BREAD FINANCIAL HOLDINGS, INC. - Quarter Report: 2015 September (Form 10-Q)

Delaware	31-1429215
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

	Large accelerated filer R	Accelerated filer  £
	Non-accelerated filer £ (Do not check if a smaller reporting company)	Smaller reporting company £

			Page Number
Part I:   FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014		3
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2015 and 2014		4
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2014		5
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2014		6
	Notes to Condensed Consolidated Financial Statements		7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		48
Item 4.	Controls and Procedures		48
Part II:   OTHER INFORMATION
Item 1.	Legal Proceedings		49
Item 1A.	Risk Factors		49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		52
Item 3.	Defaults Upon Senior Securities		52
Item 4.	Mine Safety Disclosures		52
Item 5.	Other Information		52
Item 6.	Exhibits		53
SIGNATURES			55

		September 30, 2015				December 31, 2014
		(In thousands, except per share amounts)
ASSETS
Cash and cash equivalents		$	977,341			$	1,077,152
Trade receivables, less allowance for doubtful accounts ($3,643 and $3,811 at September 30, 2015 and December 31, 2014, respectively)			642,681				743,294
Credit card and loan receivables:
Credit card receivables – restricted for securitization investors			8,589,282				8,312,291
Other credit card and loan receivables			3,210,737				2,931,589
Total credit card and loan receivables			11,800,019				11,243,880
Allowance for loan loss			(671,246	)			(570,171	)
Credit card and loan receivables, net			11,128,773				10,673,709
Credit card and loan receivables held for sale			98,709				125,060
Deferred tax asset, net			237,723				218,872
Other current assets			544,069				456,349
Redemption settlement assets, restricted			468,417				520,340
Total current assets			14,097,713				13,814,776
Property and equipment, net			561,300				559,628
Deferred tax asset, net			841				164
Cash collateral, restricted			4,888				22,511
Intangible assets, net			1,268,627				1,515,994
Goodwill			3,835,419				3,865,484
Other non-current assets			531,886				485,420
Total assets		$	20,300,674			$	20,263,977
LIABILITIES AND EQUITY
Accounts payable		$	382,220			$	455,656
Accrued expenses			395,467				457,472
Contingent consideration			—				326,023
Deposits			2,589,313				2,645,995
Non-recourse borrowings of consolidated securitization entities			1,230,000				1,058,750
Current debt			389,146				208,164
Other current liabilities			280,720				306,123
Deferred revenue			703,774				846,370
Deferred tax liability, net			1,719				930
Total current liabilities			5,972,359				6,305,483
Deferred revenue			148,443				166,807
Deferred tax liability, net			642,069				690,175
Deposits			2,633,109				2,127,546
Non-recourse borrowings of consolidated securitization entities			3,743,166				4,133,166
Long-term and other debt			4,710,032				4,001,082
Other liabilities			266,764				207,772
Total liabilities			18,115,942				17,632,031
Commitments and contingencies (Note 12)
Redeemable non-controlling interest			236,847				235,566
Stockholders' equity:
Common stock, $0.01 par value; authorized, 200,000 shares; issued, 112,072 shares and 111,686 shares at September 30, 2015 and December 31, 2014, respectively			1,121				1,117
Additional paid-in capital			2,956,814				2,905,563
Treasury stock, at cost, 50,949 shares and 47,874 shares at September 30, 2015 and December 31, 2014, respectively			(3,840,253	)			(2,975,795	)
Retained earnings			2,948,081				2,540,948
Accumulated other comprehensive loss			(117,878	)			(75,453	)
Total stockholders' equity			1,947,885				2,396,380
Total liabilities and equity		$	20,300,674			$	20,263,977

		Three Months Ended September 30,							Nine Months Ended September 30,
		2015				2014			2015				2014
	(In thousands, except per share amounts)
Revenues
Transaction		$	83,126			$	87,162		$	263,195			$	251,390
Redemption			220,922				232,464			747,192				744,658
Finance charges, net			737,918				597,892			2,101,360				1,672,339
Marketing services			498,955				353,525			1,435,520				1,021,813
Other revenue			48,196				48,090			143,625				126,991
Total revenue			1,589,117				1,319,133			4,690,892				3,817,191
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)			901,095				767,415			2,787,501				2,323,210
Provision for loan loss			171,678				114,577			461,944				281,811
General and administrative			40,890				39,169			111,992				101,498
Regulatory settlement			64,563				—			64,563				—
Depreciation and other amortization			36,450				28,070			104,983				79,555
Amortization of purchased intangibles			86,930				48,261			262,131				145,144
Total operating expenses			1,301,606				997,492			3,793,114				2,931,218
Operating income			287,511				321,641			897,778				885,973
Interest expense
Securitization funding costs			23,143				22,763			71,509				67,974
Interest expense on deposits			13,719				9,064			37,099				25,526
Interest expense on long-term and other debt, net			45,236				29,637			132,212				98,643
Total interest expense, net			82,098				61,464			240,820				192,143
Income before income tax		$	205,413			$	260,177		$	656,958			$	693,830
Provision for income taxes			75,031				95,229			231,705				253,946
Net income		$	130,382			$	164,948		$	425,253			$	439,884
Less: net income attributable to non-controlling interest			1,952				706			2,927				803
Net income attributable to common stockholders		$	128,430			$	164,242		$	422,326			$	439,081
Net income attributable to common stockholders per share:
Basic		$	2.09			$	2.84		$	6.55			$	7.98
Diluted		$	2.08			$	2.74		$	6.51			$	6.98
Weighted average shares:
Basic			61,430				57,742			62,149				54,998
Diluted			61,796				59,908			62,567				62,887

