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Item 1A. Risk Factors

2023-02-28 compared with 2022-02-25 · 384 added, 319 removed, 378 unchanged (65% of the section changed)

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This risk factor summary is qualified in its entirety by reference to the complete description of our risk factors set forth immediately below.

Risks related to our strategic, business and competitive environment include:

● The impact of the global COVID-19 pandemic and responsive measures;

● Our ten largest partners represented over half of our consolidated Total net interest and non-interest income (revenue) in 2021, and a decrease in business from, or the loss of, any of these partners, could have an adverse effect on our business.

Risks related to our macroeconomic, global, strategic, business and competitive environment include:

• Market conditions, inflation, rising interest rates, unemployment levels and the increased probability of a recession or prolonged economic slowdown, and the related impact on consumer spending behavior, payments, debt levels, savings rates and other behavior, could have a material adverse effect on our business.

• Global political, market, public health and social events or conditions, including the ongoing war in Ukraine and the continuing effects of the COVID-19 pandemic, may harm our business.

• Our unsecured loans make us reliant on the future credit performance of our customers, and if customers are unable to repay our loans, our level of future delinquency and write-off rates will increase.

• A significant percentage of our revenue is generated through relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners, could have an adverse effect on our business.

• Our business is heavily concentrated in U.S.

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• The amount of our Allowance for credit losses could adversely affect our business and may be insufficient to cover actual losses on our loans.

• We may be unable to successfully identify, complete or successfully integrate or disaggregate business acquisitions, divestitures and other strategic initiatives, including failure to realize the intended benefits of the spinoff of our former LoyaltyOne segment.

• Competition in our industry is intense.

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• Underwriting performance of acquired or new lending programs may not be consistent with existing experience.

● Unsecured consumer and business lending leads to losses from bankruptcies and inability to collect from borrowers.

Risks related to our liquidity, market and credit risk include:

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• Our level of indebtedness may restrict our ability to compete and grow our business.

● Our market valuation has been volatile, and returns to stockholders have been impacted by a lower dividend rate, cessation of share repurchase programs and issuance of shares for acquisitions.

• Our market valuation has been, and may continue to be, volatile, and returns to stockholders may be limited.

• We are a holding company and depend on dividends and other payments from our Banks, which are subject to various legal and regulatory restrictions.

Risks related to our legal, regulatory and compliance environment include:

● We face various risks related to the comprehensive government regulation and supervision of our business, including by the FDIC and other federal and state authorities.

● Legislation, regulatory matters and litigation may have a significant impact on our business, financial condition and results of operations.

• We face various risks related to the extensive government regulation and supervision of our business, including by the FDIC, CFPB and other federal and state authorities.

These risks include pending and future laws and

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regulations that may adversely impact our business, such as the CFPB’s recent proposed rulemaking with respect to late fees, as well as supervisory and other actions that may be taken against us by our regulators.

• Pending and future litigation could subject us to significant fines, penalties, judgments and/or requirements.

• Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.

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Risks related to cybersecurity, technology and third-party vendors include:

● Reliance on third-party vendors and current efforts to transition to multiple strategic outsourcing partners may result in service failures outside our control.

• We rely on third-party vendors, and we could be adversely impacted if such vendors fail to fulfill their obligations.

• Impacts arising from or relating to the transition of our credit card processing services to strategic outsourcing providers that we completed in 2022 have, and may continue, to adversely affect our business.

• Failures in data protection, cybersecurity and information security, as well as business interruptions to our data centers and other systems, could critically impair our products, services and ability to conduct business.

• Our industry is subject to rapid and significant technological changes, and we may be unable to successfully develop and commercialize new or enhanced products and services.

Strategic, Business and Competitive Risks

Impacts related to the global COVID-19 pandemic are expected to continue to pose risks to our business for the foreseeable future, heighten many of our known risks and may have a material adverse impact on our results of operations, financial condition and liquidity.

The ongoing effects of the global COVID-19 pandemic remain difficult to predict due to numerous uncertainties, including the transmissibility, severity, duration and resurgence of the virus;

Risks related to the spinoff of our former LoyaltyOne segment include potential tax liability, disputes or other adverse impacts.

Macroeconomic, Strategic, Business and Competitive Risks

Weakness and instability in the macroeconomic environment could have a material adverse effect on our business, results of operations and financial condition.

Macroeconomic conditions historically have affected our business, results of operations and financial condition and will continue to affect them in the future.

We offer an array of payment, lending and saving solutions to consumers, and a prolonged period of economic weakness, including a recession or economic slowdown, economic and market volatility, and other adverse economic conditions, including inflation, increased interest rates and high levels of unemployment, could have a material adverse effect on our business, results of operations and financial condition, as these macroeconomic conditions may reduce consumer confidence and negatively impact customers’ payment and spending behavior.

Some of the specific risks we face as a result of these conditions include the following:

• Adverse impacts on our customers’ ability and willingness to pay amounts owed to us, increasing delinquencies, defaults, bankruptcies, charge-offs and Allowances for credit losses, and decreasing recoveries;

• Decreased consumer spending, changes in payment patterns, lower demand for credit and shifts in consumer payment behavior towards avoiding late fees, finance charges and other fees;

• Decreased reliability of the process and models we use to estimate our Allowance for credit losses, particularly if unexpected variations in key inputs and assumptions cause actual losses to diverge from the projections of our models and our estimates become increasingly subject to management’s judgment;

• Limitations on our ability to replace maturing liabilities and to access the capital markets to meet liquidity needs.

As an illustration of the potential impact of an economic downturn on our business, our Delinquency and Net loss rates peaked in 2009 during the financial crisis at 6.2% and 10.0%, respectively.

As of December 31, 2022 our Delinquency rate was 5.5% and our full-year Net loss rate was 5.4% for the year ended December 31, 2022.

We continue to closely monitor economic conditions and indicators, including inflation, interest rates, housing values, consumer wages, consumer saving rates and debt levels, including student loan debt, unemployment, concerns about the level of U.S.

government debt, as well as economic and political conditions in the U.S.

and global markets, but the outcome of any of these conditions and indicators remains difficult to predict.

During 2022, our Provision for credit losses increased relative to 2021 due to, in part, the economic scenario weightings in our credit reserve modeling reflecting an increasing probability of a recession, high inflation, and the increased cost of overall consumer debt.

A recession or prolonged period of economic weakness would likely, among other things, adversely affect consumer discretionary spending levels and the ability and willingness of customers to pay amounts owed to us, and could have a material adverse effect on our business, key credit trends, results of operations and financial condition.

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Global economic, political, market, health and social events or conditions, including the war in Ukraine and the ongoing effects of the COVID-19 pandemic, may harm our business.

Our revenues are largely dependent on the number and volume of credit transactions by consumers, whose spending patterns may be affected by economic, political, market, health and social events or conditions.

As described above, adverse macroeconomic conditions within the U.S.

or internationally, including but not limited to recessions, inflation, rising interest rates, high unemployment, currency fluctuations, actual or anticipated large-scale defaults or failures, volatility in energy prices, a slowdown of global trade, and reduced consumer and business spending, have a direct impact on our loan volumes and revenues.

Furthermore, in efforts to deal with adverse macroeconomic conditions, governments may introduce new or additional initiatives or requests to reduce or eliminate late fees or other charges, which could result in additional financial pressures on our business.

In addition, outbreaks of illnesses, pandemics like COVID-19, or other local or global health issues, political uncertainties, international hostilities, armed conflict, war (such as the ongoing war in Ukraine), civil unrest, climate-related events, including the increasing frequency of extreme weather events, impacts to the power grid, and natural disasters have, to varying degrees, negatively impacted our operations, brand partners, service providers, activities, and consumer spending.

The ongoing effects of the COVID-19 pandemic remain difficult to predict due to numerous uncertainties, including the transmissibility, severity, duration and resurgence of the virus;

the emergence of new variants of the virus;

the uptake and effectiveness of health and safety measures or actions that are voluntarily adopted by the public or required by governments or public health authorities;

the effectiveness of vaccines and treatments;

the speed and strength of an economic recovery, including the reopening of borders and the resumption of international travel;

the availability, effectiveness and consumer acceptance of vaccines and treatments;

the indirect impact of the pandemic on global economic activity;

the impact of the reopening of borders and the resumption of international travel;

increased logistics costs;

an increasingly competitive labor market;

and the impact of the global COVID-19 pandemic on our employees, our operations, and the business of our partners and suppliers.

Specific impacts on our operations and financial results include, but are not limited to, the following:

● Short and long-term difficulties of our retail partners in consumer-based businesses due to restricted foot traffic, any inability to convert in-store sales to e-commerce, trouble maintaining supply chain integrity for both availability of desired products and delivery to end consumers, and reduced consumer confidence and spending may result in increased bankruptcy risk for our retail partners, decreased retail credit sales and decreases in our credit card and other loans balances.

● Decreased retail credit sales reduces the usage of our credit cards and other credit products, which reduces our revenue from finance charges and other servicing fees.

● The potential for consumer bankruptcies and any forbearance programs we may offer for impacted cardholders to reduce or delay our revenue from finance charges and other servicing fees and increase our exposure to rising delinquencies, net charge-offs in Credit card and other loans and increase our Allowance for credit losses.

● Volatility in the financial markets may increase our cost of capital and/or limit its availability, and prolonged periods of increased financial stress enhance the potential for a rating downgrade on our asset-backed debt, the occurrence of early amortization events as well as non-compliance with financial covenants or other events of default across our significant asset-backed and other indebtedness.

● Increased operational risk, including impacts to our data, customer care center, digital and installment lending platform and other network integrity and availability in addition to heightened cybercriminal activity and other payment fraud risk in this environment of e-commerce and online banking reliance, may affect our ability to timely and effectively meet the needs of our partners, cardholders or other consumers.

● Increased risks to the health and safety of our associates and that of our third-party vendors may impact our ability to maintain service levels for our partners.

● Increased privacy-related risks due to processing of employee health-related personal information.

● Workforce impacts, such as difficulty recruiting, retaining, training, motivating and developing employees due to evolving health and safety protocols;

changing worker expectations and talent marketplace variability regarding flexible work models;

restrictions on immigration, travel and employee mobility;

and the challenges of maintaining our strong corporate culture, which values communication, collaboration and connections, despite a majority of employees working from home.

Despite the availability of vaccines and treatments, surges in COVID-19 cases, including variants of the strain, such as the delta and omicron variants, may cause people to self-quarantine or governments to shut down nonessential businesses again.

Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our future results of operations or cash flows at this time.

To the extent the global COVID-19 pandemic continues to

adversely affect our business, results of operations, financial condition and liquidity, many of the other risks described in the “Risk Factors” section of this Annual Report may also be heightened.

Changes and instability in the macroeconomic environment, consumer confidence and customer behavior may adversely affect our business.

We offer an array of financial products and services to consumers, and a prolonged period of economic volatility, slow growth, or a significant deterioration in economic conditions could have a material adverse effect on our financial condition and results of operations as customers default on their loans, maintain lower deposit levels or, in the case of credit card accounts, carry lower balances and reduce credit card purchase activity.

Some of the risks we face in connection with adverse changes and instability in the macroeconomic environment, including changes in consumer confidence levels and behavior, include the following:

● Changes in payment patterns, increases in delinquencies and default rates, decreased consumer spending, lower demand for credit and shifts in consumer payment behavior towards avoiding late fees, finance charges and other fees;

● Increases in our charge-off rate caused by bankruptcies and reduced ability to recover debt that we have previously charged-off;

● Decreased reliability of the process and models we use to estimate our allowance for credit losses, particularly if unexpected variations in key inputs and assumptions cause actual losses to diverge from the projections of our models and our estimates become increasingly subject to management’s judgment.

See “ Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.

Business generated through our relationships with our 10 largest partners represented 59% and 65%, respectively, of our Total net interest and non-interest income, or revenue, for the years ended December 31, 2021 and 2020, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.

a continued competitive labor market;

and the impact of the global COVID-19 pandemic on our employees, our operations, and the business of our brand partners and suppliers.

The Russia-Ukraine conflict has had, and could continue to have, significant negative effects on regional and global economic and financial markets, including increased volatility, reduced liquidity, supply chain concerns and overall uncertainty.

Russia may take additional counter measures or retaliatory actions (including cyberattacks), which could exacerbate negative consequences on global financial markets and stability.

The duration of ongoing hostilities and corresponding sanctions and related events cannot be predicted.

A decline in economic, political, market, health and social conditions could impact our brand partners as well, and their decisions could reduce the number of cards, accounts, and credit lines of their customers, which would ultimately impact our revenues.

Our brand partners may implement cost-reduction initiatives that reduce or eliminate marketing budgets, and decrease spending on optional or enhanced value added services from us.

Any events or conditions that impair the functioning of the financial markets, tighten the credit market, or lead to a downgrade of any present or future credit rating of ours could increase our future borrowing costs and impair our ability to access the capital and credit markets on favorable terms, which could affect our liquidity and capital resources, or significantly increase our cost of capital.

Finally, as governments, investors and other stakeholders face additional pressures to accelerate actions to address climate change and other environmental, social and governance topics, governments are implementing regulations and investors and other stakeholders, whether by stockholder proposals, public campaigns, proxy solicitations or otherwise, are imposing new expectations on, or focusing investments in ways that may cause significant shifts in, disclosure, commerce and consumption behaviors.

Any of these developments may increase our operating costs and otherwise negatively impact our business.

In addition, our inability to timely address these new and evolving requirements or pressures may result in regulatory enforcement actions or stockholder litigation, and otherwise damage our reputation.

See “- Damage to our reputation could damage our business .”

The loans we make are unsecured, and we may not be able to ultimately collect from customers that default on their loans.

The primary risk associated with unsecured consumer lending is the risk of default or bankruptcy of the borrower, resulting in the borrower’s balance being written-off as uncollectible.

We rely principally on the borrower’s creditworthiness for repayment of the loan and therefore have no other recourse for collection.

We may not be able to successfully identify and evaluate the creditworthiness of borrowers to minimize delinquencies and losses.

The models and approaches we use to manage our credit risk, including our automated proprietary scoring technology and verification procedures for new account holders, establishing or adjusting their credit limits and applying our risk-based pricing, may not accurately predict future write-offs for various reasons discussed elsewhere in these Risk Factors, including see “ Our risk management

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policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.

