Item 9A. Controls and Procedures
Item 9A.
Controls and Procedures .
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
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
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Act)). 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 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; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.
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.
Item 9B.
Other Information .
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART II I
Item 10.
Directors, Executive Officer s and Corporate Governance.
Incorporated by reference to the Proxy Statement for the 2022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2021.
Item 11.
Executive Compensation .
Incorporated by reference to the Proxy Statement for the 2022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2021.
Item 12.
Security Ownership of Certain Beneficial Owner s and Management and Related Stockholder Matters.
Incorporated by reference to the Proxy Statement for the 2022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2021.
Item 13.
Certain Relationships and Related Transaction s, and Director Independence.
Incorporated by reference to the Proxy Statement for the 2022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2021.
Item 14.
Principal Accounting Fee s and Services.
Incorporated by reference to the Proxy Statement for the 2022 Annual Meeting of our stockholders, which will be filed with the SEC not later than 120 days after December 31, 2021.
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PART I V
Item 15. Exhibits, Financial Statement Schedules .
a) The following documents are filed as part of this Annual Report:
(1) Financial Statements
(2) Financial Statement Schedules.
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
(3) Exhibits.
The following exhibits are filed as part of this Annual Report on Form 10-K or, where indicated, were previously filed and are hereby incorporated by reference.
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
3.1
(a)
Third Amended and Restated Certificate of Incorporation of the Registrant.
8-K
3.2
6/10/16
3.2
(a)
Certificate of Designations of Series A Preferred Non-Voting Convertible Preferred Stock of the Registrant
8-K
3.1
4/29/19
3.3
(a)
Fifth Amended and Restated Bylaws of the Registrant.
8-K
3.1
2/1/16
4.1
(a)
Specimen Certificate for shares of Common Stock of the Registrant.
10-Q
4
8/8/03
4.2
(a)
Description of Registrant’s Common Stock
10-K
4.2
2/28/20
+10.1
(a)
Alliance Data Systems Corporation Executive Deferred Compensation Plan, amended and restated effective January 1, 2018.
8-K
10.1
11/24/17
+10.2
(a)
Alliance Data Systems Corporation 2010 Omnibus Incentive Plan.
DEF 14A
A
4/20/10
+10.3
(a)
Alliance Data Systems Corporation 2015 Omnibus Incentive Plan.
DEF 14A
B
4/20/15
+10.4
(a)
Alliance Data Systems Corporation 2020 Omnibus Incentive Plan.
DEF 14A
A
4/23/20
+10.5
(a)
Form of Time-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan.
8-K
10.1
2/20/18
+10.6
(a)
Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan (2020 grant Strategic)
8-K
10.3
2/20/20
+10.7
(a)
Form of Time-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2020 Omnibus Incentive Plan.
8-K
10.1
2/18/21
˄ +10.8
(a)
Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2020 Omnibus Incentive Plan (2021 grant).
8-K
10.2
2/18/21
+10.9
(a)
Form of Non-employee Director Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2010 Omnibus Incentive Plan.
10-K
10.52
2/28/13
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Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
+10.10
(a)
Form of Non-employee Director Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2015 Omnibus Incentive Plan.
10-Q
10.6
8/7/17
+10.11
(a)
Form of Non-employee Director Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2020 Omnibus Incentive Plan.
8-K
10.1
6/15/21
+10.12
(a)
Alliance Data Systems Corporation Non-Employee Director Deferred Compensation Plan.
8-K
10.1
6/9/06
+10.13
(a)
Form of Alliance Data Systems Associate Confidentiality Agreement.
10-K
10.18
2/27/17
+10.14
(a)
Form of Alliance Data Systems Corporation Indemnification Agreement for Officers and Directors.
8-K
10.1
6/5/15
+10.15
(a)
Alliance Data Systems Corporation 2015 Employee Stock Purchase Plan, effective July 1, 2015.
DEF 14A
C
4/20/15
<+10.16
(a)
Executive General Release and Enhanced Severance Agreement, dated as of May 11, 2021, by and between ADS Alliance Data Systems, Inc. and Tim King.
8-K
10.1
5/12/21
#10.17
(a)
Private Label Credit Card Program Agreement, dated as of June 1, 2018, by and between Victoria’s Secret Stores, LLC, Lone Mountain Factoring, LLC, L Brands Direct Marketing, Inc., L Brands Direct Fulfillment, Inc., Far West Factoring, LLC, Puerto Rico Store Operations LLC, and Comenity Bank.
10-K
10.26
2/28/20
10.18
(a)
First Amendment to Private Label Credit Card Program Agreement, dated as of July 1, 2019, by and between Victoria’s Secret Stores, LLC, Lone Mountain Factoring, LLC, L Brands Direct Marketing, Inc., L Brands Direct Fulfillment, Inc., Far West Factoring, LLC, Puerto Rico Store Operations LLC, and Comenity Bank.
10-K
10.27
2/28/20
#10.19
(a)
Second Amendment to Private Label Credit Card Program Agreement, dated as of October 23, 2020, by and among Victoria’s Secret Stores, LLC, VS Service Company, LLC by change of name and organizational form from L Brands Direct Marketing, Inc., and L Brands Direct Fulfillment, LLC by change of organizational form from L Brands Direct Fulfillment, Inc., and VSPR Store Operations, LLC by change of name from Puerto Rico Store Operations, LLC and Comenity Bank.
10-Q
10.4
11/4/20
>10.20
(a)
Third Amendment to Private Label Credit Card Program Agreement, dated as of August 1, 2021, by and between Victoria’s Secret Stores, LLC, VS Service Company, LLC by change of name and organizational form from L Brands Direct Marketing, Inc., L Brands Direct Fulfillment, LLC by change of organizational form from L Brands Direct Fulfillment, Inc., VSPR Store Operations, LLC by change of name from Puerto Rico Store Operations, LLC, and Comenity Bank.
10-Q
10.9
8/5/21
10.21
(b)
(c)
Second Amended and Restated Pooling and Servicing Agreement, dated as of January 17, 1996 as amended and restated as of September 17, 1999 and August 1, 2001, by and among WFN Credit Company, LLC, World Financial Network National Bank, and BNY Midwest Trust Company.
8-K
4.6
8/31/01
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Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.22
(b)
(c)
(d)
Second Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of May 19, 2004, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company.
8-K
4.1
8/4/04
10.23
(b)
(c)
(d)
Third Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of March 30, 2005, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company.
8-K
4.1
4/5/05
10.24
(b)
(d)
Fourth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of June 13, 2007, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company.
8-K
4.1
6/15/07
10.25
(b)
(c)
(d)
Fifth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of October 26, 2007, among World Financial Network National Bank, WFN Credit Company, LLC and BNY Midwest Trust Company.
8-K
4.1
10/31/07
10.26
(b)
(d)
Sixth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of May 27, 2008, among World Financial Network National Bank, WFN Credit Company, LLC, and The Bank of New York Trust Company, N.A.
8-K
4.1
5/29/08
10.27
(b)
(d)
Seventh Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of June 28, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and The Bank of New York Mellon Trust Company, N.A.
8-K
4.2
6/30/10
10.28
(b)
(d)
Supplemental Agreement to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 9, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and The Bank of New York Mellon Trust Company, N.A.
8-K
4.1
8/12/10
10.29
(b)
(c)
(d)
Eighth Amendment to the Second Amended and Restated Pooling and Servicing Agreement, dated as of November 9, 2011, among World Financial Network Bank, WFN Credit Company, LLC, and The Bank of New York Mellon Trust Company, N.A.
8-K
4.1
11/14/11
10.30
(b)
(c)
(d)
Ninth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of December 1, 2016, among Comenity Bank, WFN Credit Company, LLC, and MUFG Union Bank, N.A.
8-K
4.1
12/2/16
10.31
(b)
(c)
(d)
Tenth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 16, 2018, among Comenity Bank, WFN Credit Company, LLC, and MUFG Union Bank, N.A.
8-K
4.1
8/20/18
10.32
(b)
(c)
(d)
Eleventh Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of June 11, 2020, among Comenity Bank, WFN Credit Company, LLC, and MUFG Union Bank, N.A.
8-K
4.2
6/16/20
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Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.33
(b)
(c)
(d)
Twelfth Amendment to Second Amended and Restated Pooling and Servicing Agreement, dated as of October 27, 2020, among WFN Credit Company, LLC, as transferor, Comenity Bank, as servicer, and MUFG Union Bank, N.A., as trustee.
8-K
4.1
10/30/20
10.34
(b)
(c)
Collateral Series Supplement to Second Amended and Restated Pooling and Servicing Agreement, dated as of August 21, 2001, among WFN Credit Company, LLC, World Financial Network National Bank and BNY Midwest Trust Company.
8-K
4.7
8/31/01
10.35
(b)
(c)
First Amendment to Collateral Series Supplement, dated as of November 7, 2002, among WFN Credit Company, LLC, World Financial Network National Bank and BNY Midwest Trust Company.
8-K
4.3
11/20/02
10.36
(b)
(c)
(d)
Second Amendment to Collateral Series Supplement, dated as of July 6, 2016, among WFN Credit Company, LLC, Comenity Bank and MUFG Union Bank, N.A.
8-K
4.1
7/8/16
10.37
(b)
(c)
Transfer and Servicing Agreement, dated as of August 1, 2001, between WFN Credit Company, LLC, World Financial Network National Bank, and World Financial Network Credit Card Master Note Trust.
8-K
4.3
8/31/01
10.38
(b)
(c)
First Amendment to the Transfer and Servicing Agreement, dated as of November 7, 2002, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust.
8-K
4.2
11/20/02
10.39
(b)
(c)
(d)
Third Amendment to the Transfer and Servicing Agreement, dated as of May 19, 2004, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust.
8-K
4.2
8/4/04
10.40
(b)
(c)
(d)
Fourth Amendment to the Transfer and Servicing Agreement, dated as of March 30, 2005, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust.
8-K
4.2
4/5/05
10.41
(b)
(d)
Fifth Amendment to the Transfer and Servicing Agreement, dated as of June 13, 2007, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust.
8-K
4.2
6/15/07
10.42
(b)
(c)
(d)
Sixth Amendment to the Transfer and Servicing Agreement, dated as of October 26, 2007, among WFN Credit Company, LLC, World Financial Network National Bank and World Financial Network Credit Card Master Note Trust.
8-K
4.2
10/31/07
10.43
(b)
(d)
Seventh Amendment to Transfer and Servicing Agreement, dated as of June 28, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust.