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(In thousands)
Net income		$	130,382			$	164,948			$	425,253			$	439,884
Other comprehensive income (loss), net of tax:
Net unrealized gain (loss) on securities available-for-sale, net of tax expense (benefit) of $700, $(228), $572 and $688 for the three and nine months ended September 30, 2015 and 2014, respectively			420				(1,991	)			(1,034	)			(1,435	)
Net unrealized gain (loss) on cash flow hedges, net of tax expense (benefit) of $406, $(34), $(510) and $(34) for the three and nine months ended September 30, 2015 and 2014, respectively			1,415				(104	)			(1,466	)			(104	)
Foreign currency translation adjustments			4,633				(37,956	)			(39,925	)			(34,480	)
Other comprehensive income (loss)			6,468				(40,051	)			(42,425	)			(36,019	)
Total comprehensive income, net of tax		$	136,850			$	124,897			$	382,828			$	403,865
Less: comprehensive income attributable to non-controlling interest			2,363				1,251				3,360				1,514
Comprehensive income attributable to common stockholders		$	134,487			$	123,646			$	379,468			$	402,351

		Nine Months Ended September 30,
		2015				2014
		(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	425,253			$	439,884
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			367,114				224,699
Deferred income tax (benefit) expense			(62,807	)			5,320
Provision for loan loss			461,944				281,811
Non-cash stock compensation			73,343				49,754
Amortization of discount on debt			646				12,499
Amortization of deferred financing costs			23,489				17,092
Change in deferred revenue			(34,168	)			(41,537	)
Change in contingent consideration			(99,601	)			—
Change in other operating assets and liabilities, net of acquisitions			(82,996	)			21,786
Originations of credit card and loan receivables held for sale			(4,569,806	)			(3,645,315	)
Sales of credit card and loan receivables held for sale			4,556,339				3,636,809
Excess tax benefits from stock-based compensation			(22,952	)			(31,888	)
Other			(4,566	)			(2,935	)
Net cash provided by operating activities			1,031,232				967,979
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in redemption settlement assets			(16,374	)			(48,906	)
Change in cash collateral, restricted			18,000				(1,582	)
Change in restricted cash			(369	)			(316,071	)
Change in credit card and loan receivables			(913,803	)			(633,336	)
Purchase of credit card portfolios			—				(379,616	)
Proceeds from the sale of a credit card portfolio			26,900				—
Payment for acquired businesses, net of cash			(45,430	)			(259,514	)
Capital expenditures			(140,091	)			(114,595	)
Purchases of other investments			(38,772	)			(109,780	)
Maturities/sales of other investments			7,981				4,565
Other			(1,011	)			(4,000	)
Net cash used in investing activities			(1,102,969	)			(1,862,835	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under debt agreements			2,426,443				1,920,190
Repayments of borrowings			(1,528,890	)			(1,580,796	)
Proceeds from convertible note hedge counterparties			—				1,519,833
Settlement of convertible note borrowings			—				(1,864,803	)
Payment of acquisition-related contingent consideration			(205,928	)			—
Acquisition of non-controlling interest			(87,376	)			—
Issuances of deposits			2,191,885				2,342,836
Repayments of deposits			(1,743,004	)			(1,431,392	)
Non-recourse borrowings of consolidated securitization entities			2,570,000				1,495,000
Repayments/maturities of non-recourse borrowings of consolidated securitization entities			(2,788,750	)			(1,635,000	)
Payment of deferred financing costs			(16,396	)			(24,470	)
Excess tax benefits from stock-based compensation			22,952				31,888
Proceeds from issuance of common stock			8,775				10,439
Purchase of treasury shares			(856,855	)			(217,486	)
Other			—				(1,476	)
Net cash (used in) provided by financing activities			(7,144	)			564,763
Effect of exchange rate changes on cash and cash equivalents			(20,930	)			(4,905	)
Change in cash and cash equivalents			(99,811	)			(334,998	)
Cash and cash equivalents at beginning of period			1,077,152				969,822
Cash and cash equivalents at end of period		$	977,341			$	634,824
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid		$	223,681			$	153,839
Income taxes paid, net		$	225,913			$	147,927