While we monitor credit quality on a regular and consistent basis, utilizing internal algorithms and external credit bureau risk scores and other data, these algorithms and data sources may be inaccurate or incomplete, including as a result of certain customers’ credit profiles not fully reflecting their credit risk due to the less-regulated reporting requirements for many fintechs.

An increase in defaults or net principal losses could result in a reduction in Net income.

General economic conditions, including a recession or prolonged economic slowdown, inflation, rising interest rates, high unemployment or volatility in energy prices, may result in greater delinquencies that lead to greater credit losses.

In addition to being affected by general economic conditions and the success of our collection and recovery efforts, the stability of our Delinquency and Net loss rates are affected by the credit risk inherent in our Credit card and other loans portfolio, and the vintage of the accounts in our various credit card portfolios.

Further, our pricing strategy may not offset the negative impact on profitability caused by increases in delinquencies and losses, thus any material increases in delinquencies and losses beyond our current estimates could have a material adverse impact on us.

For 2022, our Net principal loss rate was 5.4%, compared with 4.6% and 6.6% for 2021 and 2020, respectively.

Our Delinquency rates were 5.5% of Credit card and other loans as of December 31, 2022, compared with 3.9% and 4.4% as of December 31, 2021 and 2020, respectively.

A significant percentage of our Total net interest and non-interest income, or revenue, is generated through our

relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.

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

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.

A decrease in business from, or the loss of, any of our significant partners for any reason, including a decrease in pricing or activity, or a decision either to utilize another service provider or to no longer outsource some or all of the services we provide, could have a material adverse effect on our business.

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

As of and for the year ended December 31, 2022, our five largest credit card programs accounted for approximately 47% of our Total net interest and non-interest income and 41% of our End-of-period credit card and other loans.

In particular, our programs with (alphabetically) Ulta Beauty and Victoria’s Secret & Co.

and its retail affiliates each accounted for more than 10% of our Total net interest and non-interest income for the year ended December 31, 2022.

A decrease in business from, or the loss of, any of our significant partners for any reason, could have a material adverse effect on our business.

We previously announced the non-renewal of our contract with BJ’s Wholesale Club (BJ’s) and the sale of the BJ’s portfolio, which closed in late February 2023.

For the year ended December 31, 2022, BJ’s branded co-brand accounts generated approximately 10% of our Total net interest and non-interest income.

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Our business concentration could have an adverse effect on our results of operations.

We expect growth to result, in part, from new and acquired credit card and other installment lending or BNPL programs whose credit card and other loans performance could result in increased portfolio losses and negatively impact our profitability.

We expect an important source of our growth to come from the acquisition of existing credit card programs and initiating credit card and other installment lending or BNPL programs with retailers and other merchants who either do

not currently offer a private label or co-brand credit card or are initiating or transitioning from another installment lending or BNPL platform.

Although we believe our pricing and models for determining credit risk are designed to evaluate the credit risk of existing programs and the credit risk we are willing to assume for acquired and start-up programs, we cannot be assured that the loss experience on acquired and start-up programs will be consistent with our more established programs.

The failure to successfully underwrite these new or acquired credit card or installment lending programs may result in defaults greater than our expectations and could have a material adverse impact on us and our profitability.

We expect growth to result, in part, from new and acquired credit card and buy now, pay later (BNPL) programs whose credit card and other loans performance could result in increased portfolio losses and negatively impact our profitability.

We expect an important source of our growth to come from the acquisition of existing credit card programs and initiating credit card and BNPL programs with retailers and other merchants who either do not currently offer a private label or co-brand credit card or are initiating or transitioning from another BNPL platform.

We believe that our pricing and models for determining credit risk are designed to effectively evaluate the credit risk of existing programs and ascertain the credit risk that we are willing to assume for acquired programs as well as those we initiate.

We cannot be assured that the loss experience on acquired and initiated programs will be consistent with our more established programs, or that the cost to provide service to these new programs will not be higher than anticipated.

The failure to successfully underwrite these acquired and initiated credit card or BNPL programs may result in defaults greater than our expectations and could have a material adverse impact on us and our profitability.

See “ Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.

Increases in net charge-offs could have a negative impact on our net income and profitability.

The primary risk associated with unsecured consumer lending is the risk of default or bankruptcy of the borrower, resulting in the borrower’s balance being charged-off as uncollectible.

We rely principally on the borrower’s creditworthiness for repayment of the loan and therefore have no other recourse for collection.

We may not be able to successfully identify and evaluate the creditworthiness of borrowers to minimize delinquencies and losses.

The models and approaches we use to manage our credit risk, including our automated proprietary scoring technology and verification procedures for new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing, may not accurately predict future charge-offs for various reasons discussed elsewhere in these Risk Factors, including see “ Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted ” below .

An increase in defaults or net charge-offs could result in a reduction in Net income.

General economic factors, such as the rate of inflation, unemployment levels and interest rates, may result in greater delinquencies that lead to greater credit losses.

In addition to being affected by general economic conditions and the success of our collection and recovery efforts, the stability of our delinquency and net charge-off rates are affected by the credit risk of our Credit card and other loans and the average age of our various credit card account portfolios.

For 2021, our net charge-off rate was 4.6%, compared to 6.6% and 6.1% for 2020 and 2019, respectively.

Delinquency rates were 3.9% of principal Credit card and other loans at December 31, 2021, compared to 4.4% and 5.8% at December 31, 2020 and 2019, respectively.

Moreover, under the CECL accounting rules, the acquisition of an existing credit card or BNPL portfolio typically has a negative impact on certain key financial metrics in the near-term, including net income and earnings per share, because we are required to include a reserve build in our Provision for credit losses for the estimated credit losses to be experienced over the life of the acquired portfolio.

The amount of this reserve build (which is included in the reporting period in which the portfolio is obtained) is

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often large relative to the amount of revenue generated through such date by the newly-acquired portfolio.

See also “ –The amount of our Allowance for credit losses could adversely affect our business and may prove to be insufficient to cover actual losses on our loans.

Our risk management policies and procedures may not be effective, and the models we rely on may not be accurate or may be misinterpreted.

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We rely extensively on models in managing many aspects of our business, including liquidity and capital planning (including stress testing), customer selection, credit and other risk management, pricing, reserving and collections management.

The models may prove in practice to be less predictive than we expect for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including failures to update assumptions appropriately or in a timely manner).

Our assumptions may be inaccurate for many reasons including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions and their impact on partner and customer behaviors) and they often involve complex interactions between a number of dependent and independent variables, factors and other assumptions.

The models may prove in practice to be less predictive than we expect for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including, models being calibrated on historical cycles and correlations which may not be predictive of the future, or failures to update assumptions appropriately or in a timely manner).

Our assumptions may be inaccurate for many reasons including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions, including continued elevated inflation, low unemployment, increasing consumer debt levels and weakening in macroeconomic indicators, and their impact on partner and customer behaviors) and they often involve complex interactions between a number of dependent and independent variables, factors and other assumptions.

The errors or inaccuracies in our models may be material, and could lead us to make poor or sub-optimal decisions in managing our business, and this could have a material adverse effect on our business, results of operations and financial condition.

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Our fraud-related operational losses were $73 million, $71 million and $141 million for the years ended December 31, 2022, 2021 and 2020, respectively.

Our products are susceptible to application fraud, because among other things, we provide immediate access to credit at the time of

Our products are susceptible to application fraud, because among other things, we provide immediate access to credit at the time of approval.

In addition, digital sales on the internet and through mobile channels are becoming a larger part of our business and fraudulent activity is higher as a percentage of sales in those channels than in stores.

The different financial products that we offer, including deposit products, are susceptible to different types of fraud, and, depending on our product mix and channel mix, we may continue to experience variations in, or levels of, fraud-related expense that are different from or higher than that experienced by some of our competitors or the industry generally.

The risk of fraud continues to increase for the financial services industry, and credit card and deposit fraud, identity theft and related crimes are likely to continue to be prevalent, with perpetrators increasingly sophisticated.

The different financial products that we offer, including deposit products, are susceptible to different types of fraud, and, depending on our product mix and channel mix, we may continue to experience variations in, or levels of, fraud-related expense that are different from or higher than those experienced by some of our competitors or the industry generally.

Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud.

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The amount of our Allowance for credit losses could adversely affect our business and may prove to be insufficient to cover actual losses on our loans.

The Financial Accounting Standards Board’s accounting standard relating to Current Expected Credit Loss, or CECL, became effective for us on January 1, 2020 and requires us to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for credit losses.

In addition, for portfolios we may acquire when we enter into new partner program agreements, we are required to establish at acquisition an allowance for expected credit losses for the life of the acquired loan portfolio.

Any subsequent deterioration in the performance of the purchased portfolios after acquisition results in incremental credit loss reserves.

The Financial Accounting Standards Board’s CECL accounting standard became effective for us on January 1, 2020 and requires us to determine periodic estimates of the lifetime expected credit losses on loans, and reserve for those expected credit losses through an allowance for credit losses against the loans.

In addition, as mentioned above, for portfolios we may acquire when we enter into new partner program agreements, we are required to establish at the time of acquisition such an allowance.

Any subsequent deterioration in the performance of a purchased portfolio after acquisition results in incremental credit loss reserves.

Growth in our loan portfolio generally would also lead to an increase in our Allowance for credit losses.

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The process for establishing an Allowance for credit losses is critical to our results of operations and financial condition, and requires complex models and judgments, including forecasts of economic conditions.

The ongoing impact of CECL will be significantly influenced by the composition, characteristics and quality of our Credit card and other loans, as well as the prevailing economic conditions and forecasts utilized.

For additional information regarding the adoption of CECL and its impact, see Note 4, “Allowance for Credit Losses,” to our Consolidated Financial Statements included as part of this Annual Report.

For additional information regarding the adoption of CECL and its impact, see Note 3, “Allowance for Credit Losses” to our Consolidated Financial Statements included as part of this Annual Report on Form 10-K.

The CECL model may create more volatility in the level of our Allowance for credit losses.

If we are required (as a result of any review, update, regulatory guidance or otherwise) to materially increase our level of Allowance for credit losses, such increase could adversely affect our business, financial condition, results of operations and opportunity to pursue new business.

Moreover, we may underestimate our expected losses, and we cannot assure you that our credit loss reserves will be sufficient to cover actual losses.

Moreover, we may underestimate our expected credit losses, and we cannot assure that our credit loss reserves will be sufficient to cover actual losses.

We may not be successful in realizing the benefits associated with our acquisitions, dispositions and strategic investments, and our business and reputation could be materially adversely affected.

We have acquired a number of businesses, including Bread, and have made a number of strategic investments, and continue to evaluate potential transactions.

There is no assurance that we will be able to successfully identify suitable candidates, value potential investment or acquisition opportunities accurately, negotiate acceptable terms for those opportunities, or complete proposed acquisitions and investments.

Historically, we have acquired a number of businesses, as well as made strategic investments in businesses, products, technologies, platforms or other ventures, and we expect to continue to evaluate potential acquisitions, investments and other transactions in the future.

There is no assurance that we will be able to successfully identify suitable candidates for any such opportunities, value any such opportunities accurately, negotiate favorable terms for any such opportunities, or successfully complete any such proposed transactions.

If we are unable to identify attractive acquisition candidates or accretive new business opportunities, our growth could be limited.

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• the impact on our financial condition due to the timing of the acquisition, disposition or new business implementation or the failure of the acquired or new business to meet operating expectations;

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

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

• the assumption of unknown liabilities of the acquired company;

• the uncertainty of achieving expected benefits of an acquisition or disposition, including revenue, human resources, technological or other cost savings, operating efficiencies or synergies;

• the inability to integrate systems, personnel or technologies from our acquisitions and strategic investments;

• unforeseen legal, regulatory or other challenges that we may not be able to manage effectively;

• the reduction of cash available for operations, stock repurchase programs or other uses and potentially dilutive issuances of equity securities or incurrence of additional debt;

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for the matter included in Note 15, “Commitments and Contingencies” to the Consolidated Financial Statements, which has resulted in a $150.0 million charge associated with Epsilon’s deferred prosecution agreement with the United States Department of Justice requiring two $75.0 million payments in January 2021 and January 2022, respectively.

In connection with the spinoff of our former LoyaltyOne segment into a standalone company, LVI, we retained a 19% ownership stake in LVI.

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During 2022, LVI’s stock price decreased significantly, and, as a result, we wrote down the value of our 19% shareholding in LVI from $50 million as of December 31, 2021 to $6 million as of December 31, 2022 , and there can be no assurance that we will not experience further write-downs or other adverse impacts going forward.

See “ Risks Related to the LoyaltyOne Spinoff.

Furthermore, if the operations of an acquired or new business do not meet expectations, our profitability may decline and we may seek to restructure the acquired business or to impair the value of some or all of the assets of the acquired or new business.

The markets for the services that we offer may contract or fail to expand and competition in our industries is intense, each of which could negatively impact our growth and profitability.

The markets for the services that we offer may contract or fail to expand and competition in our industry is intense, each of which could negatively impact our growth and profitability.

The markets for our products and services are highly competitive, and we expect this competition to intensify.

Our growth and continued profitability depend on continued acceptance or adoption of the products and services that we offer.

Our growth and continued profitability depend on continued acceptance or adoption of the products and services we offer.

We compete with a wide range of businesses, and some of our current competitors have longer operating histories, stronger brand names and greater financial, technical, marketing and other resources than we do.

In seeking to acquire and retain business with brand partners, we compete with these competitors on the basis of a number of factors, including program financial and other terms, underwriting standards, marketing expertise, service levels, product and service offerings, technological capabilities and integration, brand and reputation.

See “ Our results of operations and growth depend on our ability to retain existing partners and attract new partners” below.

Our partners may not continue to use the financial products and services, or loyalty programs, that we offer.

Moreover, the consumer credit and payments industry is highly competitive and we face an increasingly dynamic industry as emerging technologies enter the marketplace.

As a form of payment, our products compete with cash, checks, debit cards, general purpose credit cards (including Visa and MasterCard, American Express and Discover Card), various forms of consumer installment loans and BNPL products, other private label card brands, prepaid cards, digital wallets and mobile payment solutions, and other tools that simplify and personalize shopping experiences for consumers and merchants.

Changes in technology may enable merchants and retail companies to directly process transactions in a cost-efficient manner without the use of our services.

In addition, some of our competitors, including new and existing competitors in the digital and mobile payments space, are not subject to the same regulatory requirements or legislative scrutiny to which we are subject.

