interests in its Trusts ranging from 4 % to 10 % of the securitized credit card loans.

This requirement is met through a transferor’s interest and is supplemented through excess funding deposits which represent cash amounts deposited with the trustee of the securitizations.

Cash collateral, restricted deposits are generally released proportionately as investors are repaid.

Under the terms of the Trusts, the occurrence of certain triggering events associated with the performance of the securitized credit card loans in each Trust could result in certain required actions, including payment of Trust expenses, the establishment of reserve funds, or early amortization of the debt securities and/or notes, in a worst-case scenario.

During the years ended December 31, 2021, 2020 and 2019, no such triggering events occurred.

The following tables provide the total securitized credit card loans and related delinquencies as of December 31, and net principal charge-offs of securitized credit card loans for the years ended December 31:

(in millions)

Total credit card and loan receivables – restricted for securitization investors

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

Years Ended December 31,

Total credit card loans – available to settle obligations of consolidated VIEs

principal amount of credit card loans 91 days or more past due

(in millions)

Net charge-offs of securitized principal

INVENTORIES, NET

Inventories, net 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 in the Company’s loyalty programs.

For the year ended December 31,

ALLIANCE DATA SYSTEMS CORPORATION

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.

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.

Marketable securities include available for sale debt securities, mutual funds and domestic certificate of deposit investments.

The principal components of other investments, which are carried at fair value, are as follows:

December 31, 2020

December 31, 2019

AVAILABLE-FOR-SALE SECURITIES

The Company’s available-for-sale (AFS) securities consist of available-for-sale debt securities, equity securities, U.S.

Treasury bonds and mutual funds.

These investments are carried at fair value on the Consolidated Balance Sheets within Other assets.

For any AFS debt securities in an unrealized loss position, the CECL methodology requires estimation of the lifetime expected credit losses which then would be recognized in the Consolidated Statements of Income by establishing, or adjusting an existing allowance for those credit losses.

The Company did not have any such credit losses for the periods presented.

Any unrealized gains, or any portion of a security’s non-credit-related unrealized losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax.

The Company typically invests in highly-rated securities with low probabilities of default.

Gains and losses on investments in equity securities are recorded in Other non-interest expenses in the Consolidated Statements of Income.

Realized gains and losses are recognized upon disposition of the securities, using the specific identification method.

The table below reflects unrealized gains and losses as of December 31:

(in millions)

Marketable securities

The following table shows the unrealized losses and fair value for those investments that were in an unrealized loss position as of December 31, 2019, aggregated by investment category and the length of time that individual securities have been in a continuous loss position.

Unrealized losses as of December 31, 2020 were de minimis.

December 31, 2019

Available-for-sale securities

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

The gross unrealized losses were insignificant on AFS debt securities as of December 31, 2020.

Less than 12 months

1 unchanged sentence

(in millions)

Marketable securities

The amortized cost and estimated fair value of the marketable securities at December 31, 2020 by contractual maturity are as follows:

Available-for-sale securities

At December 31, 2021, the amortized cost and estimated fair value of the Company’s AFS securities by contractual maturity, are as follows:

(in millions)

4 unchanged sentences

(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 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

There were no realized gains or losses from the sale of investment securities for the years ended December 31, 2020, 2019 and 2018.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

REDEMPTION SETTLEMENT ASSETS

Redemption settlement assets consist of restricted cash and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program.

The principal components of redemption settlement assets, which are carried at fair value, are as follows:

December 31, 2020

December 31, 2019

(in millions)

Restricted cash

Corporate bonds

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of December 31, 2020 and 2019, respectively, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

December 31, 2020

Less than 12 months

12 Months or Greater

(in millions)

Corporate bonds

December 31, 2019

Less than 12 months

12 Months or Greater

(in millions)

Corporate bonds

The amortized cost and estimated fair value of the securities at December 31, 2020 by contractual maturity are as follows:

(in millions)

Due in one year or less (1)

Due after one year through five years

Due after five year through ten years

(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.

The Company typically invests in highly-rated securities with low probabilities of default and has the intent and

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.

As of December 31, 2020, the Company does not consider its investments to be impaired.

There were no 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.

The Company has operating leases for general office properties, warehouses, data centers, customer care centers, automobiles 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,

(in millions)

Operating lease cost

Short-term lease cost

Variable lease cost

Lease expense was $ 47.5 million for the year ended December 31, 2018.

Other information related to leases was as follows:

Weighted-average remaining lease term (in years):

Operating leases

Weighted-average discount rate:

Operating leases

Supplemental cash flow information related to leases was as follows:

Years Ended December 31,

(in millions)

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

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

There were no realized gains or losses from the sale of any AFS securities for the years ended December 31, 2021, 2020 and 2019.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Maturities of the lease liabilities as of December 31, 2020 were as follows:

(in millions)

Total undiscounted lease liabilities

Amount representing interest

Total present value of minimum lease payments

Amounts recognized in the December 31, 2020 consolidated balance sheet:

Current operating lease liabilities

Long-term operating lease liabilities

The Company evaluates its right of use (“ROU”) assets for impairment in accordance with ASC 360, “Property, Plant and Equipment,” when events or changes in circumstances indicate that a ROU asset’s carrying amount may not be recoverable.

The Company performed an impairment assessment for the ROU assets associated with its locations where it ceased use with 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.

PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

PROPERTY AND EQUIPMENT, NET

Furniture, equipment, buildings and leasehold improvements are carried at cost less accumulated depreciation, and depreciation is measured on a straight-line basis.

Costs incurred during construction are capitalized;

depreciation begins once the asset is placed in service.

As of December 31, 2021, the Company’s furniture and equipment 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 17 years , at December 31, 2021.

Costs associated with the acquisition or development of internal-use software are also capitalized and recorded in Property and equipment, net.

Once the internal-use software is ready for its intended use, the cost is amortized on a straight-line basis over the software’s estimated useful life.

As of December 31, 2021, the Company’s internal-use software has remaining estimated useful lives ranging from less than one year to four years .

The Company reviews long-lived assets and asset groups for impairment whenever events or circumstances indicate their carrying amounts may not be recoverable.

An impairment is recognized if the carrying amount is not recoverable and exceeds the asset or asset group’s fair value.

With the Bread acquisition on December 3, 2020, the Company acquired $ 91 million of developed technology recorded in Property and equipment, net, which is being amortized over a 5 year life;

the Company also impaired $ 4 million in capitalized software with the acquisition, which is included in Non-interest expenses in the Consolidated Statements of Income for the year ended December 31, 2020.

Also during the fourth quarter of 2020, the Company determined it would reduce its real estate footprint and cease use of certain properties with the intent to sublease, triggering an impairment analysis of certain property and equipment.

As a result of the analysis, the Company recorded asset impairment charges of $ 3 million and accelerated depreciation expense of $ 25 million, which is included in Non-interest expenses in the Consolidated Statements of Income for the year ended December 31, 2020.

Property and equipment consist of the following as of December 31:

(in millions)

Computer software and development

Internal-use computer software and development

Furniture and equipment

Land, buildings and leasehold improvements

Land and leasehold improvements

Construction in progress

2 unchanged sentences

Depreciation expense totaled $ 26 million, $ 57 million and $ 30 million for the years ended December 31, 2021, 2020 and 2019, respectively, and includes purchased software.

Amortization expense on capitalized software totaled $ 35.5 million, $ 39.3 million and $ 39.5 million for the years ended December 31, 2020, 2019 and 2018, respectively.

As of December 31, 2020 and 2019, the net amount of unamortized capitalized software costs included in the consolidated balance sheets was $ 165.5 million and $ 74.0 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.

Amortization expense on capitalized internal-use software costs totaled $ 37 million, $ 15 million and $ 18 million for the years ended December 31, 2021, 2020 and 2019, respectively.

As of December 31, 2021 and 2020, the net amount of unamortized capitalized internal-use software costs included in Property and equipment, net on the Consolidated Balance Sheets was $ 113 million and $ 118 million, respectively.

GOODWILL AND INTANGIBLE ASSETS, NET

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, 2021, 2020, or 2019.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

In addition, with the acquisition 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 income for the year ended December 31, 2020.

In the fourth quarter of 2020, the Company determined it would reduce its real estate footprint and cease use of certain properties with the intent to sublease, which triggered an impairment analysis of certain property and equipment in accordance with ASC 360.