			Three Months Ended September 30,						Nine Months Ended September 30,
			2015			2014			2015			2014
						(In thousands, except per share amounts)
Numerator:
Net income attributable to common stockholders			$	128,430		$	164,242		$	422,326		$	439,081
Less: accretion of redeemable non-controlling interest				—			—			15,194			—
Net income attributable to common stockholders after accretion of redeemable non-controlling interest			$	128,430		$	164,242		$	407,132		$	439,081
Denominator:
Weighted average shares, basic				61,430			57,742			62,149			54,998
Weighted average effect of dilutive securities:
Shares from assumed conversion of convertible senior notes				—			—			—			2,816
Shares from assumed exercise of convertible note warrants				—			1,664			—			4,561
Net effect of dilutive stock options and unvested restricted stock				366			502			418			512
Denominator for diluted calculations				61,796			59,908			62,567			62,887
Net income attributable to common stockholders per share:
Basic			$	2.09		$	2.84		$	6.55		$	7.98
Diluted			$	2.08		$	2.74		$	6.51		$	6.98

			As of January 2, 2014
			(In thousands)
Current assets, net of cash acquired			$	246,769
Deferred tax asset				3,509
Property and equipment				19,719
Other non-current assets				3,994
Intangible assets				423,832
Goodwill				565,015
Total assets acquired				1,262,838
Current liabilities				146,559
Current portion of long-term debt				34,180
Deferred tax liability				105,512
Long-term debt (net of current portion)				126,323
Other liabilities				142
Total liabilities assumed				412,716
Redeemable non-controlling interest				341,907
Net assets acquired			$	508,215

As part of the initial purchase price allocation, the Company recorded a liability for the earn-out provision included in the BrandLoyalty share purchase agreement of €181.9 million ($248.7 million as of January 2, 2014). The liability was measured at fair value on the date of purchase and subsequent changes in the fair value of the liability were included in operating expenses in the Company's consolidated statements of income. On February 10, 2015, the Company paid €269.9 million ($305.5 million) to settle the contingent liability.

Conversant, Inc.

On December 10, 2014, the Company completed the acquisition of 100% of the common stock of Conversant, Inc. ("Conversant"), a digital marketing services company offering unique end-to-end digital marketing solutions that empower clients to more effectively market to their customers across all channels. The results of Conversant^® have been included since the date of the acquisition and are reflected in the Company's Epsilon^® segment.

The Company paid total consideration of approximately $2.3 billion, with cash consideration of approximately $936.3 million, net of cash acquired and equity consideration of approximately $1.3 billion through the issuance of approximately 4.6 million shares and the exchange of certain restricted stock awards and stock options. The cash and equity consideration paid and issued were determined in accordance with the terms of the merger agreement, with the value based on the volume weighted average price per share of the Company's common stock for the consecutive period of 15 trading days ending on the close of trading on the second trading day immediately preceding the closing of the merger. The goodwill recognized is attributable to expected synergies and an assembled workforce. The goodwill resulting from the acquisition is not deductible for tax purposes.

In the first quarter of 2015, the Company finalized the purchase price allocation, with no changes from the preliminary purchase price allocation disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2014. The following table summarizes the allocation of the consideration and the respective fair values of the assets acquired and liabilities assumed in the Conversant acquisition as of the date of purchase:

			As of December 10, 2014
			(In thousands)
Current assets, net of cash acquired			$	180,030
Deferred tax asset				11,905
Property and equipment				25,555
Developed technology				182,500
Other non-current assets				1,744
Intangible assets				755,600
Goodwill				1,650,299
Total assets acquired				2,807,633
Current liabilities				177,585
Deferred tax liability				344,081
Other liabilities				26,933
Total liabilities assumed				548,599
Net assets acquired			$	2,259,034

The following table presents the Company's unaudited pro forma consolidated revenue and net income for the three and nine months ended September 30, 2014. The unaudited pro forma results include the historical consolidated statements of income of the Company and Conversant, giving effect to the Conversant acquisition and related financing transactions as if they had occurred on January 1, 2013.

		Three Months Ended September 30, 2014				Nine Months Ended September 30, 2014
		(In thousands, except per share amounts)
Total revenue		$	1,457,446			$	4,238,797
Net income		$	151,921			$	411,476
Net income attributable to common stockholders		$	151,215			$	410,673
Net income attributable to common stockholders per share:
Basic		$	2.43			$	6.89
Diluted		$	2.34			$	6.08

The unaudited pro forma results are not necessarily indicative of the operating results that would have occurred if the Conversant acquisition had been completed as of the date for which the unaudited pro forma financial information is presented. The unaudited pro forma financial information for the three and nine months ended September 30, 2014 includes adjustments that are directly related to the acquisition, factually supportable and expected to have a continuing impact. These adjustments include, but are not limited to, amortization related to fair value adjustments to intangible assets and interest expense on acquisition-related debt. The unaudited pro forma financial information for the three months and nine months ended September 30, 2014 exclude $6.6 million of acquisition costs consisting primarily of advisory, legal and other professional fees.

