0001580608 srt:MaximumMember us-gaap:FairValueInputsLevel3Member sc:PersonalLoansHeldforsaleMember us-gaap:MeasurementInputLossSeverityMember us-gaap:IncomeApproachValuationTechniqueMember 2018-12-31
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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| ☒ | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended June 30, 2019
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| ☐ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the transition period from to |
Commission File Number: 001-36270
SANTANDER CONSUMER USA HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
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Delaware | | 32-0414408 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification Number)
|
|
| | | | |
| Delaware | | 32-0414408 |
(State or other jurisdiction of
incorporation or organization) | | (I.R.S. Employer
Identification Number) |
| | | | | | | | | | | | | | |
| 1601 Elm Street | Suite 800 | Dallas | Texas | 75201 |
| (Address of principal executive offices) | | | | |
Registrant’s telephone number, including area code (214) (214) 634-1110
Not Applicable
(Former name, former address, and formal fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol (s) | | Name of each exchange on which registered | | Outstanding shares at July 29,2019April 29, 2020 |
| Common Stock ($0.01 par value) | | SC | | New York Stock Exchange | NYSE | | 345,991,292321,118,420 |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large accelerated filer | | ☒ | | Accelerated filer | | ☐ | | Emerging growth company | | ☐ |
| | | | | | | | | | |
Large accelerated filer | | ☒ | | Accelerated filer | | ☐ | | Emerging growth company | | ☐ |
| Non-accelerated filer | | ☐ | | Smaller reporting company | | ☐ | | | | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐
No ☒
INDEX
INDEX
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
| Item 5. | | |
| Item 6. | Exhibits | | |
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Unless otherwise specified or the context otherwise requires, the use herein of the terms “we,” “our,” “us,” “SC,” and the “Company” refer to Santander Consumer USA Holdings Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements about the Company’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking and reflect the current beliefs and expectations of the company’s management.forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends,” and similar words or phrases. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors, some of which are beyond the Company’s control. For more information regarding these risks and uncertainties as well as certain additional risks that the Company faces, refer to the Risk Factors detailed in Item 1A of Part I of the 2018 Annual Report on Form 10-K, as well as factors more fully described in Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, including the exhibits hereto, and subsequent reports and registration statements filed from time to time with the SEC. Among the factors that could cause the Company’s actual resultsperformance to differ materially from those suggested by the forward-looking statements are:
•the Company operates in a highly regulated industryadverse impact of COVID-19 on our business, financial condition, liquidity and continually changing federal, state, and local laws and regulations could materially adversely affect its business;results of operations;
the Company’s ability to remediate any material weaknesses in internal controls over financial reporting completely and in a timely manner;
adverse economic conditions in the United States and worldwide may negatively impact the Company’s results;
the business could suffer if access to funding is reduced or if there is a change in the Company’s funding costs or ability to execute securitizations;
the Company faces significant risks implementing its growth strategy, some of which are outside of its control;
the Company may not realize the anticipated benefits from, and may incur unexpected costs and delays in connection with, exiting its personal lending business;
the Company’s•our agreement with FCA may not result in currently anticipated levels of growth and is subject to performancecertain conditions that could result in termination of the agreement,agreement;
•continually changing federal, state, and is subject to an option giving FCA the right to acquire an equity participationlocal laws and regulations could materially adversely affect our business;
•adverse economic conditions in the Chrysler Capital portion of the Company’s business;United States and worldwide may negatively impact our results;
the•our business could suffer if the Companyour access to funding is reduced;
•significant risks we face implementing our growth strategy, some of which are outside our control;
•unexpected costs and delays in connection with exiting our personal lending business;
•our business could suffer if we are unsuccessful in developing and maintaining relationships with automobile dealerships;
the Company’s•our financial condition, liquidity, and results of operations depend on the credit performance of itsour loans;
•loss of the Company’sour key management or other personnel, or an inability to attract such management and personnel, could negatively impact its business;personnel;
the Company is directly and indirectly, through its relationship with SHUSA, subject to •certain banking and financial services regulations, including but not limited to oversight by the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), the European Central Bank (ECB), and the Federal Reserve Bank of Boston (FRBB); such, whose oversight and regulation may limit certain of the Company’sour activities, including the timing and amount of dividends and other limitations on the Company’sour business; and
•future changes in the Company’s ownership by, orour relationship with SHUSA orand Banco Santander that could adversely affect its operations.our operations; and
•the other factors that are described in Part I, Item IA – Risk Factors of the 2019 Annual Report on Form 10-K, and impacts of the COVID-19 outbreak on our business, financial condition, liquidity and results of operations, as noted in the Form 8-K filed with the SEC on April 10, 2020.
If one or more of the factors affecting the Company’s forward-looking information and statements renders forward-looking information or statements incorrect, the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information orand statements. Therefore, the Company cautions the reader not to place undue reliance on any forward-looking information or statements. The effect of these factors is difficult to predict. Factors other than these also could adversely affect the Company’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties as new factors emerge from time to time. Management cannot assess the impact of any such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-lookingForward-looking statements reflect the current beliefs and expectations of the Company's management and only speak as of the date of this document, and the Company undertakes no obligation to update any forward-looking information or
statements, whether written or oral, to reflect any change, except as required by law. All forward-looking information and statements attributable to the Company are expressly qualified by these cautionary statements.
Glossary
The following is a list of abbreviations, acronyms, and commonly used terms used in this QuarterlyAnnual Report on Form 10-Q.
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2018 Annual Report on Form 10-KABS | Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 26, 2019.Asset-backed securities |
ABSACL | Asset-backed securitiesAllowance for credit loss |
| Advance Rate | The maximum percentage of collateral that a lender is willing to lend. |
| Affiliates | A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity. |
| ALG | Automotive Lease Guide |
| Amendment | Amendment to the Chrysler Agreement with FCA, dated June 28, 2019. |
APRAmortized costs | Includes unpaid principal balance (UPB), net of discounts and premiums |
| APR | Annual Percentage Rate |
| ASC | Accounting Standards Codification |
| ASU | Accounting Standards Update |
Bluestem | |
| Bluestem | Bluestem Brands, Inc., an online retailer for whose customers SC provides financing |
| Board | SC’s Board of Directors |
CBP | |
| CBP | Citizens Bank of Pennsylvania |
CCAP | Chrysler Capital |
CCARTCCAP | Chrysler Capital |
| CCART | Chrysler Capital Auto Receivables Trust, a securitization platform |
CEO | |
| CECL | Current Expected Credit Loss, Amendments based on ASU 2016-13, ASU 2019-04, and ASU 2019-11 |
| CEO | Chief Executive Officer |
| CFPB | Consumer Financial Protection Bureau |
| CFO | Chief Financial Officer |
| Chrysler Agreement | Ten-year master private-label financing agreement with FCA |
| Clean-up Call | The early redemption of a debt instrument by the issuer, generally when the underlying portfolio has amortized to 5% or 10% of its original balance |
| Commission | U.S. Securities and Exchange Commission |
| COVID-19 | Coronavirus disease 2019 |
| Credit Enhancement | A method such as overcollateralization, insurance, or a third-party guarantee, whereby a borrower reduces default risk |
| DCF | Discounted Cash Flow Analysis |
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| Dealer Loan | A Floorplan Loan, real estate loan, working capital loan, or other credit extended to an automobile dealer |
| Dodd-Frank Act | Comprehensive financial regulatory reform legislation enacted by the U.S. Congress on July 21, 2010 |
| DOJ | U.S. Department of Justice |
| DRIVE | Drive Auto Receivables Trust, a securitization platform |
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| EIR | Effective interest rate |
| ECL | Expected credit losses |
| Exchange Act | Securities Exchange Act of 1934, as amended |
| FASB | Financial Accounting Standards Board |
| FCA | FCA US LLC, formerly Chrysler Group LLC |
| FICO® | A common credit score created by Fair Isaac Corporation that is used on the credit reports that lenders use to assess an applicant’s credit risk. FICO® is computed using mathematical models that take into account five factors: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit |
| FIRREA | Financial Institutions Reform, Recovery and Enforcement Act of 1989 |
| Floorplan Loan | A revolving line of credit that finances dealer inventory until sold |
| Federal Reserve Board | Board of Governors of the Federal Reserve System |
| FRBB | Federal Reserve Bank of Boston |
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| FTC | Federal Trade Commission |
| GAP | Guaranteed Auto Protection |
| GAAP | U.S. Generally Accepted Accounting Principles |
| IPO | SC’s Initial Public Offering |
| ISDA | International Swaps and Derivative Association |
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GAP | Guaranteed Auto Protection |
GAAP | U.S. Generally Accepted Accounting Principles |
IPO | SC’s Initial Public Offering |
ISDA | International Swaps and Derivative Association |
| Managed Assets | Managed assets included assets (a) owned and serviced by the Company; (b) owned by the Company and serviced by others; and (c) serviced for others |
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| Nonaccretable Difference | The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows of a portfolio acquired with deteriorated credit quality |
OCC | |
| OCC | Office of the Comptroller of the Currency |
| Overcollateralization | A credit enhancement method whereby more collateral is posted than is required to obtain financing |
| OEM | Original equipment manufacturer |
| Private-label | Financing branded in the name of the product manufacturer rather than in the name of the finance provider |
RC | |
| PSRT | Private Santander Retail Auto Lease Trust, a lease securitization platform |
| RC | The Risk Committee of the Board |
| Remarketing | The controlled disposal of vehicles at the end of the lease term or upon early termination or of financed vehicles obtained through repossession and their subsequent sale |
| Residual Value | The future value of a leased asset at the end of its lease term |
| Retail installment contracts | Includes retail installment contracts individually acquired individually | Includesor originated by the Company and purchased non-credit impaireddeteriorated finance receivables |
| RSU | Restricted stock unit |
| SAF | Santander Auto Finance |
| Santander | Banco Santander, S.A. |
| SBNA | Santander Bank, N.A., a wholly-owned subsidiary of SHUSA. Formerly Sovereign Bank, N.A. |
| SC | Santander Consumer USA Holdings Inc., a Delaware corporation, and its consolidated subsidiaries |
| SCI | Santander Consumer International Puerto Rico, LLC, , a wholly-owned subsidiary of SC Illinois |
| SC Illinois | Santander Consumer USA Inc., an Illinois corporation and wholly-owned subsidiary of SC |
| SCRA | Servicemembers Civil Relief Act |
| SDART | Santander Drive Auto Receivables Trust, a securitization platform |
| SEC | U.S. Securities and Exchange Commission |
SHUSA | |
| |
| SHUSA | Santander Holdings USA, Inc., a wholly-owned subsidiary of Santander and the majority stockholder of SC |
| SPAIN | Santander Prime Auto Issuing Note Trust, a securitization platform |
| SRT | Santander Retail Auto Lease Trust, a lease securitization platform |
SubventionSREV | Santander Revolving Auto Loan Trust, a securitization platform |
| Subvention | Reimbursement of the finance provider by a manufacturer for the difference between a market loan or lease rate and the below-market rate given to a customer |
TDR | |
| TDR | Troubled Debt Restructuring |
| Trusts | Special purpose financing trusts utilized in SC’s financing transactions |
VIE | |
| |
| VIE | Variable Interest Entity |
| Warehouse Line | A revolving line of credit generally used to fund finance receivable originations |
Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited) |
| |
Item 1. | Condensed Consolidated Financial Statements (Unaudited) |
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands, except per share amounts)
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Assets | | | |
| Cash and cash equivalents - $443,123 and $41,785 held at affiliates, respectively | $ | 501,588 | | | $ | 81,848 | |
| Finance receivables held for sale, net | 912,126 | | | 1,007,105 | |
| Finance receivables held for investment, at amortized cost | 30,829,863 | | | 30,810,487 | |
| Allowance for credit loss | (5,460,098) | | | (3,043,468) | |
| Finance receivables held for investment, at amortized cost, net | 25,369,765 | | | 27,767,019 | |
| Restricted cash and cash equivalents - $55 and $27 held at affiliates, respectively | 1,987,004 | | | 2,079,239 | |
| Accrued interest receivable | 299,035 | | | 288,615 | |
| Leased vehicles, net | 16,746,907 | | | 16,461,982 | |
| Furniture and equipment, net of accumulated depreciation of $90,259 and $85,347, respectively | 60,020 | | | 59,873 | |
| | | |
| Goodwill | 74,056 | | | 74,056 | |
| Intangible assets, net of amortization of $54,271 and $52,665, respectively | 47,823 | | | 42,772 | |
| | | |
| Other assets - $14,665 and $30,841 held at affiliates, respectively | 1,108,607 | | | 1,071,020 | |
| Total assets | $ | 47,106,931 | | | $ | 48,933,529 | |
| Liabilities and Equity | | | |
| Liabilities: | | | |
| Total borrowings and other debt obligations - $5,652,077 and $5,652,325 to/from affiliates, respectively | $ | 40,216,880 | | | $ | 39,194,141 | |
| | | |
| Accounts payable and accrued expenses - $63,044 and $63,951 held at affiliates, respectively | 458,429 | | | 563,277 | |
| | | |
| Deferred tax liabilities, net | 940,121 | | | 1,468,222 | |
| | | |
| | | |
| Other liabilities - $2,622 and $24,730 held at affiliates, respectively | 345,398 | | | 389,269 | |
| Total liabilities | 41,960,828 | | | 41,614,909 | |
| Commitments and contingencies (Notes 5 and 10) | | | |
| Equity: | | | |
| Common stock, $0.01 par value — 1,100,000,000 shares authorized; | | | |
| 363,074,722 and 362,798,115 shares issued and 321,117,187 and 339,201,748 shares outstanding, respectively | 3,211 | | | 3,392 | |
| Additional paid-in capital | 707,384 | | | 1,173,262 | |
| Accumulated other comprehensive income (loss), net of taxes | | (63,655) | | | (26,693) | |
| Retained earnings | 4,499,163 | | | 6,168,659 | |
| Total stockholders’ equity | 5,146,103 | | | 7,318,620 | |
| Total liabilities and equity | $ | 47,106,931 | | | $ | 48,933,529 | |
|
| | | | | | | |
| | June 30,
2019 | | December 31,
2018 |
| Assets | | | |
| Cash and cash equivalents - $42,889 and $101,334 held at affiliates, respectively | $ | 99,756 |
| | $ | 148,436 |
|
| Finance receivables held for sale, net | 1,249,101 |
| | 1,068,757 |
|
| Finance receivables held for investment, net | 25,838,749 |
| | 25,117,454 |
|
| Restricted cash and cash equivalents - $27 and $341 held at affiliates, respectively | 2,272,621 |
| | 2,102,048 |
|
| Accrued interest receivable | 277,813 |
| | 303,686 |
|
| Leased vehicles, net | 15,313,369 |
| | 13,978,855 |
|
| Furniture and equipment, net of accumulated depreciation of $79,397 and $72,345, respectively | 59,176 |
| | 61,280 |
|
| Federal, state and other income taxes receivable | 83,427 |
| | 97,087 |
|
| Related party taxes receivable | 4,581 |
| | 734 |
|
| Goodwill | 74,056 |
| | 74,056 |
|
| Intangible assets, net of amortization of $49,426 and $45,324, respectively | 34,117 |
| | 35,195 |
|
| Due from affiliates | 19,581 |
| | 8,920 |
|
| Other assets | 1,089,746 |
| | 963,347 |
|
| Total assets | $ | 46,416,093 |
| | $ | 43,959,855 |
|
| Liabilities and Equity | | | |
| Liabilities: | | | |
| Notes payable — credit facilities | $ | 6,514,163 |
| | $ | 4,478,214 |
|
| Notes payable — secured structured financings | 26,248,528 |
| | 26,901,530 |
|
| Notes payable — related party | 4,002,814 |
| | 3,503,293 |
|
| Accrued interest payable | 46,817 |
| | 49,370 |
|
| Accounts payable and accrued expenses | 431,004 |
| | 422,951 |
|
| Deferred tax liabilities, net | 1,327,342 |
| | 1,155,883 |
|
| Due to affiliates | 91,320 |
| | 63,219 |
|
| Other liabilities | 416,844 |
| | 367,037 |
|
| Total liabilities | 39,078,832 |
| | 36,941,497 |
|
| Commitments and contingencies (Notes 5 and 10) |
| |
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| Equity: | | | |
| Common stock, $0.01 par value — 1,100,000,000 shares authorized; | | | |
| 362,571,219 and 362,028,916 shares issued and 348,130,140 and 352,302,759 shares outstanding, respectively | 3,481 |
| | 3,523 |
|
| Additional paid-in capital | 1,413,461 |
| | 1,515,572 |
|
| Accumulated other comprehensive income, net | (20,567 | ) | | 33,515 |
|
| Retained earnings | 5,940,886 |
| | 5,465,748 |
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| Total stockholders’ equity | 7,337,261 |
| | 7,018,358 |
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| Total liabilities and equity | $ | 46,416,093 |
| | $ | 43,959,855 |
|
See notes to unaudited condensed consolidated financial statements.
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands)
The assets of consolidated VIEs, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used only to settle obligations of the consolidated VIE and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to the Company’s general credit were as follows:
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| | March 31, 2020 | | December 31, 2019 |
| Assets | | | |
| Restricted cash and cash equivalents | $ | 1,614,616 | | | $ | 1,629,870 | |
| | | |
| Finance receivables held for investment, net | 24,519,932 | | | 26,532,328 | |
| Leased vehicles, net | 16,746,907 | | | 16,461,982 | |
| Various other assets | 700,085 | | | 625,359 | |
| Total assets | $ | 43,581,540 | | | $ | 45,249,539 | |
| Liabilities | | | |
| Notes payable | $ | 35,358,666 | | | $ | 34,249,851 | |
| Various other liabilities | 117,024 | | | 188,093 | |
| Total liabilities | $ | 35,475,690 | | | $ | 34,437,944 | |
|
| | | | | | | |
| | June 30,
2019 | | December 31,
2018 |
| Assets | | | |
| Restricted cash and cash equivalents | $ | 1,697,692 |
| | $ | 1,582,158 |
|
| Finance receivables held for sale, net | 266,086 |
| | — |
|
| Finance receivables held for investment, net | 25,004,109 |
| | 24,151,971 |
|
| Leased vehicles, net | 15,313,369 |
| | 13,978,855 |
|
| Various other assets | 604,431 |
| | 685,383 |
|
| Total assets | $ | 42,885,687 |
| | $ | 40,398,367 |
|
| Liabilities | | | |
| Notes payable | $ | 33,289,722 |
| | $ | 31,949,839 |
|
| Various other liabilities | 99,856 |
| | 122,010 |
|
| Total liabilities | $ | 33,389,578 |
| | $ | 32,071,849 |
|
Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying condensed consolidated balance sheets due to intercompany eliminations between the VIEs and other entities consolidated by the Company. For example, for most of its securitizations, the Company retains one or more of the lowest tranches of bonds. Rather than showing investment in bonds as an asset and the associated debt as a liability, these amounts are eliminated in consolidation as required by U.S. GAAP.
See notes to unaudited condensed consolidated financial statements.
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) (Dollars in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | | | |
| March 31, | | | | | | | | | |
| | | | | | | | | | |
| | 2020 | | 2019 | | | | | | | |
| Interest on finance receivables and loans | $ | 1,273,819 | | | $ | 1,253,580 | | | | | | | | |
| Leased vehicle income | 747,979 | | | 649,560 | | | | | | | | |
| Other finance and interest income | 7,551 | | | 10,247 | | | | | | | | |
| Total finance and other interest income | 2,029,349 | | | 1,913,387 | | | | | | | | |
| Interest expense — Including $62,770 and $44,873 to affiliates, respectively | 328,834 | | | 334,382 | | | | | | | | |
| Leased vehicle expense | 552,912 | | | 444,019 | | | | | | | | |
| Net finance and other interest income | 1,147,603 | | | 1,134,986 | | | | | | | | |
| Credit loss expense | 907,887 | | | 550,879 | | | | | | | | |
| Net finance and other interest income after credit loss expense | 239,716 | | | 584,107 | | | | | | | | |
| Profit sharing | 14,295 | | | 6,968 | | | | | | | | |
| Net finance and other interest income after credit loss expense and profit sharing | 225,421 | | | 577,139 | | | | | | | | |
| Investment losses, net — Including $3 and $0 from affiliates, respectively | (63,426) | | | (67,097) | | | | | | | | |
| Servicing fee income — Including $12,552 and $12,995 from affiliates, respectively | 19,103 | | | 23,806 | | | | | | | | |
| Fees, commissions, and other — Including $3,306 and $6,781 from affiliates, respectively | 95,130 | | | 94,376 | | | | | | | | |
| Total other income | 50,807 | | | 51,085 | | | | | | | | |
| Compensation expense | 133,326 | | | 127,894 | | | | | | | | |
| Repossession expense | 57,662 | | | 70,860 | | | | | | | | |
| Other operating costs — Including $1,097 and $933 to affiliates, respectively | 91,685 | | | 92,203 | | | | | | | | |
| Total operating expenses | 282,673 | | | 290,957 | | | | | | | | |
| Income (loss) before income taxes | (6,445) | | | 337,267 | | | | | | | | |
| Income tax expense | (2,458) | | | 89,764 | | | | | | | | |
| Net income (loss) | $ | (3,987) | | | $ | 247,503 | | | | | | | | |
| | | | | | | | | | |
| Net income (loss) | $ | (3,987) | | | $ | 247,503 | | | | | | | | |
| Other comprehensive income (loss): | | | | | | | | | | |
| Change in unrealized gains (losses) on cash flow hedges, net of tax of $(12,543), and $(6,794), respectively | (39,019) | | | (21,039) | | | | | | | | |
| Unrealized gains (losses) on available-for-sale debt securities net of tax of $661 and $(149), respectively | 2,057 | | | 462 | | | | | | | | |
| Comprehensive income (loss) | $ | (40,949) | | | $ | 226,926 | | | | | | | | |
| Net income per common share (basic) | $ | (0.01) | | | $ | 0.70 | | | | | | | | |
| Net income per common share (diluted) | $ | (0.01) | | | $ | 0.70 | | | | | | | | |
| Dividend declared per common share | $ | 0.22 | | | $ | 0.20 | | | | | | | | |
| Weighted average common shares (basic) | 334,026,052 | | | 351,515,464 | | | | | | | | |
| Weighted average common shares (diluted) | 334,346,122 | | | 352,051,887 | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Interest on finance receivables and loans | $ | 1,261,098 |
| | $ | 1,211,006 |
| | $ | 2,514,678 |
| | $ | 2,379,546 |
|
| Leased vehicle income | 676,236 |
| | 537,897 |
| | 1,325,796 |
| | 1,042,175 |
|
| Other finance and interest income | 11,437 |
| | 8,494 |
| | 21,684 |
| | 15,631 |
|
| Total finance and other interest income | 1,948,771 |
| | 1,757,397 |
| | 3,862,158 |
| | 3,437,352 |
|
| Interest expense — Including $45,909, $43,640, $90,782, and $85,673 to affiliates, respectively | 330,039 |
| | 273,953 |
| | 664,421 |
| | 514,981 |
|
| Leased vehicle expense | 444,442 |
| | 360,335 |
| | 888,461 |
| | 719,018 |
|
| Net finance and other interest income | 1,174,290 |
| | 1,123,109 |
| | 2,309,276 |
| | 2,203,353 |
|
| Provision for credit losses | 430,676 |
| | 406,544 |
| | 981,555 |
| | 916,885 |
|
| Net finance and other interest income after provision for credit losses | 743,614 |
| | 716,565 |
| | 1,327,721 |
| | 1,286,468 |
|
| Profit sharing | 13,345 |
| | 12,853 |
| | 20,313 |
| | 17,230 |
|
| Net finance and other interest income after provision for credit losses and profit sharing | 730,269 |
| | 703,712 |
| | 1,307,408 |
| | 1,269,238 |
|
| Investment losses, net — Including $0, $3,177, $0, and $20,080 from affiliates, respectively | (84,787 | ) | | (82,634 | ) | | (151,884 | ) | | (169,154 | ) |
| Servicing fee income — Including $14,275, $11,375, $27, $270, and $21,447 from affiliates, respectively | 25,002 |
| | 27,538 |
| | 48,808 |
| | 53,720 |
|
| Fees, commissions, and other — Including $12,186, $398, $18,967, and $769 from affiliates, respectively | 90,196 |
| | 77,480 |
| | 184,572 |
| | 162,871 |
|
| Total other income | 30,411 |
| | 22,384 |
| | 81,496 |
| | 47,437 |
|
| Compensation expense | 122,678 |
| | 118,598 |
| | 250,572 |
| | 240,603 |
|
| Repossession expense | 69,699 |
| | 63,660 |
| | 140,559 |
| | 135,741 |
|
| Other operating costs — Including $811, $3,111, $1,744, and $4,273 to affiliates, respectively | 88,272 |
| | 94,692 |
| | 180,475 |
| | 188,518 |
|
| Total operating expenses | 280,649 |
| | 276,950 |
| | 571,606 |
| | 564,862 |
|
| Income before income taxes | 480,031 |
| | 449,146 |
| | 817,298 |
| | 751,813 |
|
| Income tax expense | 111,764 |
| | 114,120 |
| | 201,528 |
| | 172,172 |
|
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| | | | | | | | |
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| Other comprehensive income (loss): | | | | | | | |
| Change in unrealized gains (losses) on cash flow hedges, net of tax of $10,870, $79, $17,665, and $2,981, respectively | (34,045 | ) | | (761 | ) | | (55,084 | ) | | 12,039 |
|
| Unrealized gains (losses) on available-for-sale debt securities net of tax of ($173), zero, ($321), and zero, respectively | 539 |
| | — |
| | 1,001 |
| | — |
|
| Comprehensive income | $ | 334,761 |
| | $ | 334,265 |
| | $ | 561,687 |
| | $ | 591,679 |
|
| Net income per common share (basic) | $ | 1.05 |
| | $ | 0.93 |
| | $ | 1.75 |
| | $ | 1.61 |
|
| Net income per common share (diluted) | $ | 1.05 |
| | $ | 0.93 |
| | $ | 1.75 |
| | $ | 1.60 |
|
| Dividend declared per common share | $ | 0.20 |
| | $ | 0.05 |
| | $ | 0.40 |
| | $ | 0.10 |
|
| Weighted average common shares (basic) | 351,106,197 |
| | 361,268,112 |
| | 351,309,700 |
| | 360,987,233 |
|
| Weighted average common shares (diluted) | 351,556,349 |
| | 362,057,614 |
| | 351,825,554 |
| | 361,829,283 |
|
See notes to unaudited condensed consolidated financial statements.
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) (In thousands)thousands except per share amounts)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | Additional
Paid-In Capital | | Accumulated
Other
Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders' Equity |
| Shares | | Amount | | | | | | | | |
| Balance — January 1, 2019 | 352,303 | | | $ | 3,523 | | | $ | 1,515,572 | | | $ | 33,515 | | | $ | 5,465,748 | | | $ | 7,018,358 | |
| Stock issued in connection with employee incentive compensation plans | 391 | | | 4 | | | (1,715) | | | — | | | — | | | (1,711) | |
| Stock-based compensation expense | — | | | — | | | 5,987 | | | — | | | — | | | 5,987 | |
| Stock repurchase/Treasury stock | (965) | | | (10) | | | (17,770) | | | — | | | — | | | (17,780) | |
| | | | | | | | | | | |
| Dividends-Common stock, $0.20/share | — | | | — | | | — | | | — | | | (70,268) | | | (70,268) | |
| Tax sharing with affiliate | — | | | — | | | (2,982) | | | — | | | — | | | (2,982) | |
| Available-for-sale securities, net of taxes | — | | | — | | | — | | | 462 | | | — | | | 462 | |
| Net income | — | | | — | | | — | | | — | | | 247,503 | | | 247,503 | |
| Other comprehensive income (loss), net of taxes | — | | | — | | | — | | | (21,039) | | | — | | | (21,039) | |
| Balance — March 31, 2019 | 351,729 | | | $ | 3,517 | | | $ | 1,499,092 | | | $ | 12,938 | | | $ | 5,642,983 | | | $ | 7,158,530 | |
| | | | | | | | | | | |
| Balance — January 1, 2020 | 339,202 | | | | $ | 3,392 | | | | $ | 1,173,262 | | | | $ | (26,693) | | | | $ | 6,168,659 | | | | $ | 7,318,620 | |
| Stock issued in connection with employee incentive compensation plans | 277 | | | 3 | | | (1,634) | | | — | | | — | | | (1,631) | |
| Stock-based compensation expense | — | | | — | | | 4,038 | | | — | | | — | | | 4,038 | |
| Stock repurchase/Treasury stock | (18,361) | | | (184) | | | (468,282) | | | — | | | — | | | (468,466) | |
| Cumulative-effect adjustment upon adoption of CECL standard (Note 1) | — | | | — | | | — | | | — | | | (1,590,885) | | | (1,590,885) | |
| Dividends-Common stock, $0.22/share | — | | | — | | | — | | | — | | | (74,624) | | | (74,624) | |
| | | | | | | | | | | |
| Available-for-sale securities, net of taxes | — | | | — | | | — | | | 2,057 | | | — | | | 2,057 | |
| Net income (loss) | — | | | — | | | — | | | — | | | (3,987) | | | (3,987) | |
| Other comprehensive income (loss), net of taxes | — | | | — | | | — | | | (39,019) | | | — | | | (39,019) | |
| Balance — March 31, 2020 | 321,118 | | | | $ | 3,211 | | | | $ | 707,384 | | | | $ | (63,655) | | | | $ | 4,499,163 | | | | $ | 5,146,103 | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | |
| Balance — January 1, 2018 | 360,527 |
| | $ | 3,605 |
| | $ | 1,681,558 |
| | $ | 44,262 |
| | $ | 4,736,277 |
| | $ | 6,465,702 |
|
| Cumulative-effect adjustment upon adoption of ASU 2018-02 | — |
| | — |
| | — |
| | 6,149 |
| | (6,149 | ) | | — |
|
| Stock issued in connection with employee incentive compensation plans | 481 |
| | 5 |
| | 464 |
| | — |
| | — |
| | 469 |
|
| Stock-based compensation expense | — |
| | — |
| | 4,208 |
| | — |
| | — |
| | 4,208 |
|
| Dividends-Common stock, $0.05/share | — |
| | — |
| | — |
| | — |
| | (18,028 | ) | | (18,028 | ) |
| Tax sharing with affiliate | — |
| | — |
| | 3,766 |
| | — |
| | — |
| | 3,766 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 244,615 |
| | 244,615 |
|
| Other comprehensive income (loss), net of taxes | — |
| | — |
| | — |
| | 12,800 |
| | — |
| | 12,800 |
|
| Balance — March 31, 2018 | 361,008 |
| | $ | 3,610 |
| | $ | 1,689,996 |
| | $ | 63,211 |
| | $ | 4,956,715 |
| | $ | 6,713,532 |
|
| | | | | | | | | | | | |
| Stock issued in connection with employee incentive compensation plans | 401 |
| | 4 |
| | 2,349 |
| | — |
| | — |
| | 2,353 |
|
| Stock-based compensation expense | — |
| | — |
| | 1,586 |
| | — |
| | — |
| | 1,586 |
|
| Dividends-Common stock, $0.05/share | — |
| | — |
| | — |
| | — |
| | (18,064 | ) | | (18,064 | ) |
| Tax sharing with affiliate | — |
| | — |
| | (35 | ) | | — |
| | — |
| | (35 | ) |
| Net income | — |
| | — |
| | — |
| | — |
| | 335,026 |
| | 335,026 |
|
| Other comprehensive income (loss), net of taxes | — |
| | — |
| | — |
| | (762 | ) | | — |
| | (762 | ) |
| Balance — June 30, 2018 | 361,409 |
| | $ | 3,614 |
| | $ | 1,693,896 |
| | $ | 62,449 |
| | $ | 5,273,677 |
| | $ | 7,033,636 |
|
See notes to unaudited condensed consolidated financial statements.
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) (In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Additional Paid-In Capital | | Accumulated Other Comprehensive Income (Loss) | | Retained Earnings | | Total Stockholders’ Equity |
| | Shares | | Amount | | | | |
| Balance — January 1, 2019 | 352,303 |
| | $ | 3,523 |
| | $ | 1,515,572 |
| | $ | 33,515 |
| | $ | 5,465,748 |
| | $ | 7,018,358 |
|
| Stock issued in connection with employee incentive compensation plans | 391 |
| | 4 |
| | (1,715 | ) | | — |
| | — |
| | (1,711 | ) |
| Stock-based compensation expense | — |
| | — |
| | 5,987 |
| | — |
| | — |
| | 5,987 |
|
| Stock repurchase/Treasury stock | (965 | ) | | (10 | ) | | (17,770 | ) | | — |
| | — |
| | (17,780 | ) |
| Dividends-Common stock, $0.20/share | — |
| | — |
| | — |
| | — |
| | (70,268 | ) | | (70,268 | ) |
| Tax sharing with affiliate | — |
| | — |
| | (2,982 | ) | | — |
| | — |
| | (2,982 | ) |
| Available-for-sale securities, net of taxes | — |
| | — |
| | — |
| | 462 |
| | — |
| | 462 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 247,503 |
| | 247,503 |
|
| Other comprehensive income (loss), net of taxes | — |
| | — |
| | — |
| | (21,039 | ) | | — |
| | (21,039 | ) |
| Balance — March 31, 2019 | 351,729 |
| | $ | 3,517 |
| | $ | 1,499,092 |
| | $ | 12,938 |
| | $ | 5,642,983 |
| | $ | 7,158,530 |
|
| | | | | | | | | | | | |
| Stock issued in connection with employee incentive compensation plans | 151 |
| | 1 |
| | 141 |
| | — |
| | — |
| | 142 |
|
| Stock-based compensation expense | — |
| | — |
| | 1,055 |
| | — |
| | — |
| | 1,055 |
|
| Stock repurchase/Treasury stock | (3,750 | ) | | (37 | ) | | (86,827 | ) | | — |
| | — |
| | (86,864 | ) |
| Dividends-Common stock, $0.20/share | — |
| | — |
| | — |
| | — |
| | (70,364 | ) | | (70,364 | ) |
| Available-for-sale securities, net of taxes | — |
| | — |
| | — |
| | 539 |
| | — |
| | 539 |
|
| Net income | — |
| | — |
| | — |
| | — |
| | 368,267 |
| | 368,267 |
|
| Other comprehensive income (loss), net of taxes | — |
| | — |
| | — |
| | (34,044 | ) | | — |
| | (34,044 | ) |
| Balance — June 30, 2019 | 348,130 |
| | $ | 3,481 |
| | $ | 1,413,461 |
| | $ | (20,567 | ) | | $ | 5,940,886 |
| | $ | 7,337,261 |
|
See notes to unaudited condensed consolidated financial statements.
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Dollars(Dollars in thousands)
| | | | | | | | | | | | | |
| | For the Three Months Ended
March 31, | | | | |
| | | | | |
| 2020 | | 2019 | | |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | $ | (3,987) | | | $ | 247,503 | | | |
| Adjustments to reconcile net income to net cash provided by operating activities | | | | | |
| Derivative mark to market | 8,923 | | | 5,162 | | | |
| Credit loss expense | 907,887 | | | 550,879 | | | |
| Depreciation and amortization | 578,497 | | | 472,886 | | | |
| Accretion of discount | (13,619) | | | (26,708) | | | |
| | | | | |
| Proceeds from sales of and collections on receivables held for sale | 24,263 | | | 36,710 | | | |
| Change in revolving personal loans, net | 19,012 | | | 6,523 | | | |
| Investment losses, net | 63,426 | | | 67,097 | | | |
| | | | | |
| Stock-based compensation | 4,038 | | | 5,987 | | | |
| Deferred tax (benefit) expense | (4,798) | | | 81,062 | | | |
| Changes in assets and liabilities: | | | | | |
| Accrued interest receivable | (25,511) | | | 16,019 | | | |
| Accounts receivable | (434) | | | (6,926) | | | |
| Federal income tax and other taxes | 1,422 | | | 11,911 | | | |
| Other assets | (18,786) | | | (73,162) | | | |
| Accrued interest payable | (6,563) | | | 4,051 | | | |
| Other liabilities | (138,654) | | | 77,289 | | | |
| Net cash provided by operating activities | 1,395,116 | | | 1,476,283 | | | |
| Cash flows from investing activities: | | | | | |
| Originations and purchases of portfolios, and disbursements on finance receivables held for investment | (3,939,255) | | | (4,041,377) | | | |
| | | | | |
| Collections on finance receivables held for investment | 3,294,442 | | | 3,008,780 | | | |
| | | | | |
| Leased vehicles purchased | (2,030,936) | | | (1,975,326) | | | |
| Manufacturer incentives received | 170,800 | | | 227,757 | | | |
| Proceeds from sale of leased vehicles | 941,551 | | | 875,002 | | | |
| Change in revolving personal loans, net | 28,478 | | | 36,520 | | | |
| | | | | |
| | | | | |
| Purchases of available-for-sale securities | — | | | (31,410) | | | |
| | | | | |
| | | | | |
| Purchases of furniture and equipment | (7,508) | | | (5,634) | | | |
| Sales of furniture and equipment | 1 | | | 58 | | | |
| | | | | |
| | | | | |
| Other investing activities | — | | | (1,335) | | | |
| Net cash used in investing activities | (1,542,427) | | | (1,906,965) | | | |
| Cash flows from financing activities: | | | | | |
Proceeds from borrowings and other debt obligations, net of debt issuance costs - $1,835,000 and $1,195,000 from affiliates, respectively | 11,374,959 | | | 9,747,474 | | | |
Payments on borrowings and other debt obligations - $(1,835,000) and $(1,195,000) to affiliates, respectively | (10,357,462) | | | (8,989,335) | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Proceeds from stock option exercises, gross | 409 | | | 1,032 | | | |
| Shares repurchased | (468,466) | | | (17,780) | | | |
| Dividends paid | (74,624) | | | (70,268) | | | |
| | | | | |
| Net cash provided by (used in) financing activities | 474,816 | | | 671,123 | | | |
| | | | | |
|
| | | | | | | |
| | For the Six Months Ended
June 30, |
| | 2019 | | 2018 |
| Cash flows from operating activities: | | | |
| Net income | $ | 615,770 |
| | $ | 579,640 |
|
| Adjustments to reconcile net income to net cash provided by operating activities | | | |
| Derivative mark to market | 13,367 |
| | (10,199 | ) |
| Provision for credit losses | 981,555 |
| | 916,885 |
|
| Depreciation and amortization | 951,039 |
| | 775,849 |
|
| Accretion of discount | (45,826 | ) | | (91,856 | ) |
| Originations and purchases of receivables held for sale | — |
| | (1,837,463 | ) |
| Proceeds from sales of and collections on receivables held for sale | 70,173 |
| | 2,766,700 |
|
| Change in revolving personal loans, net | (72,722 | ) | | (72,922 | ) |
| Investment losses, net | 151,884 |
| | 169,154 |
|
| Stock-based compensation | 7,042 |
| | 5,794 |
|
| Deferred tax expense | 188,598 |
| | 177,903 |
|
| Changes in assets and liabilities: | | | |
| Accrued interest receivable | 10,651 |
| | 6,551 |
|
| Accounts receivable | (6,040 | ) | | 12,100 |
|
| Federal income tax and other taxes | 7,036 |
| | (5,465 | ) |
| Other assets | (25,432 | ) | | (69,117 | ) |
| Accrued interest payable | (2,258 | ) | | 7,477 |
|
| Other liabilities | (405 | ) | | 115,943 |
|
| Due to/from affiliates | 17,937 |
| | 65,265 |
|
| Net cash provided by operating activities | 2,862,369 |
| | 3,512,239 |
|
| Cash flows from investing activities: | | | |
| Originations of and disbursements on finance receivables held for investment | (8,021,054 | ) | | (7,783,649 | ) |
| Purchases of portfolios of finance receivables held for investment | (75,330 | ) | | (116,458 | ) |
| Collections on finance receivables held for investment | 6,057,333 |
| | 5,338,222 |
|
| Leased vehicles purchased | (4,517,624 | ) | | (4,764,841 | ) |
| Manufacturer incentives received | 450,954 |
| | 445,266 |
|
| Proceeds from sale of leased vehicles | 1,840,648 |
| | 1,959,866 |
|
| Change in revolving personal loans, net | 50,267 |
| | 59,350 |
|
| Purchases of available-for-sale securities | (85,098 | ) | | — |
|
| Proceeds from repayments and maturities of available-for-sale securities | 3,000 |
| | — |
|
| Purchases of furniture and equipment | (6,810 | ) | | (4,220 | ) |
| Sales of furniture and equipment | 355 |
| | 74 |
|
| Upfront fee paid to FCA | (60,000 | ) | | — |
|
| Other investing activities | — |
| | (6,578 | ) |
| Net cash used in investing activities | (4,363,359 | ) | | (4,872,968 | ) |
| Cash flows from financing activities: | | | |
| Proceeds from notes payable related to secured structured financings — net of debt issuance costs | 7,874,360 |
| | 8,651,828 |
|
| Payments on notes payable related to secured structured financings | (8,543,669 | ) | | (6,924,281 | ) |
| Proceeds from unsecured notes payable | 3,695,000 |
| | — |
|
| Payments on unsecured notes payable | (3,195,000 | ) | | — |
|
| Proceeds from notes payable | 9,852,100 |
| | 14,060,698 |
|
| Payments on notes payable | (7,816,151 | ) | | (15,033,991 | ) |
| Proceeds from stock option exercises, gross | 1,519 |
| | 5,958 |
|
| Dividends paid | (140,632 | ) | | (36,092 | ) |
| Shares repurchased | (104,644 | ) | | — |
|
| Net cash provided by financing activities | 1,622,883 |
| | 724,120 |
|
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited) (Dollars in thousands)
| | | | | | | | | | | | | |
| | For the Three Months Ended
March 31, | | | | |
| | | | | |
| | 2020 | | 2019 | | |
| Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | 327,505 | | | 240,441 | | | |
| Cash and cash equivalent and restricted cash and cash equivalents— Beginning of year | 2,161,087 | | | 2,250,484 | | | |
| Cash and cash equivalents and restricted cash and cash equivalents — End of year | $ | 2,488,592 | | | $ | 2,490,925 | | | |
| Supplemental cash flow information: | | | | | |
| Cash and cash equivalents | 501,588 | | | 76,272 | | | |
| Restricted cash and cash equivalents | 1,987,004 | | | 2,414,653 | | | |
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 2,488,592 | | | $ | 2,490,925 | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | |
| | For the Six Months Ended
June 30, |
| | 2019 | | 2018 |
| Net increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | 121,893 |
| | (636,609 | ) |
| Cash and cash equivalent and restricted cash and cash equivalents— Beginning of period | 2,250,484 |
| | 3,081,707 |
|
| Cash and cash equivalents and restricted cash and cash equivalents — End of period | $ | 2,372,377 |
| | $ | 2,445,098 |
|
| Supplemental cash flow information: | | | |
| Cash and cash equivalents | 99,756 |
| | 319,688 |
|
| Restricted cash and cash equivalents | 2,272,621 |
| | 2,125,410 |
|
| Total cash and cash equivalents and restricted cash and cash equivalents | $ | 2,372,377 |
| | $ | 2,445,098 |
|
See notes to unaudited condensed consolidated financial statements.