Non-bank providers of pay-over-time solutions, such as Affirm, Afterpay and others, extend consumer credit-like offerings but do not face the same restrictions as banks, such as capital requirements and other regulatory requirements, which also could place us at a competitive disadvantage.

Business—Competition” of this Form 10-K for further discussion of the competitive environment in the markets where we operate.

Additionally, downturns in the economy or the performance of our retail or other partners, including the impact of the global COVID-19 pandemic, may result in a decrease in the demand for our products and services.

For a more detailed discussion regarding the manner in which we compete with respect to each of our product categories, see “Item 1.

Business—Competition” of this Form 10-K above.

Additionally, downturns in the economy or the performance of our retail or other partners, including as a result of macroeconomic conditions, geopolitical events or global health events such as the COVID-19 pandemic, may result in a decrease in the demand for our products and services.

Our ability to generate significant revenue from partners and consumers will depend on our ability to differentiate ourselves through the products and services we provide and the attractiveness of our programs to consumers.

If we are not able to differentiate our products and services from those of

our competitors, drive value for our partners and their customers, or effectively and efficiently align our resources with our goals and objectives, we may not be able to compete effectively in the market.

If we are not able to differentiate our products and services from those of our competitors, drive value for our partners and their customers, or effectively and efficiently align our resources with our goals and objectives, we may not be able to compete effectively in the market.

Any decrease in the demand for our products and services for the reasons discussed above or any other reasons could have a material adverse effect on our growth, revenue and operating results.

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Historically, there has been turnover in our partners, and we expect this will continue in the future.

See also, “ Business generated through our relationships with our 10 largest partners represented 59% and 65%, respectively, of our total net interest and non-interest income, or revenue, for the years ended December 31, 2021 and 2020, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.

Program agreements with our retail and other brand partners typically are for multi-year terms.

These program agreements generally permit our partner to terminate the agreement prior to its scheduled termination date for various reasons, including, in some cases, if we fail to meet certain service levels or change certain key cardholder terms or our credit criteria, we fail to achieve certain targets with respect to approvals of new customers as a result of the credit criteria we use, we elect not to increase the program size when the outstanding loans under the program reach certain thresholds or we are not adequately capitalized, or certain force majeure events or changes in our ownership occur or a material adverse change in our financial condition occurs.

See also, “ A significant percentage of our Total net interest and non-interest income, or revenue, is generated through our relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.

Credit card program agreements with our brand partners typically are for multi-year terms.

These program agreements generally provide each party with certain early termination rights, i.e., events or circumstances that would permit the party to terminate the agreement prior to its scheduled termination date in accordance with the conditions specified in the applicable agreement.

For example, in some cases, a brand partner may have the right to terminate if we fail to meet certain service levels as set forth in the applicable brand partner agreement.

Generally, a brand partner would not have the right to terminate until providing us formal notice and an opportunity to cure the service level failure.

As a result of the transition of our credit card processing services to our strategic outsourcing providers in late June 2022, we failed to meet certain service levels in a number of our credit card program agreements due to periods of unavailability of our customer support and account servicing functions, which could, in certain circumstances, have given rise to a termination right by an impacted brand partner.

To date, no brand partner has sought to exercise any such termination right, and many other such rights have either been formally waived or lapsed pursuant to the terms of the applicable brand partner agreement.

We cannot provide assurance that a brand partner from which we did not receive such a waiver will not attempt to terminate its program agreement or that future service level failures will not occur.

There is significant competition for our existing partners, and our failure to retain our existing larger partner relationships upon the expiration of a contractual arrangement or our earlier loss of a relationship upon the exercise of a partner’s early termination rights, or the expiration or termination of a substantial number of smaller partner contracts or relationships, could have a material adverse effect on our results of operations (including growth rates) and financial condition to the extent we do not acquire new partners of similar size and profitability or otherwise grow our business.

In addition, existing relationships may be renewed with less favorable terms to us in response to increased competition for such relationships.

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The competition for new partners is also significant, and our failure to attract new partners could adversely affect our ability to grow.

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Our partners generally accept most major credit cards and various other forms of payment;

therefore our success depends on their active and effective promotion of our products to their customers.

therefore our success depends, in part, on their active and effective promotion of our products to their customers.

We depend on our partners to integrate the use of our credit products into their operations, including into their in-store and online shopping experiences and loyalty programs.

We rely on our partners to train their sales and call center associates about our products and to have their associates encourage customers to apply for, and use, our products and otherwise effectively marketing our products.

If our partners do not effectively promote and support our products, or if they make changes in their business models that negatively impact card usage, these actions could have a material adverse effect on our business and results of operations.

Partners may also implement or fail to implement changes in their systems and technologies that may disrupt the integration between their systems and technologies and ours, which could disrupt the use of our products.

Partners may also implement or fail to implement changes in their systems and technologies that may disrupt the integration between their systems and technologies and ours, any of which could disrupt the use of our products.

In addition, if our partners engage in improper business practices, do not adhere to the terms of our program agreements or other contractual arrangements or standards, or otherwise diminish the value of our brand, we may suffer reputational damage and customers may be less likely to use our products, which could have a material adverse effect on our business and results of operations.

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Our partners’ sales may decrease or may not increase as we anticipate for various reasons, some of which are in the partners’ control and some of which are not.

For example, partner sales may be adversely affected by the global COVID-19 pandemic or other macroeconomic conditions having a national, regional or

more local effect on consumer spending, business conditions affecting the general retail environment or a particular partner or industry, or natural disasters or other catastrophes affecting broad or more discrete geographic areas.

If our partners’ sales decline for any reason, it generally results in lower credit sales, and therefore lower loan volume and associated interest and fees and other income for us from their customers.

In addition, if a partner closes some or all of its stores or becomes subject to a voluntary or involuntary bankruptcy proceeding (or if there is a perception that it may become subject to a bankruptcy proceeding), its customers who have used our financing products may have less incentive to pay their outstanding balances to us, which could result in higher charge-off rates than anticipated and our costs for servicing its customers’ accounts may increase.

For example, partner sales have been, and in the future may be adversely affected by the COVID-19 pandemic or other macroeconomic conditions having a national, regional or more local effect on consumer spending, business conditions affecting the general retail environment, such as supply chain distributions or the ability to maintain sufficient staffing levels, or a particular partner or industry, or natural disasters or other catastrophes affecting broad or more discrete geographic areas.

In addition, if a partner closes some or all of its stores or becomes subject to a voluntary or involuntary bankruptcy proceeding (or if there is a perception that such an event may occur), its customers who have used our financing products may have less incentive to pay their outstanding balances to us, which could result in higher charge-off rates than anticipated and our costs for servicing its customers’ accounts may increase.

This risk is particularly acute with respect to our largest partners that account for a significant amount of our interest and fees on loans.

See “ Business generated through our relationships with our 10 largest partners represented 59% and 65%, respectively, of our Total net interest and non-interest income, or revenue, for the years ended December 31, 2021 and 2020, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.

” Moreover, if the financial condition of a partner deteriorates significantly or a partner becomes subject to a bankruptcy proceeding, we may not be able to recover for customer returns, customer payments made in partner stores or other amounts due to us from the partner.

See “ A significant percentage of our Total net interest and non-interest income, or revenue, is generated through our relationships with a limited number of partners, and a decrease in business from, or the loss of, any of these partners could cause a significant drop in our revenue.

Moreover, if the financial condition of a partner deteriorates significantly or a partner becomes subject to a bankruptcy proceeding, we may not be able to recover customer returns, customer payments made in partner stores or other amounts due to us from the partner.

A decrease in sales by our partners for any reason or a bankruptcy proceeding involving any of them could have a material adverse impact on our business and results of operations.

We may not be successful in our efforts to promote usage of our proprietary cards, or to effectively control the costs associated with such promotion, both of which may materially impact our profitability.

We have been investing in promoting the usage of our proprietary cards, but there can be no assurance that our investments to acquire cardholders, provide differentiated features and services and increase usage of our proprietary cards will be effective, particularly with increasing competition from other card issuers and fintechs as well as changing consumer and business behaviors as a result of the global COVID-19 pandemic.

In addition, if we develop new products or offers that attract customers looking for short-term incentives rather than incentivize long-term loyalty, cardholder attrition and costs could increase.

Moreover, we may not be able to cost-effectively manage and expand cardholder benefits, including containing the growth of marketing, promotion, rewards and cardholder services expenses in the future.

Reductions in interchange fees may reduce the competitive advantages our private label credit card products currently have by virtue of not charging interchange fees and would reduce our income from those fees.

We have been investing in promoting the usage of our proprietary cards, including our Bread Cashback TM American Express ® Credit Card that we launched in 2022, but there can be no assurance that our investments to acquire cardholders, provide differentiated features and services and increase usage of our proprietary cards will be effective, particularly with increasing competition from other card issuers and fintechs, as well as changing consumer and business behaviors.

In addition, if we develop new products or offers that attract customers looking for short-term incentives rather than incentivizing long-term loyalty, cardholder attrition and costs could increase.

Moreover, we may not be able to cost-effectively manage and expand cardholder benefits, including controlling the growth of marketing, promotion, rewards and cardholder services expenses in the future.

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Interchange is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure and payment facilitation, and which are paid to credit card issuers to compensate them for the risk they bear in lending money to customers.

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Several recent events and actions indicate a continuing increase in focus on interchange by both regulators and merchants.

Beyond pursuing litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing costs.

In 2022, for example, legislation was introduced in the U.S.

House of Representatives and Senate, which, among other things, would require large issuing banks to offer a choice of at least two unaffiliated networks over which electronic transactions may be processed.

Furthermore, beyond pursuing litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing costs.

To the extent interchange fees are reduced, one of our current competitive advantages with our partners — that we typically do not charge interchange fees when our private label credit card products are used to purchase our partners’ goods and services — may be reduced.

Moreover, to the extent interchange fees are reduced, our income from those fees will be lower.

Moreover, to the extent interchange fees are reduced, our income from those fees will be lower on co-brand and general purpose credit card transactions.

As a result, a reduction in interchange fees could have a material adverse effect on our business and results of operations.

In addition, for our co-brand and general purpose credit cards, we are subject to the operating regulations and procedures set forth by the interchange network, and our failure to comply with these operating regulations, which may change from time to time, could subject us to various penalties or fees, or the termination of our license to use the interchange network, all of which could have a material adverse effect on our business and results of operations

We may not be able to retain and/or attract and hire a highly qualified and diverse workforce, or maintain our corporate culture, which could impact our ability to grow effectively.

We may not be able to retain and/or attract and hire a highly qualified and diverse workforce or maintain our corporate culture, and having a large segment of our workforce working from home may exacerbate these risks and cause new risks.

Our performance largely depends on the talents and efforts of our employees, particularly our key personnel and senior management.

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The market for key personnel is highly competitive, particularly in technology and other skill areas significant to our business.

Moreover, as a result of

the global COVID-19 pandemic, a significant portion of our workforce is working in a mostly remote environment.

This remote environment may continue after the pandemic due to potential resulting trends, and could impact the quality of our corporate culture.

Failure to attract, hire, develop, motivate and retain highly qualified and diverse employee talent, or to maintain a corporate culture that fosters innovation, creativity and teamwork could harm our overall business and results of operations.

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To the extent our leaders behave in a manner that is not consistent with our values, we could experience significant impact to our brand and reputation, as well as to our corporate culture.

Moreover, in connection with the COVID-19 pandemic, we transitioned nearly all of our workforce to work remotely, and a significant portion of our workforce continues to work in a mostly remote environment.

Remote work by a majority of our employee population may impact our culture, and employee engagement with our company, which could affect productivity and our ability to retain employees who are critical to our operations and may increase our costs and impact our financial results of operations.

In addition, an increase in work from home by other companies may create more job opportunities for employees and make it more difficult for us to attract and retain key talent, especially in light of changing worker expectations and talent marketplace variability regarding flexible work models.

In addition, employees who work from home rely on residential communication networks and internet providers that may not be as resilient as commercial networks and providers and may be more susceptible to service interruptions and cyberattacks than commercial systems.

Our business continuity and disaster recovery plans, which have been historically developed and tested with a focus on centralized delivery locations, may not work as effectively in a distributed work from home model, where weather impacts, network and power grid downtime may be difficult to manage.

In addition, we may not be effective in timely updating our existing operating and administrative controls nor implementing new controls tailored to the work from home environment.

If we are unable to manage the work from home environment effectively to address these and other risks, our reputation and results of operations may be impacted.

Damage to our reputation could damage our business.

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Maintaining a positive reputation is critical to attracting and retaining partners, customers, investors and employees.

Damage to our reputation can therefore cause significant harm to our business and prospects.

Damage to our reputation can therefore cause

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significant harm to our business and prospects.

Harm to our reputation can arise from numerous sources, including, among others, employee misconduct;

a breach of our, or our service providers’ cybersecurity defenses;

service outages, such as those many of our customers experienced in 2022 in connection with the transition of our credit card processing services to strategic outsourcing providers, or otherwise;

litigation or regulatory outcomes;

stockholder activism;

failing to deliver minimum standards of service and quality;

compliance failures;

the use of our, or our partners’ products to facilitate legal, but controversial, products and services, including adult content, cryptocurrencies, firearms and gambling activity;

and the activities of customers, business partners and counterparties.

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Negative publicity regarding us, whether or not true, may result in customer attrition and other harm to our business prospects.

There has also been increased focus on topics related to environmental, social and corporate governance policies, and criticism of our policies in these areas could also harm our reputation and/or potentially limit our access to some forms of capital or liquidity.

There has also been increased focus on topics related to environmental, social and governance policies, and criticism of our policies in these areas could also harm our reputation and/or potentially limit our access to some forms of capital or liquidity.

Liquidity, Market and Credit Risks

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We need to effectively manage our funding and liquidity in order to meet our cash requirements such as day-to-day operating expenses, extensions of credit to our customers, investments to grow our business, payments of principal and interest on our borrowings and payments on our other obligations.

Our primary sources of funding and liquidity are collections from our customers, deposits, funds from securitized financings and proceeds from unsecured borrowings, including our credit facility and outstanding notes.

If we do not have sufficient liquidity, we may not be able to meet our debt service requirements and other obligations, particularly during a liquidity stress event.

If we maintain or are required to maintain too much liquidity, it could be costly and reduce our financial flexibility.

We will need additional financing in the future to refinance any existing debt and finance growth of our business.