2015 Acquisition:

Edison International Concept & Agencies B.V. and Max Holding B.V.

On August 31, 2015, BrandLoyalty acquired all of the stock of Edison International Concept & Agencies B.V. ("Edison") and Max Holding B.V. ("Merison"), two Netherlands-based loyalty marketers, for consideration of approximately $45.4 million, net of $2.2 million of cash and cash equivalents acquired. The acquisition expands BrandLoyalty's short-term loyalty programs into new markets with new brands. Total net assets acquired were $61.4 million, including $6.7 million of intangible assets and $34.7 million of goodwill, with total liabilities assumed of $16.0 million. The goodwill resulting from the acquisition is not deductible for tax purposes. The results of Edison and Merison have been included since the date of acquisition and are reflected in the Company's LoyaltyOne segment.

4. CREDIT CARD AND LOAN RECEIVABLES

The Company's credit card and loan receivables are the only portfolio segment or class of financing receivables. Quantitative information about the components of credit card and loan receivables is presented in the table below:

		September 30, 2015				December 31, 2014
		(In thousands)
Principal receivables		$	11,297,882			$	10,762,498
Billed and accrued finance charges			480,315				422,838
Other credit card and loan receivables			21,822				58,544
Total credit card and loan receivables			11,800,019				11,243,880
Less credit card receivables – restricted for securitization investors			8,589,282				8,312,291
Other credit card and loan receivables		$	3,210,737			$	2,931,589

Allowance for Loan Loss

The Company maintains an allowance for loan loss at a level that is appropriate to absorb probable losses inherent in credit card and loan receivables. The allowance for loan loss covers forecasted uncollectible principal as well as unpaid interest and fees. The allowance for loan loss is evaluated monthly for appropriateness.

In estimating the allowance for principal loan losses, management utilizes a migration analysis of delinquent and current credit card and loan receivables. Migration analysis is a technique used to estimate the likelihood that a credit card or loan receivable will progress through the various stages of delinquency and to charge-off. The allowance is maintained through an adjustment to the provision for loan loss. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. In estimating the allowance for uncollectible unpaid interest and fees, the Company utilizes historical charge-off trends, analyzing actual charge-offs for the prior three months. The allowance is maintained through an adjustment to finance charges, net. In evaluating the allowance for loan loss for both principal and unpaid interest and fees, management also considers factors that may impact loan loss experience, including seasoning, loan volume and amounts, seasonality, payment rates and forecasting uncertainties.

Net charge-offs include the principal amount of losses from credit cardholders unwilling or unable to pay their account balances, as well as bankrupt and deceased credit cardholders, less recoveries and exclude charged-off interest, fees and fraud losses. Charged‑off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card and loan receivables, including unpaid interest and fees, are charged-off at the end of the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Credit card and loan receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off at the end of each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.

The Company records the actual charge-offs for unpaid interest and fees as a reduction to finance charges, net. Actual charge-offs for unpaid interest and fees were $88.9 million and $70.9 million for the three months ended September 30, 2015 and 2014, respectively, and $258.2 million and $212.9 million for the nine months ended September 30, 2015 and 2014, respectively.

The following table presents the Company's allowance for loan loss for the periods indicated:

		Three Months Ended September 30,								Nine Months Ended September 30,
		2015				2014				2015				2014
		(In thousands)
Balance at beginning of period		$	623,316			$	483,580			$	570,171			$	503,169
Provision for loan loss			171,678				114,577				461,944				281,811
Change in estimate for uncollectible unpaid interest and fees			—				1,000				4,500				1,500
Recoveries			48,767				39,074				129,623				115,548
Principal charge-offs			(172,515	)			(126,877	)			(494,992	)			(390,674	)
Balance at end of period		$	671,246			$	511,354			$	671,246			$	511,354

Delinquencies

A credit card account is contractually delinquent if the Company does not receive the minimum payment by the specified due date on the cardholder's statement. It is the Company's policy to continue to accrue interest and fee income on all credit card accounts beyond 90 days, except in limited circumstances, until the credit card account balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent. When an account becomes delinquent, a message is printed on the credit cardholder's billing statement requesting payment. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.