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1.Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices
The Company is the holding company for SC Illinois, and its subsidiaries, a specialized consumer finance company focused on vehicle finance and third-party servicing and delivering superior service to dealers and customers across the full credit spectrum. The Company’s primary business is the indirect origination and servicing of retail installment contracts and leases, principally, through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. Additionally, the Company sells consumer retail installment contracts through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer retail installment contracts.
SAF is our primary vehicle brand, and is available as a finance option for automotive dealers across the United States.
Since May 2013, under the Chrysler Agreement with FCA, the Company has operated as FCA’s preferred provider for consumer loans, leases and dealer loans and provides services to FCA customers and dealers under the CCAP brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.
On June 28, In 2019, the Company entered into an Amendment to the Chrysler Agreement with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The Amendment also terminated the previously disclosed tolling agreement, dated July 11, 2018, between the Company and FCA.
The Company also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has other relationships through which it provides other consumer finance products.
The Company is taking numerous proactive steps to mitigate the negative financial and operational impacts of COVID-19. Business contingency plans have been implemented and will continue to be adjusted in response to the evolving global situation.
As of June 30, 2019,March 31, 2020, the Company was owned approximately 70.5%76.5% by SHUSA, a subsidiary of Santander, and approximately 29.5%23.5% by other shareholders.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including certain Trusts, which are considered VIEs. The Company also consolidates other VIEs for which it was deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements as of June 30, 2019March 31, 2020 and December 31, 2018, 2019,
and for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. These financial statements should be read in conjunction with the 20182019 Annual Report on Form 10-K.
The preparation of condensed financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, as of the date of the financial statements and the amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material. These estimates include the determination of credit loss allowance, discount accretion, impairment, fair value, expected end-of-term lease residual values, values of repossessed assets, and income taxes. These estimates, although based on actual historical trends and modeling, may potentially show significant variances over time.
Corrections to Previously Reported Amounts
As mentioned in Note 1- “Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices” in the 2018 Annual Report on Form 10-K, the Company identified and corrected two immaterial errors. The Company has revised its comparative condensed consolidated financial statements as of June 30, 2018 included within.
The following tables summarize the impacts of the corrections on the condensed consolidated financial statements of income and comprehensive income:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| | | Reported | | Corrections | | Revised | | Reported | | Corrections | | Revised |
| Interest on finance receivable and loans | | $ | 1,156,536 |
| | $ | 54,470 |
| | $ | 1,211,006 |
| | $ | 2,270,673 |
| | $ | 108,873 |
| | $ | 2,379,546 |
|
| Provision for credit losses | | 352,575 |
| | 53,969 |
| | 406,544 |
| | 811,570 |
| | 105,315 |
| | 916,885 |
|
| Income (loss) before income taxes | | 448,645 |
| | 501 |
| | 449,146 |
| | 748,255 |
| | 3,558 |
| | 751,813 |
|
| Income tax expense | | 114,004 |
| | 116 |
| | 114,120 |
| | 171,315 |
| | 857 |
| | 172,172 |
|
| Net income (loss) | | 334,641 |
| | 385 |
| | 335,026 |
| | 576,940 |
| | 2,700 |
| | 579,640 |
|
| | | | | | | | | | | | | |
| Net income (loss) per common share (basic) | | $ | 0.93 |
| | $ | — |
| | $ | 0.93 |
| | $ | 1.60 |
| | $ | 0.01 |
| | $ | 1.61 |
|
| Net income (loss) per common share (diluted) | | $ | 0.92 |
| | $ | 0.01 |
| | $ | 0.93 |
| | $ | 1.59 |
| | $ | 0.01 |
| | $ | 1.60 |
|
The following tables summarize the impacts of the corrections on the condensed consolidated statement of cash flows:
|
| | | | | | | | | | | | |
| | | Six Months Ended June 30, 2018 |
| | | Reported | | Corrections | | Revised |
| Net cash provided by operating activities | | $ | 3,413,047 |
| | $ | 99,192 |
| | $ | 3,512,239 |
|
| Net cash used in investing activities | | (4,773,776 | ) | | (99,192 | ) | | (4,872,968 | ) |
In addition to the revision of the Company’s condensed consolidated financial statements, information within the footnotes to the condensed consolidated financial statements has been revised to reflect the correction of the errors discussed above. The following table summarizes the impacts of the corrections of those items, including table disclosures in Note 4-“Credit Loss Allowance and Credit Quality”:
|
| | | | | | | | | | | | |
| | | June 30, 2018 |
| | | Reported | | Corrections | | Revised |
| TDR - Unpaid principal balance | | $ | 5,958,564 |
| | $ | 139,716 |
| | $ | 6,098,280 |
|
| TDR - Impairment | | 1,496,580 |
| | 167,642 |
| | 1,664,222 |
|
| TDR allowance ratio | | 25.1 | % | | 2.2 | % | | 27.3 | % |
| | | | | | |
|
| Nonaccrual loans TDRs | | 1,554,860 |
| | (957,705 | ) | | 597,155 |
|
| | | | | | | |
| Delinquencies for our retail installment contracts held for investment: | | | | | |
|
| Principal, 30-59 days past due | | 2,535,166 |
| | 116,651 |
| | 2,651,817 |
|
| Delinquent principal over 59 days | | 1,151,410 |
| | 83,092 |
| | 1,234,502 |
|
| Total delinquent principal | | 3,686,576 |
| | 199,743 |
| | 3,886,319 |
|
Business Segment Information
The Company has one1 reportable segment, Consumer Finance, which includes the Company’s vehicle financial products and services, including retail installment contracts, vehicle leases, and Dealer Loans, as well as financial products and services related to recreational vehicles and marine vehicles. It also includes the Company’s personal loan and point-of-sale financing operations.
Recently Adopted Accounting Standards
Since January 1, 2020, the Company adopted the following FASB ASUs:
•Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are measured at amortized cost. The amendment introduces a new credit reserving framework known as "Current Expected Credit Loss" (“CECL”), which replaces the incurred loss impairment framework in prior GAAP with one that reflects expected credit losses over the full expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for purchased credit deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the prior OTTI framework. The Company adopted the new guidance on January 1, 2020, on a modified retrospective basis, which resulted in the increase in the ACL of approximately $2.1 billion, a decrease to opening retained earnings of approximately $1.6 billion and a decrease in deferred tax liabilities, net of approximately $0.5 billion , at January 1, 2020. The estimated increase was based on forecasts of expected future economic conditions and was primarily driven by the fact that the allowance now covers expected lifetime credit losses of the loan portfolios. The standard did not have a material impact on the Company's other financial instruments.
•In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients to reduce the costs and complexity associated with the high volume of contractual modifications expected in the transition away from LIBOR as the benchmark rate in contracts and hedges.These optional expedients allow entities to negate many of the accounting impacts of modifying contracts and hedging relationships necessitated by reference rate reform, allowing them to generally maintain the accounting as if a change had not occurred. The Company adopted this standard during the three months ended March 31, 2020, and will electt the practical expedients relative to Company’s contracts and hedging relationship modified as a result of reference rate reform through December 31, 2022. These practical expedients did not have a material impact on the Company’s business, financial position, results of operations, or disclosures.
•In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general tax accounting principles and simplifying other specific tax scenarios. The Company early adopted this update as of January 1, 2020, and did not have any material impact to the Company’s business, financial position, results of operations, or disclosures.
The adoption of the following ASUs did not have a material impact on the Company’s business, financial position or results of operations.
•ASU 2018-17, Consolidation (Topic 10): Targeted Improvements to Related Party Guidance for Variable Interest Entities
•ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement
Accounting Policies
There have been no material changes (except as disclosed below) in the Company’sCompany's accounting policies from those disclosed in Part II, Item 8 - Financial Statements and Supplementary Data in the 20182019 Annual Report on Form 10-K.
Recently Adopted Accounting Standards
SinceThe change in the following policy is as a result of the Company's adoption of CECL standard, on January 1, 2019,2020.
•Investment securities
Debt securities expected to be held for an indefinite period of time are classified as AFS and recorded on the balance sheet at fair value. If the fair value of an AFS debt security declines below its amortized cost basis and the Company adopteddoes not have the following FASB ASUs:
| |
• | In February 2016, the FASB issued ASU 2016-02, Leases. The primary effect of the ASU is to replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for operating leases and sales type and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. The Company adopted this standard using the modified retrospective method and utilized the optional transition method under which we continue to apply the legacy guidance in ASC 840, Leases, including its disclosure requirements, in the comparative period presented.
|
For all our operating leases (primarily our office space/facility leases), whereintention or requirement to sell the security before it recovers its amortized cost basis, declines due to credit factors will be recorded in earnings through the ACL for debt securities, and declines due to non-credit factors will be recorded in AOCI, net of taxes. Subsequent to recognition of a credit loss, improvements to the expectation of collectability will be reversed through the ACL for debt securities. If the Company is a lessee, adoption ofhas the new standard resulted in recognizing on our balance sheet, a right-of-use (“ROU”) asset of $67,300, a reduction of accounts payable and accrued expenses of $24,100 relatingintention or requirement to straight-line rent accruals and unamortized tenant improvement allowances, and a lease liability of $91,400. The right-of-use-asset and lease liability will be derecognized in a manner that effectively yields a straight-line lease expense oversell the lease term. In addition,security, the Company will record its fair value changes in earnings as a direct write down to the security. Increases in fair value above amortized cost basis are recorded in AOCI, net of taxes.
The Company conducts an impairment assessment quarterly on all AFS securities with a fair value that is less than their amortized cost basis to determine whether the loss is due to credit factors. Securities for which management expects risk of nonpayment of the amortized costs basis is zero, do not have a reserve. The Company has a zero loss expectation when the securities are issued or guaranteed by certain US government entities, since these entities have a long history of no longer capitalize certain initial direct costsdefaults and the highest credit ratings issued by rating agencies. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and by the recording of a valuation reserve. The non-credit component is recorded within AOCI.
•Purchased Credit Deteriorated or PCD loans
Loans that at acquisition the Company deems to have more than insignificant deterioration in connection with lease originations where itcredit quality since origination (i.e., Purchased Credit Deteriorated or PCD loans) require the recognition of an allowance for credit losses at purchase. The allowance for credit losses is added to the lessor.
Further, we electedpurchase price at the packagedate of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed us to carry forward the historical lease classification. We elected not to (a) use the hindsight practical expedientacquisition to determine the lease terminitial amortized cost basis of the PCD loan. The allowance for existing leases; and (b) recognize a lease liability and associated ROU asset for short term leases if such lease meetcredit losses is calculated using the definition under ASC 842. We chose not tosame methodology as originated loans, as described below. Alternatively, the Company can elect the practical expedientfair value option at the time of purchase for any financial asset. Under the FVO, loans are recorded at fair value with changes in value recognized immediately in income. There is no ACL for loans under a FVO.
•Credit Loss Expense and Allowance for Credit losses
General
Credit loss expenses are charged to operations in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Company’s retail installment contracts. The allowance for expected credit losses on retail installment contracts is measured based on a lifetime expected loss model, which means that it is not separate non-leasenecessary for a loss event to occur before a credit loss is recognized. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. Management's evaluation takes into consideration the risks in the portfolio, past loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
The Company measures expected losses of all components on an amortized cost basis. For all loans except TDRs, the Company has elected to exclude accrued interest receivable balances from lease components. the measurement of expected credit losses because it applies a nonaccrual policy that results in the timely write off of accrued interest.
Methodology
The standard didCompany uses several methodologies for the measurement of ACL. The ACL is made up of a quantitative and a qualitative component. To determine the quantitative component, the Company generally uses a DCF approach for determining ACL for TDRs and other individually assessed loans, and a non-DCF approach for other loans. Expected credit losses are estimated on an individual basis only if the individual asset or exposure does not share similar risk attributes with other financial assets or exposures, including when an asset is treated as a collateral dependent asset.
The ACL estimate includes significant assumptions including the reasonable and supportable economic forecast period, which considers the availability of forward-looking scenarios and their respective time horizons, as well as the reversion method to historical losses. This method results in a single, quantitatively consistent credit model across the entire projection period as the macroeconomic effects in the historical data are controlled for the estimate of the long-run loss level.
Models
The Company uses a statistical methodology based on an ECL approach that focuses on forecasting the ECL components (i.e., probability of default, payoff, loss given default and exposure at default) on a loan level basis to estimate the expected future life time losses. The individual loan balances used in the models are measured on an amortized cost basis.
•In calculating the probability of default and payoff, the Company developed model forecasts, which consider variables such as delinquency status, loan tenor and other credit quality indicators.
•The loss given default component forecasts the extent of losses given that a default has occurred and considers variables such as collateral, loan-to-value and other credit quality indicators.
•The exposure at default component captures the effects of expected partial prepayments and underpayments that are expected to occur during the forecast period and considers variable such as loan-to-value, collateral and other credit quality indicators.
The above ECL components are used to compute an ACL based on the weighted average of the results of the macroeconomic scenarios. The weighting of these scenarios is governed and approved quarterly by management through established committee governance. These ECL components are inputs to both the Company’s DCF approach for TDR and individually assessed loans, and non-DCF approach for other loans.
When using a non-DCF method to measure the ACL, the Company measures ECL over the asset’s contractual term, adjusted for (a) expected prepayments; (b) expected extensions associated with assets for which management has a reasonable expectation at the reporting date that it will execute a TDR with the borrower; and (c) expected extensions or renewal options (excluding those that are accounted for as derivatives) included in the original or modified contract at the reporting date that are not unconditionally cancellable by the entity.
DCF approaches
A DCF method measures expected credit losses by forecasting expected future principal and interest cash flows and discounting them using the financial asset’s EIR. The ACL reflects the difference between the amortized cost basis (including accrued interest) and the present value of the expected cash flows. When using a DCF method to measure the ACL, the period of exposure is determined as a function of the Company’s expectations of the timing of principal and interest payments. The Company considers estimated prepayments in the future principal and interest cash flows when utilizing a DCF Method. The Company generally uses a DCF approach for TDRs.
Collateral- Dependent Assets
A loan is considered a Collateral Dependent Financial Asset when (a) the Company determines foreclosure is probable or (b) the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral. For all collateral dependent loans such as certain bankruptcy modifications, the Company measures the ACL as the difference between the loan’s amortized cost basis and the fair value of the underlying collateral as of the reporting date, adjusted for expected costs to sell if repayment of the asset depends on the sale of the collateral. If repayment or satisfaction of the loan is dependent only on the operation, rather than the sale, of the collateral, the measure of credit losses does not incorporate estimated costs to sell. The collateral dependent loan is written down (i.e. charged off) to the fair value of the collateral adjusted for costs to sell (if repayment from sale is expected.) Any subsequent increase or decrease in the collateral’s fair value less cost to sell is recognized as an adjustment to the related loan’s ACL.
Negative allowance
Negative allowance is defined as the amount of future recovery expected for accounts that have already been charged-off. The Company performs an analysis of the actual historical recovery values to determine the pattern of recovery and expected rate of recovery over a given historic period, and uses the results of this analysis to determine negative allowance. Negative allowance reduces the ACL.
Qualitative Reserve
Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains a qualitative reserve as a component of the ACL to recognize the existence of these exposures. Imprecisions include loss factors inherent in the loan portfolio that may not have a material impact on our condensed consolidated statement of income or condensed consolidated statement of cash flows.
| |
• | In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The Company adopted this standard effective January 1, 2019 and it did not have a material impact on the Company’s business, financial position or results of operations.
|
| |
• | In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits use of the OIS rate based on SOFR as an eligible benchmark interest rate for purposes of applying hedge accounting under Topic 815. The adoption of this standard did not have any impact on the Company’s business, financial position or results of operations.
|
The adoptionbeen discreetly contemplated in deriving the quantitative component of the following ASUs didallowance, as well as potential variability in estimates.
The qualitative adjustment is also established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. This analysis is conducted at least quarterly, and the Company revises the qualitative component of the allowance when necessary in order to address improving or deteriorating credit quality trends or specific risks associated with loan pool classification, not otherwise captured in the quantitative models.
Governance
A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions, trends and forecasts. Risk factors are continuously reviewed and revised by management when conditions warrant.
The Company's reserves are principally based on various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its ACL Committee. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.
Changes in the assumptions used in these estimates could have a direct material impact on the Company’s business, financial position or results of operations.
| |
• | ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
|
| |
• | ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
|
| |
• | ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
|
| |
• | ASU 2018-09, Codification Improvements
|
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, which changes the criteria under which credit losses are measured. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss (“CECL”) model, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to establish credit loss estimates.expense in the Consolidated Statements of Operations and in the allowance for credit losses. The guidance will be effective forloan portfolio represents the fiscal year beginning after December 15, 2019, including interim periods within that year.largest asset on the Consolidated Balance Sheets. The Company does not intend to adopt the new standard earlyCompany’s models incorporate a variety of assumptions based on historical experience, current conditions and is currentlyforecasts. Management also applies its judgement in evaluating the impactappropriateness of the new guidance will have on its financial position, results of operations and cash flows; however, it is expected thatallowance. Material change to the new CECL model will alterACL might be necessary if prevailing conditions differ materially from the assumptions usedand estimates utilized in calculating the Company’s credit losses, given the change to estimated losses for the estimated life of the financial asset, and will likely result in a material increase in the Company’s credit and capital reserves and related decrease in capital ratios.ACL.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.
In addition to those described in detail above, the Company is also in the process of evaluating the ASU 2018-17, Consolidation (Topic 10): Targeted Improvements to Related Party Guidance for Variable Interest Entities, but2. Finance Receivables
does not expect it to have a material impact on the Company’s business, financial position, results of operations or disclosures.
Held For Investment
Finance receivables held for investment, net is comprised of the following at June 30, 2019March 31, 2020 and December 31, 2018:2019: | | | | | | | | March 31, 2020 | | December 31, 2019 |
| Retail installment contracts, net (a) | | Retail installment contracts, net (a) | $ | 25,322,609 | | | $ | 27,719,221 | |
| Purchased receivables - credit deteriorated | | Purchased receivables - credit deteriorated | 10,872 | | | 12,177 | |
| Receivables from dealers | | Receivables from dealers | 12,366 | | | 12,536 | |
| | June 30, 2019 | | December 31, 2018 | |
| Retail installment contracts acquired individually (a) | $ | 25,790,932 |
| | $ | 25,065,511 |
| |
| Purchased receivables-Credit Impaired | 15,419 |
| | 19,235 |
| |
| Receivables from dealers | 12,875 |
| | 14,557 |
| |
| Personal loans | — |
| | 2,014 |
| |
| Finance lease receivables (Note 3) | 19,523 |
| | 16,137 |
| Finance lease receivables (Note 3) | 23,918 | | | 23,085 | |
| Finance receivables held for investment, net | $ | 25,838,749 |
| | $ | 25,117,454 |
| Finance receivables held for investment, net | $ | 25,369,765 | | | $ | 27,767,019 | |
(a) The Company has elected the fair value option for certain retail installment contracts reported in finance receivables held for investment, net. As of June 30, 2019March 31, 2020 and December 31, 2018, $8,8322019, $15,307 and $13,509$22,353 of loans were recorded at fair value, respectively (Note 13).
The Company’s held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans is comprised of the following at June 30, 2019March 31, 2020 and December 31, 2018:
| |
| June 30, 2019 | | March 31, 2020 | |
| Retail Installment Contracts
Acquired
Individually |
| Receivables from
Dealers | | Retail Installment Contracts | |
| Non-TDR |
| TDR |
| | Non-TDR | | TDR | |
| Unpaid principal balance | $ | 24,451,977 |
|
| $ | 4,519,334 |
|
| $ | 13,010 |
| Unpaid principal balance | $ | 27,261,964 | | | $ | 3,459,695 | | |
| Credit loss allowance - specific | — |
|
| (1,156,303 | ) |
| — |
| |
| Credit loss allowance - collective | (1,961,893 | ) |
| — |
|
| (135 | ) | |
| ACL | | ACL | (4,482,663) | | | (973,236) | | |
| | Discount | (120,523 | ) |
| (26,736 | ) |
| — |
| Discount | (21,542) | | | (13,109) | | |
| Capitalized origination costs and fees | 81,581 |
|
| 3,495 |
|
| — |
| Capitalized origination costs and fees | 89,108 | | | 2,392 | | |
| Net carrying balance | $ | 22,451,142 |
|
| $ | 3,339,790 |
|
| $ | 12,875 |
| Net carrying balance | $ | 22,846,867 | | | $ | 2,475,742 | | |
| ACL as a percentage of unpaid principal balance | | ACL as a percentage of unpaid principal balance | 16.4 | % | | 28.1 | % | |
| ACL and discount as a percentage of unpaid principal balance | | ACL and discount as a percentage of unpaid principal balance | 16.5 | % | | 28.5 | % | |
|
The remaining balance of personal loans, held for investment, was charged off during the quarter ended June 30, 2019.
| | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | |
| Retail Installment Contracts | | | | | | |
| Non-TDR | | TDR | | | | |
| Unpaid principal balance | $ | 26,895,551 | | | $ | 3,859,040 | | | | | |
| Credit loss allowance - specific | — | | | (914,718) | | | | | |
| Credit loss allowance - collective | (2,123,878) | | | — | | | | | |
| Discount | | (67,484) | | | (17,167) | | | | | |
| Capitalized origination costs and fees | | 84,961 | | | 2,916 | | | | | |
| Net carrying balance | | $ | 24,789,150 | | | $ | 2,930,071 | | | | | |
| Allowance as a percentage of unpaid principal balance | 7.9 | % | | 23.7 | % | | | | |
| Allowance and discount as a percentage of unpaid principal balance | 8.1 | % | | 24.1 | % | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| December 31, 2018 |
| Retail Installment Contracts
Acquired
Individually |
| Receivables from
Dealers |
| Personal Loans |
| Non-TDR |
| TDR |
|
|
| Unpaid principal balance | $ | 23,054,157 |
|
| $ | 5,378,603 |
|
| $ | 14,710 |
|
| $ | 2,637 |
|
| Credit loss allowance - specific | — |
|
| (1,416,743 | ) |
| — |
|
| — |
|
| Credit loss allowance - collective | (1,819,360 | ) |
| — |
|
| (153 | ) |
| (761 | ) |
| Discount | (172,659 | ) |
| (40,333 | ) |
| — |
|
| — |
|
| Capitalized origination costs and fees | 77,398 |
|
| 4,448 |
|
| — |
|
| 138 |
|
| Net carrying balance | $ | 21,139,536 |
|
| $ | 3,925,975 |
|
| $ | 14,557 |
|
| $ | 2,014 |
|
Retail installment contracts
Retail installment contracts are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company’s retail installment contracts held for investment are pledged against warehouse lines or securitization bonds (Note 5). Most of the borrowers on the Company’s retail installment contracts held for investment are retail consumers; however, $604,157$781,871 and $537,922$741,592 of the unpaid principal balance represented fleet contracts with commercial borrowers as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
During the sixthree months ended June 30,March 31, 2020 and 2019, and 2018, the Company originated (including the SBNA originations program) $5,895,651$2,621,828 and $4,689,784,$2,442,582, respectively, in CCAP loans which represented 54%53% and 49%61%, respectively, of the total retail installment contract originations (including the SBNA originations program). As of June 30, 2019 and December 31, 2018, the Company’s carrying value of auto retail installment contract portfolio consisted of $8,581,222 and $8,977,284, respectively, of CCAP loans which represents 33% and 36%, respectively, of the Company’s carrying value of auto retail installment contract portfolio.
As of June 30, 2019,March 31, 2020, borrowers on the Company’s retail installment contracts held for investment are located in Texas (17%), Florida (11%), California (9%), Georgia (6%) and other states each individually representing less than 5% of the Company’s total portfolio.
Purchased receivables - Credit impaired
Purchased receivables portfolios, which were acquired with deteriorated credit quality, is comprised of the following at June 30, 2019 and December 31, 2018:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Outstanding balance | $ | 25,637 |
| | $ | 30,631 |
|
| Outstanding recorded investment, net of impairment | 15,533 |
| | 19,390 |
|
Changes in accretable yield on the Company’s purchased receivables portfolios-credit impaired for the periods indicated were as follows: |
| | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
| | June 30, 2019 |
| June 30, 2018 | June 30, 2019 |
| June 30, 2018 |
| Balance — beginning of period | $ | 17,892 |
| | $ | 18,446 |
| $ | 18,145 |
| | $ | 19,464 |
|
| Accretion of accretable yield | (940 | ) | | (2,245 | ) | (2,353 | ) | | (5,085 | ) |
| Reclassifications from (to) nonaccretable difference (a) | (3,194 | ) | | 2,167 |
| (2,034 | ) | | 3,989 |
|
| Balance — end of period | $ | 13,758 |
| | $ | 18,368 |
| $ | 13,758 |
| | $ | 18,368 |
|
(a) Reclassifications from (to) nonaccretable difference represents the increases (decreases) in accretable yield resulting from higher (lower) estimated undiscounted cash flows.
During the three and six months ended June 30,March 31, 2020 and March 2019, and 2018, the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected. However, duringfrom third party lenders.
During the three months ended June 30,March 31, 2020 and 2019 and 2018, the Company recognized certain retail installment contracts with an unpaid principal balance of $74,718$76,878 and $72,963, respectively, and for the six months ended June 30, 2019 and 2018, the Company recognized certain retail installment contracts with an unpaid principal balance of $74,718 and $115,959,0 respectively, held by non-consolidated securitization Trusts, under optional clean-up calls (Note 6). Following the initial recognition of these loans at fair value, the performing loans in the portfolio are carried at amortized cost, net of allowance for credit losses. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of the re-recognition date), for which it was probable that not all contractually required payments would be collected (Note 13).
Receivable from Dealers
The receivables from dealers held for investment are all Chrysler Agreement-related. As of June 30, 2019,March 31, 2020, borrowers on these dealer receivables are located in Virginia (70%) and New York (30%).
Held For Sale
The carrying value of the Company’s finance receivables held for sale, net is comprised of the following at June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Retail installment contracts acquired individually | $ | 293,372 |
| | $ | — |
|
| Personal loans | 955,729 |
| | 1,068,757 |
|
| Finance receivables held for sale, net | $ | 1,249,101 |
| | $ | 1,068,757 |
|
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| | | |
| | | |
| Personal loans | | $ | 912,126 | | | $ | 1,007,105 | |
| | | |
Sales of retail installment contracts and proceeds from sales of charged-off assets for the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | |
| | | | | Three months ended | | | | |
| | | | | | | | | |
| | | | | March 31, 2020 | | March 31, 2019 | | |
| | | | | | | | | |
| | | | | | | | | |
| Proceeds from sales of charged-off assets to third parties | | | | | 20,875 | | | 20,225 | | | |
|
| | | | | | | | | | | | | |
| | Three Months Ended |
| Six Months Ended |
| | June 30, 2019 |
| June 30, 2018 |
| June 30, 2019 |
| June 30, 2018 |
| Sales of retail installment contracts to affiliates | $ | — |
| | $ | 1,156,060 |
| | — |
| | 2,631,313 |
|
| Proceeds from sales of charged-off assets to third parties | 6,148 |
| | 16,638 |
| | 26,373 |
| | 34,875 |
|
The Company originates operating and finance leases, which are separately accounted for and recorded on the Company’s condensed consolidated balance sheets. Operating leases are reported as leased vehicles, net, while finance leases are included in finance receivables held for investment, net.
Operating Leases
Leased vehicles, net, which is comprised of leases originated under the Chrysler Agreement, consisted of the following as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Leased vehicles | $ | 22,152,579 | | | $ | 21,722,726 | |
| Less: accumulated depreciation | (4,334,946) | | | (4,159,944) | |
| Depreciated net capitalized cost | 17,817,633 | | | 17,562,782 | |
| Manufacturer subvention payments, net of accretion | (1,144,927) | | | (1,177,342) | |
| Origination fees and other costs | 74,201 | | | 76,542 | |
| Net book value | $ | 16,746,907 | | | $ | 16,461,982 | |
|
| | | | | | | |
| | June 30,
2019 | | December 31,
2018 |
| Leased vehicles | $ | 20,190,000 |
| | $ | 18,737,338 |
|
| Less: accumulated depreciation | (3,665,402 | ) | | (3,518,025 | ) |
| Depreciated net capitalized cost | 16,524,598 |
| | 15,219,313 |
|
| Manufacturer subvention payments, net of accretion | (1,292,015 | ) | | (1,307,424 | ) |
| Origination fees and other costs | 80,786 |
| | 66,966 |
|
| Net book value | $ | 15,313,369 |
| | $ | 13,978,855 |
|
The following summarizes the maturity analysis of lease payments due to the Company as lessor under operating leases as of June 30, 2019:March 31, 2020:
| | | | | |
| |
| Remainder of 2020 | $ | 2,141,841 | |
| 2021 | 1,963,561 | |
| 2022 | 829,750 | |
| 2023 | 144,756 | |
| 2024 | 154 | |
| Thereafter | — | |
| Total | $ | 5,080,062 | |
|
| | | |
| | |
| Remainder of 2019 | $ | 1,354,257 |
|
| 2020 | 2,219,761 |
|
| 2021 | 1,170,434 |
|
| 2022 | 197,514 |
|
| 2023 | 9,722 |
|
| Thereafter | — |
|
| Total | $ | 4,951,688 |
|
Finance Leases
Certain leases originated by the Company are accounted for as direct financing leases, as the contractual residual values are nominal amounts. Finance lease receivables, net consisted of the following as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
| | | | June 30,
2019 | | December 31,
2018 | | March 31, 2020 | | December 31, 2019 |
| Gross investment in finance leases | $ | 28,783 |
| | $ | 23,809 |
| Gross investment in finance leases | $ | 34,803 | | | $ | 34,443 | |
| Origination fees and other | 188 |
| | 152 |
| Origination fees and other | 277 | | | 241 | |
| Less: unearned income | (5,520 | ) | | (4,465 | ) | Less: unearned income | (7,093) | | | (6,859) | |
| Net investment in finance leases before allowance | 23,451 |
| | 19,496 |
| Net investment in finance leases before allowance | 27,987 | | | 27,825 | |
| Less: allowance for lease losses | (3,928 | ) | | (3,359 | ) | |
| Less: allowance for lease losses (a) | | Less: allowance for lease losses (a) | (4,069) | | | (4,740) | |
| Net investment in finance leases | $ | 19,523 |
| | $ | 16,137 |
| Net investment in finance leases | $ | 23,918 | | | $ | 23,085 | |
(a) The impact of day 1 - Adjustment to allowance for adoption of CECL standard was insignificant.
The following summarizes the maturity analysis of lease payments due to the Company as lessor under finance leases as of June 30, 2019:March 31, 2020:
| | | | | |
| | |
| Remainder of 2020 | $ | 7,886 | |
| 2021 | 9,574 | |
| 2022 | 8,175 | |
| 2023 | 5,823 | |
| 2024 | 3,160 | |
| Thereafter | 185 | |
| Total | $ | 34,803 | |
|
| | | |
| | |
| Remainder of 2019 | $ | 4,163 |
|
| 2020 | 8,244 |
|
| 2021 | 7,187 |
|
| 2022 | 5,382 |
|
| 2023 | 3,166 |
|
| Thereafter | 641 |
|
| Total | $ | 28,783 |
|
| |
4. | Credit Loss Allowance and Credit Quality |
4. Credit Loss Allowance and Credit Quality
Credit Loss Allowance
During the three months ended March 31, 2020, the Company changed the model used for estimating the ACL on retail installment contracts from incurred loss model to an expected lifetime loss model, as a result of the Company's adoption of the CECL standard on January 1, 2020.
The Company estimatesmaintains an ACL on the allowance for credit losses on individually acquired retail installment contracts (including loans acquired from third party lenders that are considered to have no credit deterioration at acquisition) and personal loans held for investment, not classified as TDRs, based on delinquency status, historical loss experience, estimated
values of underlying collateral, when applicable, and various economic factors. In developing the allowance, the Company utilizes a loss emergence period assumption, a loss given default assumption applied to recorded investment, and a probability of default assumption. The loss emergence period assumption represents the average length of time between when a loss event is first estimated to have occurred and when the account is charged-off. The recorded investment represents unpaid principal balance adjusted for unaccreted net discounts, subvention from manufacturers, and origination costs. Under this approach, the resulting allowance represents the expected net losses of recorded investment inherent in the portfolio. The Company uses a transition based Markov model for estimating the allowance for credit losses on individually acquired retail installment contracts. This model utilizes the recently observed loan transition rates from various loan statuses, including delinquency and accounting statuses from performing to charge off, to forecast future losses.
Forexcluding those loans classified as TDRs, impairment is generally measured based on the present value of expected future cash flows discounted at the original effective interest rate. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. The amount of the allowance is equal to the difference between the loan’s impaired value and the recorded investment.
in accordance with applicable accounting standards. The Company maintains a general credit loss allowancean expected ACL for receivables from dealers based on risk ratings and individually evaluates loans for specific impairment as necessary. As of June 30,March 31, 2020 and 2019, and 2018, the credit loss allowanceACL for receivables from dealers is comprised entirely of general allowance as none of these receivables have been determined to be individually impaired. The Company estimates losses on the finance lease receivable portfolio based on delinquency status, loss experience to date, future expectation of losses as well as various economic factors.