8-K
4.4
6/30/10
66
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Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.44
(b)
(d)
Supplemental Agreement to Transfer and Servicing Agreement, dated as of August 9, 2010, among World Financial Network National Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust.
8-K
4.3
8/12/10
10.45
(b)
(c)
(d)
Eighth Amendment to Transfer and Servicing Agreement, dated as of June 15, 2011, among World Financial Network National Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust.
8-K
4.1
6/15/11
10.46
(b)
(c)
(d)
Ninth Amendment to Transfer and Servicing Agreement, dated as of November 9, 2011, among World Financial Network Bank, WFN Credit Company, LLC, and World Financial Network Credit Card Master Note Trust.
8-K
4.3
11/14/11
10.47
(b)
(c)
(d)
Tenth Amendment to the Transfer and Servicing Agreement, dated as of July 6, 2016, among Comenity Bank, WFN Credit Company, LLC and World Financial Network Credit Card Master Note Trust.
8-K
4.4
7/8/16
10.48
(b)
(c)
Receivables Purchase Agreement, dated as of August 1, 2001, between World Financial Network National Bank and WFN Credit Company, LLC.
8-K
4.8
8/31/01
10.49
(b)
(d)
First Amendment to Receivables Purchase Agreement, dated as of June 28, 2010, between World Financial Network National Bank and WFN Credit Company, LLC.
8-K
4.3
6/30/10
10.50
(b)
(d)
Supplemental Agreement to Receivables Purchase Agreement, dated as of August 9, 2010, between World Financial Network National Bank and WFN Credit Company, LLC.
8-K
4.2
8/12/10
10.51
(b)
(c)
(d)
Second Amendment to Receivables Purchase Agreement, dated as of November 9, 2011, between World Financial Network Bank and WFN Credit Company, LLC.
8-K
4.2
11/14/11
10.52
(b)
(c)
(d)
Third Amendment to Receivables Purchase Agreement, dated as of July 6, 2016, between Comenity Bank and WFN Credit Company, LLC.
8-K
4.2
7/8/16
10.53
(b)
(c)
(d)
Fourth Amendment to Receivables Purchase Agreement, dated as of June 11, 2020, between Comenity Bank and WFN Credit Company, LLC.
8-K
4.3
6/16/20
10.54
(b)
(c)
Master Indenture, dated as of August 1, 2001, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company.
8-K
4.1
8/31/01
10.55
(b)
(c)
Omnibus Amendment, dated as of March 31, 2003, among WFN Credit Company, LLC, World Financial Network Credit Card Master Trust, World Financial Network National Bank and BNY Midwest Trust Company.
8-K
4
4/22/03
10.56
(b)
(c)
Supplemental Indenture No. 1, dated as of August 13, 2003, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company.
8-K
4.2
8/28/03
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Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.57
(b)
(d)
Supplemental Indenture No. 2, dated as of June 13, 2007, between World Financial Network Credit Card Master Note Trust and BNY Midwest Trust Company.
8-K
4.3
6/15/07
10.58
(b)
(d)
Supplemental Indenture No. 3, dated as of May 27, 2008, between World Financial Network Credit Card Master Note Trust and The Bank of New York Trust Company, N.A.
8-K
4.2
5/29/08
10.59
(b
(d)
Supplemental Indenture No. 4, dated as of June 28, 2010, between World Financial Network Credit Card Master Note Trust and The Bank of New York Mellon Trust Company, N.A.
8-K
4.1
6/30/10
10.60
(b)
(c)
(d)
Supplemental Indenture No. 5, dated as of February 20, 2013, between World Financial Network Credit Card Master Note Trust and Union Bank, N.A.
8-K
4.2
2/22/13
10.61
(b)
(c)
(d)
Supplemental Indenture No. 6 to Master Indenture, dated as of July 6, 2016, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.3
7/8/16
10.62
(b)
(c)
(d)
Supplemental Indenture No. 7 to Master Indenture, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.1
6/16/20
10.63
(b)
(c)
(d)
Omnibus Amendment, dated as of July 10, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.1
7/11/17
10.64
(b)
(c)
(d)
Omnibus Amendment, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.4
6/16/20
10.65
(b)
(c)
(d)
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.
8-K
4.1
5/28/21
10.66
(b)
(c)
(d)
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. and U.S. Bank National Association.
8-K
4.1
6/24/21
10.67
(b)
(c)
(d)
Succession Agreement, dated as of June 18, 2021, among WFN Credit Company, LLC, MUFG Union Bank, N.A. and U.S. Bank National Association.
8-K
4.2
6/24/21
10.68
(b)
(c)
(d)
Series 2019-A Indenture Supplement, dated as of February 20, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.1
2/21/19
10.69
(b)
(c)
(d)
Series 2019-B Indenture Supplement, dated as of June 26, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.1
6/28/19
68
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.70
(b)
(c)
(d)
Series 2019-C Indenture Supplement, dated as of September 18, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A.
8-K
4.1
9/20/19
10.71
(b)
(c)
Amended and Restated Trust Agreement, dated as of August 1, 2001, between WFN Credit Company, LLC and Chase Manhattan Bank USA, National Association.
8-K
4.4
8/31/01
10.72
(b)
(c)
(d)
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.
8-K
4.2
5/28/21
10.73
(b)
(c)
Administration Agreement, dated as of August 1, 2001, between World Financial Network Credit Card Master Note Trust and World Financial Network National Bank.
8-K
4.5
8/31/01
10.74
(b)
(d)
First Amendment to Administration Agreement, dated as of July 31, 2009, between World Financial Network Credit Card Master Note Trust and World Financial Network National Bank.
8-K
4.1
7/31/09
10.75
(b)
(c)
(d)
Third Amended and Restated Service Agreement, dated as of April 23, 2019, between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
4/23/19
10.76
(b)
(c)
(d)
First Addendum to Appendix A of Third Amended and Restated Service Agreement, dated as of April 28, 2020, by and between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
11/1/19
10.77
(b)
(c)
(d)
Second Addendum to Appendix A of Third Amended and Restated Service Agreement, dated as of October 16, 2019, between Comenity Servicing LLC and Comenity Bank.
8-K
99.2
11/1/19
10.78
(b)
(c)
(d)
Amendment to Third Amended and Restated Service Agreement, dated as of February 20, 2020, between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
2/25/20
10.79
(b)
(c)
(d)
First Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of April 28, 2020, by and between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
5/4/20
10.80
(b)
(c)
(d)
Second Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of August 26, 2020, between Comenity Servicing LLC and Comenity Bank.
10-D
99.2
9/14/20
10.81
(b)
(c)
(d)
Third Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of January 26, 2021, between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
1/29/21
10.82
(b)
(c)
(d)
Fourth Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of March 31, 2021, between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
4/2/21
69
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.83
(b)
(c)
(d)
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.
8-K
99.1
5/3/21
10.84
(b)
(c)
(d)
Sixth Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of August 31, 2021, between Comenity Servicing LLC and Comenity Bank.
8-K
99.1
9/3/21
10.85
(b)
(c)
(d)
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.
8-K
99.1
1/6/22
10.86
(b)
(c)
(d)
Asset Representations Review Agreement, dated as of July 6, 2016, among Comenity Bank, WFN Credit Company, LLC, World Financial Network Credit Card Master Note Trust and FTI Consulting, Inc.
8-K
10.1
7/8/16
10.87
(a)
Receivables Purchase Agreement, dated as of September 28, 2001, between World Financial Network National Bank and WFN Credit Company, LLC.
10-Q
10.5
11/7/08
10.88
(a)
First Amendment to Receivables Purchase Agreement, dated as of June 24, 2008, between World Financial Network National Bank and WFN Credit Company, LLC.
10-K
10.94
3/2/09
10.89
(a)
Second Amendment to Receivables Purchase Agreement, dated as of March 30, 2010, between World Financial Network National Bank and WFN Credit Company, LLC.
10-K
10.127
2/28/11
10.90
(a)
Supplemental Agreement to Receivables Purchase Agreement, dated as of August 9, 2010, between World Financial Network National Bank and WFN Credit Company, LLC.
10-K
10.128
2/28/11
10.91
(a)
Third Amendment to Receivables Purchase Agreement, dated as of September 30, 2011, between World Financial Network Bank and WFN Credit Company, LLC.
10-Q
10.4
11/7/11
10.92
(a)
World Financial Network Credit Card Master Trust III Amended and Restated Pooling and Servicing Agreement, dated as of September 28, 2001, among WFN Credit Company, LLC, World Financial Network National Bank, and The Chase Manhattan Bank, USA, National Association.
10-Q
10.6
11/7/08
10.93
(a)
First Amendment to the Amended and Restated Pooling and Servicing Agreement, dated as of April 7, 2004, among WFN Credit Company, LLC, World Financial Network National Bank, and The Chase Manhattan Bank, USA, National Association.
10-Q
10.7
11/7/08
10.94
(a)
Second Amendment to the Amended and Restated Pooling and Servicing Agreement, dated as of March 23, 2005, among WFN Credit Company, LLC, World Financial Network National Bank, and The Chase Manhattan Bank, USA, National Association
10-Q
10.8
11/7/08
70
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.95
(a)
Third Amendment to the Amended and Restated Pooling and Servicing Agreement, dated as of October 26, 2007, among WFN Credit Company, LLC, World Financial Network National Bank, and Union Bank of California, N.A. (successor to JPMorgan Chase Bank, N.A.).
10-Q
10.9
11/7/08
10.96
(a)
Fourth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of March 30, 2010, among WFN Credit Company, LLC, World Financial Network National Bank, and Union Bank, N.A.
10-Q
10.9
5/7/10
10.97
(a)
Fifth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of September 30, 2011, among WFN Credit Company, LLC, World Financial Network Bank, and Union Bank, N.A.
10-Q
10.3
11/7/11
10.98
(a)
Sixth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of December 1, 2016, among WFN Credit Company, LLC, Comenity Bank, and Deutsche Bank Trust Company Americas.
10-K
10.94
2/27/17
10.99
(a)
Seventh Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of September 1, 2017, among WFN Credit Company, LLC, Comenity Bank, and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-K
10.96
2/27/18
10.100
(a)
Eighth Amendment to Amended and Restated Pooling and Servicing Agreement, dated as of November 16, 2020, among WFN Credit Company, LLC, Comenity Bank, and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-K
10.105
2/26/21
10.101
(a)
Supplemental Agreement to Amended and Restated Pooling and Servicing Agreement, dated as of August 9, 2010, among WFN Credit Company, LLC, World Financial Network National Bank, and Union Bank, N.A.