The availability of additional financing will depend on a variety of factors such as financial market conditions generally, including the availability of credit to the financial services industry, consumers’ willingness to place money on deposit with us, our performance and credit ratings and the performance of our securitized portfolios.

Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the uncertainty and volatility experienced in the capital and credit markets during periods of financial stress and other economic and political conditions in the global markets and concerning the level of U.S.

We will need additional financing in the future to repay or refinance our existing debt at maturity or otherwise and to fund our growth.

As of December 31, 2022 , we had $556 million of terms loans outstanding under our parent credit agreement, which matures in July 2024, as well as $850 million of 4.750% senior notes due in December 2024 and $500 million of 7.000% senior notes due in January 2026.

The availability of additional financing will depend on a variety of factors such as financial market conditions generally, including the availability of credit to the financial services industry and our lender counterparties’ willingness to lend to us, consumers’ willingness to place money on deposit with us, our performance and credit ratings and the performance of our securitized portfolios.

Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the uncertainty and volatility experienced in the capital and credit markets during recessions and periods of financial stress, inflation, rising interest rates, high levels of unemployment, other economic and political conditions in the global markets and concern over the level of U.S.

government debt and fiscal measures that may be taken over the longer term to address these matters, may limit our ability to obtain additional financing or refinance maturing liabilities on desired terms (including funding costs) in a timely manner, or at all.

As a result, we may be forced to delay obtaining funding or be forced to issue or raise funding on undesirable terms, which could significantly reduce our financial flexibility and cause us to contract or not grow our business, all of which could have a material adverse effect on our results of operations and financial conditions.

While financial market conditions are generally stable at the present time, there can be no assurance that significant disruptions, uncertainties and volatility will not occur in the future.

If we are unable to continue to finance our business, access capital markets and attract deposits on favorable terms and in a timely manner, or if we experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our results of operations and financial condition may be materially adversely affected.

Given the current rising interest rate environment and other recessionary pressures, the debt markets are volatile, and there can be no assurance that significant disruptions, uncertainties and volatility will not occur in the future.

Specifically, availability of capital from the non-investment grade debt markets is currently subject to significant volatility, and there can be no assurance that we will be able to access those markets at attractive rates, or at all.

Given the maturities of our current outstanding debt and the current macroeconomic conditions, it is possible that we will be required to repay or refinance some or all of our maturing debt in volatile and/or unfavorable markets.

If we are unable to continue to fund our business operations, access capital markets for debt refinancings and otherwise, and attract deposits on favorable terms and in a timely manner, or if we experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our results of operations and financial condition may be materially adversely affected.

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If we are unable to securitize our credit card loans due to changes in the market or other circumstances or events, we may not be able to fund new credit card loans, which would have a material adverse effect on our operations and profitability.

We use the securitization of credit card loans, which involves the transfer of credit card loans to a trust, and the issuance by the trust of notes to third-party investors collateralized by the beneficial interest in the transferred credit card loans, as a significant source of funding.

A number of factors affect our ability to fund our credit card and other loans in the securitization market, some of which are beyond our control, including:

A significant source of funding is our securitization of credit card loans, which involves the transfer of credit card loans to a trust, and the issuance by the trust of notes to third-party investors collateralized by the beneficial interest in the transferred credit card loans.

A number of factors affect our ability to fund our credit card loans in the securitization market, some of which are beyond our control, including:

• conditions in the securities markets in general and the asset-backed securitization market in particular;

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• costs of securitizing our credit card loans;

● ability to fund required overcollateralizations or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing cost;

• ability to fund required over-collateralization or credit enhancements, which are routinely utilized in order to achieve better credit ratings to lower borrowing cost;

• the legal, regulatory, accounting or tax rules affecting securitization transactions and asset-backed securities, generally.

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If payment rates on our securitized credit card loans are lower than they have historically been, fewer collections will be remitted to us on an ongoing basis.

Further, certain series of our asset-backed securities include a requirement that we accumulate principal collections in a restricted account for a specified number of months prior to the applicable security’s maturity date.

Further, certain series of our asset-backed securities include a requirement that we accumulate principal

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collections in a restricted account for a specified number of months prior to the applicable security’s maturity date.

We are required under the program documents to lengthen this accumulation period to the extent we expect the payment rates to be low enough that the current length of the accumulation period is inadequate to fully fund the restricted account by the applicable security’s maturity date.

Lower payment rates, and in particular payment rates that are low enough that we are required to lengthen our accumulation periods, could materially adversely affect our liquidity and financial condition.

Inability to grow our deposits in the future could have a material adverse effect on our liquidity, ability to grow our business and profitability.

Inability to grow or maintain our deposit levels in the future could have a material adverse effect on our liquidity, ability to grow our business and profitability.

A significant source of our funds is customer deposits, primarily in the form of certificates of deposit and other savings products.

We obtain deposits directly from retail and commercial customers or through brokerage firms that offer our deposit products to their customers.

In recent years, deposits have become an increasingly important source of funds for us, with, for example, our retail deposits growing 72% from $3.2 billion as of December 31, 2021 to $5.5 billion as of December 31, 2022, accounting for 26% of our funding base.

Our funding strategy includes continued growth of our liquidity through deposits.

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We compete on the basis of the rates we pay on deposits, the quality of our customer service and the competitiveness of our digital banking capabilities.

Our ability to attract and maintain retail deposits remains highly dependent on the strength of our Banks, the reputability of our business practices and our financial health.

Our ability to attract and maintain retail deposits remains highly dependent on the products we offer, the strength of our Banks, the reputability of our business practices and our financial health.

Adverse perceptions regarding our lending practices, regulatory compliance, protection of customer information or sales and marketing practices, or actions taken by regulators or others with respect to our Banks, could impede our competitive position in the deposits market.

The demand for the deposit products we offer may also be reduced due to a variety of factors, including changes in consumers’ preferences, demographics or discretionary income, regulatory actions that decrease consumer access to particular products or the development or availability of competing products.

The demand for the deposit products we offer may also be reduced due to a variety of factors, including macroeconomic events, changes in interest rates, changes in consumers’ preferences, demographics or discretionary income, regulatory actions that decrease consumer access to particular products or the development or availability of competing products.

Competition from other financial services firms and others that use deposit funding products may affect deposit renewal rates, costs or availability.

Adjustments we make to the rates offered on our deposit products to remain competitive may adversely affect conversely our liquidity or our profitability.

The FDIA prohibits an insured bank from offering interest rates on any deposits that significantly exceed rates in its prevailing market, unless it is “well capitalized.” A bank that is less than “well capitalized” may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates.

There are no such restrictions under the FDIA on a bank that is “well capitalized” and at December 31, 2021, each of our Banks met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA.

Conversely, any adjustments we make to the rates offered on our deposit products to remain competitive may adversely affect our liquidity or our profitability.

The FDIA prohibits an insured bank from offering interest rates on any deposits that significantly exceed rates in its prevailing market, unless it is “well capitalized”.

A bank that is less than “well capitalized” may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates.

There are no such restrictions under the FDIA on a bank that is “well capitalized” and as of December 31, 2022, each of our Banks met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA.

However, there can be no assurance that our Banks will continue to meet those requirements.

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In December 2020, the FDIC updated its regulations that implement Section 29 of the FDIA to establish a new framework for analyzing whether certain deposit arrangements qualify as brokered deposits.

The new brokered deposit rule establishes bright-line standards for determining whether an entity meets the statutory definition of “deposit broker,” and a consistent process for application of the primary purpose exception.

At December 31, 2021, each of our Banks met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA.

Also, all deposits on the Consolidated Balance Sheets of our Banks categorized as non-brokered under the updated regulations mentioned above comply with all application requirements of said regulations.

This brokered deposit rule establishes bright-line standards for determining whether an entity meets the statutory definition of “deposit broker” and a consistent process for application of the primary purpose exception.

All deposits on the Consolidated Balance Sheets of our Banks categorized as non-brokered in accordance with the updated regulations mentioned above comply with all application requirements of those regulations.

Any limitation on the ability of our Banks to participate in the gathering of brokered deposits may competitively disadvantage us in meeting our funding goals and result in a material adverse effect on our business.

At December 31, 2021, we had $11.0 billion in deposits, with approximately $5.6 billion in non-maturity savings deposits and approximately $5.4 billion in certificates of deposit.

Our level of indebtedness could materially adversely affect our ability to generate sufficient cash to repay our outstanding debt, our ability to react to changes in our business and our incurrence of additional indebtedness to fund future needs could exacerbate these risks.

As of December 31, 2022 , we had $13.8 billion in deposits, with approximately $6.7 billion in non-maturity savings deposits and approximately $7.1 billion in certificates of deposit.

If, for whatever reason, we are unable to grow or maintain our deposit levels, our liquidity, ability to grow our business and profitability could be materially adversely affected.

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Our level of indebtedness could materially adversely affect our ability to generate sufficient cash to repay our outstanding debt, and our ability to react to changes in our business and our incurrence of additional indebtedness to fund future needs could exacerbate these risks.

Our level of indebtedness requires a high level of interest and principal payments.

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• increase our vulnerability to adverse economic and industry conditions, which could place us at a competitive disadvantage or require us to dispose of assets to raise funds if needed for working capital or to pay, when due, the principal of, interest on or other amounts due in respect of our indebtedness;

● limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

• limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we and our brand partners operate;

• limit our ability to borrow additional funds, or to dispose of assets to raise funds, if needed, for working capital, capital expenditures, acquisitions or other new business and other corporate purposes;

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• cause any refinancing of our indebtedness to be at higher interest rates and require us to comply with more onerous covenants, which could further restrict our business operations;

● prevent us from raising the funds necessary to repurchase all notes tendered to us upon the occurrence of certain changes of control.

• prevent us from raising the funds necessary to repurchase all senior notes tendered to us upon the occurrence of certain changes of control.

Restrictions imposed by the indentures governing our senior notes, our credit agreement and our other outstanding or future indebtedness may limit our ability to operate our business and to finance our future operations or capital needs or to engage in other business activities.

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The terms of any future indebtedness we may incur could include more restrictive covenants.

We cannot assure you that we will be able to maintain compliance with these covenants in the future.

We cannot assure that we will be able to maintain compliance with these covenants in the future.

If we fail to comply with such covenants, we may not be able to obtain waivers of non-compliance from the lenders and/or amend the covenants so that we are in compliance therewith.

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Changes in market interest rates cause our finance charges, net and our interest expense, net to increase or decrease, as certain of our assets and liabilities carry interest rates that fluctuate with market benchmarks.

We fund credit card and other loans with a combination of fixed rate and floating rate funding sources that include deposits and asset-backed securities.

We also have unsecured term debt that is subject to variable interest rates.

The interest rate benchmark for most of our floating rate assets is the prime rate, and the interest rate benchmark for our floating rate liabilities is generally either the London interbank offered rate (LIBOR) or the federal funds rate.

See “ The discontinuance of LIBOR may negatively impact our access to funding and the value of our financial instruments and commercial agreements” below.

The prime rate and LIBOR or the federal funds rate could reset at different times or could diverge, leading to mismatches in the interest rates on our floating rate assets and floating rate liabilities.

Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions, the competitive environment within our markets, consumer preferences for specific loan and deposit products, and policies of various governmental and regulatory agencies, in particular, the U.S.

Federal Reserve.

Changes in monetary policy, including changes in interest rate controls being applied by the U.S.

Federal Reserve, which has already indicated plans for multiple interest rate increases in 2022, could influence the amount of interest we receive on our credit card and other loans and the amount of interest we pay on deposits and borrowings.

We fund credit card and other

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loans with a combination of fixed rate and floating rate funding sources that include deposits and securitized financings.

We also have unsecured term debt that is subject to variable interest rates, and we may in the future incur additional debt or issue preferred equity that rely on variable interest rates.

Beginning in March 2022, the Federal Reserve Board began raising the federal funds rate in an effort to curb inflation, and we expect further interest rate increases by the Federal Reserve in 2023.

The interest rate benchmark for most of our floating rate assets is the Prime rate, and the interest rate benchmark for our floating rate liabilities is generally either the Secured Overnight Financing Rate (SOFR) or the Federal funds rate.

The Prime rate and SOFR or the Federal funds rate could reset at different times or could diverge, leading to mismatches in the interest rates on our floating rate assets and floating rate liabilities.

Changes in monetary policy, including changes in interest rate controls being applied by the Federal Reserve, could influence the amount of interest we receive on our Credit card and other loans and the amount of interest we pay on deposits and borrowings.

Further, we have only recently begun indexing our variable rate debt to SOFR as a result of the discontinuation of the London Interbank Offered Rate (LIBOR) beginning in 2021.

SOFR is a relatively new reference rate, has a very limited history and is based on short-term repurchase agreements, backed by Treasury securities.

Changes in SOFR can be volatile and difficult to predict, and there can be no assurance that SOFR will perform similarly to the way LIBOR would have performed at any time.

As a result, the amount of interest we may pay on our credit facilities is difficult to predict.

If the interest we pay on deposits and other borrowings increases at a faster rate than the interest we receive on our Credit card and other loans, our profitability would be adversely affected.

Conversely, our profitability could also be adversely affected if the interest we receive on our Credit card and other loans falls more quickly than the interest we pay on deposits and other borrowings.

The discontinuance of LIBOR may negatively impact our access to funding and the value of our financial instruments and commercial agreements.

Central banks and global regulators have called for financial market participants to prepare for the discontinuance of LIBOR and the establishment of alternative reference rates.

Certain of our financial instruments and commercial agreements reference LIBOR, which will need to be amended or otherwise modified to replace LIBOR with an alternative reference rate.

Most of those instruments and agreements contain provisions to replace LIBOR as the benchmark following the occurrence of specified transition events.

To facilitate an orderly transition away from LIBOR, we have established an enterprise-wide initiative to assess and implement necessary changes to our contracts, systems, processes, documentation, and models.

These changes may introduce operational challenges and have a negative impact on our interest expense and profitability

Alternative reference rates are calculated using components different from those used in the calculation of LIBOR and may fluctuate differently than, and not be representative of, LIBOR.

In order to compensate for these differences, certain of our financial instruments and commercial agreements allow for a benchmark replacement adjustment.

However, there is no assurance that any benchmark replacement adjustment will be sufficient to produce the economic equivalent of LIBOR, either at the benchmark replacement date or over the life of such instruments and agreements.

