COMMITMENTS AND CONTINGENCIES

12 Months Ended

Dec. 31, 2019

COMMITMENTS AND CONTINGENCIES.

COMMITMENTS AND CONTINGENCIES

18. COMMITMENTS AND CONTINGENCIES

AIR MILES Reward Program

The Company has entered into contractual arrangements with certain AIR MILES Reward Program sponsors that result in fees being billed to those sponsors upon the redemption of AIR MILES reward miles issued by those sponsors. The Company has obtained letters of credit and other assurances from those sponsors for the Company’s benefit that expire at various dates. These letters of credit and other assurances totaled $141.7 million at December 31, 2019, which exceeds the amount of the Company’s estimate of its obligation to provide travel and other rewards upon the redemption of the AIR MILES reward miles issued by those sponsors.

The Company currently has an obligation to provide AIR MILES Reward Program collectors with travel and other rewards upon the redemption of AIR MILES reward miles. The Company believes that the redemption settlement assets, including the letters of credit and other assurances mentioned above, are sufficient to meet that obligation.

The Company has entered into certain long-term arrangements with airlines and other suppliers in connection with reward redemptions under the AIR MILES Reward Program. These long-term arrangements allow the Company to retain preferred pricing subject to meeting agreed upon annual volume commitments for rewards purchased.

Regulatory Matters

Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (“FDIC”). Comenity Bank remains subject to regulation by the Board of the Governors of the Federal Reserve System. The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC. Both Comenity Bank and Comenity Capital Bank are under the supervision of the Consumer Financial Protection Bureau (“CFPB”), a federal consumer protection regulator with authority to make further changes to the federal consumer protection laws and regulations, and the CFPB may, from time to time, conduct reviews of their practices.

Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank (collectively, the “Banks”) to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets. Based on these guidelines, the Banks are considered well capitalized.

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

					Minimum Ratio to be
			Minimum Ratio for		Well Capitalized under
	Actual		Capital Adequacy		Prompt Corrective
	Ratio		Purposes		Action Provisions
Comenity Bank
Tier 1 capital to average assets	12.9	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	14.6		4.5		6.5
Tier 1 capital to risk-weighted assets	14.6		6.0		8.0
Total capital to risk-weighted assets	15.9		8.0		10.0
Comenity Capital Bank
Tier 1 capital to average assets	11.9	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	14.4		4.5		6.5
Tier 1 capital to risk-weighted assets	14.4		6.0		8.0
Total capital to risk-weighted assets	15.7		8.0		10.0

The actual capital ratios and minimum ratios as of December 31, 2018 are as follows:

					Minimum Ratio to be
			Minimum Ratio for		Well Capitalized under
	Actual		Capital Adequacy		Prompt Corrective
	Ratio		Purposes		Action Provisions
Comenity Bank
Tier 1 capital to average assets	13.1	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	14.6		4.5		6.5
Tier 1 capital to risk-weighted assets	14.6		6.0		8.0
Total capital to risk-weighted assets	15.9		8.0		10.0
Comenity Capital Bank
Tier 1 capital to average assets	12.1	%	4.0	%	5.0	%
Common Equity Tier 1 capital to risk-weighted assets	14.4		4.5		6.5
Tier 1 capital to risk-weighted assets	14.4		6.0		8.0
Total capital to risk-weighted assets	15.7		8.0		10.0

On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the Federal Deposit Insurance Corporation (“FDIC”) seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in connection with the proposed merger. The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the outcome or timing of such review.

Cardholders

The Company’s Card Services segment is active in originating private label and co-brand credit cards in the United States. The Company reviews each potential customer’s credit application and evaluates the applicant’s financial history and ability and perceived willingness to repay. Credit card loans are made primarily on an unsecured basis. Cardholders reside throughout the United States and are not significantly concentrated in any one area.

Holders of credit cards issued by the Company have available lines of credit, which vary by cardholder. These lines of credit represent elements of risk in excess of the amount recognized in the financial statements. The lines of credit are subject to change or cancellation by the Company. At December 31, 2019, the Company had 61.0 million total accounts, including both active and inactive, having unused lines of credit averaging $2,307 per account.

Indemnification

On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (“Publicis”). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a Department of Justice (“DOJ”) investigation. The DOJ investigation relates to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon has actively cooperated with the DOJ in connection with its ongoing investigation. The Company records a loss contingency when a loss is probable and an amount can be reasonably estimated. For the year ended December 31, 2019, the Company recorded a loss contingency of $32.9 million, net of tax, which was included in loss from discontinued operations. As these estimates are initially developed substantially earlier than when the ultimate loss is known, no assurance can be given that the investigation will be resolved on these, or other, terms. Therefore, this loss contingency may be refined each period as additional information becomes available. For the year ended December 31, 2019, the Company incurred $3.2 million in legal fees associated with this matter, which was included in cost of operations in the Company’s consolidated statements of income.

Legal Proceedings

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