Retail installment contracts
The activity in the
credit loss allowanceACL for
individually acquiredthe retail installment contracts
and Dealer Loans for
the three and six months ended June 30, 2019 and 2018 was as follows: |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| Three Months Ended June 30, 2018 |
| | Retail Installment Contracts Acquired Individually | | Receivables from Dealers | | Personal Loans |
| Retail Installment Contracts Acquired Individually | | Receivables from Dealers | | Personal Loans |
| | Non-TDR |
| TDR | | |
| Non-TDR |
| TDR | | |
| |
|
| Balance — beginning of period | $ | 1,891,351 |
|
| $ | 1,280,649 |
| | $ | 137 |
| | $ | 605 |
|
| $ | 1,597,057 |
|
| $ | 1,716,132 |
| | $ | 161 |
| | $ | 1,714 |
|
| Provision for credit losses | 365,604 |
|
| 63,414 |
| | (2 | ) | | 1,070 |
|
| 263,648 |
|
| 144,750 |
| | (3 | ) | | (83 | ) |
| Charge-offs (a) | (795,901 | ) |
| (369,523 | ) | | — |
| | (1,761 | ) |
| (605,658 | ) |
| (412,710 | ) | | — |
| | (695 | ) |
| Recoveries | 517,626 |
|
| 185,371 |
| | — |
| | 86 |
|
| 396,667 |
|
| 216,050 |
| | — |
| | 180 |
|
| Transfers to held-for-sale | (16,787 | ) |
| (3,608 | ) | | — |
| | — |
|
| — |
|
| — |
| | — |
| | — |
|
| Balance — end of period | $ | 1,961,893 |
|
| $ | 1,156,303 |
| | $ | 135 |
| | $ | — |
|
| $ | 1,651,714 |
|
| $ | 1,664,222 |
| | $ | 158 |
| | $ | 1,116 |
|
(a) For the three months ended June 30,March 31, 2020 and 2019 and June 30, 2018, charge-offswas as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended March 31, 2020 | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | Retail Installment Contracts | | | | | | |
| | | | | | | | | Non-TDR | | TDR | | | | |
| | | | | | | | | | | | | | | |
| Balance — beginning of year | | | | | | | | | $ | 2,123,878 | | | $ | 914,718 | | | | | |
| Day 1 - Adjustment to allowance for adoption of CECL standard | | | | | | | | | 2,030,473 | | | 71,833 | | | | | |
| Credit loss expense | | | | | | | | | 757,193 | | | 150,850 | | | | | |
| | | | | | | | | | | | | | | |
| Charge-offs (a) | | | | | | | | | (899,550) | | | (289,567) | | | | | |
| Recoveries | | | | | | | | | 470,669 | | | 125,402 | | | | | |
| | | | | | | | | | | | | | | |
| Balance — end of period | | | | | | | | | $ | 4,482,663 | | | $ | 973,236 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Three Months Ended March 31, 2019 | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | Retail Installment Contracts | | | | | | |
| | | | | | | | | Non-TDR | | TDR | | | | |
| | | | | | | | | | | | | | | |
| Balance — beginning of year | | | | | | | | | $ | 1,819,360 | | | $ | 1,416,743 | | | | | |
| Credit loss expense | | | | | | | | | 446,488 | | | 104,613 | | | | | |
| Charge-offs (a) | | | | | | | | | (927,457) | | | (466,637) | | | | | |
| Recoveries | | | | | | | | | 552,960 | | | 225,930 | | | | | |
| | | | | | | | | | | | | | | |
| Balance — end of period | | | | | | | | | $ | 1,891,351 | | | $ | 1,280,649 | | | | | |
(a) Charge-offs for retail installment contracts acquired individually includes approximately $7 million and $7 million, respectively, for the partial write-down of loans to the collateral value less estimated costs to sell, for which a bankruptcy notice was received. There is no additional credit loss allowanceACL on these loans.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| Six Months Ended June 30, 2018 |
| | Retail Installment Contracts Acquired Individually |
| Receivables from Dealers |
| Personal Loans |
| Retail Installment Contracts Acquired Individually |
| Receivables
from Dealers |
| Personal Loans |
| | Non-TDR |
| TDR |
|
|
| Non-TDR |
| TDR |
|
|
| |
| | | |
| Balance — beginning of period | $ | 1,819,360 |
|
| $ | 1,416,743 |
|
| $ | 153 |
| | $ | 761 |
|
| $ | 1,540,315 |
|
| $ | 1,804,132 |
|
| $ | 164 |
|
| $ | 2,565 |
|
| Provision for credit losses | 812,092 |
|
| 168,027 |
|
| (18 | ) | | 1,153 |
|
| 550,099 |
|
| 368,324 |
|
| (6 | ) |
| (185 | ) |
| Charge-offs (a) | (1,723,358 | ) |
| (836,160 | ) |
| — |
| | (2,107 | ) |
| (1,260,827 | ) |
| (960,053 | ) |
| — |
|
| (1,763 | ) |
| Recoveries | 1,070,586 |
|
| 411,301 |
|
| — |
| | 193 |
|
| 822,127 |
|
| 451,819 |
|
| — |
|
| 499 |
|
| Transfers to held-for-sale | (16,787 | ) |
| (3,608 | ) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| Balance — end of period | $ | 1,961,893 |
|
| $ | 1,156,303 |
|
| $ | 135 |
|
| $ | — |
|
| $ | 1,651,714 |
|
| $ | 1,664,222 |
|
| $ | 158 |
|
| $ | 1,116 |
|
(a) ForThe credit risk in the six months ended June 30, 2019Company’s loan portfolios is driven by credit and June 30, 2018, charge-offs for retail installment contracts acquired individually includes approximately $12 millioncollateral quality, and $14 million, respectively, for the partial write-downis affected by borrower-specific and economy-wide factors. In general, there is an inverse relationship between credit quality of loans toand projections of impairment losses so that loans with better credit quality require a lower expected loss. The Company manages this risk through its underwriting, pricing strategies, credit policy standards, and servicing guidelines and practices, as well as the collateral value less estimated costs to sell, for which a bankruptcy notice was received. There is no additional credit loss allowance on these loans.application of geographic and other concentration limits.
The Company estimates lifetime expected losses on the finance lease receivable portfolio based on delinquency status and loss experience to date,prospective information as well as variousaccount level models based on historical data. Unemployment, housing price index, and used vehicle index growth rates, along with loan level characteristics, are the key inputs used in the models for prediction of the likelihood that the borrower will default in the forecasted period (the probability of default). The used vehicle index is also used to estimate the loss in the event of default.
The Company has determined the reasonable and supportable period to be three years at which time the economic factors.forecasts generally tend to revert to historical averages. The Company utilizes qualitative factors to capture any
additional risks that may not be captured in either the economic forecasts or in the historical data. The Company generally uses a third-party vendor's consensus baseline macroeconomic scenario for the quantitative estimate and additional positive and negative macroeconomic scenarios to make qualitative adjustment for the macroeconomic uncertainty. The scenarios are periodically updated over a reasonable and supportable time horizon with weightings assigned by management and approved through established committee governance, as inputs to the estimate.
To capture potential additional default risk as well as potential decreases in used car prices resulting from COVID-19, for the three months ended March 31, 2020, the Company adjusted the ACL using an additional outbreak specific economic forecast that considered a V-shaped economic recovery of COVID-19.
The Company’s allowance for credit losses increased $2.4 billion for the three months ended March 31, 2020. The primary drivers were an approximately $2.1 billion increase at CECL adoption on January 1, 2020, driven mainly by the addition of lifetime expected credit losses for non-TDR loans, and approximately $0.3 billion, net due to business drivers during the first quarter of 2020, which includes approximately $0.4 billion of additional reserves specific to COVID-19 risk, partially offset by decline in balances.
Other portfolios
The ACL for the period end and its activity for Dealer Loans, Finance Lease receivable portfolio, and Purchased receivable portfolio - credit deteriorated, for the three months ended March 31, 2020 and 2019, is insignificant.
For personal loans, the activity in the lease loss allowance for finance leasesACL was insignificant for the three and six months ended 2019. The remaining balance of personal loans, held for investment, was charged off during the quarter ended June 30, 2019 and 2018 was as follows:2019.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Balance — beginning of period | $ | 3,508 |
| | $ | 5,757 |
| | $ | 3,359 |
| | $ | 5,642 |
|
| Provision for lease losses | 595 |
| | (1,769 | ) | | $ | 916 |
| | (1,348 | ) |
| Charge-offs | (1,130 | ) | | (1,760 | ) | | $ | (1,789 | ) | | (3,141 | ) |
| Recoveries | 955 |
| | 1,354 |
| | $ | 1,442 |
| | 2,429 |
|
| Balance — end of period | $ | 3,928 |
| | $ | 3,582 |
| | $ | 3,928 |
| | $ | 3,582 |
|
There was no impairment activity noted for purchased receivable-credit impaired portfolio for the three and six months ended June 30, 2019 and June 30, 2018.
Delinquencies
Retail installment contracts and personal amortizing term loans are generally classified as non-performing (or nonaccrual) when they are greater than 60 days past due as to contractual principal or interest payments. Dealer receivables are classified as non-performing when they are greater than 90 days past due. At the time a loan is placed in non-performing (nonaccrual) status, previously accrued and uncollected interest is reversed against interest income. If an account is returned to a performing (accrual) status, the Company returns to accruing interest on the loan.
The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. In each case, the period of delinquency is based on the number of days payments are contractually past due.
A summary of delinquencies as of March 31, 2020, and December 31, 2019 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | | | |
| | Finance Receivables Held for Investment | | | | | | |
| | Retail Installment Contract Loans | | Purchased Receivables Portfolios - credit deteriorated | | Total | | Percent |
| | | | | | | |
| Amortized cost, 30-59 days past due | 2,565,268 | | | 1,872 | | | 2,567,140 | | | 8.3 | % |
| Amortized cost over 59 days | 1,418,857 | | | 1,008 | | | 1,419,865 | | | 4.6 | % |
| Total delinquent balance at amortized cost (a) | $ | 3,984,125 | | | $ | 2,880 | | | $ | 3,987,005 | | | 12.9 | % |
(a) The amount of accrued interest excluded from the disclosed amortized cost table is $52,300.
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | |
| | Finance Receivables Held for Investment | | | | | | |
| | Retail Installment Contract Loans | | Purchased Receivables Portfolios - credit impaired | | Total | | Percent |
| | | | | | | |
| Principal, 30-59 days past due | 2,972,495 | | | 1,930 | | | 2,974,425 | | | 9.7 | % |
| Delinquent principal over 59 days | 1,578,452 | | | 1,596 | | | 1,580,048 | | | 5.1 | % |
| Total delinquent principal (a) | $ | 4,550,947 | | | $ | 3,526 | | | $ | 4,554,473 | | | 14.8 | % |
(a) The table includes balances based on UPB. Difference between amortized cost and UPB was not material.
As of March 31, 2020 and December 31, 2019, there were 0 receivables from dealers that were 30 days or more delinquent. The accrual of interest on revolving personal loans continues until the loan is charged off. The unpaid principal balance on revolving personal loans 90 days past due and still accruing totaled $118,225$110,854 and $129,227$128,872 as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
A summaryNon-Accrual Loans for Retail Installment Contracts
The amortized cost basis of delinquencies as of June 30, 2019 and December 31, 2018financial instruments that are either non-accrual with related expected credit loss or non-accrual without related expected credit loss for retail installment contracts is as follows:
|
| | | | | | | | | | | |
| | June 30, 2019 |
| | Retail Installment Contracts Held for Investment |
| | Loans Acquired Individually | | Purchased Receivables Portfolios | | Total |
| Principal, 30-59 days past due | $ | 2,723,639 |
| | $ | 2,548 |
| | $ | 2,726,187 |
|
| Delinquent principal over 59 days (a) | 1,367,310 |
| | 1,117 |
| | 1,368,427 |
|
| Total delinquent principal | $ | 4,090,949 |
| | $ | 3,665 |
| | $ | 4,094,614 |
|
|
| | | | | | | | | | | |
| | December 31, 2018 |
| | Retail Installment Contracts Held for Investment |
| | Loans Acquired Individually | | Purchased Receivables Portfolios | | Total |
| Principal, 30-59 days past due | $ | 3,118,869 |
| | $ | 2,926 |
| | $ | 3,121,795 |
|
| Delinquent principal over 59 days (a) | 1,712,243 |
| | 1,532 |
| | 1,713,775 |
|
| Total delinquent principal | $ | 4,831,112 |
| | $ | 4,458 |
| | $ | 4,835,570 |
|
(a) Interest is generally accrued until 60 days past due in accordance with the Company’s accounting policy for retail installment contracts.
The retail installment contracts acquired individually held for investment that were placed on nonaccrual status, as of June 30, 2019 and December 31, 2018:
| | | | June 30, 2019 | | December 31, 2018 | | March 31, 2020 | |
| | Amount | | Percent (a) | | Amount | | Percent (a) | | Non-accrual loans | | Non-accrual loans with no allowance (a) | | Interest income recognized on nonaccrual loans | | Non-accrual loans as a percent of total amortized cost |
| Non-TDR | $ | 864,619 |
| | 3.0 | % | | $ | 834,921 |
| | 2.9 | % | Non-TDR | $ | 1,054,039 | | | | $ | 142,511 | | | | $ | 24,681 | | | 3.4 | % |
| TDR | 546,495 |
| | 1.9 | % | | 733,218 |
| | 2.6 | % | TDR | 421,341 | | | | 51,575 | | | | 13,429 | | | 1.4 | % |
| Total nonaccrual principal | $ | 1,411,114 |
| | 4.9 | % | | $ | 1,568,139 |
| | 5.5 | % | |
| Total non-accrual loans | | Total non-accrual loans | $ | 1,475,380 | | | $ | 194,086 | | | $ | 38,110 | | | | 4.8 | % |
(a) Percent of unpaid principal balance of total retail installment contracts individually heldThese represent loans for investment.which a bankruptcy notice was received, and have been partially write-down to the collateral value less estimated costs to sell. Accordingly, there is no additional ACL on these loans.
| | | | | | | | | | | |
| December 31, 2019 | | |
| Amount | | Percent |
| Non-TDR | $ | 1,099,462 | | | 3.6 | % |
| TDR | 516,119 | | | 1.7 | % |
| Total nonaccrual principal (a) | $ | 1,615,581 | | | 5.3 | % |
(a) The table includes balances in the above tables reflect total unpaid principal balance rather than recorded investment before allowance.based on UPB. Difference between amortized cost and UPB was not material.
As of June 30, 2019 and December 31, 2018, there were no receivables from dealers that were 30 days or more delinquent. In addition, as of June 30, 2019 and December 31, 2018, there were $10,779 and zero, respectively, of retail installment contracts held for sale that were 30 days or more delinquent.
Credit Quality Indicators
FICO®FICO® Distribution (determined at origination) — A summary of the credit risk profile of the Company’s retail installment contracts heldAmortized Cost Basis (in millions) by Origination Year for investment by FICO® distribution, determined at origination, as of June 30, 2019 and December 31, 2018 was as follows:Retail Installment Contacts
|
| | | | |
FICO® Band | | June 30, 2019 (b) | | December 31, 2018 (b) |
| Commercial (a) | | 2.1% | | 1.9% |
| No-FICOs | | 10.9% | | 11.0% |
| <540 | | 18.8% | | 19.8% |
| 540-599 | | 33.2% | | 32.9% |
| 600-639 | | 18.9% | | 18.2% |
| >640 | | 16.1% | | 16.2% |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | Total | |
| March 31, 2020 | | 2020 (b) | | 2019 | | 2018 | | 2017 | | 2016 | | 2015 | | Prior | | Amount | % |
| | | | | | | | | | | | | | | | | |
No-FICO®s | | 508 | | | 1,681 | | | | 784 | | | | 813 | | | | 446 | | | | 296 | | | | 88 | | | | 4,616 | | 15.0% |
| <540 | | 552 | | | 1,799 | | | | 1,244 | | | | 650 | | | | 399 | | | | 309 | | | | 188 | | | | 5,141 | | 16.7% |
| 540-599 | | 1,136 | | | 3,982 | | | | 2,405 | | | | 974 | | | | 649 | | | | 455 | | | | 212 | | | | 9,813 | | 31.9% |
| 600-639 | | 694 | | | 2,529 | | | | 1,392 | | | | 491 | | | | 362 | | | | 231 | | | | 119 | | | | 5,818 | | 18.9% |
| >640 | | 837 | | | 2,271 | | | | 1,176 | | | | 404 | | | | 340 | | | | 258 | | | | 105 | | | | 5,391 | | 17.5% |
| Total (c) | | $ | 3,727 | | | $ | 12,262 | | | | $ | 7,001 | | | | $ | 3,332 | | | | $ | 2,196 | | | | $ | 1,549 | | | | $ | 712 | | | $ | 30,779 | | 100.0% |
(a)No FICO® score is obtained on loans to commercial borrowers.
(b) Represents three months ended March 31, 2020
(b)(c) The amount of accrued interest excluded from the disclosed amortized cost table is $299 million.
| | | | | | | | |
| FICO® Band | | December 31, 2019 (b) |
| | |
| No-FICO®s | | 12.4% |
| <540 | | 16.9% |
| 540-599 | | 31.9% |
| 600-639 | | 19.0% |
| >640 | | 19.8% |
(a) No FICO® score is obtained on loans to commercial borrowers.
(b) Percentages are based on unpaid principal balance.UPB. Difference between amortized cost and UPB was not material.
Commercial Lending — The Company’s risk department performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described in Part II, Item 8 - Financial Statements and Supplementary Data (Note 4) in the 2018 Annual Report on Form 10-K.classifications. All the receivables from dealers, as of June 30, 2019March 31, 2020 and December 31, 20182019 were classified as “Pass.”
Troubled Debt Restructurings
In certain circumstances, the Company modifies the terms of its finance receivables to troubled borrowers. Modifications may include a temporary reduction in monthly payment, reduction in interest rate, an extension of the maturity date, rescheduling of future cash flows, or a combination thereof. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the debtor’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all individually acquired retail installment contracts that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs. The purchased receivables portfolio-credit impaired,portfolio - credit deteriorated, operating and finance leases, and loans held for sale, including personal loans, are excluded from the scope of the applicable guidance. The Company’s TDR balance as of June 30, 2019March 31, 2020 and December 31, 20182019 primarily consisted of loans that had been deferred or modified to receive a temporary reduction in monthly payment. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, there were no0 receivables from dealers classified as a TDR.
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. For loans on nonaccrual status, interest income is recognized on a cash basis, and the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. The recognition of interest income
on TDR loans reflects management’s best estimate of the amount that is reasonably assured of collection and is consistent with the estimate of future cash flows used in the impairment measurement. Any accrued but unpaid interest is fully reserved for through the recognition of additional impairment, on the recorded investment, if not expected to be collected.
The table below presents the Company’s amortized cost (including accrued interest) of TDRs as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Retail Installment Contracts |
| Outstanding recorded investment (a) | $ | 4,492,654 |
| | $ | 5,365,477 |
|
| Impairment | (1,156,303 | ) | | (1,416,743 | ) |
| Outstanding recorded investment, net of impairment | $ | 3,336,351 |
| | $ | 3,948,734 |
|
| | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | | |
| Retail Installment Contracts | | |
| Amortized Cost including accrued interest (a) | $ | 3,436,753 | | | $ | 3,828,892 | |
| Impairment | (973,236) | | | (914,718) | |
| Amortized cost including accrued interest, net of impairment | $ | 2,463,517 | | | $ | 2,914,174 | |
(a) As of June 30, 2019, the outstanding recorded investmentMarch 31, 2020, this balances excludes $94.2$86.7 million of collateral-dependent bankruptcy TDRs that have been written down by $39.0$35.2 million to fair value less cost to sell. As of December 31, 2018, the outstanding recorded investment2019, this balance excludes $90.1$94.9 million of collateral-dependent bankruptcy TDRs that have been written down by $36.4 million to fair value less cost to sell.
A summary of the amortized cost (including accrued interest) of the Company’s delinquent TDRs at June 30, 2019March 31, 2020 and December 31, 2018,2019 is as follows:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Retail Installment Contracts (a) |
| Principal, 30-59 days past due | $ | 991,730 |
| | $ | 1,265,946 |
|
| Delinquent principal over 59 days | 555,864 |
| | 810,589 |
|
| Total delinquent TDR principal | $ | 1,547,594 |
| | $ | 2,076,535 |
|
| | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | | |
| Retail Installment Contracts (a) | | |
| | | |
| 30-59 days past due | 704,812 | | | 927,952 | |
| Delinquent balance over 59 days | 417,523 | | | 521,709 | |
| Total delinquent TDRs | $ | 1,122,335 | | | $ | 1,449,661 | |
(a) The December 31, 2019 balances in the above table reflects totalwere based on unpaid principal balance rather than net recorded investment before allowance.
Average recorded investmentamortized cost (including accrued interest) and interest income recognized on TDR loans are as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 |
| June 30, 2018 | | June 30, 2019 |
| June 30, 2018 |
| | Retail Installment Contracts |
| Average outstanding recorded investment in TDRs | $ | 4,745,931 |
| | $ | 6,118,495 |
| | $ | 4,970,364 |
| | $ | 6,248,219 |
|
| Interest income recognized | $ | 199,305 |
| | 257,275 |
| | $ | 434,993 |
| | 551,062 |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | Three Months Ended | | | | |
| | | | | | March 31, 2020 | | March 31, 2019 | | |
| | | | | | Retail Installment Contracts | | | | |
| Average amortized cost (including accrued interest) | | | | | $ | 3,687,797 | | | $ | 5,181,657 | | | |
| Interest income recognized | | | | | 156,238 | | | 235,688 | | | |
The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs (including collateral-dependent bankruptcy TDRs) that occurred for the three
and six months ended
June 30, 2019March 31, 2020 and
2018: |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| | Retail Installment Contracts |
| Outstanding recorded investment before TDR | $ | 295,540 |
| | $ | 723,925 |
| | $ | 627,549 |
| | $ | 1,308,373 |
|
| Outstanding recorded investment after TDR | $ | 296,257 |
| | $ | 725,438 |
| | $ | 628,887 |
| | $ | 1,308,102 |
|
| Number of contracts (not in thousands) | 17,335 |
| | 43,265 |
| | $ | 37,208 |
| | $ | 77,639 |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | Three Months Ended | | | | |
| | | | | | March 31, 2020 | | March 31, 2019 | | |
| | | | | | Retail Installment Contracts | | | | |
| Amortized cost (including accrued interest) before TDR | | | | | $ | 177,215 | | | $ | 332,010 | | | |
| Amortized cost (including accrued interest) after TDR | | | | | 177,604 | | | 332,630 | | | |
| Number of contracts (not in thousands) | | | | | 9,826 | | | 19,873 | | | |
A TDR is considered to have subsequently defaulted upon charge off, which for retail installment contracts is at the earlier of the date of repossession or 120 days past due and for revolving personal loans is generally the month in which the receivable becomes 180 days past due. Loan restructurings accounted for as TDRs within the previous twelve months that subsequently defaulted during the three and six months ended June 30,March 31, 2020 and 2019 and 2018 are summarized in the following table:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 |
| June 30, 2018 |
| | Retail Installment Contracts |
| Recorded investment in TDRs that subsequently defaulted (a) | $ | 90,128 |
| | $ | 144,561 |
| | $ | 216,365 |
| | $ | 339,826 |
|
| Number of contracts (not in thousands) | 5,335 |
| | 8,707 |
| | $ | 12,907 |
| | $ | 20,247 |
|
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended | | | | |
| | | | | | | | | |
| | | | | | March 31, 2020 | | March 31, 2019 | | |
| | | | | | Retail Installment Contracts | | | | |
| Amortized cost (including accrued interest) in TDRs that subsequently defaulted (a) | | | | | $ | 69,335 | | | $ | 126,238 | | | |
| Number of contracts (not in thousands) | | | | | 4,085 | | | 7,572 | | | |
(a) For TDR modifications and TDR modifications that subsequently defaults,default, the allowance methodology remains unchanged; however, the transition rates of the TDR loans are adjusted to reflect the respective risks.
5. Debt
Revolving | | | | | | | | | | | |
| Total borrowings and other debt obligations as of March 31, 2020 and December 31, 2019 consists of: | | | |
| March 31, 2020 | | December 31, 2019 |
| Notes Payable — Facilities with Third Parties | $ | 6,521,679 | | | $ | 5,399,931 | |
| Notes Payable — Secured Structured Financings | 28,043,124 | | | 28,141,885 | |
| Notes Payable — Facilities with Santander and Related Subsidiaries (a) | 5,652,077 | | | 5,652,325 | |
| $ | 40,216,880 | | | $ | 39,194,141 | |
Notes Payable - Credit Facilities
The following table presents information regarding the Company’s credit facilities as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | | | | | | | |
| Maturity Date(s) | | Utilized Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
| Facilities with third parties: | | | | | | | | | | | |
| Warehouse line | June 2021 | | $ | 470,684 | | | $ | 500,000 | | | 2.18% | | $ | 674,616 | | | $ | — | |
| Warehouse line | March 2021 | | 872,645 | | | 1,250,000 | | | 2.62% | | 1,674,040 | | | 1 | |
| Warehouse line (b) | October 2021 | | — | | | 1,000,000 | | | 3.47% | | — | | | — | |
| Warehouse line (c) | October 2021 | | 1,502,143 | | | 4,000,000 | | | 3.47% | | 1,515,207 | | | 2,055 | |
| Warehouse line | July 2021 | | 156,000 | | | 500,000 | | | 3.82% | | 177,679 | | | 261 | |
| Warehouse line | October 2021 | | 1,790,377 | | | 2,100,000 | | | 2.65% | | 2,744,449 | | | 328 | |
| Repurchase facility | July 2020 | | 233,893 | | | 233,893 | | | 3.80% | | 377,550 | | | — | |
| Repurchase facility (d) | April 2020 | | 53,234 | | | 53,234 | | | 3.04% | | 99,120 | | | — | |
| Repurchase facility (d) | April 2020 | | 26,483 | | | 26,483 | | | 4.64% | | 69,945 | | | — | |
| Warehouse line | January 2022 | | 739,300 | | | 1,000,000 | | | 2.62% | | 1,325,376 | | | — | |
| Warehouse line | November 2021 | | 480,320 | | | 500,000 | | | 2.27% | | 531,179 | | | 261 | |
| Warehouse line | June 2021 | | 196,600 | | | 600,000 | | | 5.04% | | 234,858 | | | 56 | |
| Total facilities with third parties | | | 6,521,679 | | | 11,763,610 | | | | | 9,424,019 | | | 2,962 | |
| Facilities with Santander and related subsidiaries: | | | | | | | | | | | |
| Promissory Note | December 2021 | | 250,000 | | | 250,000 | | | 3.70% | | — | | | — | |
| Promissory Note | December 2022 | | 250,000 | | | 250,000 | | | 3.95% | | — | | | — | |
| Promissory Note | December 2023 | | 250,000 | | | 250,000 | | | 5.25% | | — | | | — | |
| Promissory Note | December 2022 | | 250,000 | | | 250,000 | | | 5.00% | | — | | | — | |
| Promissory Note | March 2021 | | 300,000 | | | 300,000 | | | 3.95% | | — | | | — | |
| Promissory Note | October 2020 | | 400,000 | | | 400,000 | | | 3.10% | | — | | | — | |
| Promissory Note | November 2022 | | 400,000 | | | 400,000 | | | 3.90% | | — | | | — | |
| Promissory Note | May 2020 | | 500,000 | | | 500,000 | | | 3.49% | | — | | | — | |
| Promissory Note | June 2022 | | 500,000 | | | 500,000 | | | 3.30% | | — | | | — | |
| Promissory Note | July 2024 | | 500,000 | | | 500,000 | | | 3.90% | | — | | | — | |
| Promissory Note (a) | March 2022 | | 650,000 | | | 650,000 | | | 4.20% | | — | | | — | |
| Promissory Note | August 2021 | | 650,000 | | | 650,000 | | | 3.44% | | — | | | — | |
| Promissory Note | September 2023 | | 750,000 | | | 750,000 | | | 3.27% | | — | | | — | |
| Line of credit | July 2021 | | — | | | 500,000 | | | 3.40% | | — | | | — | |
| Line of credit | March 2022 | | — | | | 2,500,000 | | | 4.19% | | — | | | — | |
| Total facilities with Santander and related subsidiaries | | | 5,650,000 | | | 8,650,000 | | | | | — | | | — | |
| Total revolving credit facilities | | | $ | 12,171,679 | | | $ | 20,413,610 | | | | | $ | 9,424,019 | | | $ | 2,962 | |
(a) In 2017, the Company entered into an interest rate swap to hedge the interest rate risk on this fixed rate debt. This derivative was designated as fair value hedge at inception. This derivative was later terminated and the unamortized fair value hedge adjustment as of March 31, 2020 and December 31, 2019 was $2.1 million and $2.3 million, respectively, the amortization of which will reduce interest expense over the remaining life of the fixed rate debt.
|
| | | | | | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Maturity Date(s) | | Utilized Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
| Facilities with third parties: | | | | | | | | | | | |
| Warehouse line | June 2021 | | $ | 186,983 |
| | $ | 500,000 |
| | 4.04% | | $ | 267,358 |
| | $ | — |
|
| Warehouse line | March 2021 | | 1,061,345 |
| | 1,250,000 |
| | 3.66% | | 1,552,733 |
| | — |
|
| Warehouse line (a) | August 2020 | | 2,966,543 |
| | 4,400,000 |
| | 3.73% | | 4,080,313 |
| | 3,849 |
|
| Warehouse line | October 2020 | | 881,577 |
| | 2,050,000 |
| | 4.38% | | 1,203,771 |
| | 46 |
|
| Repurchase facility (b) | September 2019 | | 330,062 |
| | 330,062 |
| | 3.80% | | 452,740 |
| | — |
|
| Repurchase facility (b) | July 2019 | | 95,633 |
| | 95,633 |
| | 3.04% | | 153,680 |
| | — |
|
| Warehouse line | November 2020 | | 585,400 |
| | 1,000,000 |
| | 3.76% | | 922,796 |
| | — |
|
| Warehouse line | November 2020 | | 315,720 |
| | 500,000 |
| | 3.28% | | 349,564 |
| | 486 |
|
| Warehouse line | June 2021 | | 90,900 |
| | 350,000 |
| | 5.66% | | 101,504 |
| | 239 |
|
| Total facilities with third parties | | | 6,514,163 |
| | 10,475,695 |
| | | | 9,084,459 |
| | 4,620 |
|
| Facilities with Santander and related subsidiaries: | | | | | | | | | | | |
| Promissory Note | December 2021 | | 250,000 |
| | 250,000 |
| | 3.70% | | — |
| | — |
|
| Promissory Note | December 2022 | | 250,000 |
| | 250,000 |
| | 3.95% | | — |
| | — |
|
| Promissory Note | December 2023 | | 250,000 |
| | 250,000 |
| | 5.25% | | — |
| | — |
|
| Promissory Note | December 2022 | | 250,000 |
| | 250,000 |
| | 5.00% | | — |
| | — |
|
| Promissory Note | March 2021 | | 300,000 |
| | 300,000 |
| | 3.95% | | | | |
| Promissory Note | October 2020 | | 400,000 |
| | 400,000 |
| | 3.10% | | — |
| | — |
|
| Promissory Note | May 2020 | | 500,000 |
| | 500,000 |
| | 3.49% | | — |
| | — |
|
| Promissory Note (c) | March 2022 | | 650,000 |
| | 650,000 |
| | 4.20% | | — |
| | — |
|
| Promissory Note | June 2022 | | 500,000 |
| | 500,000 |
| | 5.82% | | — |
| | — |
|
| Promissory Note | August 2021 | | 650,000 |
| | 650,000 |
| | 3.44% | | — |
| | — |
|
| Line of credit | July 2021 | | — |
| | 500,000 |
| | 4.27% | | — |
| | — |
|
| Line of credit | March 2022 | | — |
| | 3,000,000 |
| | 5.60% | | — |
| | — |
|
| Total facilities with Santander and related subsidiaries | | | 4,000,000 |
| | 7,500,000 |
| | | | — |
| | — |
|
| Total revolving credit facilities | | | $ | 10,514,163 |
| | $ | 17,975,695 |
| | | | $ | 9,084,459 |
| | $ | 4,620 |
|
(a)(c) This line is held exclusively for financing of Chrysler CapitalFinance leases. In April 2020, the commitment amount was reduced by $500 million.
(b)(d) The repurchase facilities are collateralized by securitization notes payable retained by the Company. As the borrower, we are exposed to liquidity risk due to changes in the market value of the retained securities pledged. In some instances, we place or receive cash collateral with counterparties under collateral arrangements associated with our repurchase agreements. The maturity date for thethese repurchase facilityfacilities trade that expiresexpiring in July 2019April 2020 was extended to October 2019.
| |
(c) | In 2017, the Company entered into an interest rate swap to hedge the interest rate risk on this fixed rate debt. This derivative was designated as fair value hedge at inception. This derivative was later terminated and the unamortized fair value hedge adjustment as of June 30, 2019 and December 31, 2018 was $2.8 million and $3.2 million, respectively, the amortization of which will reduce interest expense over the remaining life of the fixed rate debt. |
May 2020.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Maturity Date(s) | | Utilized Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
| Facilities with third parties: | | | | | | | | | | | |
| Warehouse line | August 2019 | | $ | 53,584 |
| | $ | 500,000 |
| | 8.34% | | $ | 78,790 |
| | $ | — |
|
| Warehouse line | Various | | 314,845 |
| | 1,250,000 |
| | 4.83% | | 458,390 |
| | — |
|
| Warehouse line | August 2020 | | 2,154,243 |
| | 4,400,000 |
| | 3.79% | | 2,859,113 |
| | 4,831 |
|
| Warehouse line | October 2020 | | 242,377 |
| | 2,050,000 |
| | 5.94% | | 345,599 |
| | 120 |
|
| Repurchase facility | April 2019 | | 167,118 |
| | 167,118 |
| | 3.84% | | 235,540 |
| | — |
|
| Repurchase facility | March 2019 | | 131,827 |
| | 131,827 |
| | 3.54% | | 166,308 |
| | — |
|
| Warehouse line | November 2020 | | 1,000,000 |
| | 1,000,000 |
| | 3.32% | | 1,430,524 |
| | 6 |
|
| Warehouse line | November 2020 | | 317,020 |
| | 500,000 |
| | 3.53% | | 359,214 |
| | 525 |
|
| Warehouse line | October 2019 | | 97,200 |
| | 350,000 |
| | 4.35% | | 108,418 |
| | 328 |
|
| Total facilities with third parties | | | 4,478,214 |
| | 10,348,945 |
| | | | 6,041,896 |
| | 5,810 |
|
| Facilities with Santander and related subsidiaries: | | | | | | | | | | | |
| Promissory Note | December 2022 | | 250,000 |
| | 250,000 |
| | 3.95% | | — |
| | — |
|
| Promissory Note | December 2021 | | 250,000 |
| | 250,000 |
| | 3.70% | | — |
| | — |
|
| Promissory Note | December 2023 | | 250,000 |
| | 250,000 |
| | 5.25% | | — |
| | — |
|
| Promissory Note | December 2022 | | 250,000 |
| | 250,000 |
| | 5.00% | | — |
| | — |
|
| Promissory Note | March 2019 | | 300,000 |
| | 300,000 |
| | 4.09% | | — |
| | — |
|
| Promissory Note | October 2020 | | 400,000 |
| | 400,000 |
| | 3.10% | | — |
| | — |
|
| Promissory Note | May 2020 | | 500,000 |
| | 500,000 |
| | 3.49% | | — |
| | — |
|
| Promissory Note | March 2022 | | 650,000 |
| | 650,000 |
| | 4.20% | | — |
| | — |
|
| Promissory Note | August 2021 | | 650,000 |
| | 650,000 |
| | 3.38% | | — |
| | — |
|
| Line of credit | July 2021 | | — |
| | 500,000 |
| | 4.34% | | — |
| | — |
|
| Line of credit | March 2019 | | — |
| | 3,000,000 |
| | 4.97% | | — |
| | — |
|
| Total facilities with Santander and related subsidiaries | | | 3,500,000 |
| | 7,000,000 |
| | | | — |
| | — |
|
| Total revolving credit facilities | | | $ | 7,978,214 |
| | $ | 17,348,945 |
| | | | $ | 6,041,896 |
| | $ | 5,810 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | | | | | |
| | Maturity Date(s) | | Utilized Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
| Facilities with third parties: | | | | | | | | | | | |
| Warehouse line | June 2021 | | $ | 471,284 | | | $ | 500,000 | | | 3.32% | | $ | 675,426 | | | $ | — | |
| Warehouse line | March 2021 | | 516,045 | | | 1,250,000 | | | 3.10% | | 734,640 | | | 1 | |
| Warehouse line | October 2021 | | 1,098,443 | | | 5,000,000 | | | 4.43% | | 1,898,365 | | | 1,756 | |
| Warehouse line | July 2021 | | 500,000 | | | 500,000 | | | 3.64% | | 761,690 | | | 302 | |
| Warehouse line | October 2021 | | 896,077 | | | 2,100,000 | | | 3.44% | | 1,748,325 | | | 7 | |
| Repurchase facility | January 2020 | | 273,655 | | | 273,655 | | | 3.80% | | 377,550 | | | — | |
| Repurchase facility | March 2020 | | 100,756 | | | 100,756 | | | 3.04% | | 151,710 | | | — | |
| Repurchase facility | March 2020 | | 47,851 | | | 47,851 | | | 3.15% | | 69,945 | | | — | |
| Warehouse line | November 2020 | | 970,600 | | | 1,000,000 | | | 2.57% | | 1,353,305 | | | — | |
| Warehouse line | November 2020 | | 471,320 | | | 500,000 | | | 2.69% | | 505,502 | | | 186 | |
| Warehouse line | June 2021 | | 53,900 | | | 600,000 | | | 7.02% | | 62,601 | | | 94 | |
| Total facilities with third parties | | | 5,399,931 | | | 11,872,262 | | | | | 8,339,059 | | | 2,346 | |
| Facilities with Santander and related subsidiaries: | | | | | | | | | | | |
| Promissory Note | December 2021 | | 250,000 | | | 250,000 | | | 3.70% | | — | | | — | |
| Promissory Note | December 2022 | | 250,000 | | | 250,000 | | | 3.95% | | — | | | — | |
| Promissory Note | December 2023 | | 250,000 | | | 250,000 | | | 5.25% | | — | | | — | |
| Promissory Note | December 2022 | | 250,000 | | | 250,000 | | | 5.00% | | — | | | — | |
| Promissory Note | March 2021 | | 300,000 | | | 300,000 | | | 3.95% | | — | | | — | |
| Promissory Note | October 2020 | | 400,000 | | | 400,000 | | | 3.10% | | — | | | — | |
| Promissory Note | November 2022 | | 400,000 | | | 400,000 | | | 3.00% | | — | | | — | |
| Promissory Note | May 2020 | | 500,000 | | | 500,000 | | | 3.49% | | — | | | — | |
| Promissory Note | June 2022 | | 500,000 | | | 500,000 | | | 3.30% | | — | | | — | |
| Promissory Note | July 2024 | | 500,000 | | | 500,000 | | | 3.90% | | — | | | — | |
| Promissory Note | March 2022 | | 650,000 | | | 650,000 | | | 4.20% | | — | | | — | |
| Promissory Note | August 2021 | | 650,000 | | | 650,000 | | | 3.44% | | — | | | — | |
| Promissory Note | September 2023 | | 750,000 | | | 750,000 | | | 3.27% | | — | | | — | |
| Line of credit | July 2021 | | — | | | 500,000 | | | 3.86% | | — | | | — | |
| Line of credit | March 2022 | | — | | | 3,000,000 | | | 4.96% | | — | | | — | |
| Total facilities with Santander and related subsidiaries | | | 5,650,000 | | | 9,150,000 | | | | | — | | | — | |
| Total revolving credit facilities | | | $ | 11,049,931 | | | $ | 21,022,262 | | | | | $ | 8,339,059 | | | $ | 2,346 | |
Notes Payable - Facilities with Third Parties
The warehouse lines and repurchase facilities are fully collateralized by a designated portion of the Company’s retail installment contracts (Note 2), leased vehicles (Note 3), securitization notes payables and residuals retained by the Company.
Facilities with Santander and Related Subsidiaries
Lines of Credit
SHUSA provides the Company with $3,500,000with $3,000,000 of committed revolving credit that can be drawn on an unsecured basis.
Promissory Notes
SHUSA provides the Company with $4,000,000 $5,650,000 of unsecured promissory notes. In July 2019, SHUSA provided a $500,000 unsecured promissory note to the Company which will mature July 2024.