The following table presents the delinquency trends of the Company's credit card and loan receivables portfolio:

		September 30, 2015				% of Total				December 31, 2014				% of Total
						(In thousands, except percentages)
Receivables outstanding – principal		$	11,297,882				100.0	%		$	10,762,498				100.0	%
Principal receivables balances contractually delinquent:
31 to 60 days			175,018				1.5	%			157,760				1.4	%
61 to 90 days			113,360				1.0				93,175				0.9
91 or more days			225,553				2.0				182,945				1.7
Total		$	513,931				4.5	%		$	433,880				4.0	%

Modified Credit Card Receivables

The Company holds certain credit card receivables for which the terms have been modified. The Company's modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs' concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. These concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms.

Credit card receivables for which temporary hardship or permanent concessions have been granted are both considered troubled debt restructurings and are collectively evaluated for impairment. Modified credit card receivables are evaluated at their present value with impairment measured as the difference between the credit card receivables balance and the discounted present value of cash flows expected to be collected. Consistent with the Company's measurement of impairment of modified credit card receivables on a pooled basis, the discount rate used for credit card receivables is the average current annual percentage rate the Company applies to non-impaired credit card receivables, which approximates what would have been applied to the pool of modified credit card receivables prior to impairment. In assessing the appropriate allowance for loan loss, these modified credit card receivables are included in the general pool of credit card receivables with the allowance determined under the contingent loss model of ASC 450-20, "Loss Contingencies." If the Company applied accounting under ASC 310-40, "Troubled Debt Restructurings by Creditors," to the modified credit card receivables in these programs, there would not be a material difference in the allowance for loan loss.

The Company had $155.5 million and $134.9 million, respectively, as a recorded investment in impaired credit card receivables with an associated allowance for loan loss of $39.1 million and $35.2 million, respectively, as of September 30, 2015 and December 31, 2014. These modified credit card receivables represented less than 2% of the Company's total credit card receivables as of both September 30, 2015 and December 31, 2014.

The average recorded investment in impaired credit card receivables was $149.2 million and $114.0 million for the three months ended September 30, 2015 and 2014, respectively, and $141.5 million and $114.2 million for the nine months ended September 30, 2015 and 2014, respectively.

Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized $3.8 million and $3.3 million for the three months ended September 30, 2015 and 2014, respectively, and $10.7 million and $9.6 million for the nine months ended September 30, 2015 and 2014, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

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

	Three Months Ended September 30, 2015									Nine Months Ended September 30, 2015
	Number of Restructurings			Pre-modification Outstanding Balance			Post-modification Outstanding Balance			Number of Restructurings			Pre-modification Outstanding Balance			Post-modification Outstanding Balance
	(Dollars in thousands)
Troubled debt restructurings – credit card receivables		44,955		$	48,088		$	48,048			120,074		$	129,775		$	129,661
	Three Months Ended September 30, 2014									Nine Months Ended September 30, 2014
	Number of Restructurings			Pre-modification Outstanding Balance			Post-modification Outstanding Balance			Number of Restructurings			Pre-modification Outstanding Balance			Post-modification Outstanding Balance
	(Dollars in thousands)
Troubled debt restructurings – credit card receivables		36,846		$	37,130		$	37,100			102,000		$	101,837		$	101,750

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

	Three Months Ended September 30, 2015						Nine Months Ended September 30, 2015
	Number of Restructurings			Outstanding Balance			Number of Restructurings			Outstanding Balance
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted – credit card receivables		20,212		$	21,436			55,940		$	57,995

	Three Months Ended September 30, 2014						Nine Months Ended September 30, 2014
	Number of Restructurings			Outstanding Balance			Number of Restructurings			Outstanding Balance
	(Dollars in thousands)
Troubled debt restructurings that subsequently defaulted – credit card receivables		14,047		$	14,037			44,545		$	44,009

Age of Credit Card and Loan Receivables Accounts

The following tables set forth, as of September 30, 2015 and 2014, the number of active credit card and loan receivables accounts with balances and the related principal balances outstanding, based upon the age of the active credit card and loan receivables accounts from origination:

		September 30, 2015
Age of Accounts Since Origination		Number of Active Accounts with Balances				Percentage of Active Accounts with Balances				Principal Receivables Outstanding				Percentage of Principal Receivables Outstanding
		(In thousands, except percentages)
0-12 Months			5,881				29.8	%		$	2,994,083				26.5	%
13-24 Months			3,014				15.3				1,783,846				15.8
25-36 Months			2,085				10.6				1,266,628				11.2
37-48 Months			1,509				7.6				917,319				8.1
49-60 Months			1,107				5.6				676,015				6.0
Over 60 Months			6,148				31.1				3,659,991				32.4
Total			19,744				100.0	%		$	11,297,882				100.0	%