As a result of the analysis, 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 four 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 year ended December 31, 2019.

INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Intangible assets consist of the following:

December 31, 2020

Amortization Life and Method

The changes in the carrying amount of goodwill for the years ended December 31, 2021 and 2020, respectively, were as follows (in millions):

Balance at December 31, 2019

Goodwill acquired during the period (1)

Balance at December 31, 2020

Goodwill acquired during the period

Balance at December 31, 2021

(1) Fully related to the acquisition of Bread in December 2020.

There were no accumulated goodwill impairment losses as of both December 31, 2021 and 2020.

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 reviews long-lived assets and asset groups, including intangible assets, for impairment whenever events and circumstances indicate their carrying amounts may not be recoverable;

recognizing an impairment if the carrying amount is not recoverable and exceeds the fair value of the asset or asset group.

No impairment of intangible assets has been recognized during any of the years ended December 31, 2021, 2020, or 2019.

Intangible assets consist of the following as of December 31:

(in millions)

1 unchanged sentence

Customer contracts and lists

3 - 7 years —straight line

Premium on purchased credit card portfolios

3 - 13 years —straight line

Collector database

5 years —straight line

4 - 15 years —straight line

Premium on purchased credit card loan portfolios

Non-compete agreements

5 years —straight line

Indefinite-Lived Assets

1 unchanged sentence

Total intangible assets

December 31, 2019

Amortization Life and Method

(in millions)

1 unchanged sentence

Customer contracts and lists

7 years —straight line

Premium on purchased credit card portfolios

1 - 13 years —straight line

Collector database

5 years —straight line

8 - 15 years —straight line

Premium on purchased credit card loan portfolios

Non-compete agreements

Indefinite-Lived Assets

1 unchanged sentence

Total intangible assets

With the Bread acquisition on 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

With the Bread acquisition on December 3, 2020, the Company acquired $ 11 million of intangible assets, consisting of customer relationships of $ 9 million and a non-compete agreement of $ 2 million that are being amortized over weighted average lives of 3.0 years and 5.0 years, respectively.

ALLIANCE DATA SYSTEMS CORPORATION

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 $ 29 million, $ 34 million and $ 48 million for the years ended December 31, 2021, 2020 and 2019, respectively.

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

For the Years Ending

(in millions)

The changes in the carrying amount of goodwill for the years ended December 31, 2020 and 2019, respectively, are as follows:

Card Services

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):

The following is a summary of Other assets as of December 31:

(in millions)

Balance at January 1, 2019

Goodwill acquired during the period

Effects of foreign currency translation

Balance at December 31, 2019

Goodwill acquired during the period

Goodwill allocated to sale of Precima

Effects of foreign currency translation

Balance at December 31, 2020

Approximately $ 3.2 million of LoyaltyOne goodwill was allocated to Precima upon sale in January 2020, based on a relative fair value allocation of the businesses.

As part of the acquisition of Bread in December 2020, 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 no 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.

As of December 31, 2020, the Company does not believe it is more-likely-than-not that the fair value of any reporting unit is less than its carrying amount.

No further testing of goodwill impairments will be performed until July 1, 2021, unless events occur or circumstances indicate an impairment is probable.

Restricted cash (1)

Deferred contract costs

Deferred tax asset, net

Accounts receivable, net (2)

Right of use assets - operating

Investment in LVI

Total other assets

(1) Represents principal accumulation for the repayment of debt issued by consolidated variable interest entities that matures in 2022 or that matured in 2021, at December 31, 2021 and 2020, respectively.

(2) Primarily related to amounts receivable from brand partners, which are recorded at the invoiced amount and do not bear interest.

(3) Primarily comprised of prepaid expenses and non-income-based tax receivables.

The Company has various operating leases for facilities and equipment which are recorded as lease-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 the lease commencement date at amounts equal to the respective lease liabilities, adjusted for any prepaid lease payments, initial direct costs and lease incentives.

The Company’s lease liabilities are recognized at the present value of the contractual fixed lease payments discounted using the Company’s incremental borrowing rate, as the rate implicit in the lease is typically not readily determinable, as of the lease commencement date or upon modification of the lease.

Operating lease expense is recognized on a straight-line basis over the lease term, while variable lease payments are expensed as incurred.

As of December 31, 2021, the Company’s leases have remaining lease terms ranging from less than one year , up to 17 years , some of which may include renewal options.

Leases with an initial term of 12 months or less are not recognized on the Consolidated Balance Sheets;

lease expense for these leases is recognized on a straight-line basis over the lease 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.

In the fourth quarter of 2020, the Company performed an impairment assessment for its right-of-use assets associated with its locations where it ceased use with the intent to

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

RESTRUCTURING AND OTHER CHARGES

In 2019, the Company, under the direction of the board 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.

The following tables summarize the restructuring and other charges incurred by reportable segment for all restructuring activities for the periods presented:

Year Ended December 31, 2020

Termination Costs

(in millions)

Corporate/Other

Card Services

Year Ended December 31, 2019

Termination Costs

As a result, the Company recorded an asset impairment charge of $ 18 million, which is included in Non-interest expenses in the Consolidated Statements of Income for the year ended December 31, 2020.

The components of lease expense were as follows for the years ended December 31:

(in millions)

Corporate/Other

Card Services

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 Costs

Operating lease cost

Short-term lease cost

Variable lease cost

Sublease income

The table below reflects other lease-related information as of December 31:

Weighted-average remaining lease term (in years):

Operating leases

Weighted-average discount rate:

Operating leases

Supplemental lease-related cash flow information was as follows for the years ended December 31:

(in millions)

Liability as of January 1, 2019

Charged to expense

Adjustments for non-cash charges

Cash payments

Liability as of December 31, 2019

Charged to expense

Adjustments for non-cash charges

Cash payments

Liability as of December 31, 2020

The Company’s outstanding liability related to restructuring and other charges is expected to be settled by the end of 2021.

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

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for lease obligations:

Operating leases

Maturities of the Company’s lease liabilities by year were as follows as of December 31, 2021 (in millions):

Total undiscounted lease liabilities

Amount representing interest

Total present value of minimum lease payments

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

ACCRUED EXPENSES

Accrued expenses consist of the following:

(in millions)

Accrued payroll and benefits

Accrued taxes

Accrued other liabilities

Accrued expenses

Debt consists of the following:

Interest Rate

BORROWINGS OF LONG-TERM AND OTHER DEBT

Long-term and other debt consisted of the following as of December 31:

Contractual Maturities

Interest Rates

(Dollars in millions)

1 unchanged sentence

Revolving line of credit

December 2022

2017 term loans

December 2022

BrandLoyalty credit agreement

Senior notes due 2024

1 unchanged sentence

Senior notes due 2026

Total long-term and other debt

Unamortized debt issuance costs

Current portion

Long-term portion

Total long-term and other debt

Certificates of deposit

1 unchanged sentence

0.20 % to 3.75 %

Money market deposits

Total deposits

Money market and other non-maturity deposits

Unamortized debt issuance costs

Current portion

Long-term portion

Non-recourse borrowings of consolidated securitization entities:

Total deposits

Debt issued by consolidated VIEs:

Fixed rate asset-backed term note securities

2 unchanged sentences

Conduit asset-backed securities

Various – Apr 2022 to Oct 2022

Various – Aug 2022 to Oct 2023

Secured loan facility

November 2022

Total non-recourse borrowings of consolidated securitization entities

Unamortized debt issuance costs

Current portion

Long-term portion

Total debt issued by consolidated VIEs

Total borrowings of long-term and other debt

(1) The interest rate is based upon LIBOR plus an applicable margin.

1 unchanged sentence

The weighted average interest rate for the term loans was 1.85 % and 1.90 % at December 31, 2021 and 2020, respectively.

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

(3) The interest rates are based on the Federal Funds rate plus an applicable margin.

4 unchanged sentences

At December 31, 2020, the interest rates ranged from 1.39 % to 1.89 % .

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

(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 % .

At December 31, 2020, the Company was in compliance with its financial covenants.

Certain of the Company’s long-term debt agreements contain various restrictive financial and non-financial covenants.

If the Company does not satisfy these covenants, the maturity of amounts outstanding may be accelerated and become payable.

The Company was in compliance with all such covenants at December 31, 2021.