Notes Payable - Secured Structured Financings
The following table presents information regarding secured structured financings as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
| | | | | | | | | | | | | | | March 31, 2020 | |
| | June 30, 2019 | | Estimated Maturity Date(s) at Issuance | | Balance | | Initial Note Amounts Issued (e) | | Initial Weighted Average Interest Rate | | Collateral (b) | | Restricted Cash |
| | Estimated Maturity Date(s) | | Balance | | Initial Note Amounts Issued (d) | | Initial Weighted Average Interest Rate | | Collateral (b) | | Restricted Cash | |
| 2015 Securitizations | April 2021 - January 2023 | | 1,179,917 |
| | 9,054,732 |
| | 1.33%-2.29% | | 1,416,611 |
| | 277,660 |
| |
| 2016 Securitizations | April 2022- March 2024 | | 1,627,222 |
| | 7,462,790 |
| | 1.63%-2.8% | | 2,145,078 |
| | 265,020 |
| 2016 Securitizations | April 2022 - March 2024 | | $ | 939,496 | | | $ | 7,462,790 | | | 1.63% - 2.80% | | $ | 1,313,459 | | | $ | 242,112 | |
| 2017 Securitizations | July 2022 - September 2024 | | 3,210,416 |
| | 9,296,570 |
| | 1.35%-2.52% | | 4,648,860 |
| | 333,728 |
| 2017 Securitizations | July 2022 - September 2024 | | 1,932,971 | | | 9,296,570 | | | 1.35% - 2.52% | | 2,922,415 | | | 298,085 | |
| 2018 Securitizations | May 2022 - April 2026 | | 7,211,450 |
| | 12,039,840 |
| | 2.41%-3.42% | | 9,521,053 |
| | 527,200 |
| 2018 Securitizations | May 2022 - April 2026 | | 4,550,511 | | | 12,039,840 | | | 2.41% - 3.42% | | 6,280,162 | | | 455,067 | |
| 2019 Securitizations | May 2024-October 2026 | | 5,865,241 |
| | 6,477,310 |
| | 2.56%-3.34% | | 7,240,492 |
| | 270,321 |
| 2019 Securitizations | May 2024 - February 2027 | | 8,731,548 | | | 11,924,720 | | | 2.08% - 3.34% | | 10,336,725 | | | 510,220 | |
| 2020 Securitizations | | 2020 Securitizations | November 2024 - May 2027 | | 2,002,173 | | | 2,122,580 | | | 1.78% - 2.14% | | 2,149,086 | | | 86,315 | |
| Public Securitizations (a) | | 19,094,246 |
| | 44,331,242 |
| | 24,972,094 |
| | 1,673,929 |
| Public Securitizations (a) | | 18,156,699 | | | 42,846,500 | | | 23,001,847 | | | 1,591,799 | |
| 2013 Private issuances | November 2020 - September 2024 | | 1,307,640 |
| | 2,044,054 |
| | 1.28%-1.38% | | 2,091,902 |
| | 1,230 |
| 2013 Private issuances | July 2024 - September 2024 | | 2,811,632 | | | 1,537,025 | | | 1.28% | | 3,013,721 | | | 135 | |
| 2015 Private issuances | July 2019-September 2021 | | 113,289 |
| | 1,000,000 |
| | 0.88%-1.05% | | 206,326 |
| | 1,473 |
| |
| 2016 Private issuances | August 2020 - Sept 2024 | | 70,786 |
| | 1,200,000 |
| | 1.93%-2.35% | | 177,175 |
| | 265 |
| |
| 2017 Private issuances | April 2021 - Sept 2021 | | 241,350 |
| | 1,600,000 |
| | 1.85%-2.44% | | 605,018 |
| | 2,315 |
| |
| 2018 Private issuance | June 2022-April 2024 | | 4,439,453 |
| | 4,536,002 |
| | 2.42%-3.53% | | 6,188,294 |
| | 11,877 |
| |
| 2018 Private issuances | | 2018 Private issuances | June 2022 - April 2024 | | 3,328,760 | | | 4,536,002 | | | 2.42% - 3.53% | | 4,610,387 | | | 9,663 | |
| 2019 Private issuance | September 2022 | | 981,764 |
| | 1,026,766 |
| | 3.34% | | 1,260,503 |
| | 2,071 |
| 2019 Private issuance | September 2022 - November 2026 | | 3,012,292 | | | 3,524,536 | | | 2.45% - 3.90% | | 3,703,702 | | | 10,056 | |
| 2020 Private issuance | | 2020 Private issuance | April 2024 | | 733,741 | | | 750,000 | | | 2.68% | | 734,025 | | | — | |
| Privately issued amortizing notes (c) | | | 7,154,282 |
| | 11,406,822 |
| | | | 10,529,218 |
| | 19,231 |
| Privately issued amortizing notes (c) | | | 9,886,425 | | | 10,347,563 | | | 12,061,835 | | | 19,854 | |
| Total secured structured financings | | | $ | 26,248,528 |
| | $ | 55,738,064 |
| | | | $ | 35,501,312 |
| | $ | 1,693,160 |
| Total secured structured financings | | | $ | 28,043,124 | | | $ | 53,194,063 | | | $ | 35,063,682 | | | $ | 1,611,653 | |
(a)Securitizations executed under Rule 144A of the Securities Act are included within this balance.
(b)Secured structured financings may be collateralized by the Company’s collateral overages of other issuances.
(c)All privately issued amortizing notes issued in 2014 through 2017 were paid in full.
(d)Excludes securitizations which no longer hashave outstanding debt and excludes any incremental borrowings.
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Estimated Maturity Date(s) | | Balance | | Initial Note Amounts Issued | | Initial Weighted Average Interest Rate | | Collateral | | Restricted Cash |
| 2014 Securitizations | January 2022 - April 2022 | | $ | 246,989 |
| | $ | 2,291,020 |
| | 1.16% - 1.27% | | $ | 334,888 |
| | $ | 65,028 |
|
| 2015 Securitizations | April 2021 - January 2023 | | 1,651,411 |
| | 9,054,732 |
| | 1.33% - 2.29% | | 1,979,942 |
| | 288,654 |
|
| 2016 Securitizations | April 2022 - March 2024 | | 2,233,720 |
| | 7,462,790 |
| | 1.63% - 2.80% | | 2,876,141 |
| | 285,300 |
|
| 2017 Securitizations | July 2022 - September 2024 | | 4,385,029 |
| | 9,296,570 |
| | 1.35% - 2.52% | | 6,090,150 |
| | 352,833 |
|
| 2018 Securitizations | May 2022 -April 2026 | | 10,708,030 |
| | 13,275,840 |
| | 2.41% - 3.53% | | 13,631,783 |
| | 549,899 |
|
| Public Securitizations | | | 19,225,179 |
| | 41,380,952 |
| | | | 24,912,904 |
| | 1,541,714 |
|
| 2013 Private issuance | November 2020 - September 2024 | | 1,507,241 |
| | 2,044,054 |
| | 1.28% - 1.38% | | 2,896,344 |
| | 3,021 |
|
| 2015 Private issuances | June 2019 -September 2021 | | 1,043,723 |
| | 1,811,312 |
| | 0.88% - 2.80% | | 350,212 |
| | 2,215 |
|
| 2016 Private issuances | August 2020 - September 2024 | | 454,280 |
| | 2,550,000 |
| | 1.93% - 2.86% | | 901,641 |
| | 1,661 |
|
| 2017 Private issuances | April 2021 -September 2021 | | 689,152 |
| | 1,600,000 |
| | 1.85% - 2.44% | | 1,037,263 |
| | 5,716 |
|
| 2018 Private issuances | June 2022 - April 2024 | | 3,981,955 |
| | 3,300,002 |
| | 2.42% - 3.17% | | 5,197,806 |
| | 22,588 |
|
| Privately issued amortizing notes | | | 7,676,351 |
| | 11,305,368 |
| | | | 10,383,266 |
| | 35,201 |
|
| Total secured structured financings | | | $ | 26,901,530 |
| | $ | 52,686,320 |
| | | | $ | 35,296,170 |
| | $ | 1,576,915 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | | | | | |
| | Estimated Maturity Date(s) at Issuance | | Balance | | Initial Note Amounts Issued | | Initial Weighted Average Interest Rate | | Collateral | | Restricted Cash |
| 2015 Securitizations | August 2021 - January 2023 | | $ | 334,916 | | | $ | 3,258,300 | | | 1.67% - 2.29% | | $ | 411,310 | | | $ | 94,382 | |
| 2016 Securitizations | April 2022- March 2024 | | 1,144,421 | | | 7,462,790 | | | 1.63% - 2.80% | | 1,560,133 | | | 248,784 | |
| 2017 Securitizations | July 2022 - September 2024 | | 2,364,177 | | | 9,296,570 | | | 1.35% - 2.52% | | 3,423,303 | | | 292,601 | |
| 2018 Securitizations | May 2022 - April 2026 | | 5,376,231 | | | 12,039,840 | | | 2.41% - 3.42% | | 7,240,151 | | | 466,069 | |
| 2019 Securitizations | May 2024 - February 2027 | | 9,588,028 | | | 11,924,720 | | | 2.08% - 3.34% | | 12,062,261 | | | 504,810 | |
| Public Securitizations | | | 18,807,773 | | | 43,982,220 | | | | | 24,697,158 | | | 1,606,646 | |
| 2013 Private issuances | July 2024- September 2024 | | 2,252,616 | | | 1,537,025 | | | 1.28% | | 2,143,065 | | | 303 | |
| 2015 Private issuances | July 2019 | | 19,029 | | | 500,000 | | | 1.05% | | 67,007 | | | 113 | |
| 2016 Private issuances | September 2024 | | 30,943 | | | 300,000 | | | 2.35% | | 90,352 | | | — | |
| 2018 Private issuance | June 2022-April 2024 | | 3,742,509 | | | 4,536,002 | | | 2.42% - 3.53% | | 5,292,020 | | | 10,114 | |
| 2019 Private issuance | September 2022 - November 2026 | | 3,289,015 | | | 3,524,536 | | | 2.45% - 3.90% | | 4,455,773 | | | 10,348 | |
| Privately issued amortizing notes | | | 9,334,112 | | | 10,397,563 | | | | | 12,048,217 | | | 20,878 | |
| Total secured structured financings | | | $ | 28,141,885 | | | $ | 54,379,783 | | | | | $ | 36,745,375 | | | $ | 1,627,524 | |
Most of the Company’s secured structured financings are in the form of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company’s securitizations and private issuances are collateralized by vehicle retail installment contracts and loans or leases. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company had private issuances of notes backed by vehicle leases totaling $8,292,230totaling $11,081,736 and $7,847,071,$10,243,158, respectively.
Unamortized debt issuance costs are amortized as interest expense over the terms of the related notes payable using the effective interest method and are classified as a discount to the related recorded debt balance. Amortized debt issuance costs were $9,309were $9,352 and $8,580$8,461 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $17,770 and $16,500 for the six months ended June 30, 2019 and 2018, respectively. For securitizations, the term takes into consideration the expected execution of the contractual call option, if applicable. Amortization of premium or accretion of discount on notes payable is also included in interest expense using the effective interest method over the estimated remaining life of the notes. Total interest expense on secured structured financings for the three months ended June 30,March 31, 2020 and 2019 was $198,463 and 2018 was $222,935 and $172,916,$231,291, respectively. Total interest expense on secured structured financings for the six months ended June 30, 2019 and 2018 was $454,226 and $323,591, respectively.
| |
6. | Variable Interest Entities |
6. Variable Interest Entities
The Company transfers retail installment contracts and vehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under U.S. GAAP and the Company may or may not consolidate these VIEs on the condensed consolidated balance sheets.
For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Part II, Item 8 - Financial Statements and Supplementary Data (Note 7) in the 20182019 Annual Report on Form 10-K.
On-balance sheet variable interest entities
The Company retains servicing rights for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in
fees, commissions and other income. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company was servicing servicin$28,343,622g $29,514,854 and $27,193,924,$27,253,573, respectively, of gross retail installment contracts that have been transferred to consolidated Trusts. The remainder of the Company’s retail installment contracts remain unpledged.
A summary of the cash flows received from consolidated securitization trusts during the three and six months ended June 30,March 31, 2020 and 2019, and 2018, is as follows:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | |
| | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | | | | | |
| | | | | | | | | |
| Assets securitized | $ | 6,675,730 | | | $ | 4,928,462 | | | | | | | |
| | | | | | | | | |
| Net proceeds from new securitizations (a) | $ | 3,876,529 | | | $ | 3,962,618 | | | | | | | |
| Net proceeds from retained bonds | 54,467 | | | 17,306 | | | | | | | |
| Cash received for servicing fees (b) | 246,743 | | | 208,325 | | | | | | | |
| Net distributions from Trusts (b) | 866,936 | | | 592,769 | | | | | | | |
| Total cash received from Trusts | $ | 5,044,675 | | | $ | 4,781,018 | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Assets securitized | $ | 4,913,261 |
| | $ | 6,511,953 |
| | $ | 9,841,723 |
| | $ | 13,752,897 |
|
| | | | | | | | |
| Net proceeds from new securitizations (a) | $ | 3,794,437 |
| | $ | 4,581,874 |
| | $ | 7,757,055 |
| | $ | 8,058,196 |
|
| Net proceeds from retained bonds | 99,999 |
| | 382,022 |
| | 117,305 |
| | 593,632 |
|
| Cash received for servicing fees (b) | 289,634 |
| | 213,900 |
| | 497,959 |
| | 429,690 |
|
| Net distributions from Trusts (b) | 1,078,665 |
| | 780,834 |
| | 1,671,434 |
| | 1,325,986 |
|
| Total cash received from Trusts | $ | 5,262,735 |
| | $ | 5,958,630 |
| | $ | 10,043,753 |
| | $ | 10,407,504 |
|
| |
(a) | Includes additional advances on existing securitizations. |
| |
(b) | These amounts are not reflected in the accompanying condensed consolidated statements of cash flows because these cash flows are intra-company and eliminated in consolidation. |
(b)These amounts are not reflected in the accompanying condensed consolidated statements of cash flows because these cash flows are intra-company and eliminated in consolidation.
Off-balance sheet variable interest entities
During the three and six months ended June 30, 2018 the Company sold $1,156,060 and $2,631,313, respectively, of gross retail installment contracts to Santander in off-balance sheet securitizations for a loss (excluding lower of cost or market adjustments, if any) of $3,177 and $20,080, respectively. The losses were recorded in investment losses, net, in the accompanying consolidated statements of income.
There were no0 sales during the three and six months ended June 30,March 31, 2020 and 2019.
As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company was servicing $3,145,282$2,022,464 and $4,072,843,$2,408,205, respectively, of gross retail installment contracts that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows: |
| | | | | | | |
| | June 30,
2019 | | December 31,
2018 |
| SPAIN | $ | 2,776,169 |
| | $ | 3,461,793 |
|
| Total serviced for related parties | 2,776,169 |
| | 3,461,793 |
|
| Chrysler Capital securitizations | 369,113 |
| | 611,050 |
|
| Total serviced for third parties | 369,113 |
| | 611,050 |
|
| Total serviced for others portfolio | $ | 3,145,282 |
| | $ | 4,072,843 |
|
| | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| | | |
| | | |
| Related party SPAIN serviced securitizations | $ | 1,869,514 | | | $ | 2,149,008 | |
| Third party CCAP serviced securitizations | 152,950 | | | 259,197 | |
| Total serviced for others portfolio | $ | 2,022,464 | | | $ | 2,408,205 | |
Other than repurchases of sold assets due to standard representations and warranties, the Company has no has 0 exposure to loss as a result of its involvement with these VIEs.
A summary of the cash flows received from off-balance sheet securitization trusts for the three and six months ended June 30,March 31, 2020 and 2019, and 2018, is as follows:
| | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Cash received for servicing fees | 6,179 | | | 10,251 | | | | | | | |
| | | | | | | | | |
7. Derivative Financial Instruments
|
| | | | | | | | | | | | | | |
| | Three Months Ended | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | June 30, 2019 | | June 30, 2018 |
| Receivables securitized (a) | $ | — |
| | $ | 1,156,060 |
| $ | — |
| | $ | 2,631,313 |
|
| | | | | | | |
| Net proceeds from new securitizations | $ | — |
| | $ | 1,160,119 |
| $ | — |
| | $ | 2,634,939 |
|
| Cash received for servicing fees | 9,357 |
| | 12,616 |
| 19,608 |
| | 20,694 |
|
| Total cash received from securitization trusts | $ | 9,357 |
| | $ | 1,172,735 |
| $ | 19,608 |
| | $ | 2,655,633 |
|
(a) Represents the unpaid principal balance at the time of original securitization.
| |
7. | Derivative Financial Instruments |
The Company uses derivativesderivative financial instruments such as interest rate swaps, interest rate caps and the corresponding options written in order to offset the interest rate caps to manage the Company’s exposure to changing interest rates. The Company uses both derivatives that qualify for hedge accounting treatment and economic hedges.
The underlying notional amounts and aggregate fair values of these derivativesderivative financial instruments at June 30, 2019March 31, 2020 and December 31, 2018,2019, are as follows:
|
| | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Notional | | Fair Value | | Asset | | Liability |
| Interest rate swap agreements designated as cash flow hedges | $ | 4,150,000 |
| | $ | (28,812 | ) | | $ | 12,225 |
| | $ | (41,037 | ) |
| Interest rate swap agreements not designated as hedges | 2,110,000 |
| | (9,179 | ) | | 2,992 |
| | (12,171 | ) |
| Interest rate cap agreements | 9,203,381 |
| | 88,240 |
| | 88,240 |
| | — |
|
| Options for interest rate cap agreements | 9,203,381 |
| | (88,240 | ) | | — |
| | (88,240 | ) |
|
| | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Notional | | Fair Value | | Asset | | Liability |
| Interest rate swap agreements designated as cash flow hedges | $ | 3,933,500 |
| | $ | 36,489 |
| | $ | 43,967 |
| | $ | (7,478 | ) |
| Interest rate swap agreements not designated as hedges | 2,270,200 |
| | 9,423 |
| | 11,553 |
| | (2,130 | ) |
| Interest rate cap agreements | 7,741,765 |
| | 128,377 |
| | 128,377 |
| | — |
|
| Options for interest rate cap agreements | 7,741,765 |
| | (128,377 | ) | | — |
| | (128,377 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2020 | | | | | | | | | | |
| | Notional | | Fair Value | | Asset | | Liability | | | | |
| Interest rate swap agreements designated as cash flow hedges | $ | 2,150,000 | | | $ | (88,598) | | | $ | — | | | $ | (88,598) | | | | | |
| Interest rate swap agreements not designated as hedges | 777,000 | | | (17,167) | | | — | | | (17,167) | | | | | |
| Interest rate cap agreements | 10,093,450 | | | 4,926 | | | 4,926 | | | — | | | | | |
| Options for interest rate cap agreements | 10,093,450 | | | (4,926) | | | — | | | (4,926) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | | | | | |
| | Notional | | Fair Value | | Asset | | Liability |
| Interest rate swap agreements designated as cash flow hedges | $ | 2,650,000 | | | $ | (36,321) | | | $ | 2,807 | | | $ | (39,128) | |
| Interest rate swap agreements not designated as hedges | 1,281,000 | | | (10,267) | | | — | | | (10,267) | |
| Interest rate cap agreements | 9,379,720 | | | 62,552 | | | 62,552 | | | — | |
| Options for interest rate cap agreements | 9,379,720 | | | (62,552) | | | — | | | (62,552) | |
The aggregate fair value of the interest rate swap agreements was included on the Company’s condensed consolidated balance sheets in other assets and other liabilities, as appropriate. The interest rate cap agreements were included in other assets and the related options in other liabilities on the Company’s condensed consolidated balance sheets. See Note 13 - “Fair Value of Financial Instruments” in the accompanying condensed financial statements for additional disclosure of fair value and balance sheet location of the Company’s derivative financial instruments.
The Company enters into legally enforceable master netting agreements that reduce risk by permitting netting of transactions, such as derivatives and collateral posting, with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in ISDA master agreements. The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting (ISDA) agreement. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offsetAmounts Not Offset in the Condensedcondensed Consolidated Balance Sheet” section of the tables below. Information on the offsetting of derivative assets and derivative liabilities due to the right of offset was as follows, as of June 30, 2019March 31, 2020 and December 31, 2018:2019:
|
| | | | | | | | | | | | |
| | Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet |
| | Assets Presented
in the
Condensed Consolidated
Balance Sheet | | Collateral
Received (a) | | | Net
Amount |
| June 30, 2019 | | | | | | |
| Interest rate swaps - third party (b) | $ | 15,217 |
| | $ | (3,836 | ) | | | $ | 11,381 |
|
| Interest rate caps - Santander and affiliates | 15,305 |
| | (4,391 | ) | | | 10,914 |
|
| Interest rate caps - third party | 72,935 |
| | (46,807 | ) | | | 26,128 |
|
| Total derivatives subject to a master netting arrangement or similar arrangement | 103,457 |
| | (55,034 | ) | | | 48,423 |
|
| Total derivatives not subject to a master netting arrangement or similar arrangement | — |
| | — |
| | | — |
|
| Total derivative assets | $ | 103,457 |
| | $ | (55,034 | ) | | | $ | 48,423 |
|
| Total financial assets | $ | 103,457 |
| | $ | (55,034 | ) | | | $ | 48,423 |
|
| | | | | | | |
| December 31, 2018 | | | | | | |
| Interest rate swaps - third party (b) | $ | 55,520 |
| | $ | (23,929 | ) | | | $ | 31,591 |
|
| Interest rate caps - third party | 128,377 |
| | (72,830 | ) | | | 55,547 |
|
| Total derivatives subject to a master netting arrangement or similar arrangement | 183,897 |
| | (96,759 | ) | | | 87,138 |
|
| Total derivatives not subject to a master netting arrangement or similar arrangement | — |
| | — |
| | | — |
|
| Total derivative assets | $ | 183,897 |
| | $ | (96,759 | ) | | | $ | 87,138 |
|
| Total financial assets | $ | 183,897 |
| | $ | (96,759 | ) | | | $ | 87,138 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | |
| Gross Amounts Not Offset in the
condensed Consolidated Balance Sheet | | | | | | |
| Assets Presented
in the condensed
Consolidated
Balance Sheet | | Collateral
Received (a) | | | | Net
Amount |
| March 31, 2020 | | | | | | | |
| | | | | | | |
| | | | | | | |
| Interest rate caps - Santander and affiliates | $ | 2,623 | | | $ | (1,980) | | | | | $ | 643 | |
| Interest rate caps - third party | 2,303 | | | (2,303) | | | | | — | |
| | | | | | | |
| | | | | | | |
| Total derivatives subject to a master netting arrangement or similar arrangement | 4,926 | | | (4,283) | | | | | 643 | |
| Total derivatives not subject to a master netting arrangement or similar arrangement | — | | | — | | | | | — | |
| Total derivative assets | $ | 4,926 | | | $ | (4,283) | | | | | $ | 643 | |
| Total financial assets | $ | 4,926 | | | $ | (4,283) | | | | | $ | 643 | |
| | | | | | | |
| December 31, 2019 | | | | | | | |
| | | | | | | |
| Interest rate swaps - third party (b) | $ | 2,807 | | | $ | (540) | | | | | $ | 2,267 | |
| Interest rate caps - Santander and affiliates | 25,330 | | | (14,930) | | | | | 10,400 | |
| Interest rate caps - third party | 37,222 | | | (26,199) | | | | | 11,023 | |
| Total derivatives subject to a master netting arrangement or similar arrangement | 65,359 | | | (41,669) | | | | | 23,690 | |
| Total derivatives not subject to a master netting arrangement or similar arrangement | — | | | — | | | | | — | |
| Total derivative assets | $ | 65,359 | | | $ | (41,669) | | | | | $ | 23,690 | |
| Total financial assets | $ | 65,359 | | | $ | (41,669) | | | | | $ | 23,690 | |
(a) Collateral received includes cash, cash equivalents, and other financial instruments. Cash collateral received is reported in Other liabilities in the consolidated balance sheet. Financial instruments that are pledged to the Company are not reflected in the accompanying consolidated balance sheet since the
Company does not control or have the ability of rehypothecation of these instruments. In certain instances, the counter party is over-collateralized since the actual amount of collateral received exceeds the associated financial asset. As a result, the actual amount of collateral received that is reported may be greater than the amount shown in the table above.
(b) Includes derivative instruments originally transacted with Santander and affiliates and subsequently amended to reflect clearing with central clearing counterparties.
|
| | | | | | | | | | | | |
| | Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet |
| | Liabilities Presented
in the Condensed
Consolidated
Balance Sheet | | Collateral
Pledged (a) | | | Net
Amount |
| June 30, 2019 | | | | | | |
| Interest rate swaps - third party (b) | $ | 53,208 |
| | $ | (53,208 | ) | | | $ | — |
|
| Interest rate caps - Santander and affiliates | 15,305 |
| | (15,305 | ) | | | — |
|
| Interest rate caps - third party | 72,935 |
| | (72,935 | ) | | | — |
|
| Total derivatives subject to a master netting arrangement or similar arrangement | 141,448 |
| | (141,448 | ) | | | — |
|
| Total derivatives not subject to a master netting arrangement or similar arrangement | — |
| | — |
| | | — |
|
| Total derivative liabilities | $ | 141,448 |
| | $ | (141,448 | ) | | | $ | — |
|
| Total financial liabilities | $ | 141,448 |
| | $ | (141,448 | ) | | | $ | — |
|
| | | | | | | |
| December 31, 2018 | | | | | | |
| Interest rate swaps - third party | $ | 9,608 |
| | $ | (9,608 | ) | | | $ | — |
|
| Interest rate caps - third party | 128,377 |
| | (128,377 | ) | | | — |
|
| Total derivatives subject to a master netting arrangement or similar arrangement | 137,985 |
| | (137,985 | ) | | | — |
|
| Total derivatives not subject to a master netting arrangement or similar arrangement | — |
| | — |
| | | — |
|
| Total derivative liabilities | $ | 137,985 |
| | $ | (137,985 | ) | | | $ | — |
|
| Total financial liabilities | $ | 137,985 |
| | $ | (137,985 | ) | | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| Gross Amounts Not Offset in the condensed Consolidated Balance Sheet | | | | | | | |
| Liabilities Presented
in the condensed
Consolidated
Balance Sheet | | | Collateral
Pledged (a) | | | | Net
Amount |
| March 31, 2020 | | | | | | | | |
| | | | | | | | |
| Interest rate swaps - third party (b) | $ | 105,765 | | | | $ | (105,765) | | | | | $ | — | |
| Interest rate caps - Santander and affiliates | 2,623 | | | | (2,623) | | | | | — | |
| Interest rate caps - third party | 2,303 | | | | (2,303) | | | | | — | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total derivatives subject to a master netting arrangement or similar arrangement | 110,691 | | | | (110,691) | | | | | — | |
| | | | | | | | |
| | | | | | | | |
| Total derivatives not subject to a master netting arrangement or similar arrangement | — | | | | — | | | | | — | |
| Total derivative liabilities | $ | 110,691 | | | | $ | (110,691) | | | | | $ | — | |
| Total financial liabilities | $ | 110,691 | | | | $ | (110,691) | | | | | $ | — | |
| | | | | | | | |
| December 31, 2019 | | | | | | | | |
| | | | | | | | |
| Interest rate swaps - third party | $ | 49,395 | | | | $ | (49,395) | | | | | $ | — | |
| Interest rate caps - Santander and affiliates | 25,330 | | | | (25,330) | | | | | — | |
| Interest rate caps - third party | 37,222 | | | | (37,222) | | | | | — | |
| Total derivatives subject to a master netting arrangement or similar arrangement | 111,947 | | | | (111,947) | | | | | — | |
| | | | | | | | |
| | | | | | | | |
| Total derivatives not subject to a master netting arrangement or similar arrangement | — | | | | — | | | | | — | |
| Total derivative liabilities | $ | 111,947 | | | | $ | (111,947) | | | | | $ | — | |
| Total financial liabilities | $ | 111,947 | | | | $ | (111,947) | | | | | $ | — | |
(a) Collateral pledged includes cash, cash equivalents, and other financial instruments. These balances are reported in Other assets in the consolidated balance sheet. In certain instances, the Company is over-collateralized since the actual amount of collateral pledged exceeds the associated financial liability. As a result, the actual amount of collateral pledged that is reported in Other assets may be greater than the amount shown in the table above.
(b) Includes derivative instruments originally transacted with Santander and affiliates and subsequently amended to reflect clearing with central clearing counterparties.
The gross gains (losses) reclassified from accumulated other comprehensive income (loss) to net income, are included as components of interest expense. The impacts on the condensed consolidated statements of income and comprehensive income forduring the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:
| | | | Three Months Ended June 30, 2019 | | Three Months Ended March 31, 2020 | |
| | Recognized in Earnings | | Gross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) | | Gross amount Reclassified From Accumulated Other Comprehensive
Income to Interest Expense | | Recognized in Earnings | | Gross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) | | Gross amount Reclassified From Accumulated Other Comprehensive
Income to Interest Expense |
| Interest rate swap agreements designated as cash flow hedges | $ | — |
| | $ | (31,014 | ) | | $ | 13,901 |
| Interest rate swap agreements designated as cash flow hedges | $ | — | | | $ | (52,386) | | | $ | (824) | |
| | | | | | | |
| | Derivative instruments not designated as hedges | | | | | | Derivative instruments not designated as hedges | | | | | |
| Losses (Gains) recognized in interest expenses | 8,446 |
| | | | | Losses (Gains) recognized in interest expenses | $ | 9,171 | | |
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | Recognized in Earnings | | Gross Gains (Losses) Recognized in Accumulated Other Comprehensive Income (Loss) | | Gross Gains (Losses) Reclassified From Accumulated Other Comprehensive
Income to Interest Expense |
| Interest rate swap agreements designated as cash flow hedges | $ | — |
| | $ | 8,412 |
| | $ | 9,095 |
|
| | | | | | |
| Derivative instruments not designated as hedges | | | | | |
| Losses (Gains) recognized in interest expenses | (22 | ) | | | | |
| | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2019 | | | | |
| Recognized in Earnings | | Gross Gains Recognized in Accumulated Other Comprehensive Income (Loss) | | Gross amount Reclassified From Accumulated Other Comprehensive
Income to Interest Expense |
| Interest rate swap agreements designated as cash flow hedges | $ | — | | | $ | (14,793) | | | $ | 13,040 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Derivative instruments not designated as hedges | | | | | |
| Losses (Gains) recognized in interest expenses | $ | 5,401 | | | | | |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| | Recognized in Earnings | | Gross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) | | Gross amount Reclassified From Accumulated Other Comprehensive
Income to Interest Expense |
| Interest rate swap agreements designated as cash flow hedges | $ | — |
| | $ | (45,807 | ) | | $ | 26,941 |
|
| | | | | | |
| Derivative instruments not designated as hedges | | | | | |
| Losses (Gains) recognized in interest expenses | 13,847 |
| | | | |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | Recognized in Earnings | | Gross Gains Recognized in Accumulated Other Comprehensive Income (Loss) | | Gross amount Reclassified From Accumulated Other Comprehensive
Income to Interest Expense |
| Interest rate swap agreements designated as cash flow hedges | $ | — |
| | $ | 34,841 |
| | $ | 13,672 |
|
| | | | | | |
| Derivative instruments not designated as hedges | | | | | |
| Losses (Gains) recognized in interest expenses | (9,739 | ) | | | | |
The Company estimates that approximately $3,119approximately $30,393 of unrealized gains includedincluded in accumulated other comprehensive income (loss) will be reclassified to interest expense within the next twelve months.
8. Other Assets
Other assets were comprised as follows:
| | | | June 30,
2019 | | December 31,
2018 | | March 31, 2020 | | December 31, 2019 |
| Vehicles (a) | $ | 331,251 |
| | $ | 342,097 |
| Vehicles (a) | $ | 444,907 | | | $ | 341,465 | |
| Manufacturer subvention payments receivable (b) | 126,185 |
| | 106,313 |
| Manufacturer subvention payments receivable (b) | 63,940 | | | 74,738 | |
| Upfront fee (b) | 113,827 |
| | 65,000 |
| Upfront fee (b) | 91,556 | | | 98,980 | |
| Derivative assets (third party) at fair value (c) | 88,152 |
| | 183,897 |
| |
| Derivative assets at fair value (c) | | Derivative assets at fair value (c) | 4,926 | | | 65,358 | |
| Derivative - collateral | 173,226 |
| | 150,783 |
| Derivative - collateral | 142,612 | | | 147,914 | |
| Operating leases (Right-of-use-assets) | 63,235 |
| | — |
| Operating leases (Right-of-use-assets) | 54,987 | | | 57,508 | |
| Available-for-sale debt securities | 94,643 |
| | — |
| Available-for-sale debt securities | 95,434 | | | 92,246 | |
| Prepaids | 40,076 |
| | 29,080 |
| Prepaids | 53,180 | | | 45,644 | |
| Accounts receivable | 33,111 |
| | 28,511 |
| Accounts receivable | 34,117 | | | 24,103 | |
| Federal and State tax receivable | | Federal and State tax receivable | 80,372 | | | 82,945 | |
| Other | 26,040 |
| | 57,666 |
| Other | 42,576 | | | 40,119 | |
| Other assets | $ | 1,089,746 |
| | $ | 963,347 |
| Other assets | $ | 1,108,607 | | | $ | 1,071,020 | |
| |
(a) | (a)Includes vehicles recovered through repossession as well as vehicles recovered due to lease terminations. |
| |
(b) | These amounts relate to the Chrysler Agreement. The Company paid a $150,000 upfront fee upon the May 2013 inception of the Chrysler Agreement. The fee is being amortized into finance and other interest income over a ten-year term. In addition, in June 2019, in connection with the execution of the sixth amendment to the Chrysler Agreement, the Company paid $60,000 upfront fee to FCA. This fee is being amortized into finance and other interest income over the remaining term of the Chrysler Agreement.
|
| |
(c) | Derivative assets at fair value represent the gross amount of derivatives presented in the condensed consolidated financial statements. Refer to Note 7 to these Condensed Consolidated Financial Statements for the detail of these amounts. |
(b)These amounts relate to the Chrysler Agreement. The Company paid a $150,000 upfront fee upon the May 2013 inception of the Chrysler Agreement. The fee is being amortized into finance and other interest income over a ten-year term. In addition, in June 2019, in connection with the execution of the sixth amendment to the Chrysler Agreement, the Company paid $60,000 upfront fee to FCA. This fee is being amortized into finance and other interest income over the remaining term of the Chrysler Agreement.
(c)Derivative assets at fair value represent the gross amount of derivatives presented in the condensed consolidated financial statements. Refer to Note 7 - "Derivative Financial Instruments" to these condensed Consolidated Financial Statements for the detail of these amounts.
Operating Leases (SC as Lessee)
The Company has entered into various operating leases, primarily for office space. Operating leases are included within other assets as operating lease ROU assets and other liabilities within our condensed consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives.
Most of our real estate leases include one or more options to renew, with renewal terms that can extend the lease term from one year to 15 years or more. The exercise of lease renewal options is at our sole discretion. The depreciable lifeCompany does not include any of assets and leasehold improvements are limited by the expectedrenewal options in the lease term unless thereas it is a transfer of title or purchase optionnot reasonably certain of exercise.that these options will be exercised.
Supplemental information relating to these operating leases is as follows:
| | | | | |
| March 31, 2020 |
| Operating leases-right of use assets | $ | 54,987 | |
| Other liabilities | 75,666 | |
| Weighted average lease term | 6 |
| Weighted average discount rate | 3.4% | |
|
| | | |
| | June 30,
2019 |
| Operating leases-right of use assets | $ | 63,235 |
|
| Other liabilities | 85,939 |
|
| Weighted average lease term | 6.5 years |
|
| Weighted average discount rate | 3.40 | % |
Lease expense incurredincurred totaled $3,4483,562 and and $2,531 $3,466 for the three months ended June 30, 2019March 31, 2020 and 2018, respectively, and $6,914 and $5,090 for the six months ended June 30, 2019, and 2018, respectively, and is included within “other operating costs” in the income statement. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Cash paid for amounts included in the measurement of operating lease liabilities was $8,406$4,251 during the sixthree months ended June 30, 2019.March 31, 2020.
The maturity of lease liabilities at June 30,March 31, 2020 and December 31, 2019 are as follows:
|
| | | |
| 2019 | $ | 8,382 |
|
| 2020 | 16,716 |
|
| 2021 | 13,201 |
|
| 2022 | 12,555 |
|
| 2023 | 12,678 |
|
| Thereafter | 32,391 |
|
| Total | $ | 95,923 |
|
| Less: Interest | (9,984 | ) |
| Present value of lease liabilities | $ | 85,939 |
|
| | | | | |
| March 31, 2020 |
| 2020 | $ | 12,579 | |
| 2021 | 13,279 | |
| 2022 | 12,632 | |
| 2023 | 12,755 | |
| 2024 | 12,701 | |
| Thereafter | 19,690 | |
| Total | $ | 83,636 | |
| Less: Interest | (7,970) | |
| Present value of lease liabilities | $ | 75,666 | |
| |
| | | | | |
| December 31, 2019 |
| 2020 | $ | 16,715 | |
| 2021 | 13,201 | |
| 2022 | 12,555 | |
| 2023 | 12,678 | |
| 2024 | 12,701 | |
| Thereafter | 19,691 | |
| Total | $ | 87,541 | |
| Less: Interest | $ | (8,603) | |
| Present value of lease liabilities | $ | 78,938 | |
Available-for-sale debt securities
Debt securities expected to be held for an indefinite period of time are classified as available-for-sale (“AFS”) and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes. All of these securities are used to satisfy collateral requirements for our derivative financial instruments.
Realized gains and losses on sales of investment securities are recognized on the trade date and are determined using specific identification method and is included in earnings within Investment gain (losses) on sale of securities. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.
The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities AFS as of March 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | March 31, 2020 | | | | | | |
| | Amortized cost (before unrealized gains / losses) | | Gross Unrealized gain | | Gross Unrealized loss | | Fair value |
| Available-for-sale debt securities (US Treasury securities) | | $ | 91,708 | | | $ | 3,726 | | | $ | — | | | $ | 95,434 | |
| | | | | | | | |
June 30, 2019:
|
| | | | | | | | | | | | | | | |
| | June 30, 2019 |
| | Amortized cost (before unrealized gains / losses) | | Gross Unrealized gain | | Gross Unrealized loss | | Fair value |
| Available-for-sale debt securities (US Treasury securities) | $ | 93,321 |
| | $ | 1,322 |
| | $ | — |
| | $ | 94,643 |
|
Contractual Maturities
The contractual maturities of available-for-sale debt instruments are summarized in the following table.
| | | | | | | | | | | |
| Amortized cost | | Fair value |
| Due within one year | $ | — | | | $ | — | |
| Due after one year but within 5 years | 91,708 | | | 95,434 | |
| | | |
| Total | $ | 91,708 | | | $ | 95,434 | |
|
| | | | | | | |
| | Amortized cost | | Fair value |
| Due within one year | $ | 2,931 |
| | $ | 2,997 |
|
| Due after one year but within 5 years | 90,390 |
| | 91,646 |
|
| Total | $ | 93,321 |
| | $ | 94,643 |
|
The Company didid d not 0t rrecordecord any other-than-temporary impairment related to its AFS securities for the sixthree months ended June 30, 2019.March 31, 2020.
9. Income Taxes
The Company recorded income tax expense of $111,764 (23.3% $(2,458) (38.1% effective tax rate) and $114,120 (25.4%$89,764 (26.6% effective tax rate) during the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively. The Company recorded income tax expense of$201,528(24.7% effective tax rate) and $172,172 (22.9%The effective tax rate) duringrate increased primarily due to discrete tax adjustments that increased the six month ended June 30, 2019 and 2018, respectively.tax benefit recorded on the pre-tax loss in the first quarter of 2020.
The Company is a party to a tax sharing agreement requiring that the unitary state tax liability among affiliates included in unitary state tax returns be allocated using the hypothetical separate company tax calculation method. The Company had a net receivable from affiliates under the tax sharing agreement of $4,581$12,160 and $734$11,010 at June 30, 2019
March 31, 2020 and December 31, 2018,2019, respectively, which was included in related party taxes receivable in the condensed consolidated balance sheet.
The Company provides U.S. income taxes on earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the United States. As of March 31, 2020 and December 31, 2018 and June 30, 2019, the Company has no0 earnings that are considered indefinitely reinvested.
The Company applies an aggregate portfolio approach whereby disproportionate income tax effects from accumulated other comprehensive income are released only when an entire portfolio (i.e., all related units of account) of a particular type is liquidated, sold or extinguished.