Uncertainty as to the nature and timing of the potential discontinuance or modification of LIBOR, the replacement of LIBOR with one or more alternative reference rates or other reforms may negatively impact market liquidity, our access to funding and the trading market for our financial instruments.

Furthermore, the timing of implementation and use of alternative reference rates and corresponding adjustments or other reforms could be subject to disputes, could cause the financial obligations related to our outstanding financial instruments and commercial agreements to be materially different than expected and may impact the value of such instruments and agreements.

While the interest rate increases to date have resulted in a nominal benefit on our results, there can be no assurance that future rate increases will not impact us negatively.

We recognize that a customers’ ability and willingness to repay us can be negatively impacted by factors such as inflation, which may result in greater delinquencies that lead to greater credit losses, as reflected in our increased Allowance for credit losses.

If the efforts to control inflation in the U.S.

and globally are not successful and inflationary pressures persist, they could magnify the slowdown in the domestic and global economies and increase the risk of a recession or prolonged economic slowdown, which may adversely impact our business, results of operations and financial condition.

Future sales of our common stock, or the perception that future sales could occur, may adversely affect our common stock price.

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In addition, we may issue shares of our common stock in connection with acquisitions.

For example, on December 3, 2020, we issued 1,903,868 shares of our common stock in a private placement completed with our acquisition of Lon Inc.

Sales or issuances of a substantial number of shares of common stock, or the perception that such sales could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the ownership interests of existing stockholders.

Sales or issuances of a substantial number of shares of common stock, or the perception that such transactions could occur, could adversely affect prevailing market prices of our common stock, and any sale or issuance of our common stock will dilute the ownership interests of existing stockholders.

The market price and trading volume of our common stock may be volatile and our stock price could decline.

The trading price of shares of our common stock has from time to time fluctuated widely and in the future may be subject to similar fluctuations.

The trading price of our common stock may be affected by a number of factors, including our operating results, changes in our earnings estimates, additions or departures of key personnel, our financial condition, legislative and regulatory changes, general conditions in the industries in which we operate, general economic conditions, and general conditions in the securities markets.

In addition, until the market has fully evaluated our business without Loyalty Ventures, the price at which our common stock trades may fluctuate significantly.

Other risks described in this Annual Report could also materially and adversely affect our share price.

The trading price of our common stock may be affected by a number of factors, including our operating results, changes in our earnings estimates, additions or departures of key personnel, our financial condition, legislative and regulatory changes, general conditions in the industries in which we and our brand partners operate, general economic conditions, and general conditions in the securities markets.

Other risks described in this Annual Report on Form 10-K could also materially adversely affect our share price.

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There is no guarantee that we will pay future dividends or repurchase shares at a level anticipated by stockholders, which could reduce returns to our stockholders.

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Future declarations of quarterly dividends and the establishment of future record and payment dates are subject to approval by our Board of Directors.

In the approximately 20 years since our initial public offering, our Board of Directors has approved various share repurchase programs resulting in the repurchase of approximately 67.4 million shares of our common stock, although there is no active share repurchase program at this time.

The Board’s determination to declare dividends on, or repurchase shares of, our common stock will depend upon our profitability and financial condition, contractual restrictions, restrictions imposed by applicable laws and regulations, including those governing our Banks’ ability to pay dividends and make distributions or other payments to us, and other factors that the Board of Directors deems relevant.

For example, beginning with the second quarter of 2020, our Board of Directors reduced our quarterly dividend payment by 67% from $0.63 to $0.21 per quarter.

Based on an evaluation of these factors, the Board of Directors may determine not to declare future dividends at all, to declare future dividends at a reduced amount, not to repurchase shares or to repurchase shares at reduced levels compared to historical levels, any or all of which could reduce returns to our stockholders.

Based on an evaluation of these factors, the Board of Directors may determine in the future not to declare dividends at all, to declare dividends at a reduced amount, not to repurchase shares or to repurchase shares at reduced levels compared to historical levels, any or all of which could reduce returns to our stockholders.

We are a holding company and depend on payments from our subsidiaries.

Alliance Data Systems Corporation, our parent holding company, depends on dividends, distributions and other payments from subsidiaries, particularly our Banks, to fund dividend payments, any potential share repurchases, payment obligations, including debt obligations, and to provide funding and capital as needed to our other operating subsidiaries.

Bread Financial Holdings, Inc., our parent holding company, depends on dividends, distributions and other payments from subsidiaries, particularly our Banks, to fund dividend payments, any potential share repurchases, payment obligations, including debt obligations, and to provide funding and capital, as needed, to our other operating subsidiaries.

Banking laws and regulations and our banking regulators may limit or prohibit our transfer of funds freely, either to or from our subsidiaries, at any time.

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For more information, see “Business — Supervision and Regulation”.

In preparing our financial statements we make certain assumptions, judgments and estimates that affect amounts reported in our consolidated financial statements, which, if not accurate, may significantly impact our financial results.

We make assumptions, judgments and estimates in determining the allowance for credit losses, accruals for employee-related liabilities, accruals for uncertain tax positions, valuation allowances on deferred tax assets and legal contingencies.

We also make assumptions, judgments and estimates for items such as the fair value of financial instruments, goodwill, long-lived assets and other intangible assets, impairment, the fair value of stock awards, as well as the recognition of revenue.

These assumptions, judgments and estimates are drawn from historical experience and various other factors that we believe are reasonable under the circumstances as of the date of the Consolidated Financial Statements.

Actual results could differ materially from our estimates, and such differences could significantly impact our financial results.

Legal, Regulatory and Compliance Risks

Our business is subject to comprehensive government regulation and supervision, which could materially adversely affect our results of operations and financial condition.

Our business is subject to extensive government regulation and supervision, which could materially adversely affect our results of operations and financial condition.

We, primarily through our Banks and certain non-bank subsidiaries, are subject to extensive federal and state regulation and supervision.

Banking regulations are intended to protect consumers, depositors’ funds, the DIF, and the safety and soundness of the banking system as a whole, not shareholders.

Banking and consumer financial protection regulations are intended to protect consumers, depositors’ funds, the DIF, and the safety and soundness of the banking system as a whole, not stockholders.

These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things.

Congress and federal regulatory agencies continually review banking laws, regulations, and policies for possible changes.

Changes to statutes, regulations, or regulatory policies, including changes in interpretation or implementation of statutes, regulations, or policies (including as a result of leadership changes at the federal banking agencies resulting from the 2020 election), could affect us in substantial and unpredictable ways.

Federal and state legislative bodies and regulatory agencies continually review banking laws, regulations and policies for possible changes.

Compliance with laws and regulations can be difficult and costly, and changes to laws and regulations, as well as increased intensity in supervision, often impose additional compliance costs.

The scope of the laws and regulations and the intensity of the supervision to which we are subject have increased in recent years, initially in response to the financial crisis, and more recently in light of other factors such as technological and market changes.

Regulatory enforcement and fines have also increased across the banking and financial services sector.

Further, the scope of regulation and the intensity of supervision will likely remain high in the current regulatory environment, including with respect to late fees, interchange fees and other matters.

Such changes could subject us to additional costs, limit the types of financial services and products we may offer, and/or limit what we may charge for certain banking services, among other things.

We expect that the current presidential administration will continue to implement a regulatory reform agenda that is significantly different than that of the previous administration.

This reform agenda could include a heightened focus on consumer protection, fair lending, heightened scrutiny on Bank Secrecy Act and AML requirements, topics related to social equity, executive compensation, and increased capital and liquidity, as well as limits on share buybacks and dividends.

It is uncertain whether and to what extent the current administration will increase the regulatory burden on banks, and changes in existing regulations and their enforcement may require modification to the Banks’ existing regulatory compliance and risk management infrastructure.

Failure to comply with laws, regulations, or policies could result in sanctions by regulatory agencies, civil money penalties, and/or reputation damage, which could have a material adverse effect on our business, financial condition, and results of operations.

While we have policies and procedures designed to prevent any such violations, there can be no assurance that such violations will not occur.

Most recently, in February 2023, the CFPB published a proposed rule with request for public comment that would:

(i) decrease the safe harbor dollar amount for credit card late fees to $8 and eliminate a higher safe harbor dollar amount for subsequent late payments;

(ii) eliminate the annual inflation adjustments that currently exist for the late fee safe harbor dollar amounts;

and (iii) require that late fees not exceed 25% of the consumer’s required minimum payment.

The “safe harbor” dollar amounts

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referenced in the CFPB’s proposed rulemaking refer to the amounts that credit card issuers may charge as late fees under the CARD Act.

Under the CARD Act, as implemented, these safe harbor amounts have been subject to annual adjustment based on changes in the consumer price index, and the safe harbor amounts are currently set at $30 for an initial late fee and $41 for subsequent late fees in one of the next six billing cycles.

Accordingly, the proposed $8 safe harbor amount on late fees (and proposed elimination of the annual inflation-based adjustment thereto) would represent a significant decrease from the current safe harbor amounts.

In addition, the proposed rulemaking seeks comment on whether late fees should be prohibited if the applicable payment is made within 15 days of the due date and whether, as a condition to utilizing the safe harbor, credit card issuers should be required to offer automatic payment options and/or provide certain notifications of upcoming payment due dates.

We are closely monitoring the content and timing of the CFPB’s proposed rulemaking and its impact on our business.

We expect that we, like the rest of the banking sector, will remain subject to increased regulation and supervision of our industry by bank regulatory agencies and that there may be additional and changing requirements and conditions imposed on us, any of which could increase our costs, require increased management attention, and adversely impact our results of operations.

In connection with their continuous supervision and examinations of us, the FDIC, CFPB and/or other regulatory agencies may require changes in our business or operations, and any such changes may be judicially enforceable or impractical for us to contest.

We may also become subject to formal or informal enforcement and other supervisory actions, including memoranda of understanding, written agreements, cease-and-desist orders, and prompt-corrective-action or safety-and-soundness directives.

Supervisory actions could entail significant restrictions on our existing business, our ability to develop new business, our flexibility in conducting operations, and our ability to pay dividends or utilize capital.

Enforcement and other supervisory actions also can result in the imposition of civil monetary penalties or injunctions, related litigation by private plaintiffs, damage to our reputation, and a loss of customer or investor confidence.

We could be required, as well, to dispose of specified assets and liabilities within a prescribed period of time.

As a result, any enforcement or other supervisory action could have an adverse effect on our business, results of operations, financial condition and prospects.

In addition, changes in the regulatory and supervisory environments could adversely affect us in substantial and unpredictable ways, including by limiting the types of financial services and products we may offer, enhancing the ability of others to offer more competitive financial services and products, restricting our ability to make acquisitions or pursue other profitable opportunities, and negatively impacting our results of operations and financial condition.

Changes in the prevailing interpretations of federal or state laws and related regulations could also invalidate or call into question the legality of certain of our services and business practices.

Our failure to comply with the laws, regulations, and supervisory actions to which we are subject, even if the failure is inadvertent or reflects a difference in interpretation, could subject us to fines, other penalties, and restrictions on our business activities, any of which could adversely affect our business, results of operations, financial condition, cash flows, capital base, and/or the price of our securities.

See “Business — Supervision and Regulation” for more information about certain laws and regulations to which we are subject and their impact on us.

Litigation and regulatory actions could subject us to significant fines, penalties, judgments and/or requirements resulting in significantly increased expenses, damage to our reputation and/or a material adverse effect on our business.

Businesses in the financial services and payments industries have historically been, and continue to be, subject to significant legal actions, including class action lawsuits.

Litigation and other actions and disputes could subject us to significant fines, penalties, judgments and/or requirements resulting in significantly increased expenses, damage to our reputation and/or a material adverse effect on our business.

Businesses in the financial services and payments industry has historically been, and continue to be, subject to significant legal actions, including class action lawsuits.

Many of these actions have included claims for substantial compensatory or punitive damages.

While we have historically relied on our arbitration clause in agreements with customers to limit our exposure to class action litigation, there can be no assurance that we will continue to be successful in enforcing our arbitration clause in the future, including as a result of regulation that would require that our consumer arbitration clause not apply to cases filed in court as class actions, and claims of the type we previously arbitrated could be subject to the complexities, risks and costs associated with class action cases.

While we have historically relied on our arbitration clause (which includes a class action waiver) in agreements with customers to limit our exposure to class action litigation, there can be no assurance that we will always be successful in enforcing our arbitration clause in the future.

There may also be legislative, regulatory or other efforts to limit or eliminate the use of arbitration clauses or class action waivers, and if our arbitration provisions are found to be unenforceable or are otherwise limited or eliminated, our exposure to class action litigation could increase significantly.

Further, e ven if our arbitration clause remains enforceable, we may be subject to mass arbitrations in which large groups of consumers bring arbitrations against us simultaneously.

The continued focus of merchants on issues relating to the acceptance of various forms of payment may lead to additional litigation and other legal actions.

Given the inherent uncertainties involved in litigation, and the very large or indeterminate damages sought in some matters asserted against us, there is significant uncertainty as to the ultimate liability we may incur from litigation.

We have been subject to regulatory actions and may continue to be subject to such actions, including governmental inquiries, investigations and enforcement proceedings, in the event of noncompliance or alleged noncompliance with laws or regulations.

External publicity concerning investigations, including those that are narrow in scope, can increase their scope and scale and lead to further regulatory inquiries.

We expect that regulators will continue taking formal enforcement actions against financial institutions in addition to addressing supervisory concerns through non-public supervisory actions or findings, which could involve restrictions on our activities, among other limitations that could adversely affect our business.

In addition, a violation of law or regulation by another financial institution could give rise to an investigation by regulators and other governmental agencies of the same or similar practices by us.

Further, a single event may give rise to numerous and overlapping

investigations and proceedings.

Regulatory action could subject us to significant fines, penalties or other requirements resulting in cardholder reimbursements, increased expenses, limitations or conditions on our business activities, and damage to our reputation and our brand, all of which could adversely affect our results of operations and financial condition.

Governmental authorities have adopted or proposed measures to provide economic assistance to individual households and businesses, stabilize markets and support economic growth in response to the COVID-19 pandemic.

The future success of these measures is unknown and they may not be sufficient to mitigate the negative impact of the pandemic.

Additionally, some measures, such as a suspension of loan payments and encouragement of forbearances, has had, and may continue to have, a negative impact on our business, results of operations and financial condition.

We also face an increased risk of litigation and governmental and regulatory scrutiny as a result of the effects of the pandemic on market and economic conditions, such as a renewed focus on fair lending laws, and actions governmental authorities take in response to those conditions.