Long-term and Other Debt

Credit Agreement

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, as guarantors, are party to a credit agreement with various agents and lenders dated June 14, 2017 (the “2017 Credit 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 $ 850.0 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, provided for $ 2,028.8 million in term loans (the “2017 term loans”), subject to certain principal repayments, and a $ 750.0 million revolving credit facility (the “2017 revolving line of credit”).

Total availability under the 2017 revolving line 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 beginning on March 31, 2020.

The credit agreement is unsecured.

The credit agreement contains the usual and customary negative 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;

The Company, as borrower, and certain of its wholly owned subsidiaries, as guarantors, are party to a credit agreement with various agents and lenders dated June 14, 2017, as amended (the credit agreement).

At December 31, 2021, the credit agreement had $ 658 million aggregate principal amount of term loans outstanding (the term loans) and provided for a $ 750 million revolving credit facility (the revolving line of credit) which was undrawn as of December 31, 2021.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The credit agreement contains the usual and customary negative and affirmative covenants, 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;

4 unchanged sentences

The negative covenants are subject to certain exceptions as specified in the credit agreement.

The credit agreement also requires the Company to satisfy 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

ALLIANCE DATA SYSTEMS CORPORATION

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 two 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 and customary negative covenants, representations, general and information undertakings and events of default.

As of December 31, 2020, there were no amounts outstanding under the 2020 BrandLoyalty Credit Agreement.

The senior 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.

The credit agreement also requires the Company to comply with certain financial covenants and includes customary events of default.

In July 2021, the Company amended its credit agreement to, among other things, (i) provide consent by the lenders to the spinoff or sale of our LoyaltyOne segment, (ii) extend the maturity date of the revolving loans and approximately 86 % of the term loans from December 31, 2022 to July 1, 2024, (iii) revise the method of determining interest rates and commitment fees to be charged in connection with the loans, (iv) modify the financial and operational covenants and certain other provisions in the credit agreement to reflect our business and operations after giving effect to the LoyaltyOne spinoff, including a financial covenant that Comenity Bank and Comenity Capital Bank each maintain a common equity tier 1 capital ratio of at least 11 % at all times there are term loans outstanding (or at least 10 % if no term loans are outstanding), (v) require a prepayment of certain of the loans in an amount equal to the net proceeds from the LoyaltyOne spinoff or sale, including any net proceeds from debt that is distributed to us minus, in the case of the first transaction associated with the divestiture of the LoyaltyOne spinoff or sale, $ 25 million and (vi) add Lon Inc.

and Lon Operations LLC acquired in our acquisition of Bread as additional guarantors.

Following our receipt of $ 750 million in connection with the spinoff of our former LoyaltyOne segment in November 2021, we used $ 725 million of such amount to repay term loans under our credit agreement, as required by the July 2021 amendment, and used the remaining $ 25 million to make our scheduled fourth quarter amortization payment with respect to such loans.

As of December 31, 2021, the Company had $ 658 million aggregate principal amount of term loans outstanding with $ 750 million total availability under the revolving line of credit.

Senior Notes Due 2024 and 2026

The senior notes set forth below are each governed by their respective indenture that includes usual and customary negative covenants and events of default.

These senior 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 credit agreement.

In December 2019, the Company issued and sold $ 850 million aggregate principal amount of 4.750 % senior notes due December 15, 2024 (the Senior Notes due 2024).

The Senior Notes due 2024 accrue interest on the 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 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.

In September 2020, the Company issued and sold $ 500 million aggregate principal amount of 7.000 % senior notes due January 15, 2026 (the Senior Notes due 2026).

The Senior Notes due 2026 accrue interest on the principal amount at the rate of 7.000 % per annum from September 22, 2020, payable semi-annually in arrears, on March 15 and

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 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.

The Company uses a variety of deposit products to finance its operating activities, including funding for its non-securitized credit card and other loans, and fund securitization enhancement requirements for the Banks.

The Company offers both direct-to-consumer retail deposit products as well as deposits sourced through contractual arrangements with various financial counterparties.

Direct-to-consumer retail deposits comprised approximately $ 3.2 billion and $ 1.7 billion of total deposits outstanding at December 31, 2021 and 2020, respectively.

Other third-party sourced deposits (often referred to as wholesale deposits) comprised approximately $ 7.8 billion and $ 8.1 billion of total deposits outstanding at December 31, 2021 and 2020, respectively.

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.

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 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 Entities

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.

The Banks issue certificates of deposit in denominations of at least $ 1,000 , across various maturities ranging between January 2022 and December 2026.

As of December 31, 2021, the effective annual interest rates on the certificates of deposit ranged from 0.20 % to 3.75 %, with a weighted average interest rate of 1.91 %;

as of December 31, 2020, the effective annual interest rates ranged from 0.15 % to 3.75 %, with a weighted average interest rate of 2.58 %.

Interest is paid monthly and at maturity, depending on the certificate of deposit.

The Banks also offer various non-maturity deposits;

these deposits are redeemable on demand by the customer and, as such, have no scheduled maturity dates.

As of December 31, 2021, the effective annual interest rates on such deposits ranged from 0.05 % to 3.50 %, with a weighted average interest rate of 0.68 %;

as of December 31, 2020, the effective annual interest rates ranged from 0.38 % to 3.50 %, with a weighted average interest rate of 1.00 %.

Interest is paid either monthly or at maturity.

Debt Issued by Consolidated VIEs

An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying 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 receivables to its securitization trusts, which are consolidated on the balance sheets of the Company under ASC 860 and ASC 810.

The liabilities of the consolidated VIEs include asset-backed securities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.

The Company regularly sells its credit card loans to its Trusts, which are consolidated by the Company.

The liabilities of these consolidated VIEs include asset-backed securities for which creditors, or beneficial interest holders, do not have recourse to the general credit of the Company.

Asset-Backed Term Notes

For the year ended December 31, 2020, no asset-backed term notes were issued, and the following asset-backed term notes matured and were repaid:

● In May 2020, $ 450.7 million of Series 2017-A asset-backed term notes, $ 50.7 million of which were 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 during 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.

For the year ended December 31, 2021, no asset-backed term notes were issued, and $ 2.1 billion of asset-backed term notes matured and were repaid, of which $ 281 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.

As of December 31, 2021, the Company collected $ 846 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the $ 563 million Series 2019-A notes, which matured and were repaid in February 2022, the $ 399 million Series 2019-B notes, which mature in June 2022, and the $ 684 million Series 2019-C notes, which mature in September 2022.

The cash is restricted to the securitization investors and is reflected in Other assets in the Consolidated Balance Sheet as of December 31, 2021.

Conduit Facilities

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

The Company maintained committed syndicated bank conduit facilities to support the funding of its credit card loans for its Trusts.

Borrowings outstanding under each facility bear interest at a margin above LIBOR or the asset-backed commercial paper costs of each individual conduit provider.

During the year ended December 31, 2020, the Company reduced the commitments under its conduit facilities by $ 1.5 billion and extended the respective maturities to April 2022 and October 2022.

Total capacity under the conduit facilities was $ 3.2 billion, of which $ 2.2 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.

During the year ended December 31, 2021, the Company obtained increased lender commitments under its conduit facilities of $ 1.3 billion and extended the respective maturities to August 2022 and October 2023.

Total capacity under the conduit facilities was $ 4.5 billion, of which $ 3.9 billion had been drawn and was included in Debt issued by consolidated variable interest entities on the Consolidated Balance Sheets.

Secured Loan Facility

At December 31, 2020, the Company had a secured loan facility related to the acquisition of Bread, with an outstanding balance of $ 86 million that was set to mature in November 2022, with prepayment permitted.

In August 2021, the Company repaid this outstanding secured loan facility in full.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Secured Loan Facility

With the acquisition of Bread in December 2020, the Company assumed two 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.

The future principal payments for the Company’s debt as of December 31, 2020 are as follows:

Borrowings of

Securitization

The future principal payments for the Company’s long-term and other debt are as follows, as of December 31, 2021:

Debt Issued by

(in millions)

1 unchanged sentence

Unamortized debt issuance costs

OTHER LIABILITIES

The following is a summary of Other liabilities as of December 31:

(in millions)

Accounts payable and other brand partner liabilities

Accrued liabilities (1)

Operating lease liabilities

Long-term tax reserves

Total other liabilities

(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.