Significant judgment is required in evaluating and reserving for uncertain tax positions. Although management believes adequate reserves have been established for all uncertain tax positions, the final outcomes of these matters may differ. Management does not believe the outcome of any uncertain tax position, individually or combined, will have a material effect on the Company’s business, financial position or results of operations. The reserve for uncertain tax positions, as well as associated penalties and interest, is a component of the income tax provision.
10. Commitments and Contingencies
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10. | Commitments and Contingencies |
The following table summarizes liabilities recorded for commitments and contingencies as of June 30, 2019March 31, 2020 and December 31, 2018,2019, all of which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Agreement or Legal Matter | | Commitment or Contingency | | | | March 31, 2020 | | December 31, 2019 |
| Chrysler Agreement | | Revenue-sharing and gain/(loss), net-sharing payments | | | | $ | 15,349 | | | $ | 12,132 | |
| Agreement with Bank of America | | Servicer performance fee | | | | 2,010 | | | 2,503 | |
| Agreement with CBP | | Loss-sharing payments | | | | 1,247 | | | 1,429 | |
| | | | | | | | |
| Other Contingencies | | Consumer arrangements | | | | 642 | | | 1,991 | |
| Legal and regulatory proceedings | | Aggregate legal and regulatory liabilities | | | | 132,000 | | | 137,000 | |
| | Total commitments and contingencies | | | | $ | 151,248 | | | $ | 155,055 | |
|
| | | | | | | | | | | | |
| Agreement or Legal Matter | | Commitment or Contingency | | June 30, 2019 | | December 31, 2018 |
| Chrysler Agreement | | Revenue-sharing and gain/(loss), net-sharing payments | | $ | 19,893 |
| | $ | 7,001 |
|
| Agreement with Bank of America | | Servicer performance fee | | 5,249 |
| | 6,353 |
|
| Agreement with CBP | | Loss-sharing payments | | 2,498 |
| | 3,708 |
|
| Other Contingencies | | Consumer arrangements | | 596 |
| | 2,138 |
|
| Legal and regulatory proceedings | | Aggregate legal and regulatory liabilities | | 100,000 |
| | 97,700 |
|
Following is a description of the agreements and legal matters pursuant to which the liabilities in the preceding table were recorded.
Chrysler Agreement
Under terms of the Chrysler Agreement, the Company must make revenue sharing payments to FCA and also must share with FCA when residual gains/(losses) on leased vehicles exceed a specified threshold. The Company had accrued $19,893$15,349 and $7,001$12,132 at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, related to these obligations. The Chrysler Agreement also requires that Santanderthe Company maintain at least $5.0 billion in funding available for Floorplan Loans and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to the Company.
Agreement with Bank of America
Until January 2017, the Company had a flow agreement with Bank of America whereby the Company was committed to selling up to $300,000 of eligible loans to the bank each month. The Company retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale. The Company had accrued $5,249$2,010 and $6,353$2,503 at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, related to this obligation.
Agreement with CBP
Until May 2017, the Company sold loans to CBP under terms of a flow agreement and predecessor sale agreements. The Company retained servicing on the sold loans and owes CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. The Company had accrued $2,498$1,247 and $3,708$1,429 at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, related to the loss-sharing obligation.
Other Contingencies
The Company is or may be subject to potential liability under various other contingent exposures. The Company had accrued $596$642 and $2,138$1,991 at June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively, for other miscellaneous contingencies.
Legal and regulatory proceedings
Periodically, the Company is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, regulatory matter and legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. Further, it is reasonably possible that actual outcomes or losses may differ materially from the Company’s current assessments and estimates and any adverse resolution of any of these matters against it could materially and adversely affect the Company’s business, financial condition and results of operation.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, regulatory matter or other legal proceeding develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency. The Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.
As of June 30, 2019,March 31, 2020, the Company has accrued aggregate legal and regulatory liabilities of $100,000.$132 million. Further, the Company believes that the estimate of the aggregate range of reasonably possible losses, in excess of reserves established, for legal and regulatory proceedings is up to $57,000$11.5 million as of June 30, 2019.March 31, 2020. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject.
Securities Class Action and Shareholder Derivative Lawsuits
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• | •Deka Lawsuit: The Company is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 26, 2014, was brought against the Company, certain of its current and former directors and executive officers and certain institutions that served as underwriters in the Company’s IPO on behalf of a class consisting of those who purchased or otherwise acquired our securities between January 23, 2014 and June 12, 2014. The complaint alleges, among other things, that our IPO registration statement and prospectus and certain subsequent public disclosuresThe Company is a defendant in a purported securities class action lawsuit (the Deka Lawsuit) in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 26, 2014, was brought against the Company, certain of its current and former directors and executive officers and certain institutions that served as underwriters in the Company’s IPO on behalf of a class consisting of those who purchased or otherwise acquired our securities between January 23, 2014 and June 12, 2014. The complaint alleges, among other things, that our IPO registration statement and prospectus and certain subsequent public disclosures violated federal securities laws by containing misleading statements concerning the Company’s ability to pay dividends and the adequacy of the Company’s compliance systems and oversight. In December 2015, the Company and the individual defendants moved to dismiss the lawsuit, which was denied. In December 2016, the plaintiffs moved to certify the proposed classes. In July 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017). In October 2018, the court vacated the order staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification. |
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• | Feldman Lawsuit: In October 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the Feldman Lawsuit). The Feldman Lawsuit names as defendants, certain of its current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing the Company’s nonprime vehicle lending practices, resulting in harm to the Company. The complaint seeks unspecified damages and equitable relief. In December 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.
|
| |
• | Parmelee Lawsuit: The Company is adefendant in two purported securities class actions lawsuits that were filed in March and April 2016 in the United States District Court, Northern District of Texas. The lawsuits were consolidated and are now captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783. The lawsuits were filed against the Company and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired our securities between February 3, 2015 and March 15, 2016. The complaint alleges that the Company violated federal securities laws by making false or misleading statements, as well as failing to disclose material adverse facts, in its periodic reports filed under the Exchange Act and certain other public disclosures, in connection with, among other things, the Company’s change in its methodology for estimating its allowance for credit losses and correction of such allowance for prior periods. In March 2017, the Company filed a motion to dismiss the lawsuit. In January 2018, the court granted the Company’s motion as to defendant Ismail Dawood (the Company’s former Chief Financial Officer) and denied the motion as to all other defendants. In July 2018, the lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement of the lawsuit for a cash payment of $9,500. In September 2018, the court entered an order granting the motion for preliminary approval of the settlement of the lawsuit. An order approving the settlement was entered in June 2019.
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• | Jackie888 Lawsuit: In September 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the Jackie888 Lawsuit). The Jackie888 Lawsuit names as defendants current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with the Company’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. In April 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.
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violated federal securities laws by containing misleading statements concerning the Company’s ability to pay dividends and the adequacy of the Company’s compliance systems and oversight. In December 2015, the Company and the individual defendants moved to dismiss the lawsuit, which was denied. In December 2016, the plaintiffs moved to certify the proposed classes. In July 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017). In October 2018, the court vacated the order staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification.
•Feldman Lawsuit: In October 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the "Feldman Lawsuit"). The Feldman Lawsuit names as defendants, certain of its current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing the Company’s nonprime vehicle lending practices, resulting in harm to the Company. The complaint seeks unspecified damages and equitable relief. In December 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.
•Jackie888 Lawsuit: In September 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with the Company’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. In April 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.
On March 23, 2018, the Feldman Lawsuit and Jackie888 Lawsuit were consolidated under the caption In Re Santander Consumer USA Holdings, Inc. Derivative Litigation, Del. Ch., Consol. C.A. No. 11614-VCG. On January 21, 2020, the Company executed a Stipulation and Agreement of Settlement, Compromise and Release with the plaintiffs in the consolidated action that fully resolves all of the plaintiffs’ claims on the Feldman Lawsuit and the Jackie888 Lawsuit. The Stipulation provides for the settlement of the consolidated action in return for defendants causing the Company to enact and implement certain corporate governance reforms and enhancements. The Settlement Hearing is scheduled for May 27, 2020 at 1:30 pm. The text of the Stipulation can be viewed and/or downloaded at https://www.sec.gov/Archives/edgar/data/1580608/000119312520053011/d896724dex991.htm. The settlement is subject to approval by the Court.
Consumer Lending Cases
The Company is also party to various lawsuits pending in federal and state courts alleging violations of state and federal consumer lending laws, including, without limitation, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.
Regulatory Investigations and Proceedings
The Company is party to, or is periodically otherwise involved in, reviews, investigations, examinations and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the FRBB, the CFPB, the DOJ, the SEC, the FTC and various state regulatory and enforcement agencies.
Currently, such matters include, but are not limited to, the following:
•The Company received a civil subpoena from the DOJ, under FIRREA, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. The Company has responded to these requests within the deadlines specified in the subpoena and has otherwise cooperated with the DOJ with respect to this matter.
•In October 2014, May 2015, July 2015 and February 2017, the Company received subpoenas and/or Civil Investigative Demands (CIDs) from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state’s consumer protection statutes. The Company has been informed
that these states serve as an executive committee on behalf of a group of 33 state Attorneys General (and the District of Columbia). The subpoenas and/or CIDs from the executive committee states contain broad requests for information and the production of documents related to the Company’s underwriting, securitization, servicing and
collection of nonprime vehicle loans. The Company has responded to these requests within the deadlines specified in the CIDs and has otherwise cooperated with the Attorneys General with respect to this matter.
•In August 2017, the Company received a CID from the CFPB. The stated purpose of the CID is to determine whether the Company has complied with the Fair Credit Reporting Act and related regulations. The Company has responded to these requests within the deadlines specified in the CIDs and has otherwise cooperated with the CFPB with respect to this matter. In February 2020, the Company received a communication from the CFPB inviting the Company to respond to the CFPB’s identified issues in the form of a Notice of Opportunity to Respond and Advise (“NORA”) during which the CFPB identified potential claims it might bring against the Company
These matters are ongoing and could in the future result in the imposition of damages, fines or other penalties. No assurance can be given that the ultimate outcome of these matters or any resulting proceedings would not materially and adversely affect the Company’s business, financial condition and results of operations.
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• | •2017 Written Agreement with the Federal Reserve: In March 2017, the Company and SHUSA entered into a written agreement with the FRBB. Under the terms of the agreement, the Company is required to enhance its compliance risk management program, Board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of the Company’s management and operations.
•Mississippi Attorney General Lawsuit: In January 2017, the Attorney General of Mississippi filed a lawsuit against the Company in the Chancery Court of the First Judicial District of Hinds County, Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that the Company engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the MCPA) and seeks unspecified civil penalties, equitable relief and other relief. In March 2017, the Company filed motions to dismiss the lawsuit and the parties are proceeding with discovery.
•SCRA Consent Order: In February 2015, the Company entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, that resolves the DOJ’s claims against the Company that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers Civil Relief Act (SCRA). The consent order requires the Company to pay a civil fine in the amount of $55, as well as at least $9,360 to affected servicemembers consisting of $10 per servicemember plus compensation for any lost equity (with interest) for each repossession by the Company, and $5 per servicemember for each instance where the Company sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder. The consent order also provides for monitoring by the DOJ for the Company’s SCRA compliance for a period of five years and requires the Company to undertake certain additional remedial measures. The five-year period for monitoring for SCRA compliance provided for in the consent order expired in February 2020. |
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• | Mississippi Attorney General Lawsuit: In January 2017, the Attorney General of Mississippi filed a lawsuit against the Company in the Chancery Court of the First Judicial District of Hinds County, Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that the Company engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the MCPA) and seeks unspecified civil penalties, equitable relief and other relief. In March 2017, the Company filed motions to dismiss the lawsuit and the parties are proceeding with discovery.
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• | SCRA Consent Order: In February 2015, the Company entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, that resolves the DOJ’s claims against the Company that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers Civil Relief Act (SCRA). The consent order requires the Company to pay a civil fine in the amount of $55, as well as at least $9,360 to affected servicemembers consisting of $10 per servicemember plus compensation for any lost equity (with interest) for each repossession by the Company, and $5 per servicemember for each instance where the Company sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder. The consent order also provides for monitoring by the DOJ for the Company’s SCRA compliance for a period of five years and requires the Company to undertake certain additional remedial measures.
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Agreements
•Bluestem
The Company is party to agreements with Bluestem whereby the Company is committed to purchase certain new advances on personal revolving financings receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewable through April 2022 at Bluestem’s option. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the total unused credit available to customers was $3.0$2.7 billion and $3.1$3 billion, respectively. In 2020, the Company purchased $0.2 billion of receivables, out of the $3 billion unused credit available to customers as of December 31, 2019. In 2019, the Company purchased $0.6$1.2 billion of receivables, out of the $3.1 billion unused credit available to customers as of December 31, 2018. In 2018, the Company purchased $1.2 billion of receivables, out of the $3.9 billion unused credit available to customers as of December 31, 2017. In addition, the Company purchased $75,486$20,943 and $24,239 of receivables related to newly opened customer accounts during the sixthree months ended June 30, 2019.March 31, 2020 and 2019 respectively.
Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company was obligated to purchase $16,329$8,620 and $15,356,$10,628, respectively, in receivables that had been originated by Bluestem but not yet purchased by the Company. The Company also is required to make a profit-sharing payment to Bluestem each month if performance exceeds a specified return threshold. The agreement, among other provisions, gives Bluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the
agreement, and, provides that if the repurchase right is exercised, Bluestem has the right to retain up to 20.00%20% of new accounts subsequently originated.
•Others
Under terms of an application transfer agreement with Nissan, the Company has the first opportunity to review for its own portfolio any credit applications turned down by the Nissan’s captive finance company. The agreement does not require the Company to originate any loans, but for each loan originated the Company will pay Nissan a referral fee.
In connection with the sale of retail installment contracts through securitizations and other sales, the Company has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of June 30, 2019,March 31, 2020, there were no0 loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for the Company’s asset-backed securities or other sales. In the opinion of management, the potential exposure of other recourse obligations related to the Company’s retail installment contract sales agreements is not expected to have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.
Santander has provided guarantees on the covenants, agreements, and obligations of the Company under the governing documents of its warehouse lines and privately issued amortizing notes. These guarantees are limited to the obligations of the Company as servicer.
In November 2015, the Company executed a forward flow asset sale agreement with a third party under terms of which the Company committed to sell $350,000 in charged off loan receivables in bankruptcy status on a quarterly basis .basis. However, any sale more than $275,000 is subject to a market price check. The remaining aggregate commitment as of June 30, 2019March 31, 2020 and December 31, 2018,2019, not subject to market price check was $46,083$27,702 and $63,975,$39,787, respectively.
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11. | Related-Party Transactions |
11. Related-Party Transactions
Related-party transactions not otherwise disclosed in these footnotes to the condensed consolidated financial statements include the following:
Credit Facilities
Interest expense, including unused fees, for affiliate lines of credit for the three and six months ended June 30,March 31, 2020 and 2019 was $63,018 and 2018, was as follows:
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| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Lines of credit agreement with Santander - New York Branch (a) | $ | — |
| | $ | 5,741 |
| | $ | — |
| | $ | 10,108 |
|
| Debt facilities with SHUSA (Note 5) | 45,996 |
| | 36,561 |
| | 90,877 |
| | 72,407 |
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(a) Through its New York branch, Santander provided the Company with revolving credit facilities. During the year ended December 31, 2018 these facilities were terminated.$44,881, respectively.
Accrued interest for affiliate lines of credit at June 30, 2019March 31, 2020 and December 31, 2018,2019 was as follows:
|
| | | | | |
| | June 30,
2019 | | December 31, 2018 |
| Debt facilities with SHUSA (Note 5) | 20,533 |
| | 19,928 |
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In 2015, under an agreement with Santander, the Company agreed to begin incurring a fee of 12.5 basis points (per annum) on certain warehouse lines, as they renew, for which Santander provides a guarantee of the Company’s servicing obligations. The Company recognized guarantee fee expense of $1540 and $384$230 for the three and six months ended June 30,March 31, 2020 and 2019, respectively, and $1,569 and $3,617 for the three and six months ended June 30, 2018,
respectively. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company had $1,101 and $1,9220 of related fees payable to Santander, respectively.Santander.
Derivatives
The Company has derivative financial instruments with Santander and affiliates with outstanding notional amounts of
$979,2702,074,450 and zero$1,874,100 as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively (Note 7). The Company had a collateral overage on derivative liabilities with Santander and affiliates of $3,525$2,048 and zero$2,220 as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
Interest and mark-to-market adjustments on these derivative financial instruments totaled $241$248 and $231$238 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $479 and $460 for the six months ended June 30, 2019 and 2018, respectively.
Retail Installment Contracts and RV Marine
The Company also has agreements with SBNA to service auto retail installment contracts and recreational and marine vehicle portfolios.
Servicing fee income recognized under these agreements totaled $370$553 and $756$407 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $777 and $1,795 for the six months ended June 30, 2019 and 2018, respectively. Other information on the serviced auto loan and retail installment contract portfolios for SBNA as of June 30, 2019March 31, 2020 and December 31, 20182019 is as follows:
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| | | | | | | |
| | June 30,
2019 | | December 31,
2018 |
| Total serviced portfolio | $ | 327,902 |
| | $ | 383,246 |
|
| Cash collections due to owner | 28,118 |
| | 14,920 |
|
| Servicing fees receivable | 187 |
| | 601 |
|
| | | | | | | | | | | |
| | March 31, 2020 | | December 31, 2019 |
| Total serviced portfolio | $ | 256,455 | | | $ | 277,669 | |
| Cash collections due to owner | 13,575 | | | 14,908 | |
| Servicing fees receivable | 119 | | | 738 | |
Dealer Lending
Under the Company’s agreement with SBNA, the Company is required to permit SBNA a first right to review and assess Chrysler CapitalCCAP dealer lending opportunities, and SBNA is required to pay the Company an origination fee and an annual renewal fee for each loan originated under the agreement. The agreement also transferred the servicing of all Chrysler CapitalCCAP receivables from dealers, including receivables held by SBNA and byto the Company and from the Company to SBNA. The Company may provide advance funding for dealer loans originated by SBNA, which is reimbursed to the Company by SBNA. The Company had no0 outstanding receivable from SBNA as of June 30, 2019 andMarch 31, 2020 or December 31, 20182019 for such advances.
Other information related to the above transactions with SBNA is as follows: |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Origination and renewal fee income from SBNA (a) | $ | 1,704 |
| | $ | 1,232 |
| | $ | 2,927 |
| | $ | 2,072 |
|
| Servicing fees expenses charged by SBNA (b) | 19 |
| | 20 |
| | 32 |
| | 39 |
|
(a) As of June 30, 2019 and December 31, 2018, the Company had origination and renewal fees receivable from SBNA of $635 and $385, respectively. | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Three Months Ended | | | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | | | | | |
| Origination and renewal fee income from SBNA | $ | 1,509 | | | $ | 1,223 | | | | | | | |
| Servicing fees expenses charged by SBNA | 74 | | | 13 | | | | | | | |
(b) As of June 30, 2019 and December 31, 2018, the Company had $16 and $19 of servicing fees payable to SBNA, respectively.
Under the agreement with SBNA, the Company may originate retail consumer loans in connection with sales of vehicles that are collateral held against floorplan loans by SBNA. Upon origination, the Company remits payment to SBNA, who settles the transaction with the dealer. The Company owed SBNA $5,526$3,634 and $5,908$5,384 related to such originations as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
The Company received a $9,000 referral fee in connection with sourcing and servicing arrangement and is amortizing the fee into income over the ten-yearten-year term of the agreement through July 1, 2022, the termination date of the agreement. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the unamortized fee balance was $3,600$2,925 and $4,050,$3,150, respectively. The Company recognized $225 and $450 of income related to the referral fee for the three and six months ended June 30, 2019March 31, 2020 and 2018, respectively.
Origination Support Services
Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail loans, primarily from FCA dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA’s behalf. DuringFor the three and six months ended June 30,March 31, 2020 and 2019, the Company facilitated the purchase of $1.9$1.1 billion and $2.95$1.0 billion of retail installment contacts, respectively. During the three and six months ended June 30, 2018, the Company facilitated the purchase of $29 million and $53 million of retail installment contacts, respectively. The Company recognized origination/referral fee and servicing fee income of $16,388$10,488 and $25,825, respectively,$6,556 for the three and six months ended June 30,March 31, 2020 and 2019, of which $4,298$970 is payable (net of any repurchase from SBNA) and $3,226 is receivable as of June 30, 2019. The Company recognized origination/referral feeMarch 31, 2020 and servicing fee income of $216 and $388, respectively, for the three and six months ended June 30, 2018 of which $46 is receivable as of June 30, 2018.2019, respectively.
Securitizations
The Company had a Master Securities Purchase Agreement (MSPA) with Santander, whereby the Company had the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term that ended in December 2018. The Company provides servicing on all loans originated under this arrangement.
Other information relating to SPAIN securitization platform for the sixthree months ended June 30,March 31, 2020 and 2019 and June 30, 2018 is as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Servicing fee income | $ | 7,711 |
| | $ | 8,622 |
| | $ | 16,142 |
| | $ | 15,822 |
|
| Loss (Gain) on sale, excluding lower of cost or market adjustments (if any) | — |
| | 3,177 |
| | — |
| | 20,080 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| | March 31, 2020 | | March 31, 2019 | | | | |
| Servicing fee income | $ | 5,973 | | | $ | 8,431 | | | | | |
| | | | | | | |
Servicing fee receivable as of June 30, 2019March 31, 2020 and December 31, 20182019 was $2,402$1,636 and $2,983$1,869, respectively. The Company had $16,131$7,002 and $15,968$8,180 of collections due to Santander as of June 30, 2019March 31, 2020 and December 31, 2018,2019, respectively.
Santander Investment Securities Inc. (SIS), an affiliated entity, serves as joint bookrunner and co-manager on certain of the Company’s securitizations. Amounts paid to SIS as co-manager for the three months ended June 30,March 31, 2020 and 2019, totaled $808 and 2018, totaled $151 and $148, respectively, and totaled $965 and $858 for the six months ended June 30, 2019 and 2018,$814, respectively, and are included in debt issuance costs in the accompanying condensed consolidated financial statements.
CEO and other
Other employee compensation
Scott Powell is President and CEO of the Company, and the President and CEO of SHUSA. During the six months ended June 30, 2019, the Company accrued $2,051 as its share of compensation expense based on time allocation between his services to the Company and SHUSA.
In addition, certainCertain employees of the Company and SHUSA, provide services to each other. For the sixthree months ended June 30, 2019,March 31, 2020, the Company owed SHUSA approximately $4,448$4,479 and SHUSA owed the Company approximately $1,133$1,518 for such services.service.
Other related-party transactions
•The Company subleases approximately 13,000 square feet of its corporate office space to SBNA. For the three months ended June 30,March 31, 2020 and 2019, and 2018, the Company recorded $44 and $41 respectively, in sublease revenue on this property. For the six months ended June 30, 2019 and 2018, the Company recorded $88 and $82 respectively, in sublease revenue on this property.
•The Company’s wholly-owned subsidiary, Santander Consumer International Puerto Rico, LLC (SCI), has deposit accounts with Banco Santander Puerto Rico, an affiliated entity. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, SCI had cash (including restricted cash) of $6,339$9,121 and $8,862,$8,102, respectively, on deposit with Banco Santander Puerto Rico.
•The Company has certain deposit and checking accounts with SBNA, an affiliated entity. As of June 30, 2019March 31, 2020 and December 31, 2018,2019, the Company had a balance of $36,550$434,002 and $92,774,$33,683, respectively, in these accounts.
Beginning in 2017, the•The Company and SBNA entered intohave a Credit Card Agreement (Card Agreement) whereby SBNA will provideprovides credit card services for travel and related business expenses and for vendor payments. This service is at zero cost but generates rebates based on purchases made. As of June 30, 2019,March 31, 2020, the activities associated with the program were insignificant.
Beginning in 2016, the•The Company agreed to paypays SBNA a market rate-based fee expense for payments made at SBNA retail branch locations for accounts originated or serviced by the Company and the costs associated with modifying the Advanced Teller platform to the payments. The Company incurred expenses of $84$58 and $154$49 for these services during the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $133 and $341 for the six months ended June 30, 2019 and 2018, respectively.
Effective 2017, the•The Company has contracted Aquanima, a Santander affiliate, to provide procurement services. Expenses incurred totaled $379$510 and $379 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $758 and $758 for the six months ended June 30, 2019 and 2018, respectively.
•Santander Global Tech (formerly known as Produban Servicios Informaticos Generales S.L.), a Santander affiliate, is under contract with the Company to provide professional services, telecommunications, and internal
and/or external applications. Expenses incurred, which are included as a component of other operating costs in the accompanying condensed consolidated statements of income, totaled $34$179 and zero$195 for the three months ended June 30,March 31, 2020 and 2019, and 2018, respectively, and $229 and zero for the six months ended June 30, 2019 and 2018, respectively.
•The Company partners with SHUSA to place Cyber Liability Insurance in which participating national entities share $150 million aggregate limits. The Company repays SHUSA for the Company’s equitably allocated portion of insurance premiums and fees. Expenses incurred totaled $108 and $93 for the three months ended June 30, 2019March 31, 2020 and 2018, respectively, and $216 and $185 for the six months ended June 30, 2019 and 2018, respectively.2019. In addition the Company partners with SHUSA for various other insurance products. Expenses incurred totaled $194$183 and $163$195 for the three months ended June 30,March 31, 2020 and 2019, respectively.
12. Computation of Basic and 2018, respectively, and $388 and $325 for the six months ended June 30, 2019 and 2018, respectively.Diluted Earnings per Common Share
| |
12. | Computation of Basic and Diluted Earnings per Common Share |
Earnings per common share (“EPS”) is computed using the two-class method required for participating securities. Restricted stock awards are considered to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of a declaration of a dividend on the Company’s common shares.
The calculation of diluted EPS excludes 85,190, 221,572, 104,790, and 221,572 employee stock options for the three and six months ended June 30, 2019 and 2018, respectively, as the effect of exercise or settlement of those securitiesthat would be anti-dilutive. RSUsanti-dilutive for employee stock options of zero34,554 and 168,728 for the three and six months ended June 30,March 31, 2020 and 2019, and zero for the three and six months ended June 30, 2018 were excluded as the effect of exercise or settlement of those securities would be anti-dilutive.respectively.
The following table represents EPS numbers for the three and six months ended June 30, 2019March 31, 2020 and 2018:2019:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended
June 30, | | Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Earnings per common share | | | | | | | |
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| Weighted average number of common shares outstanding before restricted participating shares (in thousands) | 351,106 |
| | 361,268 |
| | 351,310 |
| | 360,987 |
|
| Weighted average number of participating restricted common shares outstanding (in thousands) | — |
| | — |
| | — |
| | — |
|
| Weighted average number of common shares outstanding (in thousands) | 351,106 |
| | 361,268 |
| | 351,310 |
| | 360,987 |
|
| Earnings per common share | $ | 1.05 |
| | $ | 0.93 |
| | $ | 1.75 |
| | $ | 1.61 |
|
| Earnings per common share - assuming dilution | | | | | | | |
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| Weighted average number of common shares outstanding (in thousands) | 351,106 |
| | 361,268 |
| | 351,310 |
| | 360,987 |
|
| Effect of employee stock-based awards (in thousands) | 450 |
| | 790 |
| | 516 |
| | 842 |
|
| Weighted average number of common shares outstanding - assuming dilution (in thousands) | 351,556 |
| | 362,058 |
| | 351,826 |
| | 361,829 |
|
| Earnings per common share - assuming dilution | $ | 1.05 |
| | $ | 0.93 |
| | $ | 1.75 |
| | $ | 1.60 |
|
| | | | | | | | | | | | | | | | | |
| Three Months Ended
March 31, | | | | | | | | |
| | | | | | | | | |
| | 2020 | | 2019 | | | | | | |
| Earnings per common share | | | | | | | | | |
| Net income (loss) | $ | (3,987) | | | $ | 247,503 | | | | | | | |
| Weighted average number of common shares outstanding before restricted participating shares (in thousands) | 334,026 | | | 351,515 | | | | | | | |
| | | | | | | | | |
| Weighted average number of common shares outstanding (in thousands) | 334,026 | | | 351,515 | | | | | | | |
| Earnings per common share | $ | (0.01) | | | $ | 0.70 | | | | | | | |
| Earnings per common share - assuming dilution | | | | | | | | | |
| Net income (loss) | $ | (3,987) | | | $ | 247,503 | | | | | | | |
| Weighted average number of common shares outstanding (in thousands) | 334,026 | | | 351,515 | | | | | | | |
| Effect of employee stock-based awards (in thousands) | 320 | | | 537 | | | | | | | |
| Weighted average number of common shares outstanding - assuming dilution (in thousands) | 334,346 | | | 352,052 | | | | | | | |
| Earnings per common share - assuming dilution | $ | (0.01) | | | $ | 0.70 | | | | | | | |
| |
13. | Fair Value of Financial Instruments |
13. Fair Value of Financial Instruments
Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 inputs are those that are unobservable or not readily observable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following tables present the carrying value and estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2019March 31, 2020 and December 31, 2018,2019, and the level within the fair value hierarchy:
| | | | June 30, 2019 | | | March 31, 2020 | |
| | Carrying
Value | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 | | | Carrying
Value | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | Assets: | | | | | | | | | | |
| Cash and cash equivalents (a) | $ | 99,756 |
| | $ | 99,756 |
| | $ | 99,756 |
| | $ | — |
| | $ | — |
| Cash and cash equivalents (a) | | $ | 501,588 | | | $ | 501,588 | | | $ | 501,588 | | | $ | — | | | $ | — | |
| | Finance receivables held for investment, net (b) | 25,645,374 |
| | 26,536,662 |
| | — |
| | — |
| | 26,536,662 |
| Finance receivables held for investment, net (b) | | 25,160,731 | | | 26,794,642 | | | — | | | — | | | 26,794,642 | |
| Restricted cash and cash equivalents (a) | 2,272,621 |
| | 2,272,621 |
| | 2,272,621 |
| | — |
| | — |
| Restricted cash and cash equivalents (a) | | 1,987,004 | | | 1,987,004 | | | 1,987,004 | | | — | | | — | |
| Total | $ | 28,017,751 |
| | $ | 28,909,039 |
| | $ | 2,372,377 |
| | $ | — |
| | $ | 26,536,662 |
| Total | | $ | 27,649,323 | | | $ | 29,283,234 | | | $ | 2,488,592 | | | $ | — | | | $ | 26,794,642 | |
| Liabilities: | | | | | | | | | | Liabilities: | | | | | | | | | | |
| Notes payable — credit facilities (c) | $ | 6,514,163 |
| | $ | 6,514,163 |
| | $ | — |
| | $ | — |
| | $ | 6,514,163 |
| |
| Notes payable — facilities with third parties (c) | | Notes payable — facilities with third parties (c) | | $ | 6,521,679 | | | $ | 6,521,679 | | | $ | — | | | $ | — | | | $ | 6,521,679 | |
| Notes payable — secured structured financings (d) | 26,248,528 |
| | 26,499,153 |
| | — |
| | 19,182,978 |
| | 7,316,175 |
| Notes payable — secured structured financings (d) | | 28,043,124 | | | 27,875,409 | | | — | | | 16,963,276 | | | 10,912,133 | |
| Notes payable — related party (e) | 4,002,814 |
| | 4,047,246 |
| | — |
| | — |
| | 4,047,246 |
| |
| Notes payable — facilities with Santander and related subsidiaries (e) | | Notes payable — facilities with Santander and related subsidiaries (e) | | 5,652,077 | | | 5,485,906 | | | — | | | — | | | 5,485,906 | |
| Total | $ | 36,765,505 |
| | $ | 37,060,562 |
| | $ | — |
| | $ | 19,182,978 |
| | $ | 17,877,584 |
| Total | | $ | 40,216,880 | | | $ | 39,882,994 | | | $ | — | | | $ | 16,963,276 | | | $ | 22,919,718 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | December 31, 2019 | | | | | | | | |
| | | | | | Carrying
Value | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | | | | | | |
| Cash and cash equivalents (a) | | | | | | $ | 81,848 | | | $ | 81,848 | | | $ | 81,848 | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | | |
| Finance receivables held for investment, net (b) | | | | | | 27,544,162 | | | 28,133,427 | | | — | | | 1,009,358 | | | 27,124,069 | |
| Restricted cash and cash equivalents (a) | | | | | | 2,079,239 | | | 2,079,239 | | | 2,079,239 | | | — | | | — | |
| Total | | | | | | $ | 29,705,249 | | | $ | 30,294,514 | | | $ | 2,161,087 | | | $ | 1,009,358 | | | $ | 27,124,069 | |
| Liabilities: | | | | | | | | | | | | | | |
| Notes payable — facilities with third parties (c) | | | | | | $ | 5,399,931 | | | $ | 5,399,931 | | | $ | — | | | $ | — | | | $ | 5,399,931 | |
| Notes payable — secured structured financings (d) | | | | | | 28,141,885 | | | 28,360,948 | | | — | | | 18,646,326 | | | 9,714,622 | |
| Notes payable — facilities with Santander and related subsidiaries (e) | | | | | | 5,652,325 | | | 5,724,675 | | | — | | | — | | | 5,724,675 | |
| Total | | | | | | $ | 39,194,141 | | | $ | 39,485,554 | | | $ | — | | | $ | 18,646,326 | | | $ | 20,839,228 | |
(a)Cash and cash equivalents and restricted cash and cash equivalents — The carrying amount of cash and cash equivalents, including restricted cash and cash equivalents, is at an approximated fair value as the instruments mature within 90 days or less and bear interest at market rates.
(b)Finance receivables held for investment, net — Finance receivables held for investment, net are carried at amortized cost, net of an allowance. These receivables exclude retail installment contracts that are measured at fair value on a recurring and nonrecurring basis. The estimated fair value for the underlying financial instruments are determined as follows:
•Retail installment contracts held for investment and purchased receivables - credit deteriorated — As of December 31, 2019, Company had used the most recent purchase price as the fair value for certain loans and hence classified those retail installment contracts as Level 2. The estimated fair value of all finance receivables at March 31, 2020 is estimated using a DCF model are classified as Level 3.
•Finance lease receivables — Finance lease receivables are carried at gross investments, net of unearned income and allowance for lease losses. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
•Receivables from dealers and personal loans held for investment — Receivables from dealers and personal loans held for investment are carried at amortized cost, net of credit loss allowance. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
(c)Notes payable — facilities with third parties — The carrying amount of notes payable related to revolving credit facilities is estimated to approximate fair value. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
(d)Notes payable — secured structured financings — The estimated fair value of notes payable related to secured structured financings is calculated based on market observable prices and spreads for the Company’s publicly traded debt and market observed prices of similar notes issued by the Company, or recent market
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Carrying
Value | | Estimated
Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Assets: | | | | | | | | | |
| Cash and cash equivalents (a) | $ | 148,436 |
| | $ | 148,436 |
| | $ | 148,436 |
| | $ | — |
| | $ | — |
|
| Finance receivables held for investment, net (b) | 24,914,833 |
| | 26,037,559 |
| | — |
| | — |
| | 26,037,559 |
|
| Restricted cash and cash equivalents (a) | 2,102,048 |
| | 2,102,048 |
| | 2,102,048 |
| | — |
| | — |
|
| Total | $ | 27,165,317 |
| | $ | 28,288,043 |
| | $ | 2,250,484 |
| | $ | — |
| | $ | 26,037,559 |
|
| Liabilities: | | | | | | | | | |
| Notes payable — credit facilities (c) | $ | 4,478,214 |
| | $ | 4,478,214 |
| | $ | — |
| | $ | — |
| | $ | 4,478,214 |
|
| Notes payable — secured structured financings (d) | 26,901,530 |
| | 26,994,912 |
| | — |
| | 17,924,867 |
| | 9,070,045 |
|
| Notes payable — related party (e) | 3,503,293 |
| | 3,438,543 |
| | — |
| | — |
| | 3,438,543 |
|
| Total | $ | 34,883,037 |
| | $ | 34,911,669 |
| | $ | — |
| | $ | 17,924,867 |
| | $ | 16,986,802 |
|
| |
(a) | Cash and cash equivalents and restricted cash and cash equivalents — The carrying amount of cash and cash equivalents, including restricted cash and cash equivalents, is at an approximated fair value as the instruments mature within 90 days or less and bear interest at market rates.
|
| |
(b) | Finance receivables held for investment, net — Finance receivables held for investment, net are carried at amortized cost, net of an allowance. These receivables exclude retail installment contracts that are measured at fair value on a recurring and nonrecurring basis. The estimated fair value for the underlying financial instruments are determined as follows:
|
| |
• | Retail installment contracts held for investment and purchased receivables — The estimated fair value is calculated based on a DCF in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates, expected recovery rates, discount rates reflective of the cost of funding, and credit loss expectations.
|
| |
• | Finance lease receivables — Finance lease receivables are carried at gross investments, net of unearned income and allowance for lease losses. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
|
| |
• | Receivables from dealers and personal loans held for investment — Receivables from dealers and personal loans held for investment are carried at amortized cost, net of credit loss allowance. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
|
| |
(c) | Notes payable — credit facilities — The carrying amount of notes payable related to revolving credit facilities is estimated to approximate fair value. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
|
| |
(d) | Notes payable — secured structured financings — The estimated fair value of notes payable related to secured structured financings is calculated based on market observable prices and spreads for the Company’s publicly traded debt and market observed prices of similar notes issued by the Company, or recent market transactions involving similar debt with similar credit risks, which are considered level 2 inputs. The estimated fair value of notes payable related to privately issued amortizing notes is calculated based on a combination of credit enhancement review, discounted cash flow analysis and review of market observable spreads for similar liabilities. In conducting this analysis, the Company uses significant unobservable inputs on key assumptions, including historical default rates, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations, which are considered level 3 inputs.
|
| |
(e) | Notes payable — related party(e)Notes payable — facilities with Santander and related subsidiaries — The carrying amount of floating rate notes payable to a related party is estimated to approximate fair value as the facilities are subject to short-term floating interest rates that approximate rates available to the Company. The fair value premium/discount of the fixed rate promissory notes are derived from changes in the Company’s unsecured cost of funds since the time of issuance and weighted average life of these notes.
|
Financial Instruments Measured At Fair Value On A Recurring Basis
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2019March 31, 2020 and December 31, 2018,2019, and the level within the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2020 | | | | | | | |
| Total | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | |
| Other assets — trading interest rate caps (a) | $ | 4,926 | | | $ | — | | | $ | 4,926 | | | $ | — | | |
| | | | | | | | |
| | | | | | | | |
| Other assets — available-for-sale-debt securities (b) | 95,434 | | | — | | | 95,434 | | | — | | |
| Other liabilities — trading options for interest rate caps (a) | 4,926 | | | — | | | 4,926 | | | — | | |
| Other liabilities — cash flow hedging interest rate swaps (a) | 88,598 | | | — | | | 88,598 | | | — | | |
| Other liabilities — trading interest rate swaps (a) | 17,167 | | | — | | | 17,167 | | | — | | |
| Retail installment contracts (c)(d) | 15,307 | | | — | | | — | | | 15,307 | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2019 | | | | | | |
| Total | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) |
| Other assets — trading interest rate caps (a) | 62,552 | | | $ | — | | | $ | 62,552 | | | $ | — | |
| Other assets — cash flow hedging interest rate swaps (a) | 2,807 | | | — | | | 2,807 | | | — | |
| | | | | | | |
| Other assets — available-for-sale-debt securities (b) | 92,246 | | | — | | | 92,246 | | | — | |
| Other liabilities — trading options for interest rate caps (a) | 62,552 | | | — | | | 62,552 | | | — | |
| Other liabilities — cash flow hedging interest rate swaps (a) | 39,128 | | | — | | | 39,128 | | | — | |
| Other liabilities — trading interest rate swaps (a) | 10,267 | | | — | | | 10,267 | | | — | |
| Retail installment contracts (c)(d) | 22,353 | | | — | | | 17,634 | | | 4,719 | |
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at June 30, 2019 |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Other assets — trading interest rate caps (a) | $ | 72,935 |
| | $ | — |
| | $ | 72,935 |
| | $ | — |
|
| Due from affiliates — trading interest rate caps (a) | $ | 15,305 |
| | — |
| | 15,305 |
| | — |
|
| Other assets — cash flow hedging interest rate swaps (a) | $ | 12,225 |
| | — |
| | 12,225 |
| | — |
|
| Other assets — trading interest rate swaps (a) | 2,992 |
| | — |
| | 2,992 |
| | — |
|
| Other assets — available-for-sale-debt securities (b) | 94,643 |
| | — |
| | 94,643 |
| | — |
|
| Other liabilities — trading options for interest rate caps (a) | 72,935 |
| | — |
| | 72,935 |
| | — |
|
| Other liabilities — cash flow hedging interest rate swaps (a) | 41,037 |
| | — |
| | 41,037 |
| | — |
|
| Due to affiliates — trading options for interest rate caps (a) | 15,305 |
| | — |
| | 15,305 |
| | — |
|
| Other liabilities — trading interest rate swaps (a) | 12,171 |
| | — |
| | 12,171 |
| | — |
|
| Retail installment contracts acquired individually (c) | 8,832 |
| | — |
| | — |
| | 8,832 |
|
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements at December 31, 2018 |
| | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| Other assets — trading interest rate caps (a) | $ | 128,377 |
| | $ | — |
| | $ | 128,377 |
| | $ | — |
|
| Other assets — cash flow hedging interest rate swaps (a) | 43,967 |
| | — |
| | 43,967 |
| | — |
|
| Other assets — trading interest rate swaps (a) | 11,553 |
| | — |
| | 11,553 |
| | — |
|
| Other liabilities — trading options for interest rate caps (a) | 128,377 |
| | — |
| | 128,377 |
| | — |
|
| Other liabilities — cash flow hedging interest rate swaps (a) | 7,478 |
| | — |
| | 7,478 |
| | — |
|
| Other liabilities — trading interest rate swaps (a) | 2,130 |
| | — |
| | 2,130 |
| | — |
|
| Retail installment contracts acquired individually (c) | 13,509 |
| | — |
| | — |
| | 13,509 |
|
| |
(a) | The valuation is determined using widely accepted valuation techniques including a DCF on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees. The Company utilizes the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for instruments (Note 7). |
| |
(b) | The Company's available-for-sale debt securities includes U.S. Treasury securities that are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers and therefore, classified as Level 2. |
| |
(c) | For certain retail installment contracts reported in finance receivables held for investment, net, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using a DCF model. When estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding of debt issuance and recent historical equity yields, and recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3. Changes in the fair value are recorded in investment gains (losses), net in the condensed consolidated statement of income. |
(b)The Company's available-for-sale debt securities includes U.S. Treasury securities that are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers and therefore, classified as Level 2.