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In addition to litigation and regulatory matters, from time to time, through our operational and compliance controls, we identify compliance issues that require us to make operational changes and, depending on the nature of the issue, result in financial remediation to impacted cardholders.

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Our Banks are subject to extensive federal and state regulation that may restrict their ability to make cash available to us and may require us to make capital contributions to them.

Federal and state laws and regulations extensively regulate the operations of our Banks, including to limit the ability of the Banks to pay dividends to us.

Federal and state laws and regulations extensively regulate the operations of our Banks, including to limit the ability of the Banks to pay dividends or make other distributions to us.

Many of these laws and regulations are intended to maintain the safety and soundness of our Banks, and they impose significant restraints on them to which other non-regulated entities are not subject.

Our Banks must maintain minimum amounts of regulatory capital.

If the Banks do not meet these capital requirements, their respective regulators have broad discretion to institute a number of corrective actions that could have a direct material effect on our financial statements.

To pay any dividend, the Banks must each maintain adequate capital above regulatory guidelines.

Accordingly, neither Comenity Bank nor Comenity Capital Bank may be able to make any of its cash or other assets available to us, including to service our indebtedness.

Accordingly, neither CB nor CCB may be able to make any of their cash or other assets available to us, including to service our indebtedness.

If either of our Banks were to fail to meet any of the capital requirements to which it is subject, we may be required to provide them with additional capital, which could also impair our ability to service our indebtedness.

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Under these requirements, in the future, we could be required to provide financial assistance to our Banks if the Banks experience financial distress.

This support may be required at times when we might otherwise determine not to provide it or when doing so is not otherwise in tour interests or the interests of our shareholders or creditors.

If legislative attempts to amend the Bank Holding Company Act to eliminate the exclusion of credit card banks or industrial loan companies from the definition of “bank” are successful, we may become a bank holding company.

This support may be required at times when we might otherwise have determined not to provide it or when doing so is not otherwise in our interests or the interests of our stockholders or creditors.

If legislative attempts to amend the BHC Act to eliminate the exclusion of credit card banks or industrial loan companies from the definition of “bank” are successful, or if we voluntarily take such action that results in the Parent Company becoming a federally-regulated BHC, we would become subject to additional regulation applicable to BHCs, which could increase our compliance and regulatory costs and have other effects that could be materially adverse to our business.

The Dodd-Frank Act mandates multiple studies, which could result in future legislative or regulatory action.

In particular, the Government Accountability Office issued its study on whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system of the United States, to eliminate the exemptions to the definition of “bank” under the Bank Holding Company Act for certain institutions including limited purpose credit card banks and industrial loan companies.

In particular, the Government Accountability Office issued its study on whether it is necessary, in order to strengthen the safety and soundness of institutions or the stability of the financial system of the United States, to eliminate the exemptions to the definition of “bank” under the BHC Act for certain institutions including limited purpose credit card banks and industrial loan companies.

The study did not recommend the elimination of these exemptions.

However, legislation is periodically introduced that would eliminate this exception for industrial loan companies and other “nonbank banks”.

If such legislation were enacted without any grandfathering of or accommodations for existing institutions, we could be required to become a bank holding company.

As a bank holding company, we and our nonbank subsidiaries would be subject to supervision, regulation and examination by the Federal Reserve Board.

We would be required to provide annual reports and such additional

information as the Federal Reserve Board may require pursuant to the BHC Act, and applicable regulations.

However, legislation is periodically introduced that would eliminate this exception for industrial loan companies and other “non-bank banks”.

If such legislation were enacted without any grandfathering of or accommodations for existing institutions, we could be required to become a BHC.

As a BHC, we and our non-bank subsidiaries would be subject to supervision, regulation and examination by the Federal Reserve Board.

We would be required to provide annual reports and such additional information as the Federal Reserve Board may require pursuant to the BHC Act, and applicable regulations.

In addition, we would be subject to consolidated regulatory capital requirements.

Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, a bank holding company may only engage in, or own companies that engage in, activities deemed by the Federal Reserve Board to be permissible for bank holding companies or financial holding companies.

Activities permissible for bank holding companies are those that are so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto.

Permissible activities for financial holding companies include those "so closely related to banking as to be a proper incident thereto"

as well as certain additional activities deemed "financial in nature or incidental to such financial activity"

or complementary to a financial activity and that does not pose a substantial risk to the safety and soundness of the depository institution or the financial system.

If we were required to become a bank holding company, we may be required to modify or discontinue certain of our business activities, which may materially adversely affect our results of operations.

Pursuant to provisions of the BHC Act and regulations promulgated by the Federal Reserve Board thereunder, a BHC may only engage in, or own companies that engage in, activities deemed by the Federal Reserve Board to be permissible for BHCs or financial holding companies.

Activities permissible for BHCs are those that are so closely related to the business of banking or managing or controlling banks as to be a proper incident thereto.

Permissible activities for financial holding companies include those “so closely related to banking as to be a proper incident thereto” as well as certain additional activities deemed “financial in nature or incidental to such financial activity” or complementary to a financial activity and that do not pose a substantial risk to the safety and soundness of the depository institution or the financial system.

If we were required to become a BHC, we may be required to modify or discontinue certain of our business activities, which may materially adversely affect our results of operations and financial condition.

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Increases in FDIC insurance premiums may have a material adverse effect on our results of operations.

We are generally unable to control the amount of premiums that are required to be paid for FDIC insurance.

If there are bank or financial institution failures, we may be required to pay significantly higher premiums than the levels currently imposed or additional special assessments or taxes that could adversely affect earnings.

Any future increases or required prepayments in FDIC insurance premiums may materially adversely affect our results of operations.

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financial system for money laundering and terrorist financing activities.

The Bank Secrecy Act, as amended by the PATRIOT Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of partners, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies.

FinCEN, a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the federal bank regulatory agencies, as well as the U.S.

Department of Justice, Drug Enforcement Administration, and IRS.

The Bank Secrecy Act, as amended by the PATRIOT Act, requires depository institutions and their holding companies to undertake activities including maintaining an anti-money laundering program, verifying the identity of partners and customers, monitoring for and reporting suspicious transactions, reporting on cash transactions exceeding specified thresholds, and responding to requests for information by regulatory authorities and law enforcement agencies.

The Financial Crimes Enforcement Network (FinCEN), a unit of the Treasury Department that administers the Bank Secrecy Act, is authorized to impose significant civil money penalties for violations of those requirements and has recently engaged in coordinated enforcement efforts with the Federal Banking Agencies , as well as the U.S.

Department of Justice, Drug Enforcement Administration, and Internal Revenue Service (IRS).

Regulation in the areas of privacy, data protection, data governance, account access and information and cyber security could increase our costs and affect or limit our business opportunities and how we collect and/or use personal information.

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As such laws are interpreted and applied (in some cases, with significant differences or conflicting requirements across jurisdictions), compliance and technology costs will continue to increase, particularly in the context of ensuring that adequate data governance, data protection, data transfer and account access mechanisms are in place.

Compliance with current or future privacy, data protection, data governance, account access and information and cyber security laws could significantly impact our collection, use, sharing, retention and safeguarding of consumer and/or colleague information and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability.

Compliance with current or future privacy, data protection, data governance, account access, and information and cyber security laws could significantly impact our collection, use, sharing, retention and safeguarding of consumer and/or employee information and could restrict our ability to provide certain products and services, which could materially and adversely affect our profitability.

Our failure to comply with such laws could result in potentially significant regulatory and/or governmental investigations and/or actions, litigation, fines, sanctions, ongoing regulatory monitoring, customer attrition, decreases in the use or acceptance of our cards and damage to our reputation and our brand.

In recent years, there has been increasing regulatory enforcement and litigation activity in the areas of privacy, data protection and information and cyber security in the United States, the EU and various other countries.

For more information on regulatory and legislative activity in this area, see “Privacy and Data Protection Regulation” above.

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Operational and compliance failures or deficiencies in our control environment can expose us to reputational and legal risks as well as fines, civil money penalties or payment of damages and can lead to diminished business opportunities and diminished ability to expand key operations.

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Our failure to protect our intellectual property rights and use of open source software may harm our competitive position, and litigation to protect our intellectual property rights or defend against third party allegations of infringement may be costly, any of which could negatively impact our business, results of operations and profitability.

Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, financial condition or operating results.

Third parties may infringe or misappropriate our trademarks or other intellectual property rights, which could have a material adverse effect on our business, operating results or financial condition.

The actions we take to protect our trademarks and other proprietary rights may not be adequate.

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If portions of our proprietary software are determined to be subject to an open source license, we could also be required to, under certain circumstances, publicly release or license, at no cost, our products that incorporate the open source software or the affected portions of our source code.

In addition to risks related to license requirements, usage of open source software can lead to greater risks than use of third-party commercial software because open source licensors generally do not provide warranties or other contractual protections regarding infringement, misappropriation, security vulnerabilities, defects or errors in the code or other violations, any of which could result in liability to us and negatively impact our business, results of operations, financial condition and profitability.

We have international operations that subject us to various international risks as well as increased compliance and regulatory risks and costs.

We have international operations, primarily in India, and some of our third-party service providers provide services to us from other countries, all of which subject us to a number of international risks, including, among other things, sovereign volatility and socio-political instability.

Any future political or social instability in the countries in which we operate could have a material adverse effect on our business operations.

Any future social or political instability in the countries in which we operate could have a material adverse effect on our business.

regulations also govern various aspects of the international activities of domestic corporations and increase our compliance and regulatory risks and costs.

Any failure on our part or the part of our service providers to comply with applicable U.S.

regulations, as well as the regulations in the countries and markets in which we or they operate, could result in fines, penalties, injunctions or other

similar restrictions, any of which could have a material adverse effect on our business, results of operations and financial condition.

regulations, as well as the regulations in the countries and markets in which we or they operate, could result in fines, penalties, injunctions or other similar restrictions, any of which could have a material adverse effect on our business, results of operations and financial condition.

Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition .

We are subject to tax laws and regulations in U.S.

federal, state, local and foreign jurisdictions.

From time to time legislative initiatives may be proposed, which, if enacted, may impact our effective tax rate and could adversely affect our deferred tax assets, tax positions and/or our tax liabilities.

In addition, U.S.

federal, state, local, and foreign tax laws and regulations are extremely complex and subject to varying interpretations.

There can be no assurance that our historical tax positions will not be challenged by the relevant taxing authorities, or that we would be successful in defending our positions in connection with any such challenge.

Anti-takeover provisions in our organizational documents and Delaware law may discourage or prevent a change of control, even if an acquisition would be beneficial to our stockholders, which could affect our stock price adversely and prevent or delay change of control transactions or attempts by our stockholders to replace or remove our current management.

Delaware law, as well as provisions of our certificate of incorporation, including those relating to our Board’s authority to issue series of preferred stock without further stockholder approval, our bylaws and our existing and future debt instruments, could discourage unsolicited proposals to acquire us, even though such proposals may be beneficial to our stockholders.

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instruments, could discourage unsolicited proposals to acquire us, even though such proposals may be beneficial to our stockholders.

In addition, we are subject to the provisions of Section 203 of the Delaware General Corporation Law, which may prohibit certain business combinations with stockholders owning 15% or more of our outstanding voting stock.

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Cybersecurity, Technology and Vendor Risks

We rely on third party vendors to provide products and services and are transitioning additional services to strategic outsourcing partners.

Our business operations, reputation and profitability could be adversely impacted if our vendors fail to fulfill their obligations.

The failure of our suppliers to deliver products and services at contracted service levels or standards or in sufficient quantities and in a timely manner could adversely affect our business.

These impacts arise from and include, but are not limited to, closures or restricted operating conditions and supply chain disruptions resulting from the current impacts of the global COVID-19 pandemic.

If our significant vendors were unable or unwilling to fulfill or renew our existing contracts on current terms, we might not be able to replace the related product or service at the same cost, in a timely fashion, or at all, any of which could negatively impact our profitability.

In addition, if a third party vendor fails to meet contractual requirements, such as compliance with applicable laws and regulations, our business operations could suffer economic or reputational harm that could have a material adverse impact on our business and results of operations.

Further, we are in the process of transitioning our credit card processing to strategic outsourcing partners with targeted completion in 2022, and we have also recently completed outsourcing certain print and mail and remittance processing functions.

Transitioning these services from our legacy platforms to strategic partners with established systems and functionality presents significant risks, including, but not limited to, potential losses or corruption of data, changes in security processes, implementation delays and cost overruns, resistance from current partners and account holders, disruption to operations, loss of customization or functionality, reliability issues with legacy systems prior to cutover and incurrence of outsized consulting costs to complete the transition.

In addition, the pursuit of multiple new product integrations and outsourcing transitions simultaneously could increase the complexity and risk, as well as magnify the unintended consequences, including an inability to retain or replace key personnel during the transition as well as the incurrence of unexpected expenses as we adopt new processes for managing these service providers and establish controls and procedures to ensure regulatory compliance.

Any transition or implementation delays, errors or difficulties may result in operational challenges, security failures, increased costs or reputational harm, any of which could materially adversely impact our profitability.

We rely on third-party vendors to provide various products and services that are important to our operations, and our business could be adversely impacted if our vendors fail to fulfill their obligations.

Some services important to our business are outsourced to third-party vendors, and we contract with numerous other third-party vendors for a range of products and services.

The inability or failure of these vendors to deliver products and services at contracted service levels or standards and in a timely manner could adversely affect our business.

In addition, if a third-party vendor fails to meet other contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyberattack or other security breach, our business operations could suffer economic or reputational harm that could have a material adverse impact on our business and results of operations.

Further, if our significant vendors are unable or unwilling to fulfill or renew our existing contracts on current terms, we might not be able to replace the related product or service at the same cost, in a timely fashion, or at all, any of which could negatively impact our profitability, business and operations, in some cases materially.

We recently completed the transition of our credit card processing services to strategic outsourcing partners.

The transition was a significant and complex undertaking, which resulted in unanticipated platform stability issues and related impacts that have adversely impacted, and may continue to adversely impact, our business, results of operations, reputation and brand.

In late June 2022, we completed the transition of our credit card processing services to strategic outsourcing partners, including Fiserv for our core processing services and Microsoft for related cloud infrastructure services.