10-K
10.134
2/28/11
10.102
(a)
Receivables Purchase Agreement, dated as of September 29, 2008, between World Financial Capital Bank and World Financial Capital Credit Company, LLC.
10-Q
10.3
11/7/08
10.103
(a)
Amendment No. 1 to Receivables Purchase Agreement, dated as of June 4, 2010, between World Financial Capital Bank and World Financial Capital Credit Company, LLC.
10-Q
10.11
8/9/10
10.104
(a)
Transfer and Servicing Agreement, dated as of September 29, 2008, among World Financial Capital Credit Company, LLC, World Financial Capital Bank and World Financial Capital Master Note Trust.
10-Q
10.4
11/7/08
10.105
(a)
Amendment No. 1 to Transfer and Servicing Agreement, dated as of June 4, 2010, among World Financial Capital Credit Company, LLC, World Financial Capital Bank and World Financial Capital Master Note Trust.
10-Q
10.12
8/9/10
10.106
(a)
Master Indenture, dated as of September 29, 2008, between World Financial Capital Master Note Trust and U.S. Bank National Association, together with Supplemental Indenture Nos. 1 - 3.
10-K
10.104
2/27/18
71
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.107
(a)
Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of February 28, 2014, between World Financial Network Credit Card Master Note Trust and Union Bank, N.A.
10-K
10.129
2/27/15
10.108
(a)
First Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of July 10, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.
10-Q
10.8
8/7/17
10.109
(a)
Second Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of December 1, 2017, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.
10-K
10.109
2/27/18
10.110
(a)
Third Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of May 3, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.
10-K
10.110
2/26/19
10.111
(a)
Fourth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of August 31, 2018, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.
10-K
10.111
2/26/19
10.112
(a)
Fifth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of February 1, 2019, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.
10-K
10.112
2/26/19
10.113
(a)
Sixth Amendment to Fourth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of June 11, 2020, between World Financial Network Credit Card Master Note Trust and MUFG Union Bank, N.A., formerly known as Union Bank, N.A.
10-K
10.118
2/26/21
10.114
(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.
10-K
10.119
2/26/21
10.115
(a)
Third Amended and Restated Series 2009-VFC1 Supplement, dated as of April 28, 2017, among WFN Credit Company, LLC, Comenity Bank and Deutsche Bank Trust Company Americas.
10-Q
10.7
8/7/17
10.116
(a)
First Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of October 19, 2017, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-Q
10.4
11/8/17
10.117
(a)
Second Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of August 31, 2018, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-K
10.115
2/26/19
72
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.118
(a)
Third Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of June 28, 2019, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-K
10.123
2/26/21
10.119
(a)
Fourth Amendment to Third Amended and Restated Series 2009-VFC1 Supplement, dated as of April 17, 2020, among WFN Credit Company, LLC, Comenity Bank and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-K
10.124
2/26/21
10.120
(a)
Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of November 1, 2016, between World Financial Capital Master Note Trust and Deutsche Bank Trust Company Americas.
10-K
10.102
2/27/17
10.121
(a)
First Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of November 1, 2017, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-Q
10.5
11/8/17
10.122
(a)
Second Amendment to Fifth Amended and Restated Series 2009-VFN Indenture Supplement, dated as of September 28, 2018, between World Financial Capital Master Note Trust and U.S. Bank National Association (successor to Deutsche Bank Trust Company Americas).
10-Q
10.3
11/6/18
10.123
(a)
Amended and Restated Credit Agreement, dated as of June 14, 2017, by and among Alliance Data Systems Corporation, certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other agents and lenders.
8-K
10.1
6/19/17
10.124
(a)
First Amendment to Amended and Restated Credit Agreement and Incremental Amendment, dated as of June 16, 2017, by and among Alliance Data Systems Corporation, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders.
8-K
10.2
6/19/17
10.125
(a)
Second Amendment to Amended and Restated Credit Agreement, dated as of July 5, 2018, by and among Alliance Data Systems Corporation, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders.
10-Q
10.2
8/7/18
10.126
(a)
Third Amendment to Amended and Restated Credit Agreement, dated as of April 30, 2019, by and among Registrant, and certain subsidiaries parties thereto, as guarantors, Wells Fargo Bank, National Association, as Administrative Agent, and various other lenders.
10-Q
10.7
5/6/19
10.127
(a)
Fourth Amendment to Amended and Restated Credit Agreement, dated as of December 20, 2019, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.
8-K
10.2
12/23/19
73
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.128
(a)
Fifth Amendment to Amended and Restated Credit Agreement, dated as of February 13, 2020, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.
10-K
10.125
2/28/20
10.129
(a)
Sixth Amendment to Amended and Restated Credit Agreement, dated as of September 22, 2020, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.
8-K
10.2
9/23/20
10.130
(a)
Seventh Amendment to Amended and Restated Credit Agreement, dated as of July 9, 2021, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.
8-K
10.1
7/14/21
10.131
(a)
Indenture, dated as of December 20, 2019, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee (including the form of the Company’s 4.750% Senior Note due December 15, 2024).
8-K
4.1
12/23/19
10.132
(a)
First Supplemental Indenture, dated as of August 6, 2021, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee under the Indenture dated as of December 20, 2019.
10-Q
10.4
11/3/21
˄ 10.133
(a)
Indenture, dated as of September 22, 2020, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee (including the form of the Company’s 7.000% Senior Note due January 15, 2026).
8-K
4.1
9/23/20
10.134
(a)
First Supplemental Indenture, dated as of August 6, 2021, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee under the Indenture dated as of September 22, 2020.
10-Q
10.5
11/3/21
Ù 10.135
(a)
Separation and Distribution Agreement, dated as of November 3, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.
8-K
2.1
11/8/21
Ù 10.136
(a)
Transition Services Agreement, dated as of November 5, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.
8-K
10.1
11/8/21
Ù 10.137
(a)
Tax Matters Agreement, dated as of November 5, 2021, between Alliance Data Systems Corporation and Loyalty Ventures Inc.
8-K
10.2
11/8/21
Ù 10.138
(a)
Employee Matters Agreement, dated as of November 5, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.
8-K
10.3
11/8/21
10.139
(a)
First Amendment to Employee Matters Agreement, dated as of December 6, 2021, by and between Alliance Data Systems Corporation and Loyalty Ventures Inc.
8-K
10.1
12/7/21
74
Table of Contents
Incorporated by Reference
Exhibit No.
Filer
Description
Form
Exhibit
Filing Date
10.140
(a)
Registration Rights Agreement, dated as of November 5, 2021, by and among Alliance Data Systems Corporation and Loyalty Ventures Inc.
8-K
10.4
11/8/21
*21
(a)
Subsidiaries of the Registrant
*23.1
(a)
Consent of Deloitte & Touche LLP
*31.1
(a)
Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*31.2
(a)
Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
*32.1
(a)
Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
*32.2
(a)
Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.
*101
(a)
The following financial information from Alliance Data Systems Corporation’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021, formatted in Inline XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
*104
(a)
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
* Filed herewith
+ Management contract, compensatory plan or arrangement
#
Pursuant to Item 601(b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Registrant hereby undertakes to furnish supplementally an unredacted copy of the exhibit or a copy of any omitted schedule upon request by the U.S. Securities and Exchange Commission.
˄ Certain exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Alliance Data hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the U.S. Securities and Exchange Commission.
< Pursuant to Item 601 (b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and 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
75
Table of Contents
(b) WFN Credit Company
(c) World Financial Network Credit Card Master Trust
(d) World Financial Network Credit Card Master Note Trust
Item 16. Form 10-K Summary.
None.
76
Table of Contents
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
ALLIANCE DATA SYSTEMS CORPORATION
Page
ALLIANCE DATA SYSTEMS CORPORATION AND SUBSIDIARIES
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 34 )
F-2
Consolidated Statements of Income for the years ended December 31, 2021, 2020 and 2019
F-5
Consolidated Statements of Comprehensive Income for the years ended December 31, 2021, 2020 and 2019
F-6
Consolidated Balance Sheets as of December 31, 2021 and 2020
F-7
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021, 2020 and 2019
F-8
Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019
F-9
Notes to Consolidated Financial Statements
F-10
F-1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Alliance Data Systems Corporation
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, 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.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 25, 2022, expressed an unqualified opinion on the Company's internal control over financial reporting.
Change in Accounting Principle
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
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit 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.
F-2
Table of Contents
Allowance for Credit Losses — Refer to Notes 1 and 4 to the financial statements
Critical Audit Matter Description
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 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 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
Dallas, Texas
February 25, 2022
We have served as the Company's auditor since 1998.
F-3
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Alliance Data Systems Corporation
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Alliance Data Systems Corporation and subsidiaries (the “Company”) as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 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
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 25, 2022
F-4
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF INCOM E
Years Ended December 31,
2021
2020
2019
(in millions, except per share amounts)
Interest income
Interest and fees on loans
$
3,861
$
3,931
$
4,729
Interest on cash and investment securities
7
21
98
Total interest income
3,868
3,952
4,827
Interest expense
Interest on deposits
167
238
307
Interest on borrowings
216
261
331
Total interest expense
383
499
638
Net interest income
3,485
3,453
4,189
Non-interest income
Interchange revenue, net of retailer share arrangements
( 369 )
( 332 )
( 358 )
Other
156
177
219
Total non-interest income
( 213 )
( 155 )
( 139 )
Total net interest and non-interest income
3,272
3,298
4,050
Provision for credit losses
544
1,266
1,188
Total net interest and non-interest income, after provision for credit losses
2,728
2,032
2,862
Non-interest expenses
Employee compensation and benefits
671
609
721
Card and processing expenses
323
396
479
Information processing and communication
216
191
187
Marketing expenses
160
143
205
Depreciation and amortization
92
106
96
Other
222
286
512
Total non-interest expenses
1,684
1,731
2,200
Income from continuing operations before income taxes
1,044
301
662
Provision for income taxes
247
93
156
Income from continuing operations
797
208
506
Income (loss) from discontinued operations, net of income taxes
4
6
( 228 )
Net income
$
801
$
214
$
278
Basic income per share (Note 20):
Income from continuing operations
$
16.02
$
4.36
$
9.94
Income (loss) from discontinued operations
$
0.07
$
0.11
$
( 4.56 )
Net income per share
$
16.09
$
4.47
$
5.38
Diluted income per share (Note 20):
Income from continuing operations
$
15.95
$
4.35
$
9.94
Income (loss) from discontinued operations
$
0.07
$
0.11
$
( 4.48 )
Net income per share
$
16.02
$
4.46
$
5.46
Weighted average shares (Note 20):
Basic
49.7
47.8
50.0
Diluted
50.0
47.9
50.9
See Notes to Consolidated Financial Statements.