		September 30, 2014
Age of Accounts Since Origination		Number of Active Accounts with Balances				Percentage of Active Accounts with Balances				Principal Receivables Outstanding				Percentage of Principal Receivables Outstanding
		(In thousands, except percentages)
0-12 Months			4,869				28.2	%		$	2,220,148				25.1	%
13-24 Months			2,554				14.8				1,282,695				14.5
25-36 Months			1,781				10.3				937,043				10.6
37-48 Months			1,283				7.4				701,808				7.9
49-60 Months			969				5.6				557,911				6.3
Over 60 Months			5,828				33.7				3,149,984				35.6
Total			17,284				100.0	%		$	8,849,589				100.0	%

Credit Quality

The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company's obligor credit quality. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. The proprietary scoring models are based on historical data and require various assumptions about future performance. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 90 or more days past due at any time within the next 12 months. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects composition of the Company's credit card and loan receivables by obligor credit quality as of September 30, 2015 and 2014:

			September 30, 2015								September 30, 2014
Probability of an Account Becoming 90 or More Days Past Due or Becoming Charged-off (within the next 12 months)			Total Principal Receivables Outstanding				Percentage of Principal Receivables Outstanding				Total Principal Receivables Outstanding				Percentage of Principal Receivables Outstanding
							(In thousands, except percentages)
No Score			$	176,379				1.6	%		$	180,003				2.0	%
27.1% and higher				607,856				5.4				430,333				4.9
17.1% - 27.0%				944,270				8.3				829,208				9.4
12.6% - 17.0%				1,140,013				10.1				955,459				10.8
3.7% - 12.5%				4,413,422				39.1				3,613,024				40.8
1.9% - 3.6%				2,405,329				21.3				1,837,713				20.8
Lower than 1.9%				1,610,613				14.2				1,003,849				11.3
Total			$	11,297,882				100.0	%		$	8,849,589				100.0	%

Transfer of Financial Assets

The Company originates loans under an agreement with one of its clients, and after origination, these loan receivables are sold to the client at par value plus accrued interest. These transfers qualify for sale treatment as they meet the conditions established in ASC 860-10, "Transfers and Servicing." Following the sale, the client owns the loan receivables, bears the risk of loss in the event of loan defaults and is responsible for all servicing functions related to the loan receivables. The loan receivables originated by the Company that have not yet been sold to the client were $62.2 million and $48.9 million at September 30, 2015 and December 31, 2014, respectively, and are included in credit card and loan receivables held for sale in the Company's unaudited condensed consolidated balance sheets and carried at the lower of cost or fair value. The carrying value of these loan receivables approximates fair value due to the short duration between the date of origination and sale. Originations and sales of these loan receivables held for sale are reflected as operating activities in the Company's unaudited condensed consolidated statements of cash flows.

Upon the client's purchase of the originated loan receivables, the Company is obligated to purchase a participating interest in a pool of loan receivables that includes the loan receivables originated by the Company. Such interest participates on a pro rata basis in the cash flows of the underlying pool of loan receivables, including principal repayments, finance charges, losses and recoveries. The Company bears the risk of loss related to its participation interest in this pool.

During the nine months ended September 30, 2015 and 2014, the Company purchased $227.7 million and $181.8 million, respectively, of loan receivables under these agreements.

The total outstanding balance of these loan receivables was $193.6 million and $160.6 million as of September 30, 2015 and December 31, 2014, respectively, and was included in other credit card and loan receivables in the Company's unaudited condensed consolidated balance sheets.

Portfolios Held for Sale

The Company has certain credit card portfolios held for sale, which are carried at the lower of cost or fair value,  and were $36.5 million and $76.2 million as of September 30, 2015 and December 31, 2014, respectively. In June 2015, the Company sold one credit card portfolio previously classified as held for sale for cash proceeds of $26.9 million and recognized a de minimis gain.

Securitized Credit Card Receivables

The Company regularly securitizes its credit card receivables through its credit card securitization trusts, consisting of the World Financial Network Credit Card Master Trust, World Financial Network Credit Card Master Note Trust ("Master Trust I") and World Financial Network Credit Card Master Trust III ("Master Trust III") (collectively, the "WFN Trusts"), and World Financial Capital Credit Card Master Note Trust (the "WFC Trust"). The Company continues to own and service the accounts that generate credit card receivables held by the WFN Trusts and the WFC Trust. In its capacity as a servicer, each of the respective banks earns a fee from the WFN Trusts and the WFC Trust to service and administer the credit card receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore are not reflected in the Company's unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2015 and 2014.

The WFN Trusts and the WFC Trust are VIEs and the assets of these consolidated VIEs include certain credit card receivables that are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include non-recourse secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.