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:

(in millions)

Payment protection products

Gain on portfolio and other sales

Total other non-interest income

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table provides the components of Other non-interest expenses for the years ended December 31:

(in millions)

Professional services and regulatory fees

Asset impairment charges

Portfolio valuation adjustments (to reflect the lower of cost or market)

Loss on extinguishment of debt

Total other non-interest expenses

(1) Primarily related to occupancy expense and non-income based taxes.

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:

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

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.

Inputs that are unobservable (e.g., internally derived assumptions) and reflect an entity’s own estimates about estimates market participants would use in pricing the asset or liability based on the best information available under the circumstances.

In particular, Level 3 inputs and valuation techniques involve judgment and as a result are not necessarily indicative of amounts the Company would realize in a current market exchange.

The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

We monitor the market conditions and evaluate the fair value hierarchy levels quarterly.

For the years ended December 31, 2021 and 2020, 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:

(in millions)

Financial assets

Credit card and other loans, net

Available-for-sale securities

Financial liabilities

Debt issued by consolidated variable interest entities

Long-term and other debt

ALLIANCE DATA SYSTEMS CORPORATION

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 an allowance for credit losses, on the Consolidated Balance Sheets.

In estimating the fair values, the Company uses a discounted cash flow model (i.e., Level 3 inputs), primarily because a comparable whole loan sales market for similar loans does not exist, and therefore there is a lack of observable pricing inputs.

The Company uses various internally derived inputs, including projected income, discount rates and forecasted write-offs;

economic value attributable to future loans generated by the cardholder accounts is not included in the fair values.

Available-for-sale securities:

AFS securities consist of available-for-sale debt securities, equity securities, U.S.

Treasury bonds and mutual funds, 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).

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:

(in millions)

Available-for-sale securities

Total assets measured at fair value

(in millions)

Available-for-sale securities

Total assets measured at fair value

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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, 2021 and 2020.

The fair values of these financial instruments are estimates as of December 31, 2021 and 2020, 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.

(in millions)

Financial assets:

Credit card and other loans, net

Financial liabilities:

Debt issued by consolidated VIEs

Long-term and other debt

(in millions)

Financial assets:

Credit card and other loans, net

Financial liabilities:

Debt issued by consolidated VIEs

Long-term and other debt

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property and equipment, right-of-use assets, deferred contract assets, goodwill, and intangible assets.

These assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances, such as upon impairment.

The Company did no t have any impairments for the year ended December 31, 2021.

For the year ended December 31, 2020, the Company recorded asset impairment charges of $ 64 million related to certain deferred contract costs, fixed assets and right-of-use assets.

The fair values were determined by using discounted cash flow models over the estimated life of each asset;

the principal assumptions used were forecasted future cash flows and the discount rate, which are considered Level 3 inputs.

See Note 7, “Property and Equipment, Net,” and Note 10, “Leases,” 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 million.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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.

Regulatory Matters

Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (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, is regulated, supervised and examined by the State of Utah and the FDIC.

Both Comenity Bank and Comenity Capital Bank are under the supervision of the

ALLIANCE DATA SYSTEMS CORPORATION

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 Bank and Comenity Capital Bank (collectively, the “Banks”) 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.

Based on these guidelines, the Banks are considered well capitalized.

The actual capital ratios and minimum ratios as of December 31, 2020 are as follows:

While neither of our Banks is currently subject to regular examinations by the CFPB due to each Bank’s total assets not having exceeded $10 billion for four consecutive quarters, we have in the past been, and may in the future become, subject to supervision and examination by the CFPB with respect to federal consumer protection laws.

Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Tier 1 capital to average assets, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets.

Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as those of the Company.

Based on these regulations, as of December 31, 2021 and 2020, 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 actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of December 31, 2021, are as follows:

Minimum Ratio to be

14 unchanged sentences

Total capital to risk-weighted assets (4)

The actual capital ratios and minimum ratios as of December 31, 2019 are as follows:

Minimum Ratio to be

Minimum Ratio for

Well Capitalized under

Capital Adequacy

Prompt Corrective

Action Provisions

Comenity Bank

Tier 1 capital to average assets

Common Equity Tier 1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Total capital to risk-weighted assets

Comenity Capital Bank

Combined Banks

Tier 1 capital to average assets (1)

2 unchanged sentences

Total capital to risk-weighted assets (4)

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.

(1) Tier 1 capital to average assets ratio represents tier 1 capital divided by total assets for leverage ratio.

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

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

(4) Total capital to risk-weighted assets ratio represents total capital divided by total risk-weighted assets.

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 Company’s Card Services segment is active in originating private label and co-brand credit cards in the United States.

The Company reviews each potential customer’s credit application and evaluates the applicant’s financial history

On April 20, 2021, Comenity Capital Bank withdrew its bank merger application

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.

with the FDIC.

On May 3, 2021, each of Comenity Capital Bank and Comenity Bank similarly withdrew their counterpart bank merger applications in Utah and Delaware, respectively.

Indemnification

On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A.

(“Publicis”).

Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a United States Department of Justice (DOJ) investigation.

3 unchanged sentences

Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $ 150 million, to be paid in two equal installments, the first in January 2021 and the second in January 2022.

In accordance with ASC 450, the Company records a loss contingency when a loss is probable and an amount can be reasonably estimated.

For the year ended December 31, 2019, the Company recorded a loss contingency of $ 40.0 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.

A $ 150 million loss contingency was recorded as of December 31, 2020.

The Company paid $ 75 million to Publicis pursuant to its contractual indemnification obligation in January 2021.

As of December 31, 2021, the Company had $ 75 million included in Accrued expenses in its Consolidated Balance Sheets.

In January 2022, the Company paid the second remaining $ 75 million installment to Publicis pursuant to its contractual indemnification obligation.

Legal Proceedings

From time to time the Company is involved in various claims and lawsuits arising in the ordinary course of business that it believes will not have a material effect on its business, financial condition or cash flows, including claims and lawsuits alleging breaches of the Company’s contractual obligations.

STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

During the year ended December 31, 2020, the Company did no t repurchase any shares of its common stock.

During the years ended December 31, 2019 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 Aut horization

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.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

2019 Aut horization

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.

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

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,

(in millions)

Cost of operations

General and administrative

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 tied 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

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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:

Balance at January 1, 2018

Shares granted

Shares vested

Shares forfeited

Balance at December 31, 2018

Shares granted

Shares vested

Shares forfeited

Balance at December 31, 2019

Shares granted

Shares vested

Shares forfeited

Balance at December 31, 2020

Outstanding and Expected to Vest

(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 no stock options outstanding as of December 31, 2020.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table summarizes stock option activity under the Company’s equity compensation plans:

Exercise Price

Balance at January 1, 2018

Options granted

Options exercised

Options forfeited

Balance at December 31, 2018

Options granted

Options exercised

Options forfeited

Balance at December 31, 2019

Options granted

Options exercised

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 no stock options exercised during the year ended December 31, 2020.

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.

From time to time the Company is involved in various claims and lawsuits arising in the ordinary course of business that it believes will not have a material effect on its consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of the Company’s contractual obligations.

EMPLOYEE BENEFIT PLANS

3 unchanged sentences

The Company’s Board of Directors 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

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

employee to own more than 5 % of the voting power or value of the Company’s common stock.

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 employee to own more than 5 % of the voting rights or value of the Company’s common stock.

The 2015 ESPP provides for six-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 be 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 the six-month period.

The purchase price of the common stock upon exercise is 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 each six-month period as defined above.

An employee elects to participate and have contributions deducted through payroll deductions.

1 unchanged sentence

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.

During the year ended December 31, 2021, the Company issued 57,713 shares of common stock under the 2015 ESPP at a weighted-average issue price of $ 70.44 .

Since its adoption on July 1, 2015, 571,825 shares of common stock have been issued, with 869,502 shares available for issuance under the 2015 ESPP.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

401(k) Retirement Savings Plan

The Alliance Data Systems 401(k) and Retirement Savings Plan 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 Plan effective December 3, 2020.

The 401(k) and Retirement Savings Plan 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 Plan immediately upon joining the Company and after 180 days of employment begin receiving company matching contributions.

In addition, “seasonal” or “on-call” employees must complete a year of eligibility service before they may participate in the 401(k) and Retirement Savings Plan.

The 401(k) and Retirement Savings Plan 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, 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.

The Alliance Data Systems 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 the RSP effective December 3, 2020.