F-5
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOM E
Years Ended December 31,
2021
2020
2019
(in millions)
Net income
$
801
$
214
$
278
Other comprehensive income (loss):
Unrealized (loss) gain on available-for-sale securities
( 24 )
22
15
Tax benefit (expense)
2
( 1 )
( 2 )
Unrealized (loss) gain on available-for-sale securities, net of tax
( 22 )
21
13
Unrealized gain (loss) on cash flow hedges
1
( 1 )
—
Tax benefit (expense)
—
—
—
Unrealized gain (loss) on cash flow hedges, net of tax
1
( 1 )
—
Unrealized gain on net investment hedge
20
—
7
Tax expense
( 13 )
—
( 2 )
Unrealized gain on net investment hedge, net of tax
7
—
5
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)
17
75
20
Other comprehensive income, net of tax
3
95
38
Total comprehensive income, net of tax
$
804
$
309
$
316
See Notes to Consolidated Financial Statements.
F-6
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED BALANCE SHEET S
December 31,
2021
2020
(in millions, except per share amounts)
ASSETS
Cash and cash equivalents
$
3,046
$
2,796
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 )
17,399
16,784
Allowance for credit losses
( 1,832 )
( 2,008 )
Credit card and other loans, net
15,567
14,776
Available-for-sale securities
239
225
Property and equipment, net
215
213
Goodwill and intangible assets, net
687
711
Other assets
1,992
1,363
Assets of discontinued operations
—
2,463
Total assets
$
21,746
$
22,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
$
11,027
$
9,793
Debt issued by consolidated variable interest entities
5,453
5,710
Long-term and other debt
1,986
2,806
Other liabilities
1,194
1,359
Liabilities of discontinued operations
—
1,357
Total liabilities
19,660
21,025
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
1
1
Additional paid-in capital
2,174
3,427
Treasury stock, at cost, no shares and 67.4 million shares at December 31, 2021 and December 31, 2020, respectively
—
( 6,733 )
(Accumulated deficit) retained earnings
( 87 )
4,832
Accumulated other comprehensive loss
( 2 )
( 5 )
Total stockholders’ equity
2,086
1,522
Total liabilities and stockholders’ equity
$
21,746
$
22,547
See Notes to Consolidated Financial Statements.
F-7
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUIT Y
(Accumulated
Accumulated
Additional
Deficit)
Other
Total
Common Stock
Preferred Stock
Paid-In
Treasury
Retained
Comprehensive
Stockholders’
Shares
Amount
Shares
Amount
Capital
Stock
Earnings
Loss
Equity
(in millions)
January 1, 2019
113.0
$
1
—
$
—
$
3,172
$
( 5,715 )
$
5,012
$
( 138 )
$
2,332
Net income
—
—
—
—
—
—
278
—
278
Other comprehensive income
—
—
—
—
—
—
—
38
38
Stock-based compensation
—
—
—
—
55
—
—
—
55
Issuance of preferred stock
—
—
0.2
—
42
( 42 )
—
—
—
Conversion of preferred stock to common stock
1.5
—
( 0.2 )
—
—
—
—
—
—
Repurchases of common stock
—
—
—
—
—
( 976 )
—
—
( 976 )
Dividends and dividend equivalent rights declared ($ 2.52 per common share)
—
—
—
—
—
—
( 127 )
—
( 127 )
Issuance of shares to employees, net of shares withheld for employee taxes
0.5
—
—
—
( 11 )
—
—
—
( 11 )
December 31, 2019
115.0
$
1
—
$
—
$
3,258
$
( 6,733 )
$
5,163
$
( 100 )
$
1,589
Net income
—
—
—
—
—
—
214
—
214
Cumulative effect of change in accounting principle — Allowance for credit losses
—
—
—
—
—
—
( 485 )
—
( 485 )
Other comprehensive income
—
—
—
—
—
—
—
95
95
Stock-based compensation
—
—
—
—
21
—
—
—
21
Common stock issued as consideration for acquired business
1.9
—
—
—
149
—
—
—
149
Dividends and dividend equivalent rights declared ($ 1.26 per common share)
—
—
—
—
—
—
( 60 )
—
( 60 )
Issuance of shares to employees, net of shares withheld for employee taxes
0.2
—
—
—
( 1 )
—
—
—
( 1 )
December 31, 2020
117.1
$
1
—
$
—
$
3,427
$
( 6,733 )
$
4,832
$
( 5 )
$
1,522
Net income
—
—
—
—
—
—
801
—
801
Other comprehensive income
—
—
—
—
—
—
—
3
3
Stock-based compensation
—
—
—
—
29
—
—
—
29
Dividends and dividend equivalent rights declared ($ 0.84 per common share)
—
—
—
—
—
—
( 42 )
—
( 42 )
Retirement of treasury stock
( 67.4 )
—
—
—
( 1,280 )
6,733
( 5,453 )
—
—
Spinoff of Loyalty Ventures Inc.
—
—
—
—
—
—
( 225 )
—
( 225 )
Issuance of shares to employees, net of shares withheld for employee taxes
0.2
—
—
—
( 2 )
—
—
—
( 2 )
December 31, 2021
49.9
$
1
—
$
—
$
2,174
$
—
$
( 87 )
$
( 2 )
$
2,086
See Notes to Consolidated Financial Statements.
F-8
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW S
Years Ended December 31,
2021
2020
2019
(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
$
801
$
214
$
278
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses
544
1,266
1,188
Depreciation and amortization
123
184
249
Deferred income taxes
( 15 )
( 223 )
( 186 )
Non-cash stock compensation
29
21
55
Amortization of deferred financing costs
31
36
43
Gain on sale of business
—
( 14 )
( 512 )
Loss on extinguishment of debt
—
—
72
Asset impairment charges
—
64
52
Amortization of deferred origination costs and other charges
71
52
241
Change in other operating assets and liabilities, net of acquisitions and dispositions
Change in other assets
( 30 )
210
( 43 )
Change in other liabilities
( 11 )
73
( 219 )
Net cash provided by operating activities
1,543
1,883
1,218
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in credit card and other loans
( 1,805 )
1,784
( 2,587 )
Change in redemption settlement assets
( 113 )
( 41 )
( 9 )
Proceeds from sale of business
—
27
4,410
Payments for acquired businesses, net of cash and restricted cash
( 75 )
( 267 )
( 7 )
Proceeds from sale of credit card loan portfolio
512
289
2,062
Purchase of credit card loan portfolios
( 110 )
—
( 925 )
Capital expenditures
( 84 )
( 54 )
( 142 )
Purchases of available-for-sale securities
( 93 )
( 40 )
( 20 )
Maturities of available-for-sale securities
73
77
60
Other
4
( 1 )
19
Net cash (used in) provided by investing activities
( 1,691 )
1,774
2,861
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured borrowings under debt agreements
38
1,276
3,111
Repayments/maturities of unsecured borrowings under debt agreements
( 864 )
( 1,320 )
( 5,982 )
Debt issued by consolidated variable interest entities
4,278
2,419
4,852
Repayments/maturities of debt issued by consolidated variable interest entities
( 4,538 )
( 4,096 )
( 5,219 )
Net increase (decrease) in deposits
1,228
( 2,370 )
356
Debt proceeds from spinoff of Loyalty Ventures Inc.
652
—
—
Transfers to Loyalty Ventures Inc. related to spinoff
( 127 )
—
—
Payment of debt extinguishment costs
—
—
( 46 )
Payment of deferred financing costs
( 13 )
( 19 )
( 45 )
Proceeds from issuance of common stock
4
3
12
Dividends paid
( 42 )
( 61 )
( 127 )
Purchase of treasury shares
—
—
( 976 )
Other
( 8 )
1
( 28 )
Net cash provided by (used in) financing activities
608
( 4,167 )
( 4,092 )
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash
—
15
3
Change in cash, cash equivalents and restricted cash
460
( 495 )
( 10 )
Cash, cash equivalents and restricted cash at beginning of year
3,463
3,958
3,968
Cash, cash equivalents and restricted cash at end of year
$
3,923
$
3,463
$
3,958
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for interest
$
357
$
488
$
672
Cash paid during the year for income taxes, net
$
325
$
268
$
1,071
The Consolidated Statements of Cash Flows are presented with the combined cash flows from continuing and discontinued operations.
See Notes to Consolidated Financial Statements .
F-9
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. 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. 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
Note Number
Note Title
Credit Card and Other Loans
Note 3
Credit Card and Other Loans
Allowance for Credit Losses
Note 4
Allowance for Credit Losses
Transfers of Financial Assets
Note 5
Securitizations
Available-for-Sale Securities
Note 6
Available-for-Sale Securities
Property and Equipment
Note 7
Property and Equipment, Net
Goodwill
Note 8
Goodwill and Intangible Assets, Net
Intangible Assets, Net
Note 8
Goodwill and Intangible Assets, Net
Leases
Note 10
Leases
Stock Compensation Expense
Note 18
Stockholders' Equity
Income Taxes
Note 19
Income Taxes
Earnings Per Share
Note 20
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
F-10
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
F-11
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
F-12
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 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, and the adoption is not expected to have a material impact on the Company’s Consolidated Financial Statements.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminated certain exceptions within Accounting Standards Codification (ASC) 740, “Income Taxes,” and clarified certain aspects of ASC 740 to promote consistency among reporting entities. Most amendments within the standard were required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company’s adoption of this standard on January 1, 2021 did not have a material impact on its 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.
F-13
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
2. ACQUISITIONS
Bread
On September 28, 2020, the Company acquired 3.5 million preferred Series D Shares of Lon Inc., a Delaware corporation (Bread), for approximately $ 25 million, which represented an approximate 6 % ownership interest in Bread. 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 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 transaction, net of cash and restricted cash acquired, as of December 3, 2020 (in millions):
Installment loans
$
112
Developed technology
91
Right of use assets - operating
4
Deferred tax asset, net
7
Intangible assets
11
Goodwill
370
Total assets acquired
595
Accounts payable
2
Accrued expenses
3
Operating lease liabilities
3
Debt issued by consolidated variable interest entities
96
Total liabilities assumed
104
Net assets acquired, net of cash and restricted cash
$
491
The goodwill resulting from the acquisition was not deductible for tax purposes. 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.