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

	September 30, 2015				December 31, 2014
	(In thousands)
Total credit card receivables – restricted for securitization investors	$	8,589,282			$	8,312,291
Principal amount of credit card receivables – restricted for securitization investors, 90 days or more past due	$	172,524			$	145,768

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
	(In thousands)
Net charge-offs of securitized principal	$	94,130		$	75,092		$	290,585		$	240,754

5. INVENTORIES

Inventories of $230.4 million and $220.5 million at September 30, 2015 and December 31, 2014, respectively, consist of finished goods primarily to be utilized as rewards in the Company's loyalty programs and are included in other current assets in the Company's unaudited condensed consolidated balance sheets.

Inventories are stated at the lower of cost or market and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management's judgment regarding future market conditions and an analysis of historical experience.

6. OTHER INVESTMENTS

Other investments consist of restricted cash, marketable securities and U.S. Treasury bonds and are included in other current assets and other assets in the Company's unaudited condensed consolidated balance sheets. The principal components of other investments, which are carried at fair value, are as follows:

	September 30, 2015																December 31, 2014
	Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value				Amortized Cost				Unrealized Gains				Unrealized Losses				Fair Value
	(In thousands)
Restricted cash	$	23,414			$	—			$	—			$	23,414			$	22,611			$	—			$	—			$	22,611
Marketable securities		125,672				851				(1,007	)			125,516				95,669				520				(1,322	)			94,867
U.S. Treasury bonds		100,051				893				—				100,944				100,072				66				(33	)			100,105
Total	$	249,137			$	1,744			$	(1,007	)		$	249,874			$	218,352			$	586			$	(1,355	)		$	217,583

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2015 and December 31, 2014, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

	September 30, 2015
	Less than 12 months						12 Months or Greater						Total
	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
	(In thousands)
Marketable securities	$	18,913		$	(153	)	$	35,783		$	(854	)	$	54,696		$	(1,007	)
Total	$	18,913		$	(153	)	$	35,783		$	(854	)	$	54,696		$	(1,007	)

	December 31, 2014
	Less than 12 months						12 Months or Greater						Total
	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
	(In thousands)
Marketable securities	$	8,757		$	(27	)	$	48,961		$	(1,295	)	$	57,718		$	(1,322	)
U.S. Treasury bonds		75,043			(33	)		—			—			75,043			(33	)
Total	$	83,800		$	(60	)	$	48,961		$	(1,295	)	$	132,761		$	(1,355	)

The amortized cost and estimated fair value of the marketable securities and U.S. Treasury bonds at September 30, 2015 by contractual maturity are as follows:

		Amortized Cost				Fair Value
		(In thousands)
Due in one year or less		$	31,638			$	31,672
Due after one year through five years			75,042				75,901
Due after five years through ten years			15,331				15,606
Due after ten years			103,712				103,281
Total		$	225,723			$	226,460

Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security's issuer, and the Company's intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of September 30, 2015, the Company does not consider the investments to be other-than-temporarily impaired.

There were no realized gains or losses from the sale of investment securities for the three and nine months ended September 30, 2015 and 2014.

7. REDEMPTION SETTLEMENT ASSETS

Redemption settlement assets consist of cash and cash equivalents and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES^® Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:

	September 30, 2015																December 31, 2014
	Cost				Unrealized Gains				Unrealized Losses				Fair Value				Cost				Unrealized Gains				Unrealized Losses				Fair Value
	(In thousands)
Cash and cash equivalents	$	272,649			$	—			$	—			$	272,649			$	237,127			$	—			$	—			$	237,127
Mutual funds		26,291				—				(246	)			26,045				—				—				—				—
Corporate bonds		168,285				1,439				(1	)			169,723				280,053				3,160				—				283,213
Total	$	467,225			$	1,439			$	(247	)		$	468,417			$	517,180			$	3,160			$	—			$	520,340

The following table shows the unrealized losses and fair value for those investments that were in an unrealized loss position as of September 30, 2015, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

	September 30, 2015
	Less than 12 months						12 Months or Greater						Total
	Fair Value			Unrealized Losses			Fair Value			Unrealized Losses			Fair Value			Unrealized Losses
	(In thousands)
Mutual funds	$	26,045		$	(246	)	$	—		$	—		$	26,045		$	(246	)
Corporate bonds		7,675			(1	)		—			—			7,675			(1	)
Total	$	33,720		$	(247	)	$	—		$	—		$	33,720		$	(247	)

There were no investments that were in an unrealized loss position at December 31, 2014.

The amortized cost and estimated fair value of the securities at September 30, 2015 by contractual maturity are as follows:

	Amortized Cost				Fair Value
	(In thousands)
Due in one year or less	$	128,927			$	129,252
Due after one year through five years		65,649				66,516
Total	$	194,576			$	195,768

Market values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the security's issuer, and the Company's intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity. As of September 30, 2015, the Company does not consider the investments to be other-than-temporarily impaired.

There were no realized gains or losses from the sale of investment securities for the three and nine months ended September 30, 2015 and 2014.