The RSP is an IRS-approved safe harbor plan design that eliminates the need for most discrimination testing.

Eligible employees can participate in the RSP immediately upon joining the Company and after 180 days of employment begin receiving company matching contributions;

“seasonal” or “on-call” employees must complete a year of eligibility service before they may participate.

The RSP covers U.S.

employees of Alliance Data Systems, Inc.

who are at least 18 years old, one of the Company’s wholly-owned subsidiaries, and any other subsidiary or affiliated organization that adopts the RSP;

employees of the Company and all of its U.S.

subsidiaries, are currently covered under the 401(k) and Retirement Savings Plan.

subsidiaries are currently covered.

The RSP 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 RSP, and income earned on these contributions, are not taxable until withdrawn from the RSP.

The Company matches an employee’s contribution dollar-for-dollar up to five percent of the employee’s eligible compensation;

All company matching contributions are immediately vested.

Company matching contributions for the years ended December 31, 2020, 2019 and 2018 were $ 15.7 million, $ 35.3 million and $ 44.8 million, respectively.

The participants in the plan 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 Plan pursuant to a Registration Statement on Form S-8, File No.

all Company matching contributions immediately vest.

For the years ended December 31, 2021, 2020 and 2019, Company matching contributions were $ 15 million, $ 16 million and $ 35 million, respectively.

Participants in the RSP 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 the RSP pursuant to a Registration Statement on Form S-8, File No.

As of December 31, 2021, 290,897 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

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 five 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

Executive Deferred Compensation Plan

The Company also maintains an Executive Deferred Compensation Plan (EDCP).

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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., one of the Company’s wholly-owned subsidiaries.

Similar to the EDCP, participants may defer on a pre-tax basis a portion of their compensation and bonuses payable for services rendered and to receive certain employer contributions.

As of December 31, 2020 and 2019, the Company’s outstanding liability related to these plans and included in accrued expenses in the Company’s consolidated balance sheets was $ 19.9 million and $ 33.3 million, respectively.

ACCUMULATED OTHER COMPREHENSIVE LOSS

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 and Human Capital committee of the Company’s Board of Directors.

As of December 31, 2021 and 2020, the Company’s outstanding liability related to the EDCP, which was included in Other liabilities on the Consolidated Balance Sheets, was $ 18 million and $ 19 million, respectively.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS

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

Foreign Currency

Net Unrealized

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Net Unrealized

Foreign Currency

Gains (Losses) on

(Losses) Gains on

Gains (Losses) on

Comprehensive

AFS Securities

Cash Flow Hedges

Net Investment Hedge

Adjustments (1)

(Losses) Gains (1)

(in millions)

1 unchanged sentence

Changes in other comprehensive income (loss)

Balance at December 31, 2018

Changes in other comprehensive income (loss)

Recognition resulting from the sale of Epsilon's foreign subsidiaries

3 unchanged sentences

Balance at December 31, 2020

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

In accordance with ASC 830, “Foreign Currency Matters,” upon the sale of Precima on January 10, 2020, $ 3.8 million of accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulated 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

Changes in other comprehensive income (loss)

Recognition resulting from the spinoff of LoyaltyOne's foreign subsidiaries

Balance at December 31, 2021

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

With the spinoff of the Company’s 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, $ 4 million of accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation of the gain on the sale of Precima.

Upon the sale of Epsilon on July 1, 2019, $ 27 million of accumulated foreign currency translation adjustments attributable to Epsilon’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation of the loss on the sale of the Epsilon segment.

Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.

STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

During the years ended December 31, 2021 and 2020, the Company did no t repurchase any shares of its common stock.

During the year ended December 31, 2019, the Company repurchased approximately 6.3 million shares of its common stock for an aggregate amount of $ 976 million.

The stock repurchase program expired on June 30, 2020, and $ 348 million of this program expired unused.

Stock Compensation Plans

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

attributable to Epsilon’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included in the calculation 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 related to the adoption of ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities.” Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.

The components of income from continuing operations before income taxes and income tax expense are as follows:

Years Ended December 31,

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 unit awards (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 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, 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 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.

Terms of all awards under the 2020 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 benefits and compensation expense in the Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019 was $ 25 million, $ 15 million and $ 18 million, respectively, with corresponding income tax benefits of $ 4 million, $ 3 million and $ 3 million, respectively.

Stock-based compensation expense related to discontinued operations for the years ended December 31, 2021, 2020 and 2019 was $ 4 million, $ 6 million and $ 37 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 those estimates;

forfeitures were estimated at 5 % for each of the years ended December 31, 2021, 2020 and 2019.

As of December 31, 2021, there was approximately $ 35 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 1.8 years.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Restricted Stock Unit Awards

The following table summarizes RSUs activity under the Company’s equity compensation plans:

Balance at January 1, 2019

Shares granted

Shares vested

Shares forfeited

Balance at December 31, 2019

Shares granted

Shares vested

Shares forfeited

Balance at December 31, 2020

Shares granted (2)

Shares vested

Shares forfeited

Balance at December 31, 2021

Outstanding and Expected to Vest

(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 Loyalty Ventures Inc.

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 vest ratably over a three year period if specified performance measures tied to the Company’s financial performance are met.

For the performance-based RSUs awarded in 2021, the pre-defined vesting criteria typically permit a range from 0 % to 170 % 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 $ 23 million, $ 30 million and $ 96 million for the years ended December 31, 2021, 2020 and 2019, respectively.

As of December 31, 2021, the aggregate intrinsic value of RSUs outstanding and expected to vest was $ 42 million.

For the year ended December 31, 2021, the Company declared cash dividends of $ 0.84 per share for a total of $ 42 million, and paid cash dividends and dividend equivalents totaling $ 42 million.

For the year ended December 31, 2020, the Company declared cash dividends of $ 1.26 per share for a total of $ 60 million, and paid cash dividends and dividend equivalents totaling $ 61 million.

For the year ended December 31, 2019, the Company declared cash dividends of $ 2.52 per share for a total of $ 127 million, and paid cash dividends and dividend equivalents totaling $ 127 million.

On January 27, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $ 0.21 per share on its common stock, payable on March 18, 2022 to stockholders of record at the close of business on February 11, 2022.

ALLIANCE DATA SYSTEMS CORPORATION

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.

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.

The components of the Company’s Provision for income taxes for the years ended December 31 included in the Consolidated Statements of Income were are as follows:

(in millions)

Components of income from continuing operations before income taxes:

Components of income tax expense:

Total current

Total deferred

Total current income tax expense

Total deferred income tax benefit

Total Provision for income taxes

A reconciliation of recorded federal provision for income taxes to the expected amount computed by applying the federal statutory rate for all periods to income from continuing operations before income taxes is as follows:

Years Ended December 31,

A reconciliation of the Company’s expected income tax expense computed by applying the federal statutory rate to income from continuing operations before income taxes to the recorded Provision for income taxes for the years ended December 31 is as follows:

(in millions)

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Increase (decrease) in income taxes resulting from:

State income taxes, net of federal benefit

Foreign rate differential

Foreign restructuring

State and local income taxes, net of federal benefit

Impact of 2017 Tax Reform

Global intangible low-taxed income

Non-deductible expenses (non-taxable income)

Non-deductible expenses

IRC Section 199, net of tax reserves

1, originally known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Reform”) was enacted on December 22, 2017.

The 2017 Tax Reform permanently reduced the corporate tax rate to 21 % from 35 %, effective January 1, 2018 and implemented a change from a system 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.

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 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.

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 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.

As a result of the preliminary audit findings, the Company increased its reserve for IRC Section 199 deductions by $ 12.5 million during the year ended December 31, 2020.

For years ended December 31, 2019 and 2018, the Company recorded an income tax benefit of approximately $ 30.2 million related to a decrease in unrecognized tax benefits as a result of a tax accounting method change required by the 2017 Tax Reform and an income tax benefit of approximately $ 29.7 million related to the impact 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 consist of the following:

Deferred tax assets require certain estimates and judgments in order to determine whether it is more likely than not 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 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 following table reflects the significant components of Deferred tax assets and liabilities as of December 31:

(in millions)

1 unchanged sentence

Deferred revenue

Allowance for loan loss

Allowance for credit losses

Net operating loss carryforwards and other carryforwards

Stock-based compensation and other employee benefits

Lease liabilities

Operating lease liabilities

Accrued expenses and other

Intangible assets

Total deferred tax assets

4 unchanged sentences

Right of use assets

Intangible assets

Total deferred tax liabilities

Net deferred tax asset (liability)

Amounts recognized in the consolidated balance sheets:

Non-current assets

Non-current liabilities

Total – Net deferred tax asset (liability)

Net deferred tax assets

Amounts recognized on the Consolidated Balance Sheets:

At December 31, 2021, included in the Company’s U.S.