3. 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.
F-14
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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:
2021
2020
(in millions)
Credit card loans
$
17,217
$
16,666
Installment loans
182
118
Total credit card and other loans (1)(2)
17,399
16,784
Less: Allowance for credit losses
( 1,832 )
( 2,008 )
Credit card and other loans, net
$
15,567
$
14,776
(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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 Other Loans (1)
31 to 60 days
delinquent
61 to 90 days
delinquent
91 or more days delinquent
Total
delinquent
Current
Total
(in millions)
As of December 31, 2021
$
262
$
186
$
401
$
849
$
16,284
$
17,133
As of December 31, 2020
$
273
$
203
$
440
$
916
$
15,578
$
16,494
(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.
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 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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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:
2021
2020
Pre-
Post-
Pre-
Post-
modification
modification
modification
modification
Number of
Outstanding
Outstanding
Number of
Outstanding
Outstanding
Restructurings
Balance
Balance
Restructurings
Balance
Balance
(Dollars in millions)
Troubled debt restructurings
171,993
$
254
$
254
391,049
$
554
$
553
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:
2021
2020
Number of
Outstanding
Number of
Outstanding
Restructurings
Balance
Restructurings
Balance
(Dollars in millions)
Troubled debt restructurings that subsequently defaulted
114,531
$
154
118,600
$
162
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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:
Vantage
2021
2020
661 or
601 to
600 or
661 or
601 to
600 or
Higher
660
Less
Higher
660
Less
Credit card loans
62
%
26
%
12
%
60
%
28
%
12
%
Note: The Company’s credit card loans are revolving as they do not have stated maturities, and therefore are exempted from certain vintage disclosures otherwise required under GAAP.
Installment Loans
The amortized cost basis of the Company’s installment loans totaled $ 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
F-18
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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, 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.
4. 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 under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and other loans, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for credit losses includes an estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans. The allowance is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness.
In estimating its allowance for credit losses, for each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, with no reversion period. In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects the Company’s best estimate of current expected credit losses. As permitted by GAAP, the Company excludes unbilled finance charges from its amortized cost basis of credit card and other loans. As of 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
F-19
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
warrant. 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
(in months)
Group A (Current, risk score - high)
14
Group B (Current, risk score - low)
19
Group C (Delinquent, risk score - high)
17
Group D (Delinquent, risk score - low)
26
Installment Loans
The 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:
2021
2020
2019
(in millions)
Beginning balance
$
2,008
$
1,815
(3)
$
1,038
Provision for credit losses (1)
544
1,266
1,188
Change in estimate for uncollectible unpaid interest and fees
—
10
—
Net principal charge-offs (2)
( 720 )
( 1,083 )
( 1,055 )
Ending balance
$
1,832
$
2,008
$
1,171
(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.
F-20
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
5. 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 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:
2021
2020
(in millions)
Total credit card loans – available to settle obligations of consolidated VIEs
$
11,215
$
11,208
Of which: principal amount of credit card loans 91 days or more past due
$
159
$
201
2021
2020
2019
(in millions)
Net charge-offs of securitized principal
$
453
$
756
$
908
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
6. 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:
2021
2020
Amortized
Unrealized
Unrealized
Amortized
Unrealized
Unrealized
Cost
Gains
Losses
Fair Value
Cost
Gains
Losses
Fair Value
(in millions)
Available-for-sale securities
$
237
$
4
$
( 2 )
$
239
$
219
$
6
$
—
$
225
Total
$
237
$
4
$
( 2 )
$
239
$
219
$
6
$
—
$
225
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
12 Months or Greater
Total
Unrealized
Unrealized
Unrealized
Fair Value
Losses
Fair Value
Losses
Fair Value
Losses
(in millions)
Available-for-sale securities
$
57
$
( 1 )
$
15
$
( 1 )
$
72
$
( 2 )
Total
$
57
$
( 1 )
$
15
$
( 1 )
$
72
$
( 2 )
At December 31, 2021, the amortized cost and estimated fair value of the Company’s AFS securities by contractual maturity, are as follows:
Amortized
Estimated
Cost
Fair Value
(in millions)
Due in one year or less (1)
$
65
$
65
Due after one year through five years
—
—
Due after five years through ten years
—
—
Due after ten years
172
174
Total
$
237
$
239
(1) Includes mutual funds, which do not have a stated maturity.
There were no realized gains or losses from the sale of any AFS securities for the years ended December 31, 2021, 2020 and 2019.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
7. 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:
2021
2020
(in millions)
Internal-use computer software and development
$
263
$
248
Furniture and equipment
107
122
Land and leasehold improvements
76
90
Construction in progress
25
24
Total
471
484
Accumulated depreciation and amortization
( 256 )
( 271 )
Property and equipment, net
$
215
$
213
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 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.
8. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
Goodwill is reviewed at least annually for impairment, or more frequently if circumstances indicate that an impairment is probable, using qualitative or quantitative analysis. No goodwill impairment has been recognized during any of the years ended December 31, 2021, 2020, or 2019.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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
$
264
Goodwill acquired during the period (1)
370
Balance at December 31, 2020
$
634
Goodwill acquired during the period
—
Balance at December 31, 2021
$
634
(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:
2021
Gross
Accumulated
Assets
Amortization
Net
Useful Life
(in millions)
Definite-Lived Assets
Customer contracts and lists
$
9
$
( 3 )
$
6
3 years
Premium on purchased credit card loan portfolios
133
( 89 )
44
1 - 13 years
Non-compete agreements
2
—
2
5 years
$
144
$
( 92 )
$
52
Indefinite-Lived Assets
Tradename
1
—
1
Indefinite life
Total intangible assets
$
145
$
( 92 )
$
53
2020
Gross
Accumulated
Assets
Amortization
Net
Useful Life
(in millions)
Definite-Lived Assets
Customer contracts and lists
$
9
$
—
$
9
3 years
Premium on purchased credit card loan portfolios
138
( 73 )
65
1 - 13 years
Non-compete agreements
2
—
2
5 years
$
149
$
( 73 )
$
76
Indefinite-Lived Assets
Tradename
1
—
1
Indefinite life
Total intangible assets
$
150
$
( 73 )
$
77
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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 December 31 (in millions):
2022
$
20
2023
15
2024
11
2025
2
2026
1
Thereafter
3
$
52
9. OTHER ASSETS
The following is a summary of Other assets as of December 31:
2021
2020
(in millions)
Restricted cash (1)
$
877
$
323
Deferred contract costs
364
311
Deferred tax asset, net
302
289
Accounts receivable, net (2)
151
114
Right of use assets - operating
97
119
Investment in LVI
50
—
Other (3)
151
207
Total other assets
$
1,992
$
1,363
(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.
10. LEASES
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
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
sublease. 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:
2021
2020
2019
(in millions)
Operating lease cost
$
23
$
25
$
24
Short-term lease cost
—
1
1
Variable lease cost
2
2
3
Sublease income
( 5 )
( 1 )
—
Total
$
20
$
27
$
28
The table below reflects other lease-related information as of December 31:
2021
2020
Weighted-average remaining lease term (in years):
Operating leases
9.8
10.3
Weighted-average discount rate:
Operating leases
5.8 %
5.8 %
Supplemental lease-related cash flow information was as follows for the years ended December 31:
2021
2021
2020
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
25
$
28
$
27
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
$
5
$
1
$
23
Maturities of the Company’s lease liabilities by year were as follows as of December 31, 2021 (in millions):
2022
$
20
2023
21
2024
21
2025
20
2026
19
Thereafter
86
Total undiscounted lease liabilities
187
Less: Amount representing interest
( 47 )
Total present value of minimum lease payments
$
140
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
11. BORROWINGS OF LONG-TERM AND OTHER DEBT
Long-term and other debt consisted of the following as of December 31:
Description
2021
2020
Contractual Maturities
Interest Rates
(Dollars in millions)
Long-term and other debt:
Revolving line of credit
$
—
$
—
July 2024
(1)
Term loans
658
1,484
July 2024
(2)
Senior notes due 2024
850
850
December 2024
4.750 %
Senior notes due 2026
500
500
January 2026
7.000 %
Subtotal
2,008
2,834
Less: Unamortized debt issuance costs
22
28
Total long-term and other debt
$
1,986
$
2,806
Deposits:
Certificates of deposit
$
5,447
$
6,015
Various – Jan 2022 to Dec 2026
0.20 % to 3.75 %
Money market and other non-maturity deposits
5,586
3,790
Non-maturity
(3)
Subtotal
11,033
9,805
Less: Unamortized debt issuance costs
6
12
Total deposits
$
11,027
$
9,793
Debt issued by consolidated VIEs:
Fixed rate asset-backed term note securities
$
1,572
$
3,424
Various – Feb 2022 to Sep 2022
2.21 % to 3.61 %
Conduit asset-backed securities
3,883
2,205
Various – Aug 2022 to Oct 2023
(4)
Secured loan facility
—
86
Subtotal
5,455
5,715
Less: Unamortized debt issuance costs
2
5
Total debt issued by consolidated VIEs
$
5,453
$
5,710
Total borrowings of long-term and other debt
$
18,466
$
18,309
(1) The interest rate is based upon LIBOR plus an applicable margin.
(2) The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 1.85 % and 1.90 % at December 31, 2021 and 2020, respectively.
(3) The interest rates are based on the Federal Funds rate plus an applicable margin. At December 31, 2021, the interest rates ranged from 0.05 % to 3.50 % . At December 31, 2020, the interest rates ranged from 0.38 % to 3.50 % .
(4) The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At December 31, 2021, the interest rates ranged from 0.89 % to 0.96 % . At December 31, 2020, the interest rates ranged from 1.39 % to 1.89 % .
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 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.
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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; sell, lease, or otherwise transfer any substantial part of its assets; create or incur indebtedness; create liens; and make acquisitions. The negative covenants are subject to certain exceptions as specified in the credit agreement. 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.
Due 2024: 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 outstanding principal amount at the rate of 4.750 % per annum from December 20, 2019, payable semi-annually in arrears, on June 15 and December 15 of each year, beginning on June 15, 2020. The Senior Notes due 2024 will mature on December 15, 2024, subject to earlier repurchase or redemption.
Due 2026: 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 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.