(c)For certain retail installment contracts reported in finance receivables held for investment, net, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using a DCF model are classified as Level 3. As of December 31, 2019, Company had used the most recent purchase price as the fair value for certain loans and hence classified those retail installment contracts as Level 2. Changes in the fair value are recorded in investment gains (losses), net in the condensed consolidated statement of income.
(d)The aggregate fair value of retail installment contracts in non-accrual status as of March 31, 2020 and December 31, 2019 is $2,402 and $9,511, respectively.
The following table presents the changes in retail installment contracts held for investment balances classified as Level 3 balances for the three
and six months ended
June 30, 2019March 31, 2020 and
2018: |
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Balance — beginning of period | $ | 11,195 |
| | $ | 18,850 |
| | $ | 13,509 |
| | $ | 22,124 |
|
| Additions / issuances | 2,079 |
| | 1,927 |
| | 2,079 |
| | 3,276 |
|
| Net collection activities | (4,412 | ) | | (3,936 | ) | | (7,066 | ) | | (9,530 | ) |
| Gains recognized in earnings | (30 | ) | | 341 |
| | 310 |
| | 1,312 |
|
| Balance — end of period | $ | 8,832 |
| | $ | 17,182 |
| | $ | 8,832 |
| | $ | 17,182 |
|
| | | | | | | | | | | | | | | | | | |
| | | | | | | | | | |
| Three Months Ended March 31, | | | | | | | | | |
| 2020 | | 2019 | | | | | | | |
| Balance — beginning of year | $ | 4,719 | | | $ | 13,509 | | | | | | | | |
| Additions / issuances | 2,512 | | | — | | | | | | | | |
| Transfer from level 2 (a) | 17,634 | | | — | | | | | | | | |
| Net collection activities | (9,680) | | | (2,654) | | | | | | | | |
| Gains recognized in earnings | 122 | | | 340 | | | | | | | | |
| Balance — end of year | $ | 15,307 | | | $ | 11,195 | | | | | | | | |
(a) The Company did not have any transfers between Levels 1 andtransferred retail installment contracts from Level 2 to Level 3 during the three and six months ended June 30, 2019 and 2018.March 31, 2020 because the fair value for these assets cannot be determined by using readily observable inputs at March 31, 2020. There were no amounts transferred intoother material transfers in or out of Level 3 during the three and six months ended June 30, 2019March 31, 2020 and 2018.2019.
Financial Instruments Measured At Fair Value On A Nonrecurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a nonrecurring basis at June 30, 2019March 31, 2020 and December 31, 2018,2019, and are categorized using the fair value hierarchy:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at March 31, 2020 | | | | | | | | |
| Total | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Lower of cost or fair value expense for the three months ended March 31, 2020 |
| Other assets — vehicles (a) | $ | 444,907 | | | $ | — | | | $ | 444,907 | | | $ | — | | | $ | — | |
| Personal loans held for sale (b) | 912,126 | | | — | | | — | | | 912,126 | | | 62,958 | |
| | | | | | | | | |
| Auto loans impaired due to bankruptcy (c) | 193,727 | | | — | | | 193,727 | | | — | | | 4,953 | |
|
| | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements at June 30, 2019 |
| | Total | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Lower of cost or fair value expense for the six months ended June 30, 2019 |
| Other assets — vehicles (a) | 331,251 |
| | $ | — |
| | $ | 331,251 |
| | $ | — |
| | $ | — |
|
| Personal loans held for sale (b) | 955,729 |
| | — |
| | — |
| | 955,729 |
| | 151,712 |
|
| Retail installment contracts held for sale (d) | 293,372 |
| | — |
| | 293,372 |
| |
|
| | 20,395 |
|
| Auto loans impaired due to bankruptcy (c) | 184,543 |
| | — |
| | 184,543 |
| | — |
| | 11,664 |
|
| | | | Fair Value Measurements at December 31, 2018 | | Fair Value Measurements at December 31, 2019 | |
| | Total | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Lower of cost or fair value expense for the year ended December 31, 2018 | | Total | | Quoted Prices
in Active
Markets for
Identical Assets
(Level 1) | | Significant
Other
Observable
Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Lower of cost or fair value expense for the year ended December 31, 2019 |
| Other assets — vehicles (a) | $ | 342,097 |
| | $ | — |
| | $ | 342,097 |
| | $ | — |
| | $ | — |
| Other assets — vehicles (a) | $ | 341,465 | | | $ | — | | | $ | 341,465 | | | $ | — | | | $ | — | |
| Personal loans held for sale (b) | 1,068,757 |
| | — |
| | — |
| | 1,068,757 |
| | 367,219 |
| Personal loans held for sale (b) | 1,007,105 | | | — | | | — | | | 1,007,105 | | | 408,700 | |
| Retail installment contracts held for sale | — |
| | — |
| | — |
| | — |
| | 15,098 |
| |
| | Auto loans impaired due to bankruptcy (c) | 189,114 |
| | — |
| | 189,114 |
| | — |
| | 18,083 |
| Auto loans impaired due to bankruptcy (c) | 200,504 | | | — | | | 200,504 | | | — | | | 9,106 | |
(a) The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market levels of used car prices.
(b) The estimated fair value for personal loans held for sale is calculated based on the lower of market participant view and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates (principal and interest), discount rates reflective of the cost of funding, and credit loss expectations.assumptions. The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.
(c) For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.
(d) The estimated fair value of retail installment contracts held for sale is based on market participant view.
Quantitative Information about Level 3 Fair Value Measurements
The following table presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at
June 30, 2019March 31, 2020 and December 31,
2018:2019, respectively: |
| | | | | | | | | | | |
| | Financial Instruments | | Fair Value at June 30, 2019 | | Valuation Technique | | Unobservable Inputs | | Range |
| | Financial Assets: |
| | Retail installment contracts held for investment | | $ | 8,832 |
| | Discounted Cash Flow | | Discount Rate | | 8%-10% |
| | Default Rate | 15%-20% |
| | Prepayment Rate | 6%-8% |
| | Loss Severity Rate | 50%-60% |
| | Personal loans held for sale | | $ | 955,729 |
| | Lower of Market or Income Approach | | Market Approach | | |
| | Market Participant View | 70%-80% |
| | Income Approach | |
| | Discount Rate | 15%-25% |
| |
| | Default Rate | 30%-40% |
| | Net Principal & Interest Payment Rate | 70%-85% |
| | Loss Severity Rate | 90%-95% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instruments | | Fair Value at March 31, 2020 | | Valuation Technique | | Unobservable Inputs | | Range (weighted average) (a) |
| Financial Assets: | | | | | | | | |
| Retail installment contracts held for investment | | $ | 15,307 | | | Discounted Cash Flow | | Discount Rate | | 7%-13% (8%) |
| | | | | | Default Rate | | 4%-20% (10%) |
| | | | | | Prepayment Rate | | 4%-15% (12%) |
| | | | | | Loss Severity Rate | | 50%-60% (55%) |
| Personal loans held for sale | | $ | 912,126 | | | Lower of Market or Income Approach | | Market Approach | | | |
| | | | | | Market Participant View | | | 70%-80% |
| | | | | | Income Approach | | | |
| | | | | | Discount Rate | | | 15%-25% |
| | | | | | | | |
| | | | | | Default Rate | | 35%-45% |
| | | | | | Net Principal & Interest Payment Rate | | 65%-75% |
| | | | | | Loss Severity Rate | | 90%-95% |
(a) Weighted average was developed by weighting the associated relative unpaid principal balances.
|
| | | | | | | | | | | |
| | Financial Instruments | | Fair Value at December 31, 2018 | | Valuation Technique | | Unobservable Inputs | | Range |
| | Financial Assets: |
| | Retail installment contracts held for investment | | $ | 13,509 |
| | Discounted Cash Flow | | Discount Rate | | 8%-10% |
| | Default Rate | 15%-20% |
| | Prepayment Rate | 6%-8% |
| | Loss Severity Rate | 50%-60% |
| | Personal loans held for sale | | $ | 1,068,757 |
| | Lower of Market or Income Approach | | Market Approach | | |
| | Market Participant View | 70%-80% |
| | Income Approach | |
| | Discount Rate | 15%-25% |
| |
| | Default Rate | 30%-40% |
| | Net Principal & Interest Payment Rate | 70%-85% |
| | Loss Severity Rate | 90%-95% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial Instruments | | Fair Value at December 31, 2019 | | Valuation Technique | | Unobservable Inputs | | Range |
| Financial Assets: | | | | | | | | |
| Retail installment contracts held for investment | | $ | 4,719 | | | Discounted Cash Flow | | Discount Rate | | 8%-10% |
| | | | | | Default Rate | | 15%-20% |
| | | | | | Prepayment Rate | | 6%-8% |
| | | | | | Loss Severity Rate | | 50%-60% |
| Personal loans held for sale | | $ | 1,007,105 | | | Lower of Market or Income Approach | | Market Approach | | | |
| | | | | | Market Participant View | | | 70%-80% |
| | | | | | Income Approach | | | |
| | | | | | Discount Rate | | | 15%-25% |
| | | | | | | | |
| | | | | | Default Rate | | 30%-40% |
| | | | | | Net Principal & Interest Payment Rate | | 70%-85% |
| | | | | | Loss Severity Rate | | 90%-95% |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
14. Employee Benefit Plans
The Company has granted stock options to certain executives, other employees, and independent directors under the Company’s 2011 Management Equity Plan (the MEP), which enabled the Company to make stock option awards up to a total of approximately 29 million common shares (net of shares canceled and forfeited). The MEP expired in January 2015 and the Company will not grant any further awards under the MEP. The Company has granted stock options, restricted stock awards and restricted stock units (RSUs) under the Omnibus Incentive Plan (the Plan), which was established in 2013 and enables the Company to grant awards of cash and of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, RSUs, and other awards that may be settled in or based upon the value of the Company’s common stock up to a total of 5,192,641 common shares. The Plan was amended and restated as of June 16, 2016.
Stock options granted under the MEP and the Plan have an exercise price based on the estimated fair market value of the Company’s common stock on the grant date. The stock options expire ten years after grant date and include both
time vesting options and performance vesting options. The fair value of the stock options is amortized into expense over the vesting period as time and performance vesting conditions are met.
Compensation expense related to the 583,890 shares of restricted stock that the Company has issued to certain executives is recognized over a five-yearfive-year vesting period, with zero0 recorded for the three and six months ended June 30, 2019March 31, 2020 and 2018. 2019. The Company recognized $7,042$4,038 and $5,794$5,987 related to stock options and restricted stock units within compensation expense for the sixthree months ended June 30, 2019March 31, 2020 and 20182019, respectively. In addition, the Company recognizes forfeitures of awards as they occur.
A summary of the Company’s stock options and related activity as of and for the sixthree months ended June 30, 2019March 31, 2020 is as follows: |
| | | | | | | | | | | | | | |
| | Shares | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
| Options outstanding at January 1, 2019 | 645,376 |
| | $ | 13.15 |
| | 4.0 |
| | $ | 3,682 |
|
| Granted | — |
| | — |
| | — |
| | — |
|
| Exercised | (145,198 | ) | | 9.73 |
| | — |
| | 1,674 |
|
| Expired | (1,480 | ) | | 9.21 |
| | — |
| | — |
|
| Forfeited | — |
| | — |
| | — |
| | — |
|
| Other (a) | 1,480 |
| | 9.21 |
| | — |
| | — |
|
| Options outstanding at June 30, 2019 | 500,178 |
| | 14.15 |
| | 3.7 |
| | 4,971 |
|
| Options exercisable at June 30, 2019 | $ | 453,519 |
| | 13.71 |
| | 3.5 |
| | $ | 4,703 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Shares | | Weighted
Average
Exercise
Price | | Weighted
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| Options outstanding at January 1, 2020 | 273,737 | | | $ | 13.09 | | | 3.1 | | $ | 2,867 | |
| Granted | — | | | — | | | — | | | — | |
| Exercised | (38,577) | | | 10.54 | | | — | | | 621 | |
| Expired | — | | | — | | | — | | | — | |
| Forfeited | — | | | — | | | — | | | — | |
| Other (a) | — | | | — | | | — | | | — | |
| Options outstanding at March 31, 2020 | 235,160 | | | 13.50 | | | 2.9 | | 725 | |
| Options exercisable at March 31, 2020 | 217,780 | | | $ | 13.13 | | | 2.7 | | $ | 724 | |
| Options expected to vest at March 31, 2020 | 17,380 | | | $ | 18.26 | | | 5.6 | | $ | 1 | |
(a) Represents stock options that were reinstated.
In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the Capital Requirements Directive IV prudential rules, which require a portion of such officers’ and employees’ variable compensation to be paid in the form of equity, the Company periodically grants RSUs. Under the Plan, a portion of these RSUs vest immediately upon grant, and a portion vest annually over the following three or five years and subject to the achievement of certain performance conditions as applicable. After the shares subject to the RSUs vest and are settled, they are subject to transfer and sale restrictions for one year. In addition, the Company grants RSUs to certain officers and employees as part of variable compensation and these RSUs typically vest over three years. The Company also has granted certain directors RSUs that vest either upon the earlier of the first anniversary of grant date or the first annual stockholder meeting following the grant date. RSUs are valued based upon the fair market value on the date of the grant.
A summary of the Company’s RSUsRestricted Stock Units and performance stock units and related activity as of and for the sixthree months ended June 30, 2019March 31, 2020 is as follows:
| | | | | | | | | | | Shares | | Weighted
Average
Grant Date Fair Value | | Weighted
Average
Remaining
Contractual
Term (Years) | | Aggregate
Intrinsic
Value |
| | Shares | | Weighted Average Grant Date Fair Value | | Weighted Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value | |
| Outstanding as of January 1, 2019 | 698,799 |
| | $ | 14.53 |
| | 1.1 |
| | $ | 12,292 |
| |
| Outstanding as of January 1, 2020 | | Outstanding as of January 1, 2020 | 498,299 | | | $ | 17.41 | | | 0.9 | | $ | 11,645 | |
| Granted | 473,325 |
| | 20.83 |
| | — |
| | — |
| Granted | 247,635 | | | 21.42 | | | — | | | — | |
| Vested | (541,812 | ) | | 16.70 |
| | — |
| | 11,366 |
| Vested | (321,880) | | | 19.84 | | | — | | | 7,812 | |
| Forfeited/canceled | (20,981 | ) | | 13.35 |
| | — |
| | — |
| Forfeited/canceled | (7,359) | | | 16.17 | | | — | | | — | |
| Unvested as of June 30, 2019 | 609,331 |
| | 17.62 |
| | 1.5 |
| | $ | 14,600 |
| |
| Non-vested at March 31, 2020 | | Non-vested at March 31, 2020 | 416,695 | | | $ | 18.05 | | | 1.3 | | $ | 5,796 | |
|
Share Repurchases and Treasury Stock
In MayJune 2019, the Company announced that the Board approved a share repurchase programhad authorized purchases by the Company of up to $400 million in share repurchase$1.1 billion,
excluding commissions, of its outstanding common stock effective from the third quarter of 2019 through the end of
the second quarter of 2020.
During the three months ended March 31, 2020, the Company purchased a total of 18,361,168 shares of its common stock through a tender offer and other share repurchase program at a total cost of approximately $467 million, excluding commission (see below for details). During the three months ended March 31, 2019, which concluded with the Company purchased 965,430 shares of its common stock under its share repurchase program at a cost of $86.8approximately $18 million, excluding commissions.
A.Tender Offer
On January 30, 2020, the Company commenced a modified Dutch Auction tender offer to purchase shares of its common stock, at a range of between $23 and $26 per share, or such lesser number of shares of its common stock as are properly tendered and not properly withdrawn by the seller, in cash. The tender offer expired on February 27, 2020.
On March 3, 2020, the Company announced the final results of its “modified Dutch Auction” tender offer. The Company accepted for purchase 17,514,707 shares of its common stock, $0.01 par value per share, at a price of $26 per share, for an aggregate cost of approximately $455 million, excluding fees and expenses related to the tender offer. These shares represent approximately 5.2 percent of the Company’s common stock.shares outstanding.
The following table presents information regarding the shares we repurchased duringB. Other Share Repurchases
During the three and six months ended June 30, 2019 ($ and shares in thousands, except perMarch 31, 2020, the Company purchased 846,461 share amounts):s of its common stock under its share repurchase program at a cost of approximately $12 million, excluding commissions.
|
| | | | | | | |
| | Three Months Ended | Six Months Ended |
| | June 30, 2019 | | June 30, 2019 |
| Total cost of shares repurchased | $ | 86,826 |
| | $ | 104,587 |
|
| Average price per share | 23.16 |
| | 22.18 |
|
| Number of shares repurchased | 3,749,692 |
| | 4,715,122 |
|
Refer to Part II “UnregisteredItem 2 - "Unregistered Sales of Equity Securities and Use of Proceeds”Proceeds" section for additional details on share repurchases.
Further, in June 2019, the Company announced its planned capital actions for the third quarter of 2019 through the second quarter of 2020, which includes an authorization to repurchase up to $1.1 billion of the Company’s outstanding common stock through the end of the second quarter of 2020.
Treasury Stock
The Company had 14,441,07941,957,535 and 9,725,95723,596,367 shares of treasury stock outstanding, with a cost of $292,574$994,363 and $187,930$525,897 as of June 30, 2019,March 31, 2020 and December 31, 2018,2019, respectively. NoNaN shares were withheld to cover income taxes related to stock issued in connection with employee incentive compensation plans for the three months ended June 30, 2019.March 31, 2020. The value of the treasury stock is included within the additional paid-in-capital.
Accumulated Other Comprehensive Income (Loss)
A summary of changes in accumulated other comprehensive income (loss), net of tax, for the three and six months ended June 30, 2019March 31, 2020 and 20182019 is as follows:
| | | | | | | | | | | | | Three Months Ended | | | |
| | Three Months Ended | Six Months Ended | |
| | June 30, 2019 | | June 30, 2018 | June 30, 2019 | | June 30, 2018 | | March 31, 2020 | | March 31, 2019 | | |
| Beginning balance, unrealized gains (losses) | $ | 12,938 |
| | $ | 63,211 |
| $ | 33,515 |
| | $ | 44,262 |
| Beginning balance, unrealized gains (losses) | $ | (26,693) | | | $ | 33,515 | | | |
| Other comprehensive income (loss) before reclassifications (gross) | (22,997 | ) | | 7,015 |
| (33,678 | ) | | 29,934 |
| Other comprehensive income (loss) before reclassifications (gross) | (37,585) | | | (10,680) | | | |
| Amounts (gross) reclassified out of accumulated other comprehensive income (loss) | (10,508 | ) | | (7,777 | ) | (20,404 | ) | | (11,747 | ) | Amounts (gross) reclassified out of accumulated other comprehensive income (loss) | 623 | | | (9,897) | | | |
| Ending balance, unrealized gains (losses) | $ | (20,567 | ) | | $ | 62,449 |
| $ | (20,567 | ) | | $ | 62,449 |
| Ending balance, unrealized gains (losses) | $ | (63,655) | | | $ | 12,938 | | | |
Amounts (gross) reclassified out of accumulated other comprehensive income (loss) during the three and six months ended June 30, 2019March 31, 2020 and 20182019 consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2020 | | | | Three Months Ended March 31, 2019 | | | | | | | | |
| Reclassification | Amount reclassified | | Income statement line item | | Amount reclassified | | Income statement line item | | | | | | |
| Cash flow hedges | $ | 824 | | | Interest expense | | $ | (13,040) | | | Interest expense | | | | | | |
| Available-for-sale | — | | | Investment gain/loss | | — | | | Investment gain/loss | | | | | | |
| Tax benefit | (201) | | | | | 3,143 | | | | | | | | | |
| Net of tax | $ | 623 | | | | | $ | (9,897) | | | | | | | | | |
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| Reclassification | Amount reclassified | | Income statement line item | | Amount reclassified | | Income statement line item |
| | | | | | | |
| Cash flow hedges | $ | (13,901 | ) | | Interest expense | | $ | (9,095 | ) | | Interest expense |
| Available for sale-debt securities | $ | — |
| | Investment gain/loss | | — |
| | Investment gain/loss |
| Tax expense (benefit) | 3,393 |
| | | | 1,318 |
| | |
| Net of tax | $ | (10,508 | ) | | | | $ | (7,777 | ) | | |
47
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2019 | | Six Months Ended June 30, 2018 |
| Reclassification | Amount reclassified | | Income statement line item | | Amount reclassified | | Income statement line item |
| | | | | |
| | |
| Cash flow hedges | $ | (26,941 | ) | | Interest expense | | $ | (13,672 | ) | | Interest expense |
| Available for sale-debt securities | $ | — |
| | Investment gain/loss | | $ | — |
| | Investment gain/loss |
| Tax expense (benefit) | $ | 6,537 |
| | | | $ | 1,925 |
| | |
| Net of tax | $ | (20,404 | ) | | | | $ | (11,747 | ) | | |
Dividends
The Company paid a cash dividenddividend of $0.20 per share in May 2019. Further, the Company$0.22 in February 2020, and has declared a cash dividend of $0.22 per share, to be paid on August 20, 2019,May 18, 2020, to shareholders of record as of the close of business on August 10, 2019.May 8, 2020.
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16. | Investment Losses, Net |
16. Investment Losses, Net
When the Company sells retail installment contracts, acquired individually, personal loans or leases to unrelated third parties or to VIEs and determines that such sale meets the applicable criteria for sale accounting, the Company recognizes a gain or loss for the difference between the cash proceeds and carrying value of the assets sold. The gain or loss is recorded in investment gains (losses), net. Lower of cost or market adjustments on the recorded investmentamortized cost of finance receivables held for sale are also recorded in investment gains (losses), net.
Investment gains (losses), net was comprised of the following for the three and six months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | | | |
| Gain (loss) on sale of loans and leases | $ | — | | | $ | — | | | | | | | |
| Lower of cost or market adjustments | (62,958) | | | (67,691) | | | | | | | |
| Other gains, (losses and impairments), net | (468) | | | 594 | | | | | | | |
| $ | (63,426) | | | $ | (67,097) | | | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Gain (loss) on sale of loans and leases | $ | — |
| | $ | (2,096 | ) | | $ | — |
| | $ | (18,792 | ) |
| Lower of cost or market adjustments | (84,021 | ) | | (79,215 | ) | | (151,712 | ) | | (149,714 | ) |
| Other gains, (losses and impairments), net | (766 | ) | | (1,323 | ) | | (172 | ) | | (648 | ) |
| | $ | (84,787 | ) | | $ | (82,634 | ) | | $ | (151,884 | ) | | $ | (169,154 | ) |
The lower of cost or market adjustments for the three and six months ended June 30,March 31, 2020 and 2019 included $110,199 and 2018 included $97,267, $206,421, $89,513, and $195,287 $109,154, in customer default activity, respectively, and net favorable adjustments of $13,246, $54,709, $10,298,$47,241 and $45,573, $41,463, respectively, primarily related to net changes in the unpaid principal balance on the personal lending portfolio,all of which is classified as held for sale.
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ItemITEM 2. | Management’s Discussion and Analysis of Financial Condition and Results of OperationsMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q should be read in conjunction with the 20182019 Annual Report on Form 10-K and in
conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere in this
report. Additional information, not part of this filing, about the Company is available on the Company’s website atwww.santanderconsumerusa.com.
www.santanderconsumerusa.com. The Company’s recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, proxy statements, as well as other filings with the SEC, are available free of charge through the
Company’s website by clicking on the “Investors” page and selecting “SEC Filings.” The Company’s filings with the SEC and
other information may also be accessed at the SEC’s website at
www.sec.gov.www.sec.gov.
Background and Overview
Santander Consumer USA Holdings Inc. was formed in 2013 as a corporation in the state of Delaware and is the holding company for Santander Consumer USA Inc., a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. The Company is majority-owned (as of June 30, 2019,March 31, 2020, approximately 70.5%76.5%) by SHUSA, a wholly-owned subsidiary of Santander.
The Company is managed through a single reporting segment, Consumer Finance, which includes its vehicle financial products and services, including retail installment contracts, vehicle leases, and Dealer Loans, as well as financial products and services related to recreational and marine vehicles, and other consumer finance products.
The Company’s average penetration rate for the second quarter of 2019 was 36%, an increase from 32% for the same period in 2018. CCAP continues to be a focal point of the Company’s strategy. On June 28,In 2019, the Company entered into an Amendment to the Chrysler Agreement with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The Amendment also established an operating framework that is mutually beneficial for both parties for the remainder of the contract. The Company’s average penetration rate under the Chrysler Agreement for the three months ended March 31, 2020 was 39%, an increase from 31% for the same period in 2019.
The Company has dedicated financing facilities in place for its CCAP business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the CCAP program. During the sixthree months ended June 30, 2019, March 31, 2020, the Company originated $5.9$2.6 billion in CCAP loans which represented 54%53% of total retail installment contract originations (unpaid principal balance), as well as $4.5$2.0 billion in CCAP leases. Additionally, substantially all of the leases originated by the Company during the sixthree months endedJune 30, 2019 March 31, 2020 were under the Chrysler Agreement. Since its May 2013 launch, CCAP has originated more than $59.0 billion in retail loans (excluding SBNA originations program)
Refer to Part I, Item 2. "Management's Discussion and purchased $37.8 billion in leases. AsAnalysis of June 30, 2019,Financial Conditions and Results of Operations - Recent Developments and Other Factors Affecting The Company’s Results of Operations" for additional details on the Company’s carrying value of auto retail installment contract portfolio consisted of $8.6 billion of CCAP loans, which represents 33%impact of the Company’s carrying value of auto retail installment contract portfolio.COVID-19 outbreak on Company's current financial and operating status, as well as its future operational and financial planning.
Economic and Business Environment
Unemployment rates continueRefer to be at low levelsPart I, Item 2. "Management's Discussion and Analysis of 3.7%Financial Conditions and Results of Operations - Recent Developments and Other Factors Affecting The Company’s Results of Operations" for additional details on the impact of the COVID-19 outbreak on Company's current financial and operating status, as reported by the Bureau of Labor Statistics for June 30, 2019,well as its future operational and the federal funds rate were in the range of 2.25% to 2.5% in June 30, 2019.financial planning.
Despite this stability, consumer debt levels continued to rise, specifically auto debt. As consumers assume higher debt levels, the Company may experience an increase in delinquencies and credit losses. Additionally, the Company is exposed to geographic customer concentration risk, which could have an adverse effect on the Company’s business, financial position, results of operations or cash flow. Refer to Note 2 - "Finance Receivables"to these Condensed Consolidated Financial Statementsthe accompanying condensed consolidated financial statements for the details on the Company’s retail installment contracts by state concentration.
Regulatory Matters
The U.S. lending industry is highly regulated under various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practices, SCRA, and Unfair, Deceptive, or Abusive Acts or Practices, Credit CARD, Telephone Consumer Protection, FIRREA, and Gramm-Leach-Bliley Acts, as well as various state laws. The Company is subject to inspections, examinations, supervision, and regulation by the Commission, the CFPB, the FTC, and the DOJ and by regulatory agencies in each state in which the Company is licensed. In addition, the Company is directly and indirectly, through its relationship with SHUSA, subject to certain bank regulations, including oversight by the OCC, the European Central Bank, and the Federal Reserve, which have the ability to limit certain of the Company’s activities, such as the timing and amount of dividends and certain transactions that the Company might otherwise desire to enter into, such as merger and acquisition opportunities, or to impose other limitations on the Company’s growth.
Additional legal and regulatory matters affecting the Company’s activities are further discussed in Part I, Item 1A - Risk Factors of the 20182019 Annual Report on Form 10-K.10-K and this Form 10Q for the three months ended March 31, 2020.
How the Company Assesses its Business Performance
Net income, and the associated return on assets and equity, are the primary metrics by which the Company judges the performance of its business. Accordingly, the Company closely monitors the primary drivers of net income:
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• | Net financing income — The Company tracks the spread between the interest and finance charge income earned on assets and the interest expense incurred on liabilities, and continually monitors the components of its yield and cost of funds. The Company’s effective interest rate on borrowing is driven by various items including, but not limited to, credit quality of the collateral assigned, used/unused portion of facilities, and reference rate for the credit spread. These drivers, as well as external rate trends, including the swap curve, spot and forward rates are monitored.
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• | Net credit losses — The Company performs net credit loss analysis at the vintage level for individually acquired retail installment contracts, loans and leases, and at the pool level for purchased portfolios, enabling it to pinpoint drivers of any unusual or unexpected trends. The Company also monitors its recovery rates as well as industry-wide rates. Additionally, because delinquencies are an early indicator of future net credit losses, the Company analyzes delinquency trends, adjusting for seasonality, to determine if the Company’s loans are performing in line with original estimations. The net credit loss analysis does not include considerations of the Company’s estimated allowance for credit losses.
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•Net financing income — The Company tracks the spread between the interest and finance charge income earned on assets and the interest expense incurred on liabilities, and continually monitors the components of its yield and cost of funds. The Company’s effective interest rate on borrowing is driven by various items including, but not limited to, credit quality of the collateral assigned, used/unused portion of facilities, and reference rate for the credit spread. These drivers, as well as external rate trends, including the swap curve, spot and forward rates are monitored.
•Net credit losses — The Company performs net credit loss analysis at the vintage level for retail installment contracts, loans and leases, and at the pool level for purchased portfolios - credit deteriorated, enabling it to pinpoint drivers of any unusual or unexpected trends. The Company also monitors its recovery rates as well as industry-wide rates. Additionally, because delinquencies are an early indicator of future net credit losses, the Company analyzes delinquency trends, adjusting for seasonality, to determine if the Company’s loans are performing in line with original estimations. The net credit loss analysis does not include considerations of the Company’s estimated allowance for credit losses.
•Other income — The Company’s flow agreements have resulted in a large portfolio of assets serviced for others. These assets provide a steady stream of servicing income and may provide a gain or loss on sale. The Company monitors the size of the portfolio and average servicing fee rate and gain. Additionally, due to the classification of the Company’s personal lending portfolio as held for sale upon the decision to exit the personal lending line of business, adjustments to record this portfolio at the lower of cost or market are included in investment gains (losses), net, which is a component of other income (losses).
•Operating expenses — The Company assesses its operational efficiency using the cost-to-managed assets ratio. The Company performs extensive analysis to determine whether observed fluctuations in operating expense levels indicate a trend or are the nonrecurring impact of large projects. The operating expense analysis also includes a loan- and
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• | portfolio-level review of origination and servicing costs to assist the Company in assessing profitability by pool and vintage.
— The Company’s flow agreements have resulted in a large portfolio of assets serviced for others. These assets provide a steady stream of servicing income and may provide a gain or loss on sale. The Company monitors the size of the portfolio and average servicing fee rate and gain. Additionally, due to the classification of the Company’s personal lending portfolio as held for sale upon the decision to exit the personal lending line of business, adjustments to record this portfolio at the lower of cost or market are included in investment gains (losses), net, which is a component of other income (losses).
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• | Operating expenses — The Company assesses its operational efficiency using the cost-to-managed assets ratio. The Company performs extensive analysis to determine whether observed fluctuations in operating expense levels indicate a trend or are the nonrecurring impact of large projects. The operating expense analysis also includes a loan- and portfolio-level review of origination and servicing costs to assist the Company in assessing profitability by pool and vintage.
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Because volume and portfolio size determine the magnitude of the impact of each of the above factors on the Company’s earnings, the Company also closely monitors origination and sales volume along with APR and discounts (including subvention and net of dealer participation).
CorrectionsRecent Developments and Other Factors Affecting The Company’s Results of Operations
Outbreak of COVID-19
The current outbreak of a novel strain of coronavirus, or COVID-19, has materially impacted our business, and the continuance of this outbreak or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.
Due the unpredictable and rapidly changing nature of this outbreak and the resulting economic distress, it is not possible to Previously Reported Amounts
As previously mentioned in Footnote 1 - Descriptiondetermine with certainty the ultimate impact on our results of Business,operations or whether other currently unanticipated consequences of the Company identified and corrected two immaterial errors.outbreak are reasonably likely to materially affect our results of operations; however, certain adverse effects have already manifest themselves or are probable. The Company includedfollowing sets forth our expectations of the impact of COVID-19 on Company's current financial and operating status, as well as its future operational and financial planning as of the date hereof:
•Impact on workforce: The health and well-being of our colleagues and customers is a top priority for the Company. The Company has implemented business continuity plans and has followed guidelines issued by government
authorities regarding social distancing and work-from-home arrangements. Currently, approximately 90-95% of our
workforce is working remotely. The Company has established a Temporary Emergency Paid Leave Program that provides employees with up to 80 hours of additional paid time off to use – either continuously or intermittently, and before exhausting other paid time off – to assist with needs related to COVID-19. Further, the Company is providing $250 a week in pay premiums for frontline customer support workers to help defray additional costs incurred while coming to work during the outbreak. While our business continuity plans are place, if significant portions of our or our vendors’ workforces are unable to work effectively as a result of the COVID-19 outbreak including because of illness, stay-at-home orders, facility closures reductions in services or hours of operation, or ineffective remote work arrangements, there may be servicing disruptions, which could result in reduced collection effectiveness or impair our ability to operate our business and satisfy our obligations under our third-party servicing agreements. Each of these errorsscenarios could have negative effects on our business, financial condition and results of operations.
•Impact on customers and loans and lease performance: The COVID-19 outbreak and the associated economic crisis have led to negative effects on our customers. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak is impacting customers nationwide and is expected to have a materially more significant impact on the material accountsperformance of our auto loan and disclosures presentedauto lease portfolio than even the most severe historical natural disaster.
Similar to many other financial institutions, we have taken and will continue to take measures to mitigate our customers’ COVID-19 related economic challenges. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. In addition, we have temporarily suspended—and may continue to temporarily suspend— involuntary repossessions although we may elect to re-initiate involuntary repossessions at any time. These customer support programs, by their nature, are expected to negatively impact our financial performance and other results of operations in the near term. Our business, financial condition and results of operations may be materially and adversely affected in the longer term if the COVID-19 outbreak leads us to continue to conduct such programs for a significant period of time, if the number of customers experiencing hardship related directly or indirectly to the outbreak of COVID-19 increases or if our customer support programs are not effective in mitigating the effects of COVID-19 on our customers' financial situations. Given the unpredictable nature of this situation, the nature and extent of such effects cannot be predicted at this time.
Further, government or regulatory authorities could also enact laws, regulations, executive orders or other guidance that allow customers to forgo making scheduled payments for some period of time, require modifications to receivables (e.g., waiving accrued interest), preclude creditors from exercising certain rights or taking certain actions with respect to collateral, including repossession or liquidation of the financed vehicles, or mandate limited operations or temporary closures of the Company or our vendors as “non-essential businesses” or otherwise. Such actions by
government or regulatory authorities could have negative effects on our business, financial condition and results of operations.
•Impact on originations: In many jurisdictions, businesses such as automobile dealers have been required to temporarily close or restrict their operations. Further, even for dealerships that have remained open, consumer demand has deteriorated rapidly. As a result, we have recently experienced a significant decline in our origination of auto loans and leases. In response, the Company has partnered with FCA to launch new incentive programs, including, first payment deferred 90 days on select FCA models and 0% APR for 84 months on select 2019/2020 FCA models. However, if the economic slowdown caused by the outbreak is sustained, it could result in further declines in new and used vehicle sales and downward pressure on used vehicle values, which could materially adversely affect our origination of auto loans and leases and the performance of our existing loans and leases.
•Impact on Debt and Liquidity: We rely upon four primary sources to fund our operations, including private financing, warehouse lines of credit, the asset-backed securitization market, and support from Santander. As international trade and business activity has slowed and supply chains have been disrupted, global credit and financial markets have recently experienced, and may continue to experience, significant disruption and volatility. During the first quarter of 2020, financial markets experienced significant declines and volatility, and such market conditions may continue and/or precede recessionary conditions in the U.S. economy. Under these circumstances, we may experience some or all of the risks related to market volatility and recessionary conditions described in the Risk Factors section of our Form 10-K. These include reduced demand for our products and services and reduced access to capital markets funding. These risks could have significant adverse impacts on our financial condition, results of operations and cash flows.