As we described in our 2021 Annual Report on Form 10-K, transitioning these services from our legacy platforms to strategic partners with established systems and functionality presented significant risks, including, but not limited to, potential losses or corruption of data, changes in security processes, implementation delays and cost overruns, resistance from current partners and account holders, disruption to operations, loss of customization or functionality, reliability issues with legacy systems prior to cutover and incurrence of outsized consulting costs to complete the transition.

In addition, as previously disclosed, the pursuit of multiple new product integrations and outsourcing transitions simultaneously increased the complexity and risk, as well as magnified the potential for the unintended consequences, including an inability to retain or replace key personnel during the transition as well as the incurrence of unexpected expenses as we adopted new processes for managing these service providers and established controls and procedures to ensure regulatory compliance.

In connection with the transition, we experienced unanticipated issues with platform stability, which resulted in outages and interruptions in our call center operations and online customer service platforms.

These outages and interruptions resulted in a number of adverse impacts, including customer complaints, negative social media postings, reputational damage, regulatory scrutiny, lost potential revenue, remediation costs, timing-related impacts to our Delinquency rate and Net loss rate data, and increased consulting and professional fees.

These challenges associated with the transition have adversely impacted, and may continue to adversely impact, our business, results of operations, financial condition, and result in damage to our reputation and our brand.

Moreover, now that we have completed this transition, it would be difficult and disruptive for us to replace certain of these third-party vendors, particularly Fiserv, in a timely or seamless manner if they were unwilling or unable to continue to provide us with these services in the future (as a result of their financial or business conditions or otherwise), which could materially impact our business and operations.

Failure to safeguard our data and consumer privacy could affect our reputation among our partners and their customers, and may expose us to legal claims.

Although we have extensive physical and cyber security controls and associated procedures, our data has in the past been and in the future may be subject to unauthorized access.

In such instances of unauthorized access, we may have data loss that could harm our loan holders.

This in turn could lead to reputational risk as concerns with security and

privacy of data may result in consumers not wanting to participate in our product offerings.

In such instances of unauthorized access, we may have data loss

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that could harm our customers and brand partners.

This in turn could lead to reputational risk as concerns with security and privacy of data may result in consumers not wanting to participate in our product offerings.

We also have arrangements in place with our partners and other third parties through which we share and receive information about their customers who are or may become our customers, which magnifies certain information security issues.

Information security risks for large financial institutions have increased with the adoption of new technologies, including those used on mobile devices, to conduct financial and other business transactions, and the increased sophistication and activity level of threat actors.

The use of our products and services could decline if any compromise of physical or cyber security occurred.

In addition, any unauthorized release of customer information or any public perception that we released consumer information without authorization, could subject us to legal claims from our partners or their customers, consumers or regulatory enforcement actions, which may adversely affect our partner relationships.

In addition, any unauthorized release of customer information or any public perception that we released customer information without authorization, could subject us to legal claims from our partners or their customers, consumers or regulatory enforcement actions, which may adversely affect our partner relationships and result in damage to our reputation and our brand .

We cannot be certain that our cybersecurity insurance coverage will be adequate for cybersecurity liabilities actually incurred, that insurance will continue to be available to us on economically reasonable terms, or at all, or that our insurer will not deny coverage as to any future claim.

Business interruptions, including loss of data center capacity, interruption due to cyber-attacks, loss of network connectivity or inability to utilize proprietary software of third party vendors, could affect our ability to timely meet the needs of our partners and customers and harm our business.

Our ability, and that of our third-party service providers, to protect our data centers and other facilities and systems against damage, loss or performance degradation from power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, insider threats, hardware and software defects or malfunctions, human error, computer viruses or other malware, public health crises, disruptions in telecommunications services, fraud, fires and other disasters and other events is critical.

Our ability, and that of our third-party service providers and brand partners, to protect our data centers and other facilities and systems against damage, loss or performance degradation from power loss, network failure, cyber-attacks, including ransomware or denial of service attacks, insider threats, hardware and software defects or malfunctions, human error, computer viruses or other malware, public health crises, disruptions in telecommunications services, fraud, fires and other disasters and other events is critical.

In order to provide many of our services, we must be able to store, retrieve, process and manage large amounts of data, as well as periodically expand and upgrade our technology capabilities.

Any damage to our data centers or other facilities and systems, or those of our third-party service providers, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our partners’ needs and their confidence in utilizing us for future services.

Any damage to our data centers or other facilities and systems, or those of our third-party service providers or brand partners, any failure of our network links that interrupts our operations or any impairment of our ability to use our software or the proprietary software of third party vendors, including impairments due to cyber-attacks, could adversely affect our ability to meet our partners’ and customers’ needs and their confidence in utilizing us for future services.

In addition, any failure to successfully implement new information systems and technologies, or improvements or upgrades to existing information systems and technologies in a timely manner could have an adverse impact on our business if we are not able to be competitive with other financial services companies, and could also adversely impact our internal controls (including internal controls over financial reporting), results of operations, and financial condition.

If we are not able to invest successfully in, and compete at the leading edge of, technological developments across all our businesses, our revenue and profitability could be materially adversely affected.

If we are not able to invest successfully in, and compete at the leading edge of, technological developments in our industry, our revenue and profitability could be materially adversely affected.

Our industry is subject to rapid and significant technological changes.

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We expect that new technologies in the payments industry will continue to emerge, and these new technologies may be superior to, or render obsolete, our existing technology.

The process of developing new products and services, enhancing existing products and services and adapting to technological changes and evolving industry standards is complex, costly and uncertain, and any failure by us to anticipate customers’ changing needs and emerging technological trends accurately could significantly impede our ability to compete effectively.

Consumer and merchant adoption is a key competitive factor and our competitors may develop products, platforms or technologies that become more widely adopted than ours.

The process of developing new products and services, enhancing existing products and services and adapting to technological changes and evolving industry standards is complex, costly and uncertain, and any failure by us to anticipate partners’ and customers’ changing needs and emerging technological trends accurately could significantly impede our ability to compete effectively.

Partner and customer adoption is a key competitive factor and our competitors may develop products, platforms or technologies that become more widely adopted than ours.

In addition, we may underestimate the time and expense we must invest in new products and services before they generate significant revenues, if at all.

Our use of artificial intelligence and machine learning is subject to risks related to flaws in our algorithms and datasets that may be insufficient or contain biased information.

These deficiencies could undermine the decisions based on impact to data quality, predictions or analysis such technologies produce, subjecting us to competitive harm, legal liability, and brand or reputational harm.

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Our ability to develop, acquire or access competitive technologies or business processes on acceptable terms may also be limited by intellectual property rights that third parties, including those that current and potential competitors, may assert.

In addition, our ability to adopt new technologies may be inhibited by the emergence of industry-wide

standards, a changing legislative and regulatory environment, an inability to develop appropriate governance and controls, a lack of internal product and engineering expertise, resistance to change from partners or consumers, lack of appropriate change management processes or the complexity of our systems.

In addition, our ability to adopt new technologies may be inhibited by the emergence of industry-wide standards, a changing legislative and regulatory environment, an inability to develop appropriate governance and controls, a lack of internal product and engineering expertise, resistance to change from partners or consumers, lack of appropriate change management processes or the complexity of our systems.

Risks Related to the LoyaltyOne Spinoff

We may be unable to achieve some or all of the benefits we expect to achieve from the spinoff.

In November 2021, we completed the spinoff of our LoyaltyOne segment, consisting of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc.

Although we believe that the spinoff will enhance our long-term value, we may not be able to achieve some or all of the anticipated benefits from the separation of our businesses, and the spinoff may adversely affect our business.

Separating the businesses resulted in two independent, publicly traded companies, each of which is now a smaller, less diversified and more narrowly focused business than before the spinoff, which makes us more vulnerable to changing market and economic conditions.

Additionally, a potential loss of synergies from separating the businesses could negatively impact the balance sheet, profit margins or earnings of both businesses and the combined value of the common stock of the two publicly traded companies may not be equal to or greater than the value of Alliance Data’s common stock had the spinoff not occurred.

We currently hold 19% of the outstanding shares of common stock of Loyalty Ventures Inc., and the value of these shares is dependent upon the current and future performance of Loyalty Ventures Inc.

We cannot guarantee that Loyalty Ventures Inc.

will be successful as a standalone company, and Loyalty Ventures Inc.’s performance remains subject to various risks and uncertainties, including those related to the ongoing COVID-19 pandemic and the other risks described in Loyalty Ventures Inc.’s filings with the SEC, including its registration statement on Form 10 filed with the SEC in connection with the spinoff.

Most recently, for example, Loyalty Ventures Inc.

noted in its quarterly earnings release for the quarter ended December 31, 2021 that, based on its preliminary results, it was recognizing a non-cash, goodwill impairment charge of $50 million in connection with the ongoing impact of COVID-19.

Any such current or future impairment charges or other results or circumstances that adversely impact Loyalty Ventures Inc.

will in turn adversely impact the value of our ownership position in Loyalty Ventures Inc.

While we intend to divest this position in a tax-efficient manner (i.e., in a debt-for-equity exchange within one year of the completion of the spinoff), there is no assurance that we will be able to do so in a tax-efficient manner or at a price that is attractive to us.

If we fail to achieve some or all of the benefits that we expect to achieve as a result of the spinoff, or do not achieve them in the time we expect, our results of operations and financial condition could be materially adversely affected.

The LoyaltyOne spinoff could result in substantial tax liability to us and our stockholders.

We received an opinion from our tax advisor confirming that the spinoff of our LoyaltyOne segment qualifies as tax-free for U.S.

federal income tax purposes for us and our stockholders (except for cash received in lieu of fractional shares), and we also received a private letter ruling, or PLR, from the Internal Revenue Service to this effect.

However, if the factual assumptions or representations made by us in connection with the delivery of the opinion or the PLR are inaccurate or incomplete in any material respect, including those relating to the past and future conduct of our business, we may not be able to rely on the same.

Furthermore, the opinion from our tax advisor is not binding on the IRS or the courts.

If, notwithstanding receipt of the opinion from our tax advisor and the PLR, the spinoff transaction and certain related transactions are determined to be taxable, we would be subject to a substantial tax liability.

In addition, if the spinoff transaction is taxable, each holder of our common stock who received shares of Loyalty Ventures Inc.

in connection with the spinoff would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares received.

Even if the spinoff otherwise qualifies as a tax-free transaction, the distribution would be taxable to us (but not to our stockholders) in certain circumstances if future significant acquisitions of our stock or the stock of Loyalty Ventures Inc.

are deemed to be part of a plan or series of related transactions that included the spinoff.

In this event, the resulting tax liability could be substantial.

In connection with the spinoff, we entered into a tax matters agreement with Loyalty Ventures Inc., pursuant to which Loyalty Ventures Inc.

agreed to not enter into any transaction that could cause any portion of the spinoff to be taxable to us without our consent and to indemnify us for any tax liability resulting from any such transaction.

In addition, these potential tax liabilities may discourage, delay or prevent a change of control of us.

A director who serves on our Board of Directors also serves as a director of Loyalty Ventures Inc., and ownership of shares of common stock of Loyalty Ventures Inc.

by our directors and executive officers may create, or appear to create, conflicts of interest.

A director who serves on our Board of Directors also currently serves on the Board of Directors of Loyalty Ventures Inc.

This may create, or appear to create, conflicts of interest when our or Loyalty Ventures Inc.’s management and directors face decisions that could have different implications for us and Loyalty Ventures Inc., including the resolution of any dispute regarding the terms of the agreements governing the spinoff and our relationship with Loyalty Ventures Inc.

or any other commercial agreements entered into in the future between us and Loyalty Ventures Inc.

Some of our executive officers and non-employee directors currently own shares of the common stock of Loyalty Ventures Inc.

The continued ownership of such common stock by our directors and executive officers may create, or may appear to create, a conflict of interest when these directors and executive officers are faced with decisions that could have different implications for us and Loyalty Ventures Inc.

The LoyaltyOne spinoff could result in substantial tax liability to us and our stockholders, and more generally we could be adversely affected by the performance of, or disputes involving, LVI.

In November 2021, we completed the spinoff of our former LoyaltyOne segment, consisting of the Canadian AIR MILES® Reward Program and the Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, LVI.

As part of the spinoff, we retained 19% of the outstanding shares of common stock of LVI.

We received a private letter ruling, or PLR, from the IRS and an opinion from our tax advisor to the effect that the spinoff of our former LoyaltyOne segment qualified as tax-free for U.S.

federal income tax purposes for us and our stockholders (except for cash received in lieu of fractional shares).

However, if the factual assumptions or representations made by us in connection with the delivery of the PLR opinion are inaccurate or incomplete in any material respect, including those relating to the past and future conduct of our business, we may not be able to rely on the PLR opinion.

Furthermore, the PLR does not address all the issues that are relevant to determining whether the spinoff qualified for tax-free treatment, and the opinion from our tax advisor is not binding on the IRS or the courts.

If, notwithstanding receipt of the PLR and the opinion from our tax advisor, the spinoff transaction and certain related transactions are determined to be taxable, we would be subject to a substantial tax liability.

In addition, if the spinoff transaction is taxable, each holder of our common stock who received shares of LVI in connection with the spinoff would generally be treated as receiving a taxable distribution of property in an amount equal to the fair market value of the shares received.

In this event, the resulting tax liability could be substantial, and could discourage, delay or prevent a change of control of us.

In connection with the spinoff, we entered into a tax matters agreement with LVI, pursuant to which LVI agreed to not enter into any transaction that could cause any portion of the spinoff to be taxable to us without our consent and to indemnify us for any tax liability resulting from any such transaction.

Subsequently, we agreed to accommodate LVI’s potential disposition of certain assets.

While we believe that such disposition should not affect the qualification of the spinoff as a tax-free transaction, it is possible the IRS could disagree and successfully assert that the spinoff should be taxable to us and our shareholders that received LVI shares in the spinoff.

In addition, it is possible that the IRS could view this disposition as inconsistent with the PLR and, as a result, the IRS could take the position that we cannot rely on the PLR.

More generally, we could continue to be adversely affected by the performance of LVI.

During 2022, LVI’s stock price decreased significantly and, as a result, we wrote down the value of our 19% shareholding in LVI from $50 million as of December 31, 2021 to $6 million as of December 31, 2022.

While we had intended to divest our ownership position in LVI in a tax-efficient manner within 12 months of the spinoff, market conditions and other factors prevented us from doing so.

As such, we may be unable to divest our ownership position in LVI a timely manner and may be required to write down further the value of our position.