2 unchanged sentences

With the exception of NOLs generated after December 31, 2017, these attributes expire at various times through the year 2037.

Pursuant to Section 382 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, the Company has state income tax NOLs of approximately $ 232.3 million and state credits of approximately $ 3.0 million available to offset future state taxable income.

The Company also has state capital losses of approximately $ 10.6 million to offset capital gains.

The state NOLs, capital losses and credits will expire at various times through the year 2039.

The Company believes a majority of these NOLs and all of the capital losses will expire before utilization and has therefore established a valuation allowance

As well, as of December 31, 2021, the Company has state income tax NOLs of approximately $ 231 million and state credits of approximately $ 3 million, both available to offset future state taxable income, and state capital losses of approximately $ 7 million to offset capital gains.

The state NOLs, credits and capital losses will expire at various times through the year 2040.

The Company uses the portfolio approach relating to the release of stranded tax effects recorded in accumulated other comprehensive loss.

ALLIANCE DATA SYSTEMS CORPORATION

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 substantial 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):

1, originally known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Reform”) was enacted on December 22, 2017 and permanently reduced the corporate tax rate to 21 % from 35 %, effective January 1, 2018.

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 Other comprehensive income due to the divestiture of the LoyaltyOne segment.

For the year ended December 31, 2020, the Company recorded an income tax benefit of approximately $ 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.

The Company is currently under audit with the Internal Revenue Service for years 2012-2018.

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.

As a result of the preliminary audit findings, the Company increased its reserve for IRC Section 199 deductions by $ 12 million during the year ended December 31, 2020.

For the year ended December 31, 2019, the Company recorded an income tax benefit of approximately $ 30 million related to a decrease in unrecognized tax benefits as a result of a tax accounting method change required by the 2017 Tax Reform.

The following table presents changes in unrecognized tax benefits (in millions):

Balance at January 1, 2019

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Settlements during the period

Lapses of applicable statutes of limitation

Balance at December 31, 2021

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 income tax expense.

The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits in Provision for income taxes.

The Company has potential cumulative interest and penalties with respect to unrecognized tax benefits of approximately $ 76 million, $ 69 million and $ 60 million at December 31, 2021, 2020 and 2019, respectively.

For the years ended December 31, 2020, 2019 and 2018, the Company recorded approximately an $ 7.6 million expense, a

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

$ 0.8 million benefit and a $ 24.5 million expense, respectively, for potential interest and penalties with respect to unrecognized tax benefits.

For the years ended December 31, 2021, 2020 and 2019, the Company recorded approximately $ 8 million, $ 9 million and $ 2 million, respectively, in Provision for income taxes for potential interest and penalties for unrecognized tax benefits.

At December 31, 2021, 2020 and 2019, the Company had unrecognized tax benefits of approximately $ 241 million, $ 243 million and $ 198 million, respectively, that, if recognized, would impact the effective tax rate.

1 unchanged sentence

The Company files income tax returns in the U.S.

federal jurisdiction and in many state and foreign jurisdictions.

federal jurisdiction and in many state and foreign 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 2017.

FINANCIAL INSTRUMENTS

In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value.

To obtain fair values, observable market prices are used if available.

In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument.

These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange.

The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

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

December 31, 2020

December 31, 2019

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

EARNINGS PER SHARE

Basic earnings (losses) per share (EPS) is based only on the weighted average number of common shares outstanding, excluding any dilutive effects of stock options, unvested restricted stock awards, or other dilutive securities.

Diluted EPS is based on the weighted average number of common and potentially dilutive common shares (dilutive stock options, unvested restricted stock awards and other dilutive securities outstanding during the year) pursuant to the Treasury Stock method.

For periods with participating securities, in this case 2019, the Company computes EPS using the two-class method, which is an allocation of earnings between the holders of common stock and a company’s participating security holders that determines EPS for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings.

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

(in millions, except per share amounts)

Income from continuing operations

Dividends declared on preferred stock

Allocation of undistributed earnings

Income from continuing operations

Income (loss) from discontinued operations, net of income taxes

Weighted average shares

Continuing operations

Discontinued operations

Diluted EPS (1) :

Income from continuing operations

Income (loss) from discontinued operations, net of income taxes

Weighted average shares from Basic EPS above

Weighted average effect of dilutive securities (2) :

Shares from assumed conversion of preferred stock

Net effect of dilutive unvested restricted stock awards (1)

Denominator for diluted calculation

Continuing operations

Discontinued operations

(1) Computed using the if-converted method, as the result was more dilutive.

(2) For the years ended December 31, 2021, 2020 and 2019, 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.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

On April 25, 2019, the Company entered into an exchange agreement with ValueAct Holdings, L.P.

In October 2019, ValueAct converted all 150,000 shares of preferred stock back to common stock.

SUPPLEMENTAL CASH FLOW INFORMATION

The Consolidated Statements of Cash Flows are presented with the combined cash flows from continuing and discontinued operations.

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 as of December 31:

(in millions)

Financial assets

Credit card and loan receivables, net

Credit card receivables held for sale

Cash and cash equivalents

Restricted cash included within Other assets

Cash, cash equivalents and restricted cash included within Assets of discontinued operations

Total cash, cash equivalents and restricted cash

Non-cash investing and financing activities for the year ended December 31, 2021 included the Company’s equity method investment in Loyalty Ventures Inc.

upon spinoff, which totaled $ 48 million on November 5, 2021, and the Company’s retirement of its outstanding treasury stock in July 2021.

For more information, see Note 22, “Discontinued Operations and Bank Holding Company Financial Presentation,” and Note 18, “Stockholders’ Equity.”

Non-cash investing and financing activities for the year ended December 31, 2020 included $ 75 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 2, “Acquisitions.”

DISCONTINUED OPERATIONS AND BANK HOLDING COMPANY FINANCIAL PRESENTATION

DISCONTINUED OPERATIONS

On November 5, 2021, the separation of Loyalty Ventures Inc.

(Loyalty Ventures) from the Company was completed after market close (the Separation).

The Separation of Loyalty Ventures, which comprised the LoyaltyOne segment and has been classified as discontinued operations, was achieved through the Company’s distribution of 81 % of the shares of Loyalty Ventures common stock to holders of ADS common stock as of the close of business on the record date of October 27, 2021.

ADS stockholders of record received one share of Loyalty Ventures common stock for every two and a half shares of ADS common stock.

Following this distribution, Loyalty Ventures became an independent, publicly-traded company, in which the Company has retained a 19 % ownership interest.

As part of the plan regarding the Separation, the Company received distributions from Loyalty Ventures prior to the effectiveness of the Separation in the aggregate amount of $ 750 million, of which $ 725 million was used by the Company to repay certain term loans as required under the Company’s credit agreement and $ 25 million was used by the Company to make scheduled amortization payments for the fourth quarter of 2021 with respect to such term loans.

See Note 11, “Borrowings of Long-term and Other Debt,” for further discussion on the Company’s outstanding long-term debt.

The Company accounts for its 19 % ownership interest in Loyalty Ventures following the equity method of accounting.

As of December 31, 2021, the carrying amount of the Company’s ownership interest in Loyalty Ventures, which investment totaled was $ 50 million, and is included in Other assets in the Consolidated Balance Sheet, while earnings (losses), which were immaterial for the period, are recorded in Other non-interest income in the Consolidated Statements of Income.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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

(in millions)

Total interest income

Total interest expense (1)

Net interest income

Total non-interest income

Total non-interest expenses

Income before provision from income taxes

Provision for income taxes

Income from discontinued operations, net of income taxes

(1) As described above, the Company’s credit agreement, as amended, required a $ 725 million prepayment of term loans in conjunction with the LoyaltyOne spinoff.

As a result, the interest expense reflected above is the allocation to discontinued operations of interest on the basis of this $ 725 million mandatory prepayment.