Governmental and regulatory authorities have recently implemented fiscal and monetary policies and initiatives to mitigate the effects of the outbreak on the economy and individual businesses and households, such as the reduction of the Federal Reserve’s benchmark interest rate to near zero in March 2020. Further, the Company expects that the Federal Reserve's Term Asset Backed Securities Loan Facility ("TALF") will be available, if necessary, to support investment in our eligible ABS transactions. However, these governmental and regulatory actions may not be successful in mitigating the adverse economic effects of COVID-19 and could affect our net interest income and reduce our profitability. Sustained adverse economic effects from the outbreak may also result in downgrades in our credit ratings or adversely affect the interest rate environment. If our access to funding is reduced or if our costs to obtain such funding significantly increases, our business, financial condition and results of operations could be materially and adversely affected.
In addition, the Company’s ability to make payments on the notes could be adversely affected if its customers were unable to make timely payments or if the Company elected to, or was required to, implement forbearance programs in connection with customers suffering a hardship (including hardships related to the outbreak of COVID-19).
In addition to the significant amount of liquidity available from warehouse lines and affiliate lines of credit, the Company has executed two new private financing transactions for approximately $1.1 billion in the final 2 weeks of March 2020. The Company also renewed an existing $1.25 billion revolving warehouse line of credit in March 2020. Subsequent to the quarter end, the Company executed an ABS transaction of approximately $1 billion in April 2020.
However, due to the rapidly evolving nature of the COVID-19 outbreak, it is not possible to predict whether unanticipated consequences of the outbreak are reasonably likely to materially affect our liquidity and capital resources in the future.
•Impact on impairment of goodwill, indefinite-lived and long-lived assets: In accordance with accounting policy, the Company has analyzed the impact of COVID-19 on its financial statements, within Footnote 1.including the potential for impairment. The analysis did not support any impairment of these assets, including Goodwill, Leased Vehicles and other non-financial assets such as Upfront fee and other Intangibles.
•Impact on communities: The Company is committed to supporting our communities impacted by the COVID-19 outbreak and the Company's non-profit foundation has begun responding to the COVID-19 crisis with $200,000 in donations to a select group of organizations addressing community issues.
Overall, due to the evolving nature of the outbreak, we are currently unable to estimate the adverse impact of these errorsCOVID-19 on other material items included within Management’s Discussionour business, financial condition, liquidity and Analysis section are as follows:
Delinquency ratiosresults of operations. Our initiatives may negatively impact our revenue and other
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| | | | | | | | | |
| | | As of June 30, 2018 |
| | | Reported | | Corrections | | Revised |
| Delinquent principal, 30-59 days past due | | 9.2 | % | | 0.4 | % | | 9.6 | % |
| Delinquent principal over 59 days | | 4.2 | % | | 0.3 | % | | 4.5 | % |
Other ratios
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| | | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, 2018 | | Six Months Ended June 30, 2018 |
| | | Reported | | Corrections | | Revised | | Reported | | Corrections | | Revised |
| Net Charge-off ratio | | 6.0 | % | | 0.1 | % | | 6.1 | % | | 7.1 | % | | 0.1 | % | | 7.2 | % |
| | | | | | | | | | | | | |
| Yield on individually acquired retail installment contracts | | 15.5 | % | | 0.7 | % | | 16.2 | % | | 15.4 | % | | 0.7 | % | | 16.1 | % |
Second Quarter 2019 Summaryresults of Results
Key highlights of the Company’s performanceoperations in the second quarternear term and, if not effective in mitigating the effect of 2019 included:COVID-19 on our customers, may adversely affect our business and results of operations materially over a longer period of time.
Total auto originations (excluding the SBNA originations program) of $6.5 billion, down (18.5)% from $7.9 originated in the same quarter in 2018;
Net finance and other interest income of $1.2 billion, up 4.6% compared to the same quarter in 2018;
Return on average assets of 3.2%, down from 3.3% compared to the same quarter in 2018;
Common equity tier 1 (CET1) ratio of 15.7%, down 119 bps compared to the same quarter in 2018; and
Net leased vehicle income of $232 million, up 30.5% compared to the same quarter in 2018.
Volume
The Company’s originations of individually acquired loans and leases, including revolving loans, average APR, and dealer discount (net of dealer participation) for the three months ended March 31, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | |
| Retained Originations | | | | | | | | | | | | | |
| Retail installment contracts | $ | 3,846,226 | | | $ | 4,026,327 | | | | | | | | | | | |
| Average APR | 15.3 % | | | 17.2 | % | | | | | | | | | | |
| Average FICO® (a) | 607 | | | 593 | | | | | | | | | | | |
| Discount | (0.8) | % | | (0.1) | % | | | | | | | | | | |
| | | | | | | | | | | | | |
| Personal loans (b) | $ | 270,835 | | | $ | 288,557 | | | | | | | | | | | |
| Average APR | 29.8 | % | | 29.7 | % | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Leased vehicles | $ | 2,020,721 | | | $ | 1,963,580 | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Finance lease | $ | 3,002 | | | $ | 3,308 | | | | | | | | | | | |
| Total originations retained | $ | 6,140,784 | | | $ | 6,281,772 | | | | | | | | | | | |
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| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total originations (excluding SBNA Originations Program) (c) | $ | 6,140,784 | | | $ | 6,281,772 | | | | | | | | | | | |
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(a)Unpaid principal balance excluded from the weighted average FICO score is $432 million and $493 million as the borrowers on these loans did not have FICO scores at origination and $139 million and $106 million of commercial loans for the three months ended March 31, 2020 and 2019, respectively.
(b) Included in the total origination volume is $21 million and $24 million for the three months ended March 31, 2020, and 2019, respectively, related to newly opened accounts.
(c) There were no asset sales during the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:.
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| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| | (Dollar amounts in thousands) |
| Retained Originations | | | | | | | |
| Retail installment contracts | $ | 3,949,648 |
| | $ | 4,630,704 |
| | $ | 7,975,975 |
| | $ | 8,014,110 |
|
| Average APR | 16.2 % |
| | 16.8 | % | | 16.7 % |
| | 17.0 | % |
| Average FICO® (a) | 601 |
| | 602 |
| | 597 |
| | 599 |
|
| Discount | (0.5 | )% | | 0.004 | % | | (0.3 | )% | | 0.2 | % |
| | | | | | | | |
| Personal loans (b) | $ | 343,214 |
| | $ | 340,088 |
| | $ | 631,770 |
| | $ | 613,416 |
|
| Average APR | 29.7 | % | | 27.1 | % | | 29.8 | % | | 28.3 | % |
| | | | | | | | |
| Leased vehicles | $ | 2,520,130 |
| | $ | 2,632,052 |
| | $ | 4,483,710 |
| | $ | 4,725,657 |
|
| | | | | | | | |
| Finance lease | $ | 4,822 |
| | $ | 2,058 |
| | $ | 8,129 |
| | $ | 4,456 |
|
| Total originations retained | $ | 6,817,814 |
| | $ | 7,604,902 |
| | $ | 13,099,584 |
| | $ | 13,357,639 |
|
| | | | | | | | |
| Sold Originations | | | | | | | |
| Retail installment contracts | $ | — |
| | $ | 683,935 |
| | $ | — |
| | $ | 1,553,979 |
|
| Average APR | — | % | | 7.6 | % | | — | % | | 7.3 | % |
| Average FICO® (c) | — |
| | 726 |
| | — |
| | 726 |
|
| | | | | | | | |
| Total originations (excluding SBNA Originations Program) | $ | 6,817,814 |
| | $ | 8,288,837 |
| | $ | 13,099,584 |
| | $ | 14,911,618 |
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(a) | Unpaid principal balance excluded from the weighted average FICO score is $448 million and $594 million for the three months ended June 30, 2019 and 2018, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, $141 million and $44 million, respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is $941 million and $1 billion for the six months ended June 30, 2019 and 2018, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, $247 million and $77 million, respectively, were commercial loans. |
| |
(b) | Included in the total origination volume is $51 million and $58 million for the three months ended June 30, 2019 and 2018, respectively, and $76 million and $84 million for the six months ended June 30, 2019 and 2018, respectively, related to newly opened accounts. |
| |
(c) | Unpaid principal balance excluded from the weighted average FICO score is zero and $54 million for the three months ended June 30, 2019 and 2018, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, zero and $26 million, respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is
zero and $121 million for the six months ended June 30, 2019 and 2018, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, zero and $67 million, respectively, were commercial loans.
|
Total auto originations (excluding SBNA OriginationsOrigination Program) decreased $1.5$0.1 billion, or 18.5% 2.1%, from the three months ended June 30, 2018March 31, 2019 to the three months ended June 30, 2019,March 31, 2020, since the Company has initiated the SBNA originations program as described below. The Company’scompany's initiatives to improve our pricing as well as dealer and customer experience has increased our competitive position in the market. The Company continues to focus on optimizing the loan quality of its portfolio with an appropriate balance of volume and risk. Chrysler CapitalCCAP volume and penetration rates are influenced by strategies implemented by FCA and the Company, including product mix and incentives.
SBNA Originations Program
Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail auto loans, primarily from FCA dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA’s behalf. During the three and six months ended June 30,March 31, 2020 and 2019 the Company facilitated the purchase of $1.9$1.1 billion and $2.95$1.0 billion of retail installment contacts, respectively.
The Company’s originations of individually acquired retail installment contracts and leases by vehicle type during the three and six months ended June 30,March 31, 2020 and 2019 and 2018 were as follows:
| | | | | | | | | | | | | | | | | | | | Three Months Ended | |
| | Three Months Ended | | Six months ended | |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 | | March 31, 2020 | | | March 31, 2019 | |
| | (Dollar amounts in thousands) | | (Dollar amounts in thousands) | |
| Retail installment contracts | | | | | | | | | | | | Retail installment contracts | | |
| Car | $ | 1,396,979 |
| 35.4 | % | | $ | 1,892,910 |
| 35.6 | % | | $ | 2,952,093 |
| 37.0 | % | | $ | 3,473,841 |
| 36.2 | % | Car | $ | 1,229,615 | | 32.0 | % | | $ | 1,555,114 | | 38.6 | % | |
| Truck and utility | 2,381,365 |
| 60.3 | % | | 3,101,908 |
| 58.4 | % | | 4,703,456 |
| 59.0 | % | | 5,482,673 |
| 57.4 | % | Truck and utility | 2,425,512 | | 63.0 | % | | 2,322,091 | | 57.7 | % | |
| Van and other (a) | 171,304 |
| 4.3 | % | | 319,821 |
| 6.0 | % | | 320,426 |
| 4.0 | % | | 611,575 |
| 6.4 | % | Van and other (a) | 191,099 | | 5.0 | % | | 149,122 | | 3.7 | % | |
| | $ | 3,949,648 |
| 100.0 | % | | $ | 5,314,639 |
| 100.0 | % | | $ | 7,975,975 |
| 100.0 | % | | $ | 9,568,089 |
| 100.0 | % | | $ | 3,846,226 | | 100.0 | % | | $ | 4,026,327 | | 100.0 | % | |
| | Leased vehicles | | | | | | | | | | | | Leased vehicles | | |
| Car | $ | 149,669 |
| 5.9 | % | | $ | 274,589 |
| 10.4 | % | | $ | 256,171 |
| 5.7 | % | | $ | 433,513 |
| 9.2 | % | Car | $ | 70,152 | | 3.5 | % | | $ | 106,502 | | 5.4 | % | |
| Truck and utility | 2,285,002 |
| 90.7 | % | | 2,260,804 |
| 85.9 | % | | 4,087,758 |
| 91.2 | % | | 4,101,105 |
| 86.8 | % | Truck and utility | 1,899,568 | | 94.0 | % | | 1,802,755 | | 91.8 | % | |
| Van and other (a) | 85,459 |
| 3.4 | % | | 96,659 |
| 3.7 | % | | 139,781 |
| 3.1 | % | | 191,039 |
| 4.0 | % | Van and other (a) | 51,001 | | 2.5 | % | | 54,323 | | 2.8 | % | |
| | | $ | 2,020,721 | | 100.0 | % | | $ | 1,963,580 | | 100.0 | % | |
| | $ | 2,520,130 |
| 100.0 | % | | $ | 2,632,052 |
| 100.0 | % | | $ | 4,483,710 |
| 100.0 | % | | $ | 4,725,657 |
| 100.0 | % | | |
| Total originations by vehicle type | | | | | | | | | | | | Total originations by vehicle type | | |
| Car | $ | 1,546,648 |
| 23.9 | % | | $ | 2,167,499 |
| 27.3 | % | | $ | 3,208,264 |
| 25.7 | % | | $ | 3,907,354 |
| 27.4 | % | Car | $ | 1,299,767 | | 22.2 | % | | $ | 1,661,616 | | 27.7 | % | |
| Truck and utility | 4,666,367 |
| 72.1 | % | | 5,362,712 |
| 67.5 | % | | 8,791,214 |
| 70.6 | % | | 9,583,778 |
| 67.0 | % | Truck and utility | 4,325,080 | | 73.7 | % | | 4,124,846 | | 68.9 | % | |
| Van and other (a) | 256,763 |
| 4.0 | % | | 416,480 |
| 5.2 | % | | 460,207 |
| 3.7 | % | | 802,614 |
| 5.6 | % | Van and other (a) | 242,100 | | 4.1 | % | | 203,445 | | 3.4 | % | |
| | $ | 6,469,778 |
| 100.0 | % | | $ | 7,946,691 |
| 100.0 | % | | $ | 12,459,685 |
| 100.0 | % | | $ | 14,293,746 |
| 100.0 | % | | $ | 5,866,947 | | 100.0 | % | | $ | 5,989,907 | | 100.0 | % | |
|
(a) Other primarily consists of commercial vehicles.
The Company’s asset sales for the three and six months ended June 30, 2019 and 2018 were as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| | (Dollar amounts in thousands) |
| Retail installment contracts | $ | — |
| | $ | 1,156,060 |
| | $ | — |
| | $ | 2,631,313 |
|
| Average APR | — | % | | 7.5 | % | | — | % | | 7.0 | % |
| Average FICO® | — |
| | 724 |
| | — |
| | 726 |
|
| | | | | | | | |
| Total asset sales | $ | — |
| | $ | 1,156,060 |
| | $ | — |
| | $ | 2,631,313 |
|
There were no asset sales for the three and six months ended June 30, 2019.
The Company’s portfolio of retail installment contracts held for investment and leases by vehicle type as of June 30, 2019March 31, 2020 and December 31, 20182019 are as follows: | | | | June 30,
2019 | | December 31,
2018 | | March 31, 2020 | | | December 31, 2019 | |
| | (Dollar amounts in thousands) | | (Dollar amounts in thousands) | |
| Retail installment contracts | | | | | | Retail installment contracts | |
| Car | $ | 12,535,991 |
| 43.2 | % | | $ | 13,011,925 |
| 45.7 | % | Car | $ | 11,864,775 | | 38.6 | % | | $ | 12,286,182 | | 39.9 | % |
| Truck and utility | 15,274,401 |
| 52.7 | % | | 14,266,757 |
| 50.1 | % | Truck and utility | 17,587,709 | | 57.2 | % | | 17,238,406 | | 56.0 | % |
| Van and other (a) | 1,186,443 |
| 4.1 | % | | 1,184,554 |
| 4.2 | % | Van and other (a) | 1,288,660 | | 4.2 | % | | 1,251,450 | | 4.1 | % |
| | $ | 28,996,835 |
| 100.0 | % | | $ | 28,463,236 |
| 100.0 | % | | $ | 30,741,144 | | 100.0 | % | | $ | 30,776,038 | | 100.0 | % |
| | | | | | | |
| Leased vehicles |
|
| | | | | Leased vehicles | |
| Car | $ | 1,433,262 |
| 8.7 | % | | $ | 1,590,621 |
| 10.5 | % | Car | $ | 1,106,266 | | 6.2 | % | | $ | 1,237,803 | | 7.1 | % |
| Truck and utility | 14,436,351 |
| 87.3 | % | | 12,899,955 |
| 84.8 | % | Truck and utility | 16,202,518 | | 90.9 | % | | 15,795,594 | | 89.8 | % |
| Van and other (a) | 654,987 |
| 4.0 | % | | 728,737 |
| 4.7 | % | Van and other (a) | 508,849 | | 2.9 | % | | 529,385 | | 3.1 | % |
| | $ | 16,524,600 |
| 100.0 | % | | $ | 15,219,313 |
| 100.0 | % | | $ | 17,817,633 | | 100.0 | % | | $ | 17,562,782 | | 100.0 | % |
| | | | | | | |
| Total by vehicle type | | | | | | Total by vehicle type | |
| Car | $ | 13,969,253 |
| 30.7 | % | | $ | 14,602,546 |
| 33.4 | % | Car | $ | 12,971,041 | | 26.7 | % | | $ | 13,523,985 | | 28.0 | % |
| Truck and utility | 29,710,752 |
| 65.3 | % | | 27,166,712 |
| 62.2 | % | Truck and utility | 33,790,227 | | 69.6 | % | | 33,034,000 | | 68.3 | % |
| Van and other (a) | 1,841,430 |
| 4.0 | % | | 1,913,291 |
| 4.4 | % | Van and other (a) | 1,797,509 | | 3.7 | % | | 1,780,835 | | 3.7 | % |
| | $ | 45,521,435 |
| 100.0 | % | | $ | 43,682,549 |
| 100.0 | % | | $ | 48,558,777 | | 100.0 | % | | $ | 48,338,820 | | 100.0 | % |
(a) Other primarily consists of commercial vehicles.
The unpaid principal balance, average APR, and remaining unaccreted dealernet discount of the Company’s held for investment portfolio as of June 30, 2019March 31, 2020 and December 31, 20182019 are as follows:
| | | | | | | | March 31, 2020 | | December 31, 2019 |
| | June 30,
2019 | | December 31, 2018 | | (Dollar amounts in thousands) | |
| | (Dollar amounts in thousands) | |
| Retail installment contracts (a) | $ | 28,996,835 |
| | $ | 28,463,236 |
| |
| Retail installment contracts | | Retail installment contracts | $ | 30,741,144 | | | $ | 30,776,038 | |
| Average APR | 16.8 | % | | 16.7 | % | Average APR | 15.8 | % | | 16.1 | % |
| Discount | 0.5 | % | | 0.8 | % | Discount | 0.1 | % | | 0.3 | % |
| |
| | | |
| Personal loans (b) | $ | — |
| | $ | 2,637 |
| |
| Average APR | — | % | | 31.7 | % | |
| | |
| | | |
| Receivables from dealers | $ | 13,010 |
| | $ | 14,710 |
| Receivables from dealers | $ | 12,496 | | | $ | 12,668 | |
| Average APR | 4.0 | % | | 4.1 | % | Average APR | 4.0 | % | | 4.0 | % |
| |
| | | |
| Leased vehicles | $ | 16,524,600 |
| | $ | 15,219,313 |
| Leased vehicles | $ | 17,817,633 | | | $ | 17,562,782 | |
| |
| | | | | |
| Finance leases | $ | 23,263 |
| | $ | 19,344 |
| Finance leases | $ | 27,710 | | | $ | 27,584 | |
(a) Of this balance as of June 30, 2019, $7.3 billion, $10.3 billion, $4.3 billion, and $3.2 billion was originated during the six months ended June 30, 2019, and the years ended 2018, 2017, and 2016, respectively.
(b) The remaining balance of personal loans, held for investment, was charged off during the quarter ended June 30, 2019.
The Company records interest income from individually acquired retail installment contracts personal loans, and receivables from dealers in accordance with the terms of the loans, generally discontinuing and reversing accrued income once a loan becomes more than 60 days past due, except in the case of revolving personal loans, for which the Company continues to accrue interest until charge-off, in the month in which the loan becomes 180 days past due, and receivables from dealers, for which the Company continues to accrue interest until the loan becomes more than 90 days past due.
The Company generally does not acquire receivables from dealers and term personal loans at a discount. The Company amortizes discounts, subvention payments from manufacturers, and origination costs as adjustments to income from individually acquired retail installment contracts using the effective yield method. The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans generally experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience, and is used as an input in the calculation of the constant effective yield. Our estimated weighted average prepayment rates ranged from 5.3%5.0% to 11.1%11.0% as of June 30, 2019,March 31, 2020, and 5.9%5.4% to 10.6%11.0% as of June 30, 2018.March 31, 2019. The Company amortizes the discount, if applicable, on revolving personal loans straight-line over the estimated period over which the receivables are expected to be outstanding.
For individually acquired retail installment contracts, personal loans, finance leases, and receivables from dealers, the Company also establishes a credit loss allowance for the estimated losses inherent in the portfolio. The Company estimates probable losses based on contractual delinquency status, historical loss experience, expected recovery rates from sale of repossessed collateral, bankruptcy trends, and general economic conditions such as unemployment rates. For loans within these portfolios that are classified as TDRs, impairment is measured based on the present value of expected future cash flows discounted at the original effective interest rate. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell.
The Company classifies most of its vehicle leases as operating leases. The Company records the net capitalized cost of each
lease as an asset, which is depreciated straight-line over the contractual term of the lease to the expected residual value. The
Company records lease payments due from customers as income until and unless a customer becomes more than 60 days
delinquent, at which time the accrual of revenue is discontinued and reversed. The Company resumes and reinstates the accrual
if a delinquent account subsequently becomes 60 days or less past due. The Company amortizes subvention payments from the
manufacturer, down payments from the customer, and initial direct costs incurred in connection with originating the lease
straight-line over the contractual term of the lease.
Historically, the Company’s primary means of acquiring retail installment contracts has been through individual acquisitions immediately after origination by a dealer. The Company also periodically purchasedpurchases pools of receivables and had significant volumes of these purchases during the credit crisis. While the Company continues to pursue such opportunities when
available, itduring the three months ended March 31, 2020, the Company did not purchaseacquire any poolsvehicle loan portfolios for which there have more than insignificant deterioration in credit quality since origination. In addition, during the three months ended March 2019, the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected, during the six months ended June 30, 2019 and 2018. collected.
However, during the three months ended June 30,March 31, 2020 and 2019 and 2018, the Company recognizeddid recognize certain retail installment contracts with an unpaid principal balance of $74,718$76,878 and $72,963, respectively, and for the six months ended June 30, 2019 and 2018, the Company recognized certain retail installment contracts with an unpaid principal balance of $74,718 and $115,959,$0, respectively, held by non-consolidated securitization Trusts under optional clean-up calls. Following the initial recognition of these loans at fair value, the performing loans in the portfolio will be carried at amortized cost, net of allowance for credit losses.ACL. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of re-recognition date), for which it was probable that not all contractually required payments would be collected. All of the retail installment contracts acquired during these periods were acquired individually. For the Company’s existing purchased receivables portfolios - credit deteriorated, which were acquired at a discount partially attributable to credit deterioration since origination, the Company estimates the expected yield on each portfolio at acquisition and recordrecords monthly accretion income based on this expectation. The Company periodically re-evaluates performance expectations and may increase the accretion rate if a pool is performing better than expected. If a pool is performing worse than expected, the Company is required to continue to record accretion income at the previously established rate and to record impairment to account for the worsening performance.
Selected Financial Data
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| Income Statement Data | (Dollar amounts in thousands, except per share data) | | | | | | |
| Interest on retail installment contracts | $ | 1,179,436 | | | $ | 1,156,023 | | | | | |
| Interest on purchased receivables portfolios - credit deteriorated | 788 | | | 1,413 | | | | | |
| Interest on receivables from dealers | 54 | | | 122 | | | | | |
| Interest on personal loans | 93,541 | | | 96,022 | | | | | |
| Interest on finance receivables and loans | 1,273,819 | | | 1,253,580 | | | | | |
| Net leased vehicle income | 195,067 | | | 205,541 | | | | | |
| Other finance and interest income | 7,551 | | | 10,247 | | | | | |
| Interest expense | 328,834 | | | 334,382 | | | | | |
| Net finance and other interest income | 1,147,603 | | | 1,134,986 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Credit loss expense | 907,887 | | | 550,879 | | | | | |
| Profit sharing | 14,295 | | | 6,968 | | | | | |
| Other income | 50,807 | | | 51,085 | | | | | |
| Operating expenses | 282,673 | | | 290,957 | | | | | |
| Income before tax expense | (6,445) | | | 337,267 | | | | | |
| Income tax (benefit) / expense | (2,458) | | | 89,764 | | | | | |
| Net income | $ | (3,987) | | | $ | 247,503 | | | | | |
| Share Data | | | | | | | |
| Weighted-average common shares outstanding | | | | | | | |
| Basic | 334,026,052 | | | 351,515,464 | | | | | |
| Diluted | 334,346,122 | | | 352,051,887 | | | | | |
| Earnings per share | | | | | | | |
| Basic | $ | (0.01) | | | $ | 0.70 | | | | | |
| Diluted | $ | (0.01) | | | $ | 0.70 | | | | | |
| Dividend paid per share | $ | 0.22 | | | $ | 0.20 | | | | | |
| Balance Sheet Data | | | | | | | |
| Finance receivables held for investment, net | $ | 25,369,765 | | | $ | 25,598,716 | | | | | |
| Finance receivables held for sale, net | 912,126 | | | 974,017 | | | | | |
| Goodwill and intangible assets | 121,879 | | | 115,256 | | | | | |
| Total assets | 47,106,931 | | | 45,045,906 | | | | | |
| Total borrowings | 40,216,880 | | | 35,647,153 | | | | | |
| Total liabilities | 41,960,828 | | | 37,887,376 | | | | | |
| Total equity | 5,146,103 | | | 7,158,530 | | | | | |
| Allowance for credit losses | 5,460,098 | | | 3,176,250 | | | | | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Income Statement Data | (Dollar amounts in thousands, except per share data) |
| Interest on individually acquired retail installment contracts | 1,169,785 |
| | $ | 1,123,860 |
| | $ | 2,325,808 |
| | 2,200,178 |
|
| Interest on purchased receivables portfolios | 939 |
| | 2,244 |
| | 2,352 |
| | 5,085 |
|
| Interest on receivables from dealers | 51 |
| | 130 |
| | 173 |
| | 250 |
|
| Interest on personal loans | 90,323 |
| | 84,772 |
| | 186,345 |
| | 174,032 |
|
| Interest on finance receivables and loans | 1,261,098 |
| | 1,211,006 |
| | 2,514,678 |
| | 2,379,545 |
|
| Net leased vehicle income | 231,794 |
| | 177,562 |
| | 437,335 |
| | 323,157 |
|
| Other finance and interest income | 11,437 |
| | 8,494 |
| | 21,684 |
| | 15,631 |
|
| Interest expense | 330,039 |
| | 273,953 |
| | 664,421 |
| | 514,981 |
|
| Net finance and other interest income | 1,174,290 |
| | 1,123,109 |
| | 2,309,276 |
| | 2,203,352 |
|
| Provision for credit losses | 430,676 |
| | 406,544 |
| | 981,555 |
| | 916,885 |
|
| Profit sharing | 13,345 |
| | 12,853 |
| | 20,313 |
| | 17,230 |
|
| Other income | 30,411 |
| | 22,384 |
| | 81,496 |
| | 47,437 |
|
| Operating expenses | 280,649 |
| | 276,950 |
| | 571,606 |
| | 564,862 |
|
| Income before tax expense | 480,031 |
| | 449,146 |
| | 817,298 |
| | 751,812 |
|
| Income tax expense | 111,764 |
| | 114,120 |
| | 201,528 |
| | 172,172 |
|
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| Share Data | | | | | | | |
| Weighted-average common shares outstanding | | | | | | | |
| Basic | 351,106,197 |
| | 361,268,112 |
| | 351,309,700 |
| | 360,987,233 |
|
| Diluted | 351,556,349 |
| | 362,057,614 |
| | 351,825,554 |
| | 361,829,283 |
|
| Earnings per share | | | | | | | |
| Basic | $ | 1.05 |
| | $ | 0.93 |
| | $ | 1.75 |
| | $ | 1.61 |
|
| Diluted | $ | 1.05 |
| | $ | 0.93 |
| | $ | 1.75 |
| | $ | 1.60 |
|
| Dividend paid per common share | $ | 0.20 |
| | $ | 0.05 |
| | $ | 0.40 |
| | $ | 0.10 |
|
| Balance Sheet Data | | | | | | | |
| Finance receivables held for investment, net | 25,838,749 |
| | $ | 24,057,164 |
| | $ | 25,838,749 |
| | $ | 24,057,164 |
|
| Finance receivables held for sale, net | 1,249,101 |
| | 1,246,732 |
| | 1,249,101 |
| | 1,246,732 |
|
| Goodwill and intangible assets | 108,173 |
| | 105,669 |
| | 108,173 |
| | 105,669 |
|
| Total assets | 46,416,093 |
| | 41,157,189 |
| | 46,416,093 |
| | 41,157,189 |
|
| Total borrowings | 36,765,505 |
| | 31,929,606 |
| | 36,765,505 |
| | 31,929,606 |
|
| Total liabilities | 39,078,832 |
| | 34,123,553 |
| | 39,078,832 |
| | 34,123,553 |
|
| Total equity | 7,337,261 |
| | 7,033,636 |
| | 7,337,261 |
| | 7,033,636 |
|
| Allowance for credit losses | 3,122,259 |
| | 3,320,792 |
| | 3,122,259 |
| | 3,320,792 |
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| Other Information | (Dollar amounts in thousands) | | | | | | |
| Charge-offs, net of recoveries, on retail installment contracts | $ | 593,046 | | | $ | 615,204 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Total charge-offs, net of recoveries | 593,599 | | | 615,615 | | | | | |
| | | | | | | |
| End of period delinquent amortized cost over 59 days, retail installment contracts held for investment | 1,418,857 | | | 1,224,289 | | | | | |
| End of period personal loans delinquent principal over 59 days, held for sale | 161,639 | | | 165,220 | | | | | |
| End of period delinquent amortized cost over 59 days, loans held for investment | 1,419,865 | | | 1,225,807 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| End of period assets covered by allowance for credit losses | 30,781,350 | | | 28,857,519 | | | | | |
| End of period gross retail installment contracts held for investment | 30,741,144 | | | 28,821,729 | | | | | |
| End of period gross personal loans held for sale | 1,341,361 | | | 1,393,403 | | | | | |
| End of period gross finance receivables and loans held for investment | 30,753,640 | | | 28,864,876 | | | | | |
| End of period gross finance receivables, loans, and leases held for investment | 48,598,983 | | | 44,491,987 | | | | | |
| Average gross retail installment contracts held for investment | 30,718,119 | | | 28,595,315 | | | | | |
| | | | | | | |
| Average gross retail installment contracts held for investment and held for sale | 30,768,423 | | | 28,595,315 | | | | | |
| Average gross purchased receivables portfolios- credit deteriorated | 20,523 | | | 29,283 | | | | | |
| Average gross receivables from dealers | 12,584 | | | 13,598 | | | | | |
| Average gross personal loans held for sale | 1,413,021 | | | 1,466,300 | | | | | |
| Average gross finance leases | 27,839 | | | 20,018 | | | | | |
| Average gross finance receivables and loans | 32,242,390 | | | 30,124,514 | | | | | |
| Average gross operating leases | 17,735,640 | | | 15,425,190 | | | | | |
| Average gross finance receivables, loans, and leases | 49,978,030 | | | 45,549,704 | | | | | |
| Average managed assets | 60,207,338 | | | 54,433,129 | | | | | |
| Average total assets | 47,690,751 | | | 44,488,868 | | | | | |
| Average debt | 39,692,456 | | | 35,261,121 | | | | | |
| Average total equity | 6,006,455 | | | 7,052,703 | | | | | |
| Ratios | | | | | | | |
| Yield on retail installment contracts | 15.3 | % | | 16.2 | % | | | | |
| | | | | | | |
| | | | | | | |
| Yield on leased vehicles | 4.4 | % | | 5.3 | % | | | | |
| Yield on personal loans held for sale (1) | 26.5 | % | | 26.2 | % | | | | |
| Yield on earning assets (2) | 11.8 | % | | 12.9 | % | | | | |
| Cost of debt (3) | 3.3 | % | | 3.8 | % | | | | |
| Net interest margin (4) | 9.2 | % | | 10.0 | % | | | | |
| Expense ratio (5) | 1.9 | % | | 2.1 | % | | | | |
| Return on average assets (6) | (0.03) | % | | 2.2 | % | | | | |
| Return on average equity (7) | (0.3) | % | | 14.0 | % | | | | |
| Net charge-off ratio on retail installment contracts (8) | 7.7 | % | | 8.6 | % | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net charge-off ratio (8) | 7.7 | % | | 8.6 | % | | | | |
| Delinquency ratio on retail installment contracts held for investment, end of period (9) | 4.6 | % | | 4.2 | % | | | | |
| | | | | | | |
| Delinquency ratio on loans held for investment, end of period (9) | 4.6 | % | | 4.2 | % | | | | |
| Equity to assets ratio (10) | 10.9 | % | | 15.9 | % | | | | |
| Tangible common equity to tangible assets (10) | 10.7 | % | | 15.7 | % | | | | |
| Common stock dividend payout ratio (11) | * | | | 28.4 | % | | | | |
| Allowance ratio (12) | 17.7 | % | | 11.0 | % | | | | |
| Common Equity Tier 1 capital ratio (13) | 13.8 | % | | 15.8 | % | | | | |
(6)“Return on average assets” is defined as the ratio of annualized Net income to Average total assets.