Deposits
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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 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, 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 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, 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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Maturities
The future principal payments for the Company’s long-term and other debt are as follows, as of December 31, 2021:
Long-Term
Debt Issued by
and
Consolidated
Year
Other Debt
Deposits
VIEs
Total
(in millions)
2022
$
231
$
9,096
$
3,034
$
12,361
2023
177
1,217
2,421
3,815
2024
1,100
627
—
1,727
2025
—
57
—
57
2026
500
36
—
536
Thereafter
—
—
—
—
Total maturities
2,008
11,033
5,455
18,496
Unamortized debt issuance costs
( 22 )
( 6 )
( 2 )
( 30 )
$
1,986
$
11,027
$
5,453
$
18,466
12. OTHER LIABILITIES
The following is a summary of Other liabilities as of December 31:
2021
2020
(in millions)
Accounts payable and other brand partner liabilities
$
291
$
354
Accrued liabilities (1)
314
384
Operating lease liabilities
140
172
Long-term tax reserves
313
347
Other (2)
136
102
Total other liabilities
$
1,194
$
1,359
(1) Primarily related to accrued payroll and benefits, marketing, taxes and professional services expenses.
(2) Primarily comprised of long-term unearned revenue and cardholder liabilities.
13. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSES
The following table provides the components of Other non-interest income for the years ended December 31:
2021
2020
2019
(in millions)
Payment protection products
$
141
$
156
$
174
Gain on portfolio and other sales
10
20
41
Other
5
1
4
Total other non-interest income
$
156
$
177
$
219
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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:
2021
2020
2019
(in millions)
Professional services and regulatory fees
$
136
114
$
120
Asset impairment charges
—
64
11
Portfolio valuation adjustments (to reflect the lower of cost or market)
—
—
190
Loss on extinguishment of debt
—
—
72
Other (1)
86
108
119
Total other non-interest expenses
$
222
$
286
$
512
(1) Primarily related to occupancy expense and non-income based taxes.
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is defined under GAAP as the price that would be required to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; with such transaction based on the principal market, or in the absence of a principal market the most advantageous market for the specific instrument. GAAP provides for a three-level fair value hierarchy that classifies the inputs to valuation techniques used to measure fair value, defined as follows:
Level 1: Inputs that are unadjusted quoted prices for identical assets or liabilities in active markets that the entity can access.
Level 2: Inputs, other than those included within Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or inputs other than quoted prices that are observable for the asset or liability.
Level 3: Inputs that are unobservable (e.g., internally derived assumptions) and reflect an entity’s own estimates about estimates market participants would use in pricing the asset or liability based on the best information available under the circumstances. In particular, Level 3 inputs and valuation techniques involve judgment and as 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:
2021
2020
Carrying
Fair
Carrying
Fair
Amount
Value
Amount
Value
(in millions)
Financial assets
Credit card and other loans, net
$
15,567
$
17,989
$
14,776
$
17,301
Available-for-sale securities
239
239
225
225
Financial liabilities
Deposits
11,027
11,135
9,793
10,016
Debt issued by consolidated variable interest entities
5,453
5,467
5,710
2,783
Long-term and other debt
1,986
2,053
2,806
2,875
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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).
Deposits: Money market and other non-maturity deposits carrying values approximate their fair values because they are short-term in duration and have no defined maturity. Certificates of deposit are recorded at their historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, with fair value being estimated based on the currently observable market rates available to the Company for similar deposits with similar remaining maturities (i.e., Level 2 inputs). Interest payable is included within Other liabilities on the Consolidated Balance Sheets.
Debt issued by consolidated VIEs: The Company records debt issued by its consolidated VIEs at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. Fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction (i.e., Level 2 inputs).
Long-term and other debt: The Company records its long-term and other debt at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. The fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities, or quoted market prices for the same transaction (i.e., Level 2 inputs).
The following tables summarize the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by the fair value hierarchy described in the preceding paragraphs, as of December 31:
2021
Total
Level 1
Level 2
Level 3
(in millions)
Available-for-sale securities
$
239
$
48
$
191
$
—
Total assets measured at fair value
$
239
$
48
$
191
$
—
2020
Total
Level 1
Level 2
Level 3
(in millions)
Available-for-sale securities
$
225
$
34
$
191
$
—
Total assets measured at fair value
$
225
$
34
$
191
$
—
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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.
2021
Fair Value
Level 1
Level 2
Level 3
(in millions)
Financial assets:
Credit card and other loans, net
$
17,989
$
—
$
—
$
17,989
Total
$
17,989
$
—
$
—
$
17,989
Financial liabilities:
Deposits
$
11,135
$
—
$
11,135
$
—
Debt issued by consolidated VIEs
5,467
—
5,467
—
Long-term and other debt
2,053
—
2,053
—
Total
$
18,655
$
—
$
18,655
$
—
2020
Fair Value
Level 1
Level 2
Level 3
(in millions)
Financial assets:
Credit card and other loans, net
$
17,301
$
—
$
—
$
17,301
Total
$
17,301
$
—
$
—
$
17,301
Financial liabilities:
Deposits
$
10,016
$
—
$
10,016
$
—
Debt issued by consolidated VIEs
5,783
—
5,783
—
Long-term and other debt
2,875
—
2,875
—
Total
$
18,674
$
—
$
18,674
$
—
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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
Regulatory Matters
Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (FDIC). The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC. While neither of 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
Minimum Ratio for
Well Capitalized under
Actual
Capital Adequacy
Prompt Corrective
Ratio
Purposes
Action Provisions
Comenity Bank
Tier 1 capital to average assets (1)
20.0
%
4.0
%
5.0
%
Common Equity Tier 1 capital to risk-weighted assets (2)
21.4
4.5
6.5
Tier 1 capital to risk-weighted assets (3)
21.4
6.0
8.0
Total capital to risk-weighted assets (4)
22.7
8.0
10.0
Comenity Capital Bank
Tier 1 capital to average assets (1)
17.3
%
4.0
%
5.0
%
Common Equity Tier 1 capital to risk-weighted assets (2)
18.6
4.5
6.5
Tier 1 capital to risk-weighted assets (3)
18.6
6.0
8.0
Total capital to risk-weighted assets (4)
19.9
8.0
10.0
Combined Banks
Tier 1 capital to average assets (1)
18.6
%
4.0
%
5.0
%
Common Equity Tier 1 capital to risk-weighted assets (2)
20.0
4.5
6.5
Tier 1 capital to risk-weighted assets (3)
20.0
6.0
8.0
Total capital to risk-weighted assets (4)
21.3
8.0
10.0
(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. On April 20, 2021, Comenity Capital Bank withdrew its bank merger application
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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. The DOJ investigation related to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon actively cooperated with the DOJ in connection with the investigation. On January 19, 2021, Epsilon entered into a deferred prosecution agreement (DPA) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $ 150 million, to be paid in two equal installments, the first in January 2021 and the second in January 2022. A $ 150 million loss contingency was recorded as of December 31, 2020. The Company paid $ 75 million to Publicis pursuant to its contractual indemnification obligation in January 2021. 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 consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of the Company’s contractual obligations.
16. EMPLOYEE BENEFIT PLANS
Employee Stock Purchase Plan
In March 2015, the Company’s Board of Directors adopted the 2015 Employee Stock Purchase Plan (the 2015 ESPP), which was subsequently approved by the Company’s stockholders on June 3, 2015. The 2015 ESPP became effective July 1, 2015 with no definitive expiration date. The Company’s 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 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 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. The 2015 ESPP provides for the issuance of any remaining shares available for issuance under the 2005 ESPP, which were 441,327 shares at June 30, 2015. The 2015 ESPP reserved an additional 1,000,000 shares of the Company’s common stock for issuance under the 2015 Plan, bringing the maximum number of shares reserved for issuance under the 2015 ESPP to 1,441,327 shares, subject to adjustment as provided in the 2015 ESPP.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
401(k) 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.
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 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. 333-65556. As of December 31, 2021, 290,897 of such shares remain available for issuance.
Executive Deferred Compensation Plan
The Company also maintains an Executive Deferred Compensation Plan (EDCP). The EDCP permits a defined group of management and highly compensated employees to defer on a pre-tax basis a portion of their base salary and incentive compensation (as defined in the EDCP) payable for services rendered. Deferrals under the EDCP are unfunded and subject to the claims of the Company’s creditors. Each participant in the EDCP is 100 % vested in their account, and account balances accrue interest at a rate established and adjusted periodically by the Compensation 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
17. 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
Accumulated
Net Unrealized
Net Unrealized
Net Unrealized
Translation
Other
Gains (Losses) on
(Losses) Gains on
Gains (Losses) on
Adjustment
Comprehensive
AFS Securities
Cash Flow Hedges
Net Investment Hedge
(Losses) Gains (1)
Loss
(in millions)
Balance as of January 1, 2019
$
( 11 )
$
—
$
( 12 )
$
( 115 )
$
( 138 )
Changes in other comprehensive income (loss)
13
—
5
( 7 )
11
Recognition resulting from the sale of Epsilon's foreign subsidiaries
—
—
—
27
27
Balance at December 31, 2019
$
2
$
—
$
( 7 )
$
( 95 )
$
( 100 )
Changes in other comprehensive income (loss)
21
( 1 )
—
71
91
Recognition resulting from the sale of Precima's foreign subsidiaries
—
—
—
4
4
Balance at December 31, 2020
$
23
$
( 1 )
$
( 7 )
$
( 20 )
$
( 5 )
Changes in other comprehensive income (loss)
( 21 )
2
—
( 37 )
( 56 )
Recognition resulting from the spinoff of LoyaltyOne's foreign subsidiaries
( 1 )
( 1 )
7
54
59
Balance at December 31, 2021
$
1
$
—
$
—
$
( 3 )
$
( 2 )
(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.
18. 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
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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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. 333-239040. 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.
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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:
Weighted
Market-
Performance-
Service-
Average
Based (1)
Based (1)
Based
Total
Fair Value
Balance at January 1, 2019
56,229
423,242
317,441
796,912
$
218.81
Shares granted
37,878
420,239
246,118
704,235
161.05
Shares vested
—
( 262,773 )
( 178,730 )
( 441,503 )
218.45
Shares forfeited
( 69,819 )
( 350,436 )
( 126,257 )
( 546,512 )
188.40
Balance at December 31, 2019
24,288
230,272
258,572
513,132
$
172.06
Shares granted
20,770
219,186
241,610
481,566
89.11
Shares vested
—
( 42,097 )
( 127,921 )
( 170,018 )
175.09
Shares forfeited
( 22,831 )
( 186,135 )
( 38,447 )
( 247,413 )
166.93
Balance at December 31, 2020
22,227
221,226
333,814
577,267
$
103.89
Shares granted (2)
2,641
111,542
774,062
888,245
88.18
Shares vested
—
( 24,677 )
( 167,723 )
( 192,400 )
118.78
Shares forfeited
( 5,801 )
( 216,675 )
( 291,201 )
( 513,677 )
93.16
Balance at December 31, 2021
19,067
91,416
648,952
759,435
$
89.14
Outstanding and Expected to Vest
633,480
$
90.09
(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.