The following table summarizes the assets and liabilities of the Company’s former LoyaltyOne segment as of December 31:

(in millions)

Cash and cash equivalents

Accounts receivable, net

Redemption settlement assets, restricted

Other investments

Derivative instruments

Financial liabilities

Derivative instruments

Non-recourse borrowings of consolidated securitization entities

Long-term and other debt

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

Credit card and loan receivables, net — The Company utilizes a discounted 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.

Property and equipment, net

Total assets of discontinued operations

Accounts payable

Accrued expenses

Deferred revenue

Other liabilities

Total liabilities of discontinued operations

The following table summarizes the depreciation and amortization, and capital expenditures of the Company’s former LoyaltyOne segment for the years ended December 31:

(in millions)

Depreciation and amortization

Capital expenditures

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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 consolidated balance sheets.

Other investments are recorded at fair value based on quoted market prices for the same or similar securities.

Deposits — For money market deposits, carrying value approximates fair value due to the liquid nature of these deposits.

For certificates of deposit, the fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.

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

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

Derivative instruments — The Company’s foreign currency cash flow hedges and foreign currency exchange forward contracts are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each derivative.

This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs.

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;

● 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.

Effective April 12, 2019, the Company entered into a definitive agreement to sell its Epsilon segment to Publicis Groupe S.A.

for $ 4 billion in cash, subject to certain specified adjustments.

Beginning in the first quarter of 2019, Epsilon met the criteria for classification as discontinued operations.

The sale of Epsilon was completed on July 1, 2019, and the pre-tax gain is shown in the table below (in millions).

Consideration received (1)

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

Pre-tax gain on deconsolidation

(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 million for the year ended December 31, 2019 and recorded an after-tax loss on sale of $ 252 million, which is included in Loss from discontinued operations, net of taxes.

Following the sale of Epsilon, the Company has continued its existing contractual relationships with Epsilon for digital marketing services.

The following table summarizes the results of operations of the Company’s former Epsilon segment, direct costs identifiable to the Epsilon segment, and the allocation of interest expense on corporate debt, for the years ended December 31:

(in millions)

Total interest income

Total interest expense (1)

Net interest income

Total non-interest income

Total non-interest expenses

(Loss) income before (benefit) provision for income taxes

(Benefit) provision for income taxes

(Loss) income from discontinued operations, net of income taxes

(1) The Company’s credit agreement, as amended, required a $ 500 million payment of the revolving credit facility and the redemption of all of the Company’s outstanding senior notes.

As a result, the interest expense reflected above is the allocation to discontinued operations of interest on the basis of this $ 500 million mandatory repayment and redemption of its $ 2 billion in senior notes outstanding.

For the year ended December 31, 2021, loss from discontinued operations reflects a tax liability associated with indemnification issues with the purchaser.

For the year ended December 31, 2020, loss from discontinued operations reflects a loss contingency associated with indemnification issues with the purchaser.

For the year ended December 31, 2019, 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 15, “Commitments and Contingencies,” for additional information with respect to the loss contingency.

The following table summarizes the depreciation and amortization, and capital expenditures of the Company’s former Epsilon segment for the years ended December 31:

(in millions)

Depreciation and amortization

Capital expenditures

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2020 and 2019:

Fair Value Measurements at

December 31, 2020 Using

BANK HOLDING COMPANY FINANCIAL PRESENTATION

As a result of the Separation and consequential classification of LoyaltyOne as discontinued operations, the Company has adjusted the presentation of its Consolidated Financial Statements from the Company’s historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither the Company nor any of its subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the bank holding company presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s operations going forward and better align the Company with its peers for comparability purposes.

The Separation and associated reporting changes applied herein also results in the Company reflecting one reportable operating segment.

The following tables reflect a reconciliation from the Company’s historical approach to the presentation of its Consolidated Statements of Income to the Company’s bank holding company presentation for the years ended December 31, 2020 and 2019.

The “Adjustments for Discontinued Operations” column reflects the removal of the operations of Loyalty Ventures and is derived from the LoyaltyOne reportable operating segment, presented in the corresponding Annual Report on Form 10-K, adjusted to reflect directly attributable costs and allocations previously held in the Corporate segment, such as transaction costs, hedging costs, and interest on term loans required to be repaid as a result of the Separation.

The “Adjustments for Bank Holding Company Presentation” column reflects the changes, due to the removal of the operations of Loyalty Ventures, in the presentation of the Company’s historic Consolidated Statements of Income from commercial and industrial company presentation to the bank holding company presentation.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

For the Year Ended December 31, 2020

Historical as Reported

Adjustments for Discontinued Operations

As Adjusted for Discontinued Operations

Adjustments for Bank Holding Company Presentation

Per Consolidated Statements of Income

(in millions)

Mutual funds (1)

Corporate bonds (1)

Marketable securities (2)

Derivative instruments (3)

Total assets measured at fair value

Derivative instruments (3)

Total liabilities measured at fair value

Fair Value Measurements at

December 31, 2019 Using

Redemption, net

Finance charges, net

Interest and fees on loans

Interest on cash and investment securities

Total interest income*

Interest expense

Interest on deposits

Interest on borrowings

Total interest expense

Net interest income*

Non-interest income

Interchange revenue, net of retailer share arrangements

Total non-interest income

Total net interest and non-interest income*

Provision for credit losses

Total net interest and non-interest income, after provision for credit losses*

Operating expenses

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

General and administrative

Depreciation and other amortization

Amortization of purchased intangibles

Non-interest expenses

Employee compensation and benefits

Card and processing expenses

Information processing and communication

Marketing expense

Depreciation and amortization

Total non-interest expenses*

Operating income

Interest expense

Securitization funding costs

Interest expense on deposits

Interest expense on long-term and other debt, net

Total interest expense, net

Income from continuing operations before income taxes

Provision for income taxes

Income from continuing operations

(Loss) income from discontinued operations, net of income taxes

* Caption total not historically provided.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

For the Year Ended December 31, 2019

Historical as Reported

Adjustments for Discontinued Operations

As Adjusted for Discontinued Operations

Adjustments for Bank Holding Company Presentation

Per Consolidated Statements of Income

(in millions)

Mutual funds (1)

Corporate bonds (1)

Marketable securities (2)

Derivative instruments (3)

Total assets measured at fair value

Derivative instruments (3)

Total liabilities measured at fair value

(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 no transfers between Levels 1 and 2 within the fair value hierarchy for the years ended December 31, 2020 and 2019.

Redemption, net

Finance charges, net

Interest and fees on loans

Interest on cash and investment securities

Total interest income*

Interest expense

Interest on deposits

Interest on borrowings

Total interest expense

Net interest income*

Non-interest income

Interchange revenue, net of retailer share arrangements

Total non-interest income

Total net interest and non-interest income*

Provision for credit losses

Total net interest and non-interest income, after provision for credit losses*

Operating expenses

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

General and administrative

Depreciation and other amortization

Amortization of purchased intangibles

Loss on extinguishment of debt

Non-interest expenses

Employee compensation and benefits

Card and processing expenses

Information processing and communication

Marketing expense

Depreciation and amortization

Total non-interest expenses*

Operating income

Interest expense

Securitization funding costs

Interest expense on deposits

Interest expense on long-term and other debt, net

Total interest expense, net

Income from continuing operations before income taxes

Provision for income taxes

Income from continuing operations

(Loss) income from discontinued operations, net of income taxes

* Caption total not historically provided.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Financial Instruments Disclosed but Not Carried at Fair Value

The following tables provide assets and liabilities disclosed but not carried at fair value as of December 31, 2020 and 2019:

Fair Value Measurements at

December 31, 2020

(1) The following tables provide a net interest income reconciliation of interest income previously reported in Finance charges, net revenue, and represents interest income and interest expense previously reported in Total interest expense, net.

For the Year Ended December 31, 2020

Finance charges, net

Securitization funding costs

Interest expense on deposits

Interest expense on long-term and other debt, net

(in millions)

Financial assets:

Credit card and loan receivables, net

Financial liabilities:

Non-recourse borrowings of consolidated securitization entities

Long-term and other debt

Fair Value Measurements at

December 31, 2019

Interest income

Interest and fees on loans

Interest on cash and investment securities

Interest expense

Interest on deposits

Interest on borrowings

Net interest income

For the Year Ended December 31, 2019

Finance charges, net

Securitization funding costs

Interest expense on deposits

Interest expense on long-term and other debt, net

(in millions)

Financial assets:

Credit card and loan receivables, net

Credit card receivables held for sale

Financial liabilities:

Non-recourse borrowings of consolidated securitization entities

Long-term and other debt

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, 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.