Also, our post-spinoff arrangements and relationships with LVI may be impacted by the performance of LVI.

Moreover, though we believe that our process and decision-making with respect to the spinoff transaction were entirely appropriate, we could become involved in disputes with LVI or other third parties relating to the spinoff.

Any dispute relating to the spinoff could distract management, result in legal and other costs, and otherwise adversely impact our financial position, results of operations and financial condition.

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RISK MANAGEMENT

Our Enterprise Risk Management (ERM) program is designed to ensure that all significant risks are identified, measured, monitored and addressed.

Our ERM program defines our risk appetite, governance, culture and reporting.

We manage enterprise risk using our Board-approved Enterprise Risk Management Framework, which includes board-level oversight, several risk management committees, and a dedicated risk management team led by our Chief Risk Officer (CRO).

Our Board and management manage the level of risk the organization is willing to accept in pursuit of its objectives through well-defined risk appetite statements.

We utilize the "three lines of defense"

risk management model to assign roles, responsibilities and accountabilities in the organization for taking and managing risk.

Our ERM program reflects our risk appetite, governance, culture and reporting.

We manage enterprise risk using our Board-approved Enterprise Risk Management Framework, which includes Board-level oversight, risk management committees, and a dedicated risk management team led by our Chief Risk Officer (CRO).

Our Board and executive management determine the level of risk the Company is willing to accept in pursuit of its objectives through the ERM program and the well-defined risk appetite statements developed thereunder.

We utilize the “three lines of defense” risk management model to assign roles, responsibilities and accountabilities in the Company for taking and managing risk.

Governance and Accountability

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Risk Management Roles and Responsibilities

In addition to our Board and Board Committees, responsibility for risk management also flows to other individuals and entities throughout the Company, including various management committees and senior management.

As defined in our ERM Framework, we utilize the “three lines of defense” risk management model.

Our ERM Framework defines our “three lines of defense” risk management model, which includes the following:

• The “first line of defense” is comprised of the business areas that engage in activities that generate revenue or provide operational support or services that introduce risk to the Company.

As the business owner, the first line of defense is responsible for, among other things, identifying, owning, managing and controlling key risks associated with their activities, addressing issues and remediation, and implementing processes and procedures to strengthen the risk and control environment.

The first line of defense identifies and manages key performance indicators and risks and controls consistent with the Company’s risk appetite statements.

The senior executive officers who serve as leaders in the "first line of defense,"

are responsible for ensuring that their respective functions operate within established risk limits, in accordance with our risk appetite statements.

As the business owner, the first line of defense is responsible for, among other things, identifying, owning, managing and controlling key risks associated with their activities, timely addressing issues and remediation, and implementing processes and procedures to strengthen the risk and control environment.

The first line of defense identifies and manages key risk indicators and risks and controls consistent with the Company’s risk appetite.

The executive officers who serve as leaders in the “first line of defense,” are responsible for ensuring that their respective functions operate within established risk limits, in accordance with our risk appetite.

These leaders are also responsible for identifying risks, considering risk when developing strategic plans, budgets and new products, and implementing appropriate risk controls when pursuing business strategies and objectives.

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• The “second line of defense” consists of an independent risk management team charged with oversight and monitoring of risk within the business.

The second line of defense is responsible for, among other things, implementing our ERM Framework and related policies and procedures, challenging the first line of defense and identifying, monitoring and reporting on aggregate risks of the business and support functions.

Our risk management team, including compliance, which is led by our CRO, provides oversight of our risk profile and is responsible for maintaining a compliance program that includes compliance risk assessment, policy development, testing and reporting activities.

The second line of defense is responsible for, among other things, formulating our ERM Framework and related policies and procedures, challenging the first line of defense and identifying, monitoring and reporting on aggregate risks of the business and support functions.

Our risk management team, which is led by our CRO and includes compliance, provides oversight of our risk profile and is responsible for maintaining a compliance program that includes compliance risk assessment, policy development, testing and reporting activities.

The CRO manages our risk management team and is responsible for establishing and implementing standards for the identification, management, measurement, monitoring and reporting of risk on an Enterprise-wide basis.

The CRO has responsibility for developing an appropriate risk appetite with corresponding limits that aligns with supervisory expectations, and presenting our risk appetite statements to the Board of Directors.

The CRO regularly reports to the Risk Committee as well as the Bank Risk and Compliance Committees on risk management matters.

The CRO is responsible for developing an appropriate risk appetite with corresponding limits that aligns with supervisory expectations, and proposing our risk appetite to the Board of Directors.

The CRO regularly reports to the Risk Committee as well as the Banks’ Risk and Compliance Committees on risk management matters.

• The “third line of defense” is comprised of the Global Audit organization.

The third line of defense provides an independent review and objective assessment of the design and operating effectiveness of the first and second lines of defense governance, policies, procedures, processes and internal controls and reports its findings to senior management

and the Board through the Audit Committee.

The third line of defense provides an independent review and objective assessment of the design and operating effectiveness of the first and second lines of defense, governance, policies, procedures, processes and internal controls, and reports its findings to executive management and the Board, through the Audit Committee.

Global Audit is responsible for performing periodic, independent reviews and testing compliance with the Company’s and the Banks’ risk management policies and standards, as well as with regulatory guidance and industry best practices.

Global Audit also assesses the design of the Company's and the Banks’ policies and standards and validates the effectiveness of risk management controls, and reports the results of such reviews to the Audit Committee.

Global Audit also assesses

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the design of the Company'’ and the Banks’ policies and standards and validates the effectiveness of risk management controls, and reports the results of such reviews to the Audit Committee.

Management Committees

The Company operates several internal management committees, including a Bank Risk Management Committee (BRMC) at each of our Banks.

The BRMCs are the highest-level management committees to oversee risks and are responsible for risk governance, risk oversight and making recommendations on the Banks’ and its affiliates’ risk appetite.

The BRMCs monitor compliance with limits and related escalation requirements and oversee implementation of risk policies.

In addition to the BRMCs, we maintain the following management risk committees at each of our Banks to oversee the risks listed below:

The Company operates several internal management committees, including at each of our Banks a Bank Risk Management Committee (BRMC) and, effective January 2023, an IT Governance Committee (ITGC).

The BRMCs and ITGCs are the highest-level management committees at the Banks to oversee risks and are responsible for risk governance, risk oversight and making recommendations on the Banks’ risk appetite.

The BRMCs and ITGC’s monitor compliance with limits and related escalation requirements, and oversee implementation of risk policies.

In addition to the BRMCs, we maintain the following risk management committees at each of our Banks to oversee the risks listed below:

the Credit Risk Management Committee;

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and the Asset & Liability Management Committee.

Each of these committees is responsible for one or more of the Banks’ eight risk categories.

Each of these Committees is responsible for one or more of the Banks’ eight risk categories, which are described in greater detail below under the heading “Risk Categories”.

For its risk category(ies) of responsibility, each Committee provides risk governance, risk oversight and monitoring.

Each Committee reviews key risk exposures, trends and significant compliance matters, and provides guidance on steps to monitor, control and escalate significant risks.

We include the risk information provided by the BRMCs and these management committees, along with additional risk information that is identified at the ADSC parent company level in our determination and assessment of the risks that are presented to and discussed with our Board and the relevant Board Committees.

We include the risk information provided by the BRMCs and the ITGC, and these management risk committees, along with additional risk information that is identified at the Parent Company level in our determination and assessment of the risks that are presented to and discussed with our Board and Board Committees.

Risk Categories

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credit, market, liquidity, operational, compliance, model, strategic and reputational risk.

We evaluate the potential impact of a risk event on us (including our subsidiaries) by assessing the partner and customer, financial, reputational, and legal and regulatory impacts.

We evaluate the potential impact of a risk event on us (including our subsidiaries) by assessing the customer, partner, financial, reputational, and legal and regulatory impacts.

Credit Risk is the risk arising from an obligor’s failure to meet the terms of any contract or otherwise perform as agreed.

Credit Risk is found in all activities in which settlement or repayment depends on counterparty, issuer, or borrower performance.

We are exposed to credit risk relating to the credit card, installment or other loans we make to our partners’ or Bank customers.

Our credit risk relates to the risk that consumers using the private label, co-brand, general purpose or business credit cards or installment or other loans that we issue will not repay their revolving credit card, installment or other loan balances.

To minimize our risk of credit card, installment or other loan charge-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting their credit limits and applying our risk-based pricing.

We are exposed to credit risk relating to the credit card, installment or other loans we make to our customers.

To minimize our risk of credit card, installment or other loan write-offs, we have developed automated proprietary scoring technology and verification procedures to make risk-based origination decisions when approving new accountholders, establishing or adjusting accountholder credit limits and applying our risk-based pricing.

The credit risk on our credit card, installment or other loans is quantified through our Allowance for credit losses which is recorded net with Credit card and other loans on our Consolidated Balance Sheets.

Credit risk is overseen and monitored by the Credit Risk Management Committee.

Market Risk includes interest rate risk which is the risk arising from movements in interest rates.

Interest rate risk results from differences between the timing of rate changes and the timing of cash flows (repricing risk);

from changing rate relationships among different yield curves affecting an organization’s activities (basis risk);

from changing rate relationships across the spectrum of maturities (yield curve risk);

and from interest-related options embedded in certain products (options risk).

Interest rate risk results from:

• differences between the timing of rate changes and the timing of cash flows (repricing risk);

• changing rate relationships among different yield curves affecting an organization’s activities (basis risk);

• hanging rate relationships across the spectrum of maturities (yield curve risk);

• interest-related options embedded in certain products (options risk).

Our principal market risk exposures arise from volatility in interest rates and their impact on economic value, capitalization levels and earnings.

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This approach calculates the impact on Net interest income from an instantaneous and sustained 100 basis point increase or decrease in interest rates.

Due to the mix of fixed and floating rate assets and liabilities on our Consolidated Balance

Sheet as of December 31, 2021, this hypothetical instantaneous 100 basis point increase in interest rates would have an insignificant impact on our annual Net interest income.

Due to the mix of fixed and floating rate assets and liabilities on our Consolidated Balance Sheet as of December 31, 2022, this

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hypothetical instantaneous 100 basis point increase or decrease in interest rates would have an insignificant impact on our annual Net interest income.

Actual changes in our Net interest income will depend on many factors, and therefore may differ from our estimated risk to changes in interest rates.

Market risk is managed by the Asset & Liability Management Committee.

The Asset & Liability Management Committee assists the Banks’ Board of Directors and Bank Management in overseeing, reviewing, and monitoring market risk.

Liquidity Risk

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Policy and risk appetite limits require the Company and the Banks to ensure that sufficient liquid assets are available to survive liquidity stresses over a specified time period.

The Asset & Liability Management Committee reviews liquidity exposures in the context of approved policy and risk appetite limits and reports results quarterly.

The Asset & Liability Management Committee assists the Banks Board of Directors and Bank Management in overseeing, reviewing, and monitoring liquidity risk.

Operational Risk

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inadequate or inappropriate employment practices and workplace safety;

failure to meet professional obligations involving partners, products, and business practices;

failure to meet obligations involving customers, partners, products, and business practices;

damage to physical assets;

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and/or failures in execution, delivery, and process management.

Operational risk is inherent in all business activities and can impact an organization through direct or indirect financial loss, brand damage, customer dissatisfaction, or legal and regulatory penalties.

Operational risk is inherent in all business activities and can impact us through direct or indirect financial loss, brand damage, customer dissatisfaction, and legal and regulatory penalties.

The Company has implemented a comprehensive operational risk framework that is defined in the Operational Risk Management Policy.

The Operational Risk Management Committee, chaired by our Chief Operational Risk Officer, coordinates with all control groups on effective risk assessments and controls.

The Operational Risk Management Committee, chaired by our Chief Operational Risk Officer, oversees and monitors operational risk exposures, including escalating issues and recommending policies, procedures and practices to manage operational risks.

As part of our Operational Risk Program, we maintain an information and cyber security program, which is led by our Chief Information Security Officer and is designed to protect the confidentiality, integrity, and availability of information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction.

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Pursuant to this Program, we seek to manage and mitigate compliance risk by assessing, controlling, monitoring, measuring and reporting the legal and regulatory risks to which we are exposed.

The Compliance Risk Management Committee, chaired by the Chief Compliance Officer, is responsible for identifying, evaluating, managing, and escalating compliance risks.

The Compliance Risk Management Committee, chaired by the Chief Compliance Officer, oversees the implementation and execution of the Compliance Management System and monitors compliance exposures to manage compliance risks.

Model Risk is the risk arising from decisions based on incorrect or misused model outputs and reports.

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(2) a model may be used incorrectly or inappropriately, or there may be a misunderstanding about its limitations and assumptions;

or (3) the model produces results that are not compliant with fair lending or other regulations.

or (3) the model produces results that are not compliant with fair lending or other laws and regulations.

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We manage model risk through a comprehensive model governance framework, including policies and procedures for model development, maintenance and performance monitoring activities, independent model validation and change management capabilities.

We also assess model performance on an ongoing basis.

Model Risk oversight is conducted by the Model Risk Management Committee.

Model Risk oversight and monitoring is conducted by the Model Risk Management Committee.

Strategic Risk

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We seek to manage strategic and business risks through risk controls embedded in these processes, as well as overall risk management oversight over business goals.

Existing product performance is reviewed periodically by committees and business leaders.

Existing product performance is reviewed periodically by various of our Committees and executive management.

Reputational Risk

Reputational Risk is the risk arising from negative public opinion.

This risk may impair an organizations competitiveness by affecting its ability to establish new relationships or services or continue servicing existing relationships.

Reputational Risk is inherent in all activities and requires management to exercise caution in dealing with stakeholders, such as customers, counterparties, correspondents, investors, regulators, employees, and the community.

Our business leaders are responsible for considering the reputational risk implications of business activities and strategies and ensuring the relevant subject matter experts are engaged as needed.

This risk may impair our competitiveness by affecting our ability to establish new relationships or services, or continue servicing existing relationships.

Reputational Risk is inherent in all activities and requires us to exercise caution in dealing with stakeholders, such as customers, counterparties, correspondents, investors, regulators, employees, and the community.

Executive management is responsible for considering the reputational risk implications of business activities and strategies, and ensuring the relevant subject matter experts are engaged as needed.

Unresolved Staff Comments.

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

What changed 10-K

Item 1A. Risk Factors