Dividends
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.
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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.
19. INCOME TAXES
The Company files income tax returns in federal, state, local and foreign jurisdictions, as applicable. Provisions for current income tax liabilities are calculated and accrued on income and expense amounts expected to be included in the income tax returns for the current year. Income taxes reported in earnings also include deferred income tax provisions and provisions for uncertain tax positions.
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:
2021
2020
2019
(in millions)
Current
Federal
$
218
$
228
$
123
State
49
36
35
Total current income tax expense
267
264
158
Deferred
Federal
( 13 )
( 143 )
( 9 )
State
( 7 )
( 28 )
7
Total deferred income tax benefit
( 20 )
( 171 )
( 2 )
Total Provision for income taxes
$
247
$
93
$
156
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:
2021
2020
2019
(in millions)
Expected expense at statutory rate
$
219
$
63
$
139
Increase (decrease) in income taxes resulting from:
State and local income taxes, net of federal benefit
33
6
33
Impact of 2017 Tax Reform
( 8 )
( 2 )
( 30 )
Non-deductible expenses
4
6
7
IRC Section 199, net of tax reserves
—
12
—
Other
( 1 )
8
7
Total
$
247
$
93
$
156
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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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:
2021
2020
(in millions)
Deferred tax assets
Deferred revenue
$
17
$
14
Allowance for credit losses
447
482
Net operating loss carryforwards and other carryforwards
42
43
Operating lease liabilities
33
42
Accrued expenses and other
65
75
Total deferred tax assets
604
656
Valuation allowance
( 8 )
( 8 )
Deferred tax assets, net of valuation allowance
596
648
Deferred tax liabilities
Deferred income
$
221
$
291
Depreciation
28
14
Right of use assets
22
28
Intangible assets
23
26
Total deferred tax liabilities
294
359
Net deferred tax assets
$
302
$
289
Amounts recognized on the Consolidated Balance Sheets:
Other assets
$
302
$
289
At December 31, 2021, included in the Company’s U.S. tax returns are approximately $ 132 million of U.S. federal net operating loss carryovers (“NOLs”) and approximately $ 34 million of foreign tax credits. With the exception of NOLs generated after December 31, 2017, these attributes expire at various times through the year 2037. 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. Under the portfolio approach, the net unrealized gains or losses recorded in accumulated other comprehensive loss would be eliminated only on the date the entire portfolio of available-for-sale securities is sold or otherwise disposed of.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
H.R. 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
$
223
Increases related to prior years’ tax positions
2
Decreases related to prior years’ tax positions
( 66 )
Increases related to current year tax positions
58
Settlements during the period
( 1 )
Lapses of applicable statutes of limitation
( 1 )
Balance at December 31, 2019
$
215
Increases related to prior years’ tax positions
59
Decreases related to prior years’ tax positions
( 23 )
Increases related to current year tax positions
11
Settlements during the period
( 5 )
Lapses of applicable statutes of limitation
( 2 )
Balance at December 31, 2020
$
255
Increases related to prior years’ tax positions
1
Decreases related to prior years’ tax positions
( 13 )
Increases related to current year tax positions
12
Settlements during the period
( 8 )
Balance at December 31, 2021
$
247
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, 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. The Company does not anticipate a significant change to the total amount of unrecognized tax benefits over the next twelve months.
The Company files income tax returns in the U.S. federal jurisdiction and in many state and foreign jurisdictions, 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.
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
20. 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:
2021
2020
2019
(in millions, except per share amounts)
Basic EPS:
Numerator:
Income from continuing operations
$
797
$
208
$
506
Less: Dividends declared on preferred stock
—
—
3
Less: Allocation of undistributed earnings
—
—
6
Income from continuing operations
797
208
497
Income (loss) from discontinued operations, net of income taxes
4
6
( 228 )
Net income
$
801
$
214
$
269
Denominator:
Weighted average shares
49.7
47.8
50.0
Basic EPS:
Continuing operations
$
16.02
$
4.36
$
9.94
Discontinued operations
$
0.07
$
0.11
$
( 4.56 )
Total
$
16.09
$
4.47
$
5.38
Diluted EPS (1) :
Numerator:
Income from continuing operations
$
797
$
208
$
506
Income (loss) from discontinued operations, net of income taxes
4
6
( 228 )
Net income
$
801
$
214
$
278
Denominator:
Weighted average shares from Basic EPS above
49.7
47.8
50.0
Weighted average effect of dilutive securities (2) :
Shares from assumed conversion of preferred stock
—
—
0.8
Net effect of dilutive unvested restricted stock awards (1)
0.3
0.1
0.1
Denominator for diluted calculation
50.0
47.9
50.9
Diluted EPS:
Continuing operations
$
15.95
$
4.35
$
9.94
Discontinued operations
$
0.07
$
0.11
$
( 4.48 )
Total
$
16.02
$
4.46
$
5.46
(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.
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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. 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.
21. 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:
2021
2020
(in millions)
Cash and cash equivalents
$
3,046
$
2,796
Restricted cash included within Other assets
877
323
Cash, cash equivalents and restricted cash included within Assets of discontinued operations
—
344
Total cash, cash equivalents and restricted cash
$
3,923
$
3,463
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.”
22. DISCONTINUED OPERATIONS AND BANK HOLDING COMPANY FINANCIAL PRESENTATION
DISCONTINUED OPERATIONS
LoyaltyOne
On November 5, 2021, the separation of Loyalty Ventures Inc. (Loyalty Ventures) from the Company was completed after market close (the Separation). The Separation 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.
F-44
Table of Contents
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:
2021
2020
2019
(in millions)
Total interest income
$
1
$
1
$
2
Total interest expense (1)
11
17
31
Net interest income
( 10 )
( 16 )
( 29 )
Total non-interest income
574
765
1,033
Total non-interest expenses
519
656
927
Income before provision from income taxes
45
93
77
Provision for income taxes
36
6
10
Income from discontinued operations, net of income taxes
$
9
$
87
$
67
(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:
2020
(in millions)
Assets:
Cash and cash equivalents
$
286
Accounts receivable, net
270
Inventories
164
Redemption settlement assets, restricted
693
Property and equipment, net
98
Goodwill
736
Other assets
216
Total assets of discontinued operations
$
2,463
Liabilities:
Accounts payable
$
68
Accrued expenses
61
Deferred revenue
1,004
Other liabilities
224
Total liabilities of discontinued operations
$
1,357
The following table summarizes the depreciation and amortization, and capital expenditures of the Company’s former LoyaltyOne segment for the years ended December 31:
2021
2020
2019
(in millions)
Depreciation and amortization
$
31
$
78
$
80
Capital expenditures
$
15
$
24
$
41
F-45
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Epsilon
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)
$
4,452
Net carrying value of assets and liabilities (including other comprehensive income)
3,940
Pre-tax gain on deconsolidation
$
512
(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:
2021
2020
2019
(in millions)
Total interest income
$
—
$
—
$
—
Total interest expense (1)
—
—
64
Net interest income
—
—
( 64 )
Total non-interest income
—
—
963
Total non-interest expenses
7
110
519
(Loss) income before (benefit) provision for income taxes
( 7 )
( 110 )
380
(Benefit) provision for income taxes
( 2 )
( 29 )
675
(Loss) income from discontinued operations, net of income taxes
$
( 5 )
$
( 81 )
$
( 295 )
(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:
2021
2020
2019
(in millions)
Depreciation and amortization
$
—
$
—
$
73
Capital expenditures
$
—
$
—
$
56
F-46
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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.
F-47
Table of Contents
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)
Revenues
Services
$
117
$
( 292 )
$
( 175 )
$
175
$
—
Redemption, net
473
( 473 )
—
—
—
Finance charges, net
3,931
—
3,931
( 3,931 )
—
Interest and fees on loans
—
—
—
3,931
3,931
(1)
Interest on cash and investment securities
—
—
—
21
21
(1)
Total interest income*
4,521
( 765 )
3,756
196
3,952
Interest expense
Interest on deposits
—
—
—
238
238
(1)
Interest on borrowings
—
—
—
261
261
(1)
Total interest expense
—
—
—
499
499
Net interest income*
4,521
( 765 )
3,756
( 303 )
3,453
Non-interest income
Interchange revenue, net of retailer share arrangements
—
—
—
( 332 )
( 332 )
(2)
Other
—
—
—
177
177
(2)
Total non-interest income
—
—
—
( 155 )
( 155 )
Total net interest and non-interest income*
4,521
( 765 )
3,756
( 458 )
3,298
Provision for credit losses
1,266
—
1,266
—
1,266
Total net interest and non-interest income, after provision for credit losses*
3,255
( 765 )
2,490
( 458 )
2,032
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
2,077
( 577 )
1,500
( 1,500 )
—
General and administrative
106
( 1 )
105
( 105 )
—
Depreciation and other amortization
99
( 29 )
70
( 70 )
—
Amortization of purchased intangibles
85
( 49 )
36
( 36 )
—
Non-interest expenses
Employee compensation and benefits
—
—
—
609
609
(3)
Card and processing expenses
—
—
—
396
396
(3)
Information processing and communication
—
—
—
191
191
(3)
Marketing expense
—
—
—
143
143
(3)
Depreciation and amortization
—
—
—
106
106
(3)
Other
—
—
—
286
286
(3)
Total non-interest expenses*
2,367
( 656 )
1,711
20
1,731
Operating income
888
( 109 )
779
( 478 )
301
Interest expense
Securitization funding costs
166
—
166
( 166 )
—
Interest expense on deposits
220
—
220
( 220 )
—
Interest expense on long-term and other debt, net
108
( 16 )
92
( 92 )
—
Total interest expense, net
494
( 16 )
478
( 478 )
—
Income from continuing operations before income taxes
394
( 93 )
301
—
301
Provision for income taxes
99
( 6 )
93
—
93
Income from continuing operations
295
( 87 )
208
—
208
(Loss) income from discontinued operations, net of income taxes
( 81 )
87
6
—
6
Net income
$
214
$
—
$
214
$
—
$
214
* Caption total not historically provided.
F-48
Table of Contents
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)
Revenues
Services
$
216
$
( 396 )
$
( 180 )
$
180
$
—
Redemption, net
637
( 637 )
—
—
—
Finance charges, net
4,729
—
4,729
( 4,729 )
—
Interest and fees on loans
—
—
—
4,729
4,729
(1)
Interest on cash and investment securities
—
—
—
98
98
(1)
Total interest income*
5,582
( 1,033 )
4,549
278
4,827
Interest expense
Interest on deposits
—
—
—
307
307
(1)
Interest on borrowings
—
—
—
331
331
(1)
Total interest expense
—
—
—
638
638
Net interest income*
5,582
( 1,033 )
4,549
( 360 )
4,189
Non-interest income
Interchange revenue, net of retailer share arrangements
—
—
—
( 358 )
( 358 )
(2)
Other
—
—
—
219
219
(2)
Total non-interest income
—
—
—
( 139 )
( 139 )
Total net interest and non-interest income*
5,582
( 1,033 )
4,549
( 499 )
4,050
Provision for credit losses
1,188
—
1,188
—
1,188
Total net interest and non-interest income, after provision for credit losses*
4,394
( 1,033 )
3,361
( 499 )
2,862
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)
2,688
( 847 )
1,841
( 1,841 )
—
General and administrative
150
—
150
( 150 )
—
Depreciation and other amortization
80
( 32 )
48
( 48 )
—
Amortization of purchased intangibles
96
( 48 )
48
( 48 )
—
Loss on extinguishment of debt
72
—
72
( 72 )
—
Non-interest expenses
Employee compensation and benefits
—
—
—
721
721
(3)
Card and processing expenses
—
—
—
479
479
(3)
Information processing and communication
—
—
—
187
187
(3)
Marketing expense
—
—
—
205
205
(3)
Depreciation and amortization
—
—
—
96
96
(3)
Other
—
—
—
512
512
(3)
Total non-interest expenses*
3,086
( 927 )
2,159
41
2,200
Operating income
1,308
( 106 )
1,202
( 540 )
662
Interest expense
Securitization funding costs
213
—
213
( 213 )
—
Interest expense on deposits
226
—
226
( 226 )
—
Interest expense on long-term and other debt, net
130
( 29 )
101
( 101 )
—
Total interest expense, net
569
( 29 )
540
( 540 )
—
Income from continuing operations before income taxes
739
( 77 )
662
—
662
Provision for income taxes
166
( 10 )
156
—
156
Income from continuing operations
573
( 67 )
506
—
506
(Loss) income from discontinued operations, net of income taxes
( 295 )
67
( 228 )
—
( 228 )
Net income
$
278
$
—
$
278
$
—
$
278
* Caption total not historically provided.
F-49
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
(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
Total
(in millions)
Interest income
Interest and fees on loans
$
3,931
$
—
$
—
$
—
$
3,931
Interest on cash and investment securities
—
1
18
2
21
Interest expense
Interest on deposits
—
—
( 238 )
—
( 238 )
Interest on borrowings
—
( 167 )
—
( 94 )
( 261 )
Net interest income
$
3,931
$
( 166 )
$
( 220 )
$
( 92 )
$
3,453
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
Total
(in millions)
Interest income
Interest and fees on loans
$
4,729
$
—
$
—
$
—
$
4,729
Interest on cash and investment securities
—
7
81
10
98
Interest expense
Interest on deposits
—
—
( 307 )
—
( 307 )
Interest on borrowings
—
( 220 )
—
( 111 )
( 331 )
Net interest income
$
4,729
$
( 213 )
$
( 226 )
$
( 101 )
$
4,189
(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
Services
revenue
Cost of operations
expense
Total
(in millions)
Non-interest income
Interchange revenue, net of retailer share arrangements
$
( 332 )
$
—
$
( 332 )
Other
Payment protection products
157
—
157
Gain on portfolio and other sales
—
20
20
Subtotal
157
20
177
Total non-interest income
$
( 175 )
$
20
$
( 155 )
F-50
Table of Contents
ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
For the Year Ended December 31, 2019
Services
revenue
Cost of operations
expense
Total
(in millions)
Non-interest income
Interchange revenue, net of retailer share arrangements
$
( 358 )
$
—
$
( 358 )
Other
Payment protection products
178
—
178
Gain on portfolio and other sales
—
41
41
Subtotal
178
41
219
Total non-interest income
$
( 180 )
$
41
$
( 139 )
(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
Total
(in millions)
Non-interest expenses
Employee compensation and benefits
$
562
$
47
$
—
$
—
$
609
Card and processing expenses
396
—
—
—
396
Information processing and communication
177
14
—
—
191
Marketing expense
143
—
—
—
143
Depreciation and amortization
—
—
70
36
106
Other
242
44
—
—
286
Total non-interest expenses
$
1,520
$
105
$
70
$
36
$
1,731
Gain on portfolio and other sales (non-interest income)
( 20 )
—
—
—
( 20 )
Total
$
1,500
$
105
$
70
$
36
$
1,711
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
Total
(in millions)
Non-interest expenses
Employee compensation and benefits
$
654
$
67
$
—
$
—
$
—
$
721
Card and processing expenses
479
—
—
—
—
479
Information processing and communication
168
19
—
—
—
187
Marketing expense
204
1
—
—
—
205
Depreciation and amortization
—
—
48
48
—
96
Other
377
63
—
—
72
512
Total non-interest expenses
$
1,882
$
150
$
48
$
48
$
72
$
2,200
Gain on portfolio and other sales (non-interest income)
( 41 )
—
—
—
—
( 41 )
Total
$
1,841
$
150
$
48
$
48
$
72
$
2,159
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Table of Contents
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.
23. 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. Certain of the Company’s subsidiaries may be restricted in distributing cash or other assets to ADSC, which could be utilized to service its indebtedness. The stand-alone parent-only financial statements are presented below.
Parent Company – Condensed Balance Sheets
December 31,
2021
2020
(in millions)
Assets:
Cash and cash equivalents
$
—
$
—
Investment in subsidiaries
4,446
5,127
Investment in Loyalty Ventures
50
—
Other assets
123
42
Total assets
$
4,619
$
5,169
Liabilities:
Long-term and other debt
$
1,985
$
2,805
Intercompany liabilities, net
482
742
Other liabilities
66
100
Total liabilities
2,533
3,647
Stockholders’ equity
2,086
1,522
Total liabilities and stockholders’ equity
$
4,619
$
5,169
Parent Company – Condensed Statements of Income
Years Ended December 31,
2021
2020
2019
(in millions)
Total interest income
$
12
$
13
$
19
Total interest expense
103
110
130
Net interest expense
( 91 )
( 97 )
( 111 )
Dividends from subsidiaries
535
256
923
Total net interest and non-interest income
444
159
812
Total non-interest expenses
1
1
71
Income before income taxes and equity in undistributed net income (loss) of subsidiaries
443
158
741
Benefit for income taxes
36
21
42
Income before equity in undistributed net income (loss) of subsidiaries
479
179
783
Equity in undistributed net income (loss) of subsidiaries
322
35
( 505 )
Net income
$
801
$
214
$
278
Parent Company – Condensed Statements of Comprehensive Income
Years Ended December 31,
2021
2020
2019
(in millions)
Net income
$
801
$
214
$
278
Other comprehensive income, net of tax
7
—
5
Total comprehensive income, net of tax
$
808
$
214
$
283
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ALLIANCE DATA SYSTEMS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Parent Company – Condensed Statements of Cash Flows
Years Ended December 31,
2021
2020
2019
(in millions)
Net cash used in operating activities
$
( 398 )
$
( 138 )
$
( 1,029 )
Investing activities:
Investment in subsidiaries
—
( 3 )
( 135 )
Proceeds from sale of business
—
—
4,118
Dividends received
533
256
923
Purchases of available-for-sale securities
( 10 )
—
—
Net cash provided by investing activities
523
253
4,906
Financing activities:
Debt proceeds from spinoff of Loyalty Ventures Inc.
750
—
—
Borrowings under debt agreements
38
1,276
3,083
Repayments of borrowings
( 864 )
( 1,320 )
( 5,778 )
Payment of debt extinguishment costs
—
—
( 46 )
Payment of deferred financing costs
( 4 )
( 9 )
( 21 )
Purchase of treasury shares
—
—
( 976 )
Dividends paid
( 42 )
( 61 )
( 127 )
Proceeds from issuance of common stock
4
3
12
Other
( 7 )
( 4 )
( 24 )
Net cash used in financing activities
( 125 )
( 115 )
( 3,877 )
Change in cash, cash equivalents and restricted cash
—
—
—
Cash, cash equivalents and restricted cash at beginning of year
—
—
—
Cash, cash equivalents and restricted cash at end of year
$
—
$
—
$
—
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 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. to ADSC.
F-53
Table of Contents
SIGNATURES
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.
ALLIANCE DATA SYSTEMS CORPORATION
By:
/S/ RALPH J. ANDRETTA
Ralph J. Andretta
President and Chief Executive Officer
DATE: February 25, 2022
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Alliance Data Systems Corporation and in the capacities and on the dates indicated.
Name
Title
Date
/S/ RALPH J. ANDRETTA
President, Chief Executive
February 25, 2022
Ralph J. Andretta
Officer and Director
/S/ PERRY S. BEBERMAN
Executive Vice President and
February 25, 2022
Perry S. Beberman
Chief Financial Officer
/S/ J. BRYAN CAMPBELL
Senior Vice President and
February 25, 2022
J. Bryan Campbell
Chief Accounting Officer
/S/ ROGER H. BALLOU
Chairman of the Board, Director
February 25, 2022
Roger H. Ballou
/S/ JOHN C. GERSPACH, JR.
Director
February 25, 2022
John C. Gerspach, Jr.
/S/ KARIN J. KIMBROUGH
Director
February 25, 2022
Karin J. Kimbrough
/S/ RAJESH NATARAJAN
Director
February 25, 2022
Rajesh Natarajan
/S/ TIMOTHY J. THERIAULT
Director
February 25, 2022
Timothy J. Theriault
/S/ LAURIE A. TUCKER
Director
February 25, 2022
Laurie A. Tucker
/S/ SHAREN J. TURNEY
Director
February 25, 2022
Sharen J. Turney
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.