8. INTANGIBLE ASSETS AND GOODWILL

Intangible Assets

Intangible assets consist of the following:

		September 30, 2015
		Gross Assets				Accumulated Amortization				Net			Amortization Life and Method
		(In thousands)
Finite Lived Assets
Customer contracts and lists		$	1,204,572			$	(319,976	)		$	884,596		3-12 years—straight line
Premium on purchased credit card portfolios			249,743				(110,995	)			138,748		3-10 years—straight line, accelerated
Customer database			210,300				(153,887	)			56,413		3-10 years—straight line
Collector database			52,572				(49,507	)			3,065		30 years—15% declining balance
Publisher networks			140,200				(22,344	)			117,856		5-7 years—straight line
Tradenames			85,077				(40,586	)			44,491		2-15 years—straight line
Purchased data lists			11,944				(6,238	)			5,706		1-5 years—straight line, accelerated
Favorable lease			6,891				(1,597	)			5,294		3-10 years—straight line
Noncompete agreements			1,300				(1,192	)			108		3 years—straight line
		$	1,962,599			$	(706,322	)		$	1,256,277
Indefinite Lived Assets
Tradenames			12,350				—				12,350		Indefinite life
Total intangible assets		$	1,974,949			$	(706,322	)		$	1,268,627

		December 31, 2014
		Gross Assets				Accumulated Amortization				Net			Amortization Life and Method
		(In thousands)
Finite Lived Assets
Customer contracts and lists		$	1,328,056			$	(295,263	)		$	1,032,793		4-12 years—straight line
Premium on purchased credit card portfolios			289,173				(114,923	)			174,250		3-10 years—straight line, accelerated
Customer database			210,300				(126,157	)			84,143		3-10 years—straight line
Collector database			60,238				(56,239	)			3,999		30 years—15% declining balance
Publisher networks			140,200				(1,662	)			138,538		5-7 years—straight line
Tradenames			86,934				(29,408	)			57,526		2-15 years—straight line
Purchased data lists			12,335				(6,497	)			5,838		1-5 years—straight line, accelerated
Favorable lease			6,891				(767	)			6,124		3-10 years—straight line
Noncompete agreements			1,300				(867	)			433		3 years—straight line
		$	2,135,427			$	(631,783	)		$	1,503,644
Indefinite Lived Assets
Tradenames			12,350				—				12,350		Indefinite life
Total intangible assets		$	2,147,777			$	(631,783	)		$	1,515,994

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

		For the Years Ending December 31,
		(In thousands)
2015 (excluding the nine months ended September 30, 2015)		$	81,064
2016			306,826
2017			267,469
2018			208,967
2019			171,248
2020 & thereafter			220,703

Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2015 are as follows:

		LoyaltyOne				Epsilon				Card Services				Corporate/Other				Total
		(In thousands)
December 31, 2014		$	713,457			$	2,890,295			$	261,732			$	—			$	3,865,484
Goodwill acquired during the year			34,712				—				—				—				34,712
Effects of foreign currency translation			(63,923	)			(854	)			—				—				(64,777	)
September 30, 2015		$	684,246			$	2,889,441			$	261,732			$	—			$	3,835,419

9. DEBT

Debt consists of the following:

Description		September 30, 2015			December 31, 2014			Maturity		Interest Rate
		(Dollars in thousands)
Long-term and other debt:
2013 revolving line of credit		$	749,000		$	—		July 2018 and December 2019			(1)
2013 term loans			2,736,875			2,603,125		Various (2)			(1)
BrandLoyalty revolving line of credit			115,325			108,789		August 2018			(3)
Senior notes due 2017			397,978			397,332		December 2017			5.250%
Senior notes due 2020			500,000			500,000		April 2020			6.375%
Senior notes due 2022			600,000			600,000		August 2022			5.375%
Total long-term and other debt			5,099,178			4,209,246
Less: current portion			389,146			208,164
Long-term portion		$	4,710,032		$	4,001,082
Deposits:
Certificates of deposit		$	4,017,140		$	3,934,906		Various – October 2015 – November 2021			0.25% to 2.80%
Money market deposits			1,205,282			838,635		On demand			(4)
Total deposits			5,222,422			4,773,541
Less: current portion			2,589,313			2,645,995
Long-term portion		$	2,633,109		$	2,127,546
Non-recourse borrowings of consolidated securitization entities:
Fixed rate asset-backed term note securities		$	3,158,166		$	3,376,916		Various – May 2016 – August 2020			0.91% to 4.55%
Floating rate asset-backed term note securities			810,000			450,000		February 2016 and April 2018			(5)
Conduit asset-backed securities			1,005,000			1,365,000		Various – May 2016 – May 2017			(6)
Total non-recourse borrowings of consolidated securitization entities			4,973,166			5,191,916
Less: current portion			1,230,000			1,058,750
Long-term portion		$	3,743,166		$	4,133,166