Interest income

Interest and fees on loans

Interest on cash and investment securities

Interest expense

Interest on deposits

Interest on borrowings

Net interest income

(2) The following tables provide a non-interest income reconciliation of servicing fees previously reported in Services revenue, and the gain/loss on portfolio and other sales previously reported in Cost of operations expense.

For the Year Ended December 31, 2020

Cost of operations

(in millions)

Non-interest income

Interchange revenue, net of retailer share arrangements

Payment protection products

Gain on portfolio and other sales

Total non-interest income

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

PARENT-ONLY FINANCIAL STATEMENTS

For the Year Ended December 31, 2019

Cost of operations

(in millions)

Non-interest income

Interchange revenue, net of retailer share arrangements

Payment protection products

Gain on portfolio and other sales

Total non-interest income

(3) The following tables provide a reconciliation of further detailed expense line items previously reported in Cost of operations expense, General and administrative expense, Depreciation and other amortization, Amortization of purchased intangibles, and Loss on extinguishment of debt.

For the Year Ended December 31, 2020

Cost of operations expense

General and administrative expense

Depreciation and other amortization

Amortization of purchased intangibles

(in millions)

Non-interest expenses

Employee compensation and benefits

Card and processing expenses

Information processing and communication

Marketing expense

Depreciation and amortization

Total non-interest expenses

Gain on portfolio and other sales (non-interest income)

For the Year Ended December 31, 2019

Cost of operations expense

General and administrative expense

Depreciation and other amortization

Amortization of purchased intangibles

Loss on extinguishment of debt

(in millions)

Non-interest expenses

Employee compensation and benefits

Card and processing expenses

Information processing and communication

Marketing expense

Depreciation and amortization

Total non-interest expenses

Gain on portfolio and other sales (non-interest income)

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The adjustments to the presentation of the Consolidated Statements of Comprehensive Income, Consolidated Balance Sheets, Consolidated Statements of Stockholders' Equity and Consolidated Statements of Cash Flows, from the Company's historical approach under SEC Regulation S-X Article 5, to Article 9, were insignificant.

PARENT COMPANY FINANCIAL STATEMENTS

The following ADSC financial statements are provided in accordance with the rules of the Securities and Exchange Commission, which require such disclosure when the restricted net assets of consolidated subsidiaries exceed 25 percent of consolidated net assets.

1 unchanged sentence

The stand-alone parent-only financial statements are presented below.

Balance Sheets

Parent Company – Condensed Balance Sheets

(in millions)

1 unchanged sentence

Investment in subsidiaries

Current portion of long-term and other debt

Investment in Loyalty Ventures

Long-term and other debt

4 unchanged sentences

Total liabilities and stockholders’ equity

See Note 17, “Debt,” for more information regarding the Company’s long-term and other debt.

Statements of Income

Parent Company – Condensed Statements of Income

Years Ended December 31,

(in millions)

Interest from loans to subsidiaries

Total interest income

Total interest expense

Net interest expense

Dividends from subsidiaries

Total revenue

Loss on extinguishment of debt

Interest expense, net

Other expenses, net

Total expenses

Total net interest and non-interest income

Total non-interest expenses

Income before income taxes and equity in undistributed net income (loss) of subsidiaries

2 unchanged sentences

Equity in undistributed net income (loss) of subsidiaries

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Statements of Comprehensive Income

Parent Company – Condensed Statements of Comprehensive Income

Years Ended December 31,

2 unchanged sentences

Total comprehensive income, net of tax

Statements of Cash Flows

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Parent Company – Condensed Statements of Cash Flows

Years Ended December 31,

(in millions)

Net cash (used in) provided by operating activities

Net cash used in operating activities

Investing activities:

2 unchanged sentences

Dividends received

Purchases of available-for-sale securities

Net cash provided by investing activities

Financing activities:

Debt proceeds from spinoff of Loyalty Ventures Inc.

Borrowings under debt agreements

9 unchanged sentences

Cash, cash equivalents and restricted cash at end of year

Non-cash investing and financing activities related to the parent-only statement 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 Bread 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.

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;

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.”

Year Ended December 31, 2020

Card Services

(in millions)

Income (loss) before income taxes

Interest expense, net

Operating income (loss)

Depreciation and amortization

Stock compensation expense

Gain on sale of business, net of strategic transaction costs

Strategic transaction costs

Asset impairments

Restructuring and other charges

Adjusted EBITDA (1)

Securitization funding costs

Interest expense on deposits

Adjusted EBITDA, net (1)

Capital expenditures

Year Ended December 31, 2019

Card Services

(in millions)

Income (loss) before income taxes

Interest expense, net

Operating income (loss)

Depreciation and amortization

Stock compensation expense

Strategic transaction costs

Restructuring and other charges

Loss on extinguishment of debt

Adjusted EBITDA (1)

Securitization funding costs

Interest expense on deposits

Adjusted EBITDA, net (1)

Capital expenditures

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Year Ended December 31, 2018

Card Services

(in millions)

Income (loss) before income taxes

Interest expense, net

Operating income (loss)

Depreciation and amortization

Stock compensation expense

Adjusted EBITDA (1)

Securitization funding costs

Interest expense on deposits

Adjusted EBITDA, net (1)

Capital expenditures

(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:

Card Services

Corporate/ Other

(in millions)

December 31, 2020

December 31, 2019

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:

(in millions)

Year Ended December 31, 2020

Year Ended December 31, 2019

Year Ended December 31, 2018

Long Lived Assets

December 31, 2020

December 31, 2019

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 .

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:

(in millions)

Cash and cash equivalents

Restricted cash included within other current assets (1)

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

Total cash, cash equivalents and restricted cash

(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.

Non-cash investing and financing activities for the year ended December 31, 2021 included the Company’s equity method investment in Loyalty Ventures Inc.

upon spinoff, which totaled $ 48 million on November 5, 2021.

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 Bread on December 3, 2020.

For more information, see Note 2, “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.

ALLIANCE DATA SYSTEMS CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Unaudited quarterly results of operations for the years ended December 31, 2020 and 2019 are presented below.

Quarter Ended

September 30,

(in millions, except per share amounts)

Operating expenses

Operating income

Interest expense, net

Income from continuing operations before income taxes

Provision for income taxes

Income from continuing operations

Loss from discontinued operations, net of taxes

Basic income (loss) per share:

Income from continuing operations

Loss from discontinued operations

Net income per share

Diluted income (loss) per share:

Income from continuing operations

Loss from discontinued operations

Net income per share

Quarter Ended

September 30,

(in millions, except per share amounts)

Operating expenses

Operating income

Interest expense, net

Income from continuing operations before income taxes

Provision for income taxes

Income from continuing operations

Loss from discontinued operations, net of taxes

Net income (loss)

Basic income (loss) per share:

Income from continuing operations

Loss from discontinued operations

Net income (loss) per share

Diluted income (loss) per share:

Income from continuing operations

Loss from discontinued operations

Net income (loss) per share

Non-cash investing activities related to the Parent Company – Condensed Statements of Cash Flows for the year ended December 31, 2019, included a $ 3 billion non-cash dividend in the form of an intercompany return of capital from ADS Alliance Data Systems, Inc.

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Alliance Data Systems Corporation has duly caused this annual report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

6 unchanged sentences

Officer and Director

/S/ TIMOTHY P.

Executive Vice President and

1 unchanged sentence

Chief Financial Officer

/S/ LAURA SANTILLAN

BRYAN CAMPBELL

Senior Vice President and

February 25, 2022

Laura Santillan

Bryan Campbell

Chief Accounting Officer

4 unchanged sentences

Gerspach, Jr.

February 25, 2022

/S/ RAJESH NATARAJAN

7 unchanged sentences

February 25, 2022

ALLIANCE DATA SYSTEMS CORPORATION

CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS

Recoveries (1)

(in millions)

Allowance for Doubtful Accounts—Accounts receivable:

Year Ended December 31, 2020

Year Ended December 31, 2019

Year Ended December 31, 2018

(1) Accounts written off during the year, net of recoveries and foreign exchange impact .

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures