COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2022

9. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (FDIC). The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC.

The Consumer Financial Protection Bureau (CFPB) promulgates regulations for the federal consumer financial protection laws. Banks in a multi-bank organization, such Comenity Bank and Comenity Capital Bank, are subject to supervision and examination by the CFPB with respect to the federal consumer financial protection laws if at least one bank reports total assets over $10 billion for four consecutive quarters. While neither of the Banks was subject to regular examinations by the CFPB during the quarter ended September 30, 3022, Comenity Capital Bank’s total assets have now exceeded $10 billion for four consecutive quarters, ending with this most recent quarter. Accordingly, effective October 1, 2022, both Banks became subject to supervision and examination by the CFPB with respect to federal consumer protection laws.

Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Tier 1 capital to average assets, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as those of the Company. Based on these regulations, as of September 30, 2022, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized.

The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of September 30, 2022, are as follows:


					Minimum Ratio to be
			Minimum Ratio for		Well Capitalized under
	Actual		Capital Adequacy		Prompt Corrective
	Ratio		Purposes		Action Provisions
Comenity Bank
Common Equity Tier 1 capital ratio ⁽¹⁾	25.6	%	4.5	%	6.5	%
Tier 1 capital ratio ⁽²⁾	25.6		6.0		8.0
Total Risk-based capital ratio ⁽³⁾	26.9		8.0		10.0
Tier 1 Leverage capital ratio ⁽⁴⁾	20.4		4.0		5.0

Comenity Capital Bank
Common Equity Tier 1 capital ratio ⁽¹⁾	18.4	%	4.5	%	6.5	%
Tier 1 capital ratio ⁽²⁾	18.4		6.0		8.0
Total Risk-based capital ratio ⁽³⁾	19.7		8.0		10.0
Tier 1 Leverage capital ratio ⁽⁴⁾	16.1		4.0		5.0

Combined Banks
Common Equity Tier 1 capital ratio ⁽¹⁾	21.4	%	4.5	%	6.5	%
Tier 1 capital ratio ⁽²⁾	21.4		6.0		8.0
Total Risk-based capital ratio ⁽³⁾	22.8		8.0		10.0
Tier 1 Leverage capital ratio ⁽⁴⁾	18.0		4.0		5.0

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

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

(3)	The Total Risk-based capital ratio represents total capital divided by total risk-weighted assets.

(4)	The Tier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.

Indemnification

On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (Publicis). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a United States Department of Justice (DOJ) investigation. The DOJ investigation related to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon actively cooperated with the DOJ in connection with the investigation. On January 19, 2021, Epsilon entered into a deferred prosecution agreement (DPA) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $150 million, to be paid in two equal installments, the first in January 2021 and the second in January 2022. A $150 million loss contingency was recorded as of December 31, 2020. The Company paid $75 million to Publicis pursuant to its contractual indemnification obligation in January 2021. In January 2022, the Company paid the second remaining $75 million installment to Publicis pursuant to its contractual indemnification obligation.

Legal Proceedings

From time to time the Company is involved in various claims and lawsuits and other proceedings, arising in the ordinary course of business that it believes will not have a material adverse effect on its business, consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of the Company’s contractual obligations, arbitrations, class actions and other litigation, arising in connection with its business activities. The Company is also involved, from time to time, in reviews, investigations, subpoenas and other proceedings (both formal and informal) by governmental agencies regarding its business (collectively, “regulatory matters”), which could subject the Company to significant fines,

penalties, obligations to change its business practices or other requirements resulting in increased expenses, diminished income and damage to the Company’s reputation.