(8)“Net charge-off ratio” is defined as the ratio of annualized Charge-offs on an amortized cost basis, net of recoveries, to average unpaid principal balance of the respective held-for-investment portfolio. |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 |
| Other Information | (Dollar amounts in thousands) |
| Charge-offs, net of recoveries, on individually acquired retail installment contracts | $ | 462,427 |
| | $ | 405,651 |
| | $ | 1,077,631 |
| | $ | 946,934 |
|
| Charge-offs, net of recoveries, on purchased receivables portfolios | — |
| | (565 | ) | | — |
| | (993 | ) |
| Charge-offs, net of recoveries, on personal loans | 1,675 |
| | 515 |
| | 1,914 |
| | 1,264 |
|
| Charge-offs, net of recoveries, on finance leases | 175 |
| | 406 |
| | 347 |
| | 712 |
|
| Total charge-offs, net of recoveries | 464,277 |
| | 406,007 |
| | 1,079,892 |
| | 947,917 |
|
| End of period delinquent principal over 59 days, individually acquired retail installment contracts held for investment | 1,368,427 |
| | 1,232,521 |
| | 1,368,427 |
| | 1,232,521 |
|
| End of period personal loans delinquent principal over 59 days | 167,033 |
| | 164,458 |
| | 167,033 |
| | 164,458 |
|
| End of period delinquent principal over 59 days, loans held for investment | 1,368,427 |
| | 1,234,502 |
| | 1,368,427 |
| | 1,234,502 |
|
| End of period assets covered by allowance for credit losses | 29,007,585 |
| | 27,551,134 |
| | 29,007,585 |
| | 27,551,134 |
|
| End of period gross individually acquired retail installment contracts held for investment | 28,971,311 |
| | 27,511,718 |
| | 28,971,311 |
| | 27,511,718 |
|
| End of period gross personal loans held for sale | 1,364,956 |
| | 1,370,888 |
| | 1,364,956 |
| | 1,370,888 |
|
| End of period gross finance receivables and loans held for investment | 29,009,846 |
| | 27,566,517 |
| | 29,009,846 |
| | 27,566,517 |
|
| End of period gross finance receivables, loans, and leases held for investment | 45,557,709 |
| | 40,422,435 |
| | 45,557,709 |
| | 40,422,435 |
|
| Average gross individually acquired retail installment contracts held for investment | 29,017,122 |
| | 26,772,369 |
| | 28,816,732 |
| | 26,402,688 |
|
| Average gross personal loans held for investment | 1,337 |
| | 4,562 |
| | 1,809 |
| | 5,304 |
|
| Average gross individually acquired retail installment contracts held for investment and held for sale | 29,070,738 |
| | 27,673,016 |
| | 28,834,640 |
| | 27,305,408 |
|
| Average gross purchased receivables portfolios | 26,759 |
| | 37,284 |
| | 28,020 |
| | 39,257 |
|
| Average gross receivables from dealers | 13,088 |
| | 15,361 |
| | 13,368 |
| | 15,507 |
|
| Average gross personal loans held for investment and held for sale | 1,375,306 |
| | 1,375,877 |
| | 1,424,717 |
| | 1,421,861 |
|
| Average gross finance leases | 21,889 |
| | 20,937 |
| | 20,994 |
| | 21,699 |
|
| Average gross finance receivables and loans | 30,507,780 |
| | 29,122,475 |
| | 30,321,739 |
| | 28,803,732 |
|
| Average gross operating leases | 16,043,654 |
| | 12,219,612 |
| | 15,752,705 |
| | 11,856,109 |
|
| Average gross finance receivables, loans, and leases | 46,551,434 |
| | 41,342,087 |
| | 46,074,444 |
| | 40,659,841 |
|
| Average managed assets | 55,545,503 |
| | 50,445,203 |
| | 55,043,583 |
| | 49,632,691 |
|
| Average total assets | 45,700,887 |
| | 40,885,863 |
| | 45,101,873 |
| | 40,316,990 |
|
| Average debt | 36,152,602 |
| | 31,898,900 |
| | 35,715,392 |
| | 31,589,063 |
|
| Average total equity | 7,273,470 |
| | 6,879,749 |
| | 7,163,738 |
| | 6,724,157 |
|
| Ratios | | | | | | | |
| Yield on individually acquired retail installment contracts | 16.1 | % | | 16.2 | % | | 16.1 | % | | 16.1 | % |
| Yield on purchased receivables portfolios | 14.0 | % | | 24.1 | % | | 16.8 | % | | 25.9 | % |
| Yield on receivables from dealers | 1.6 | % | | 3.4 | % | | 2.6 | % | | 3.2 | % |
| Yield on personal loans held for sale (1) | 26.3 | % | | 24.6 | % | | 26.2 | % | | 24.5 | % |
| Yield on earning assets (2) | 12.9 | % | | 13.5 | % | | 12.9 | % | | 13.4 | % |
| Cost of debt (3) | 3.7 | % | | 3.4 | % | | 3.7 | % | | 3.3 | % |
| Net interest margin (4) | 10.1 | % | | 10.9 | % | | 10.0 | % | | 10.8 | % |
| Expense ratio (5) | 2.0 | % | | 2.2 | % | | 2.1 | % | | 2.3 | % |
| Return on average assets (6) | 3.2 | % | | 3.3 | % | | 2.7 | % | | 2.9 | % |
| Return on average equity (7) | 20.3 | % | | 19.5 | % | | 17.2 | % | | 17.2 | % |
| Net charge-off ratio on individually acquired retail installment contracts (8) | 6.4 | % | | 6.1 | % | | 7.5 | % | | 7.2 | % |
| Net charge-off ratio (8) | 6.4 | % | | 6.0 | % | | 7.5 | % | | 7.2 | % |
| Delinquency ratio on individually acquired retail installment contracts held for investment, end of period (9) | 4.7 | % | | 4.5 | % | | 4.7 | % | | 4.5 | % |
| Delinquency ratio on loans held for investment, end of period (9) | 4.7 | % | | 4.5 | % | | 4.7 | % | | 4.5 | % |
| Equity to assets ratio (10) | 15.8 | % | | 17.1 | % | | 15.8 | % | | 17.1 | % |
| Tangible common equity to tangible assets (10) | 15.6 | % | | 16.9 | % | | 15.6 | % | | 16.9 | % |
| Common stock dividend payout ratio (11) | 19.1 | % | | 5.4 | % | | 22.8 | % | | 6.2 | % |
| Allowance ratio (12) | 10.8 | % | | 12.1 | % | | 10.8 | % | | 12.1 | % |
| Common Equity Tier 1 capital ratio (13) | 15.7 | % | | 16.9 | % | | 15.7 | % | | 16.9 | % |
| |
(1) | Includes finance and other interest income; excludes fees. |
| |
(2) | “Yield on earning assets” is defined as the ratio of annualized Total finance and other interest income, net of Leased vehicle expense, to Average gross finance receivables, loans and leases. |
| |
(3) | “Cost of debt” is defined as the ratio of annualized Interest expense to Average debt. |
| |
(4) | “Net interest margin” is defined as the ratio of annualized Net finance and other interest income to Average gross finance receivables, loans and leases. |
| |
(5) | “Expense ratio” is defined as the ratio of annualized Operating expenses to Average managed assets. |
| |
(6) | “Return on average assets” is defined as the ratio of annualized Net income to Average total assets. |
| |
(7) | “Return on average equity” is defined as the ratio of annualized Net income to Average total equity. |
| |
(8) | “Net charge-off ratio” is defined as the ratio of annualized Charge-offs on a recorded investment basis, net of recoveries, to average unpaid principal balance of the respective held-for-investment portfolio. |
| |
(9) | “Delinquency ratio” is defined as the ratio of End of period Delinquent principal over 59 days to End of period gross balance of the respective portfolio, excludes capital leases. |
| |
(10) | (10)“Tangible common equity to tangible assets” is defined as the ratio of Total equity, excluding Goodwill and intangible assets, to Total assets, excluding Goodwill and intangible assets. Management believes this non-GAAP financial measure is useful to assess and monitor the adequacy of the Company’s capitalization. This additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly-titled measures used by other financial institutions. A reconciliation from GAAP to this non-GAAP measure for the periods ended June 30, 2019 and 2018 is as follows: |
|
| | | | | | | |
| | June 30, 2019 | | June 30, 2018 |
| | (Dollar amounts in thousands) |
| Total equity | $ | 7,337,261 |
| | $ | 7,033,636 |
|
| Deduct: Goodwill and intangibles | 108,173 |
| | 105,669 |
|
| Tangible common equity | $ | 7,229,088 |
| | $ | 6,927,967 |
|
| | | | |
| Total assets | $ | 46,416,093 |
| | $ | 41,157,189 |
|
| Deduct: Goodwill and intangibles | 108,173 |
| | 105,669 |
|
| Tangible assets | $ | 46,307,920 |
| | $ | 41,051,520 |
|
| | | | |
| Equity to assets ratio | 15.8 | % | | 17.1 | % |
| Tangible common equity to tangible assets | 15.6 | % | | 16.9 | % |
| |
(11) | “Common stock dividend payout ratio” is defined as the ratio of Dividends declared per share of common stock to Earnings per share attributable to the Company’s shareholders. |
| |
(12) | “Allowance ratio” is defined as the ratio of Allowance for credit losses, which excludes impairment on purchased receivables portfolios, to End of period assets covered by allowance for credit losses. |
| |
(13) | “Common Equity Tier 1 Capital ratio” is defined as the ratio of Total Common Equity Tier 1 Capital (CET1) to Total risk-weighted assets. |
|
| | | | | | | |
| | June 30, 2019 | | June 30, 2018 |
| Total equity | $ | 7,337,261 |
| | $ | 7,033,636 |
|
| Deduct: Goodwill, intangibles, and other assets, net of deferred tax liabilities | $ | 152,264 |
| | $ | 166,241 |
|
| Deduct: Accumulated other comprehensive income (loss), net | $ | (21,568 | ) | | $ | 62,449 |
|
| Tier 1 common capital | $ | 7,206,565 |
| | $ | 6,804,946 |
|
| Risk weighted assets (a) | $ | 45,849,574 |
| | $ | 40,251,526 |
|
| Common Equity Tier 1 capital ratio (b) | 15.7 | % | | 16.9 | % |
| |
(a) | Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company’s total Risk weighted assets. |
| |
(b) | CET1 is calculated under Basel III regulations required since January 1, 2015. The fully phased-in capital ratios are non-GAAP financial measures. |
The following tables present an analysis of net yield on interest earning assets:
|
| | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2019 | | 2018 |
| | (Dollar amounts in thousands) |
| | Average Balances | | Interest Income/Interest Expense | | Yield/Rate | | Average Balances | | Interest Income/Interest Expense | | Yield/Rate |
| Assets | | | | | | | | | | | |
| Retail installment contracts acquired individually | $ | 29,070,738 |
| | $ | 1,169,785 |
| | 16.1 | % | | $ | 27,673,016 |
| | $ | 1,123,860 |
| | 16.2 | % |
| Purchased receivables | 26,759 |
| | 939 |
| | 14.0 | % | | 37,284 |
| | 2,244 |
| | 24.1 | % |
| Receivables from dealers | 13,088 |
| | 51 |
| | 1.6 | % | | 15,361 |
| | 130 |
| | 3.4 | % |
| Personal loans | 1,375,306 |
| | 90,323 |
| | 26.3 | % | | 1,375,877 |
| | 84,772 |
| | 24.6 | % |
| Finance lease receivables | 21,889 |
| | 910 |
| | 16.6 | % | | 20,937 |
| | 376 |
| | 7.2 | % |
| Finance receivables | 30,507,780 |
| | 1,262,008 |
| | 16.5 | % | | 29,122,475 |
| | 1,211,382 |
| | 16.6 | % |
| Leased vehicles, net | 16,043,654 |
| | 231,794 |
| | 5.8 | % | | 12,219,612 |
| | 177,562 |
| | 5.8 | % |
| Other assets | 2,310,954 |
| | 10,527 |
| | 1.8 | % | | 2,866,389 |
| | 8,118 |
| | 1.1 | % |
| Allowance for credit losses | (3,161,501 | ) | | — |
| | — |
| | (3,322,613 | ) | | — |
| | — |
|
| Total assets | $ | 45,700,887 |
| | $ | 1,504,329 |
| | | | $ | 40,885,863 |
| | $ | 1,397,062 |
| | |
| Liabilities and equity | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Notes payable | $ | 36,152,602 |
| | $ | 330,039 |
| | 3.7 | % | | $ | 31,898,900 |
| | $ | 273,953 |
| | 3.4 | % |
| Other liabilities | 2,274,815 |
| | — |
| | — |
| | 2,107,214 |
| | — |
| | — |
|
| Total liabilities | 38,427,417 |
| | 330,039 |
| | | | 34,006,114 |
| | 273,953 |
| | |
| | | | | | | | | | | |
| Total stockholders' equity | 7,273,470 |
| | — |
| | — |
| | 6,879,749 |
| | — |
| | |
| Total liabilities and equity | $ | 45,700,887 |
| | $ | 330,039 |
| | | | $ | 40,885,863 |
| | $ | 273,953 |
| | |
|
| | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| | (Dollar amounts in thousands) |
| | Average Balances | | Interest Income/Interest Expense | | Yield/Rate | | Average Balances | | Interest Income/Interest Expense | | Yield/Rate |
| Assets | | | | | | | | | | | |
| Retail installment contracts acquired individually | $ | 28,834,640 |
| | $ | 2,325,808 |
| | 16.1 | % | | $ | 27,305,408 |
| | $ | 2,200,178 |
| | 16.1 | % |
| Purchased receivables | 28,020 |
| | 2,352 |
| | 16.8 | % | | 39,257 |
| | 5,085 |
| | 25.9 | % |
| Receivables from dealers | 13,368 |
| | 173 |
| | 2.6 | % | | 15,507 |
| | 250 |
| | 3.2 | % |
| Personal loans | 1,424,717 |
| | 186,345 |
| | 26.2 | % | | 1,421,861 |
| | 174,032 |
| | 24.5 | % |
| Finance lease receivables | 20,994 |
| | 1,275 |
| | 12.1 | % | | 21,699 |
| | 934 |
| | 8.6 | % |
| Finance receivables held for investment, net | 30,321,739 |
| | 2,515,953 |
| | 16.6 | % | | 28,803,732 |
| | 2,380,479 |
| | 16.5 | % |
| Leased vehicles, net | 15,752,705 |
| | 437,335 |
| | 5.6 | % | | 11,856,109 |
| | 323,157 |
| | 5.5 | % |
| Other assets | 2,218,872 |
| | 20,409 |
| | 1.8 | % | | 2,991,938 |
| | 14,697 |
| | 1.0 | % |
| Allowance for credit losses | (3,191,443 | ) | | — |
| | — |
| | (3,334,789 | ) | | — |
| | — |
|
| Total assets | $ | 45,101,873 |
| | $ | 2,973,697 |
| | | | $ | 40,316,990 |
| | $ | 2,718,333 |
| | |
| Liabilities and equity | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | |
| Notes payable | $ | 35,715,392 |
| | $ | 664,421 |
| | 3.7 | % | | $ | 31,589,063 |
| | $ | 514,981 |
| | 3.3 | % |
| Other liabilities | 2,222,743 |
| | — |
| | — |
| | 2,003,770 |
| | — |
| | — |
|
| Total liabilities | 37,938,135 |
| | 664,421 |
| | | | 33,592,833 |
| | 514,981 |
| | |
| | | | | | | | | | | | |
| Total stockholders' equity | 7,163,738 |
| | — |
| | | | 6,724,157 |
| | — |
| | |
| Total liabilities and equity | $ | 45,101,873 |
| | $ | 664,421 |
| | | | $ | 40,316,990 |
| | $ | 514,981 |
| | |
Results of Operations
The following table presents the Company’s resultscapitalization. This additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in
accordance with GAAP and may not be comparable to similarly-titled measures used by other financial institutions. A reconciliation from GAAP to this non-GAAP measure for the periods ended March 31, 2020 and 2019 is as follows:
| | | | | | | | | | | |
| March 31, 2020 | | March 31, 2019 |
| (Dollar amounts in thousands) | | |
| Total equity | $ | 5,146,103 | | | $ | 7,158,530 | |
| Deduct: Goodwill and intangibles | 121,879 | | | 115,256 | |
| Tangible common equity | $ | 5,024,224 | | | $ | 7,043,274 | |
| | | |
| Total assets | $ | 47,106,931 | | | $ | 45,045,906 | |
| Deduct: Goodwill and intangibles | 121,879 | | | 115,256 | |
| Tangible assets | $ | 46,985,052 | | | $ | 44,930,650 | |
| | | |
| Equity to assets ratio | 10.9 | % | | 15.9 | % |
| Tangible common equity to tangible assets | 10.7 | % | | 15.7 | % |
(11)“Common stock dividend payout ratio” is defined as the ratio of operationsDividends declared per share of common stock to Earnings per share attributable to the Company’s shareholders. The Common stock dividend payout ratio for the three and six months ended June 30,March 31, 2020 has not been disclosed since the earnings per share for the three months ended March 31, 2020 was a negative number.
(12)“Allowance ratio” is defined as the ratio of Allowance for credit losses, which excludes impairment on purchased receivables portfolios-credit deteriorated/impaired, to End of period assets covered by allowance for credit losses.
(13)“Common Equity Tier 1 Capital ratio” is defined as the ratio of Total Common Equity Tier 1 Capital (CET1) to Total risk-weighted assets.
| | | | | | | | | | | |
| March 31, 2020 | | March 31, 2019 |
| Total equity | $ | 5,146,103 | | | $ | 7,158,530 | |
| Add: Adjustment due to CECL capital relief (c) | 1,669,466 | | | — | |
| Deduct: Goodwill, intangibles, and other assets, net of deferred tax liabilities | 153,712 | | | 163,444 | |
| Deduct: Accumulated other comprehensive income (loss), net | (63,655) | | | 12,938 | |
| Tier 1 common capital | $ | 6,725,512 | | | $ | 6,982,148 | |
| Risk weighted assets (a)(c) | $ | 48,829,941 | | | $ | 44,260,896 | |
| Common Equity Tier 1 capital ratio (b)(c) | 13.8 | % | | 15.8 | % |
(a)Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company’s total Risk weighted assets.
(b)CET1 is calculated under Basel III regulations required since January 1, 2015. The fully phased-in capital ratios are non-GAAP financial measures.
(c)As described in our 2019 annual report on Form 10-K, on January 1, 2020, we adopted ASU 2016-13, Financial Instruments -Credit Losses (“CECL”), which upon adoption resulted in a reduction to our opening retained earnings balance, net of income tax, and 2018:increase to the allowance for credit losses of approximately $2 billion. As also described in our 2019 10-K, the U.S. banking agencies in December 2018 had approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations, including the Company, the option to phase in the day-one impact of CECL until the first quarter of 2023. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The Company is electing this alternative option instead of the one described in the December 2018 rule.
|
| | | | | | | | | | | | | | | |
| | For the Three Months Ended
June 30, | | For the Six Months Ended
June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (Dollar amounts in thousands) |
| Interest on finance receivables and loans | $ | 1,261,098 |
| | $ | 1,211,006 |
| | $ | 2,514,678 |
| | $ | 2,379,546 |
|
| Leased vehicle income | 676,236 |
| | 537,897 |
| | 1,325,796 |
| | 1,042,175 |
|
| Other finance and interest income | 11,437 |
| | 8,494 |
| | 21,684 |
| | 15,631 |
|
| Total finance and other interest income | 1,948,771 |
| | 1,757,397 |
| | 3,862,158 |
| | 3,437,352 |
|
| Interest expense | 330,039 |
| | 273,953 |
| | 664,421 |
| | 514,981 |
|
| Leased vehicle expense | 444,442 |
| | 360,335 |
| | 888,461 |
| | 719,018 |
|
| Net finance and other interest income | 1,174,290 |
| | 1,123,109 |
| | 2,309,276 |
| | 2,203,353 |
|
| Provision for credit losses | 430,676 |
| | 406,544 |
| | 981,555 |
| | 916,885 |
|
| Net finance and other interest income after provision for credit losses | 743,614 |
| | 716,565 |
| | 1,327,721 |
| | 1,286,468 |
|
| Profit sharing | 13,345 |
| | 12,853 |
| | 20,313 |
| | 17,230 |
|
| Net finance and other interest income after provision for credit losses and profit sharing | 730,269 |
| | 703,712 |
| | 1,307,408 |
| | 1,269,238 |
|
| Total other income | 30,411 |
| | 22,384 |
| | 81,496 |
| | 47,437 |
|
| Total operating expenses | 280,649 |
| | 276,950 |
| | 571,606 |
| | 564,862 |
|
| Income before income taxes | 480,031 |
| | 449,146 |
| | 817,298 |
| | 751,813 |
|
| Income tax expense | 111,764 |
| | 114,120 |
| | 201,528 |
| | 172,172 |
|
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| | | | | | | | |
| Net income | $ | 368,267 |
| | $ | 335,026 |
| | $ | 615,770 |
| | $ | 579,640 |
|
| Change in unrealized gains (losses) on cash flow hedges, net of tax | (34,045 | ) | | (761 | ) | | (55,084 | ) | | 12,039 |
|
| Unrealized gains (losses) on available-for-sale debt securities, net of tax | $ | 539 |
| | — |
| | $ | 1,001 |
| | $ | — |
|
| Comprehensive income | $ | 334,761 |
| | $ | 334,265 |
| | $ | 561,687 |
| | $ | 591,679 |
|
Three and Six Months Ended June 30, 2019March 31, 2020 Compared to Three and Six Months Ended June 30, 2018March 31, 2019
Interest on Finance Receivables and Loans
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Income from retail installment contracts | $ | 1,179,436 | | | $ | 1,156,023 | | | $ | 23,413 | | | 2 | % | | | | | | | | |
| Income from purchased receivables portfolios - credit deteriorated | 788 | | | 1,413 | | | (625) | | | (44) | % | | | | | | | | |
| Income from receivables from dealers | 54 | | | 122 | | | (68) | | | (56) | % | | | | | | | | |
| Income from personal loans | 93,541 | | | 96,022 | | | (2,481) | | | (3) | % | | | | | | | | |
| Total interest on finance receivables and loans | $ | 1,273,819 | | | $ | 1,253,580 | | | $ | 20,239 | | | 2 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Income from individually acquired retail installment contracts | $ | 1,169,785 |
| | $ | 1,123,860 |
| | $ | 45,925 |
| | 4 | % | | $ | 2,325,808 |
| | $ | 2,200,178 |
| | $ | 125,630 |
| | 6 | % |
| Income from purchased receivables portfolios | 939 |
| | $ | 2,244 |
| | (1,305 | ) | | (58 | )% | | 2,352 |
| | $ | 5,085 |
| | (2,733 | ) | | (54 | )% |
| Income from receivables from dealers | 51 |
| | $ | 130 |
| | (79 | ) | | (61 | )% | | 173 |
| | $ | 250 |
| | (77 | ) | | (31 | )% |
| Income from personal loans | 90,323 |
| | $ | 84,772 |
| | 5,551 |
| | 7 | % | | 186,345 |
| | $ | 174,032 |
| | 12,313 |
| | 7 | % |
| Total interest on finance receivables and loans | $ | 1,261,098 |
| | $ | 1,211,006 |
| | $ | 50,092 |
| | 4 | % | | $ | 2,514,678 |
| | $ | 2,379,545 |
| | $ | 135,133 |
| | 6 | % |
Income from individually acquired retail installment contracts increased $46$23 million, or 4%2%, from the second quarter of 2018 to the secondfirst quarter of 2019 and increased $126 million, or 6%, from the six months ended June 30, 2018 to the six months ended June 30, 2019,first quarter of 2020, primarily due to 5.1% and 5.6%a 7.6% increase respectively, in the average outstanding balance of the Company's portfolio.
Income from purchased receivables-credit impairedreceivables - credit deteriorated portfolios decreased $1 million, or 58%44%, from the second quarter of 2018 to the secondfirst quarter of 2019 and decreased $3 million , or 54%, from the six months ended June 30, 2018 to the six months ended June 30, 2019,first quarter of 2020 due to the continued runoff of the portfolios, as the Company has made no portfolio acquisitions accounted for under ASC 310-30 since 2012.
Income from personal loans increased $6 decreased $2 million, or 7%3%, from the second quarter of 2018 to the secondfirst quarter of 2019 and increased $12 million, or 7%, from the six months ended June 30, 2018 to the six months ended June 30, 2019,first quarter of 2020, primarily due to newer originations with higher loan APRs.a 4% decrease in average outstanding balance of company's portfolio.
Leased Vehicle Income and Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Leased vehicle income | $ | 747,979 | | | $ | 649,560 | | | $ | 98,419 | | | 15 | % | | | | | | | | |
| Leased vehicle expense | 552,912 | | | 444,019 | | | 108,893 | | | 25 | % | | | | | | | | |
| Leased vehicle income, net | $ | 195,067 | | | $ | 205,541 | | | $ | (10,474) | | | (5) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Leased vehicle income | $ | 676,236 |
| | $ | 537,897 |
| | $ | 138,339 |
| | 26 | % | | $ | 1,325,796 |
| | $ | 1,042,175 |
| | $ | 283,621 |
| | 27 | % |
| Leased vehicle expense | 444,442 |
| | 360,335 |
| | 84,107 |
| | 23 | % | | 888,461 |
| | 719,018 |
| | 169,443 |
| | 24 | % |
| Leased vehicle income, net | $ | 231,794 |
| | $ | 177,562 |
| | $ | 54,232 |
| | 31 | % | | $ | 437,335 |
| | $ | 323,157 |
| | $ | 114,178 |
| | 35 | % |
Leased vehicle income, and expense increasednet decreased in the three and six months ended June 30, 2019, whenfirst quarter of 2020 as compared to the same periods in 2018,first quarter of 2019. This change was primarily due to increasedepreciation on a larger lease portfolio and a decrease in the average outstanding balance of the portfolio by 31% and 33% respectively. liquidated units. Through the Chrysler Agreement, the Company receives manufacturer incentives on new leases originated under the program in the form of lease subvention payments, which are amortized over the term of the lease and reduce depreciation expense within leased vehicle expense.
Interest Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Interest expense on notes payable | $ | 338,954 | | | $ | 343,312 | | | $ | (4,358) | | | (1) | % | | | | | | | | |
| Interest expense on derivatives | (10,120) | | | (8,930) | | | (1,190) | | | 13 | % | | | | | | | | |
| Total interest expense | $ | 328,834 | | | $ | 334,382 | | | $ | (5,548) | | | (2) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Interest expense on notes payable | $ | 336,813 |
| | $ | 287,369 |
| | $ | 49,444 |
| | 17 | % | | $ | 680,125 |
| | $ | 540,741 |
| | $ | 139,384 |
| | 26 | % |
| Interest expense on derivatives | (6,774 | ) | | (13,416 | ) | | 6,642 |
| | (50 | )% | | (15,704 | ) | | (25,760 | ) | | 10,056 |
| | (39 | )% |
| Total interest expense | $ | 330,039 |
| | $ | 273,953 |
| | $ | 56,086 |
| | 20 | % | | $ | 664,421 |
| | $ | 514,981 |
| | $ | 149,440 |
| | 29 | % |
Total Interest expense increased $56decreased$6 million, or 20%2%, fromfrom the secondfirst quarter of 2018 2019 to the secondfirst quarter of 2019, and increased $149 million, or 29%, from the six months ended June 30, 2018 2020 primarily due to the six months ended June 30, 2019, primarily duelower interest rate environment partially offset by an increase in average outstanding debt balancebalance by 13.3% and 13.1% respectively, and13%.
Credit Loss Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Credit loss expense | $ | 907,887 | | | $ | 550,879 | | | $ | 357,008 | | | 65 | % | | | | | | | | |
Credit loss expense increased cost of funds resulting from higher market rates and wider spreads.
Provision for Credit Losses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Provision for credit losses | $ | 430,676 |
| | $ | 406,544 |
| | $ | 24,132 |
| | 6 | % | | $ | 981,555 |
| | $ | 916,885 |
| | $ | 64,670 |
| | 7 | % |
Provision for credit losses increased $24$357 million, or 6%65%, from the second quarter of 2018 to the secondfirst quarter of 2019 and increased $65 million, or 7%, from the six months ended June 30, 2018 to the six months ended June 30, 2019,first quarter of 2020. The change is primarily duedriven by the adoption of CECL standard in 2020, which replaced the incurred loss impairment framework with one that reflects expected credit losses over the full expected life of financial assets. In addition, the Company added a significant amount of additional reserve in the first quarter of 2020 to increase in portfolio by 5.3% and higher net charge offs in 2019.address credit risk associated with the COVID-19 outbreak.
Profit Sharing
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Profit sharing | $ | 14,295 | | | $ | 6,968 | | | $ | 7,327 | | | 105 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Profit sharing | $ | 13,345 |
| | $ | 12,853 |
| | $ | 492 |
| | 4 | % | | $ | 20,313 |
| | $ | 17,230 |
| | $ | 3,083 |
| | 18 | % |
Profit sharing expense consists of revenue sharing related to the Chrysler Agreement and profit sharing on personal loans originated pursuant to the agreements with Bluestem. Profit sharing expense increased in the three and six months ended June 30, 2019first quarter of 2020 compared to the same periods in 2018,first quarter of 2019, primarily due to increase in lease portfolio.portfolio and an increase in profit sharing eligible portfolio due to amendment to the Chrysler Agreement with FCA.
Other Income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Investment losses, net | $ | (63,426) | | | $ | (67,097) | | | $ | 3,671 | | | (5) | % | | | | | | | | |
| Servicing fee income | 19,103 | | | 23,806 | | | (4,703) | | | (20) | % | | | | | | | | |
| Fees, commissions, and other | 95,130 | | | 94,376 | | | 754 | | | 1 | % | | | | | | | | |
| Total other income | $ | 50,807 | | | $ | 51,085 | | | $ | (278) | | | (1) | % | | | | | | | | |
| | | | | | | | | | | | | | | |
| Average serviced for others portfolio | $ | 10,227,948 | | | $ | 8,887,964 | | | $ | 1,339,984 | | | 15 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Investment losses, net | $ | (84,787 | ) | | $ | (82,634 | ) | | $ | (2,153 | ) | | (3 | )% | | $ | (151,884 | ) | | $ | (169,154 | ) | | $ | 17,270 |
| | 10 | % |
| Servicing fee income | 25,002 |
| | 27,538 |
| | (2,536 | ) | | (9 | )% | | 48,808 |
| | 53,720 |
| | (4,912 | ) | | (9 | )% |
| Fees, commissions, and other | 90,196 |
| | 77,480 |
| | 12,716 |
| | 16 | % | | 184,572 |
| | 162,871 |
| | 21,701 |
| | 13 | % |
| Total other income | $ | 30,411 |
| | $ | 22,384 |
| | $ | 8,027 |
| | 36 | % | | $ | 81,496 |
| | $ | 47,437 |
| | $ | 34,059 |
| | 72 | % |
| Average serviced for others portfolio | $ | 8,996,182 |
| | $ | 9,103,107 |
| | $ | (106,925 | ) | | | | $ | 8,970,346 |
| | $ | 8,928,448 |
| | $ | 41,898 |
| | |
Investment losses, net, decreased $17$4 million or 10%, fromin the six months ended June 30, 2018first quarter of 2020, as compared to the six months ended June 30,first quarter of 2019, primarily becausedue to lower outstanding balance.
Servicing fee income decreased $5 million in the first quarter of no asset sales in 2019. The Company recorded a loss2020, as compared to the first quarter of $20 million during2019, due to the six months ended June 30, 2018, related to asset sales.
lower average balances for serviced portfolio that had higher servicing fee rates. The Company records servicing fee income on loans that it services but does not own and does not report on its balance sheet. Servicing fee income decreased 9% in 2019, as compared to 2018, due to the lower average balances for serviced portfolio that had higher servicing fee rates. The serviced for others portfolio as of June 30,March 31, 2020 and 2019 and 2018 was as follows:
| | | | | | | | | | | |
| March 31, | | |
| 2020 | | 2019 |
| (Dollar amounts in thousands) | | |
| SBNA and Santander retail installment contracts | $ | 8,760,998 | | | $ | 5,735,648 | |
| SBNA leases | 131 | | | 202 | |
| Total serviced for related parties | 8,761,129 | | | 5,735,850 | |
| CCAP securitizations | 152,950 | | | 520,842 | |
| Other third parties | 1,417,358 | | | 2,487,473 | |
| Total serviced for third parties | 1,570,308 | | | 3,008,315 | |
| Total serviced for others portfolio | $ | 10,331,437 | | | $ | 8,744,165 | |
|
| | | | | | | |
| | June 30, |
| | 2019 | | 2018 |
| | (Dollar amounts in thousands) |
| SBNA and Santander retail installment contracts | $ | 6,853,846 |
| | $ | 4,458,912 |
|
| SBNA leases | 163 |
| | 7,042 |
|
| Total serviced for related parties | 6,854,009 |
| | 4,465,954 |
|
| Chrysler Capital securitizations | 369,113 |
| | 960,057 |
|
| Other third parties | 2,059,186 |
| | 4,128,950 |
|
| Total serviced for third parties | 2,428,299 |
| | 5,089,007 |
|
| Total serviced for others portfolio | $ | 9,282,308 |
| | $ | 9,554,961 |
|
The Company’s fees,Fees, commissions, and other, primarily includes late fees, miscellaneous, and other income. This income increased inremained flat from the first quarter of 2019 as compared 2018, primarily due to the increase in referral fee income from SBNA related to origination support services.first quarter of 2020.
Total Operating Expenses
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Compensation expense | $ | 133,326 | | | $ | 127,894 | | | $ | 5,432 | | | 4 | % | | | | | | | | |
| Repossession expense | 57,662 | | | 70,860 | | | (13,198) | | | (19) | % | | | | | | | | |
| Other operating costs | 91,685 | | | 92,203 | | | (518) | | | (1) | % | | | | | | | | |
| Total operating expenses | $ | 282,673 | | | $ | 290,957 | | | $ | (8,284) | | | (3) | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Compensation expense | $ | 122,678 |
| | $ | 118,598 |
| | $ | 4,080 |
| | 3 | % | | $ | 250,572 |
| | $ | 240,603 |
| | $ | 9,969 |
| | 4 | % |
| Repossession expense | 69,699 |
| | 63,660 |
| | 6,039 |
| | 9 | % | | 140,559 |
| | 135,741 |
| | 4,818 |
| | 4 | % |
| Other operating costs | 88,272 |
| | 94,692 |
| | (6,420 | ) | | (7 | )% | | 180,475 |
| | 188,518 |
| | (8,043 | ) | | (4 | )% |
| Total operating expenses | $ | 280,649 |
| | $ | 276,950 |
| | $ | 3,699 |
| | 1 | % | | $ | 571,606 |
| | $ | 564,862 |
| | $ | 6,744 |
| | 1 | % |
Compensation expense increased three and six months ended June 30,expenses remained flat from the first quarter of 2019 compared to the same periodsfirst quarter of 2020.
Repossession expense decreased from the first quarter of 2019 to the first quarter of 2020, primarily because the Company has temporarily suspended involuntary repossession activities nationwide as a result of the COVID-19 outbreak.
Other operating costs remained flat from the first quarter of 2019 to the first quarter of 2020.
Income Tax Expense
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| Income tax expense | $ | (2,458) | | | $ | 89,764 | | | $ | (92,222) | | | (103) | % | | | | | | | | |
| Income before income taxes | (6,445) | | | 337,267 | | | (343,712) | | | (102) | % | | | | | | | | |
| Effective tax rate | 38.1 | % | | 26.6 | % | | | | | | | | | | | | |
The effective tax rate increased from 26.6% in 2018,the first quarter of 2019 to 38.1% in the first quarter of 2020, primarily due to an increasediscrete tax adjustments that increased the tax benefit recorded on the pre-tax loss in numberthe first quarter of employees period over period.
Repossession expense increased three and six months ended June 30, 2019 compared to the same periods in 2018, primarily due to an increase in number of repossessions in 2019.
Other operating costs decreased three and six months ended June 30, 2019 compared to the same periods in 2018, primarily due to a decrease in legal accruals in 2019.2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Income tax expense | $ | 111,764 |
| | $ | 114,120 |
| | $ | (2,356 | ) | | (2 | )% | | $ | 201,528 |
| | $ | 172,172 |
| | $ | 29,356 |
| | 17 | % |
| Income before income taxes | 480,031 |
| | 449,146 |
| | 30,885 |
| | 7 | % | | 817,298 |
| | 751,813 |
| | 65,486 |
| | 9 | % |
| Effective tax rate | 23.3 | % | | 25.4 | % | | | | | | 24.7 | % | | 22.9 | % | | | | |
The effective tax rate increased from 22.9% for the six months ended June 30, 2018 to 24.7% for the six months ended June 30, 2019, primarily due to certain state return to provision true-ups and decrease in electric vehicle credits in 2019.
Other Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Three Months Ended | | | | | | | | | | | | | | |
| March 31, | | | | Increase (Decrease) | | | | | | | | | | |
| 2020 | | 2019 | | Amount | | Percent | | | | | | | | |
| (Dollar amounts in thousands) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| Change in unrealized gains (losses) on cash flow hedges and available-for-sale securities, net of tax | $ | (36,962) | | | $ | (20,577) | | | $ | (16,385) | | | 80 | % | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | Increase (Decrease) | | June 30, | | Increase (Decrease) |
| | 2019 | | 2018 | | Amount | | Percent | | 2019 | | 2018 | | Amount | | Percent |
| | (Dollar amounts in thousands) |
| Change in unrealized gains (losses) on cash flow hedges and available-for-sale securities, net of tax | $ | (33,506 | ) | | $ | (761 | ) | | $ | (32,745 | ) | | 4,303 | % | | $ | (54,083 | ) | | $ | 12,039 |
| | $ | (66,122 | ) | | 549 | % |
The change in unrealized gains (losses) for in the three and six months ended June 30, 2019first quarter of 2020 as compared to the three and six months ended June 30, 2018first quarter of 2019, was primarily driven by interest income realized into the Statement of Income in 2019.2020. In addition, as described in Note 7 “Derivative Financial Instruments”, our cash flow hedge portfolio is in a net negative position because of the decreasing rate environment.
Credit Quality
Loans and Other Finance Receivables
Allowance for Credit losses
NonprimeNon-prime loans comprise 82%77% of the Company’s portfolio as of June 30, 2019.March 31, 2020. The Company records an allowance for credit lossesloss at a level considered adequate to cover lifetime expected credit losses in the estimate of inherent losses on individually acquiredCompany’s retail installment contracts and other loans and receivables held for investment. The Company’s allowance for credit losses asinvestment, based upon a percentage of retail installment contracts acquired individually, was comprised of the following at June 30, 2019holistic assessment including both quantitative and December 31, 2018: |
| | | | | | | | |
| | June 30, 2019 | December 31, 2018 |
| | Non-TDR | TDR | Non-TDR | TDR |
| Allowance as a percentage of unpaid principal balance | 8.0 | % | 25.6 | % | 7.9 | % | 26.3 | % |
| Allowance and discount as a percentage of unpaid principal balance | 8.5 | % | 26.2 | % | 8.6 | % | 27.1 | % |
Note:qualitative considerations. Refer to Note 2 - "Finance Receivables" and Note 4 - "Credit Loss Allowance and Credit Quality" to these Condensed Consolidated Financial Statementsthe accompanying condensed consolidated financial statements for the details on the components of the carrying valueCompany’s held for investment portfolio of retail installment contracts acquired individually held for investmentand receivables from dealers, as of June 30, 2019March 31, 2020 and December 31, 2018.2019.
As of June 30, 2019 and December 31, 2018, used car financing represented 57% of our outstanding retail installment contracts acquired individually. 85% of this used car financing consisted of nonprime auto loans.Credit risk profile
A summary of the credit risk profile of the Company’s retail installment contracts held for investment, by FICO® score, number of trade lines, and length of credit history, each as determined at origination, as of
June 30, 2019March 31, 2020 and December 31,
20182019 was as follows (dollar amounts in billions, totals may not foot due to rounding):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2019 |
| Trade Lines | | 1 | | 2 | | 3 | | 4+ | | Total |
| FICO | Months History | | $ | % | | $ | % | | $ | % | | $ | % | | $ | % |
| No-FICO (a) | <36 | | $ | 2.6 |
| 96 | % | | $ | 0.1 |
| 4 | % | | $ | — |
| — |
| | $ | — |
| — |
| | $ | 2.7 |
| 9 | % |
| 36+ | | 0.4 |
| 40 | % | | 0.2 |
| 20 | % | | 0.1 |
| 10 | % | | 0.3 |
| 30 | % | | 1.0 |
| 4 | % |
| <540 | <36 | | 0.1 |
| 33 | % | | 0.1 |
| 33 | % | | — |
| — | % | | 0.1 |
| 33 | % | | 0.3 |
| 1 | % |
| 36+ | | 0.2 |
| 4 | % | | 0.2 |
| 4 | % | | 0.2 |
| 4 | % | | 4.5 |
| 87 | % | | 5.1 |
| 18 | % |
| 540-599 | <36 | | 0.3 |
| 38 | % | | 0.2 |
| 25 | % | | 0.1 |
| 12 | % | | 0.2 |
| 25 | % | | 0.8 |
| 3 | % |
| 36+ | | 0.2 |
| 2 | % | | 0.3 |
| 3 | % | | 0.3 |
| 3 | % | | 8.0 |
| 92 | % | | 8.8 |
| 30 | % |
| 600-639 | <36 | | 0.3 |
| 38 | % | | 0.2 |
| 25 | % | | 0.1 |
| 12 | % | | 0.2 |
| 25 | % | | 0.8 |
| 3 | % |
| 36+ | | 0.1 |
| 2 | % | | 0.1 |
| 2 | % | | 0.1 |
| 2 | % | | 4.3 |
| 94 | % | | 4.6 |
| 16 | % |
| >640 | <36 | | 0.4 |
| 43 | % | | 0.2 |
| 22 | % | | 0.1 |
| 11 | % | | 0.2 |
| 22 | % | | 0.9 |
| 3 | % |
| 36+ | | 0.1 |
| 3 | % | | 0.1 |
| 3 | % | | 0.1 |
| 3 | % | | 3.6 |
| 91 | % | | 3.9 |
| 13 | % |
| Total | | $ | 4.7 |
| 16 | % | | $ | 1.7 |
| 6 | % | | $ | 1.1 |
| 4 | % | | $ | 21.4 |
| 74 | % | | $ | 28.9 |
| 100 | % |
| | | December 31, 2018 | |
| March 31, 2020 | | March 31, 2020 | |
| Trade Lines | Trade Lines | | 1 | | 2 | | 3 | | 4+ | | Total | Trade Lines | | | 1 | | | 2 | | | 3 | | | 4+ | | | Total | |
| FICO | Months History | | $ | % | | $ | % | | $ | % | | $ | % | | $ | % | FICO | Months History | | $ | % | | $ | % | | $ | % | | $ | % | | $ | % |
| No-FICO (a) | <36 | | $ | 2.5 |
| 96 | % | | $ | 0.1 |
| 4 | % | | $ | — |
| — |
| | $ | — |
| — |
| | $ | 2.6 |
| 9 | % | No-FICO (a) | <36 | | td.9 | 97 | % | | $0.1 | 3 | % | | $0.0 | — | % | | $0.0 | — | % | | $3.0 | 10 | % |
| 36+ | | 0.4 |
| 40 | % | | 0.2 |
| 20 | % | | 0.1 |
| 10 | % | | 0.3 |
| 30 | % | | 1.0 |
| 4 | % | | 36+ | | 0.3 | 38 | % | | 0.2 | 25 | % | | 0.1 | 13 | % | | 0.2 | 25 | % | | 0.8 | 3 | % |
| <540 | <36 | | 0.1 |
| 25 | % | | 0.1 |
| 25 | % | | 0.1 |
| 25 | % | | 0.1 |
| 25 | % | | 0.4 |
| 1 | % | <540 | <36 | | 0.1 | 33 | % | | 0.1 | 33 | % | | 0.0 | — | % | | 0.1 | 33 | % | | 0.3 | 1 | % |
| 36+ | | 0.2 |
| 4 | % | | 0.3 |
| 5 | % | | 0.3 |
| 5 | % | | 4.7 |
| 86 | % | | 5.5 |
| 19 | % | | 36+ | | 0.1 | 2 | % | | 0.2 | 4 | % | | 0.2 | 4 | % | | 4.3 | 90 | % | | 4.8 | 15 | % |
| 540-599 | <36 | | 0.3 |
| 37 | % | | 0.2 |
| 25 | % | | 0.1 |
| 13 | % | | 0.2 |
| 25 | % | | 0.8 |
| 3 | % | 540-599 | <36 | | 0.3 | 38 | % | | 0.2 | 25 | % | | 0.1 | 13 | % | | 0.2 | 25 | % | | 0.8 | 3 | % |
| 36+ | | 0.2 |
| 2 | % | | 0.2 |
| 2 | % | | 0.3 |
| 4 | % | | 7.7 |
| 92 | % | | 8.4 |
| 30 | % | | 36+ | | 0.1 | 1 | % | | 0.2 | 2 | % | | 0.3 | 3 | % | | 8.4 | 93 | % | | 9.0 | 29 | % |
| 600-639 | <36 | | 0.2 |
| 33 | % | | 0.1 |
| 17 | % | | 0.1 |
| 17 | % | | 0.2 |
| 33 | % | | 0.6 |
| 2 | % | 600-639 | <36 | | 0.4 | 44 | % | | 0.2 | 22 | % | | 0.1 | 11 | % | | 0.2 | 22 | % | | 0.9 | 3 | % |
| 36+ | | 0.1 |
| 2 | % | | 0.1 |
| 2 | % | | 0.1 |
| 2 | % | | 4.2 |
| 94 | % | | 4.5 |
| 16 | % | | 36+ | | 0.1 | 2 | % | | 0.1 | 2 | % | | 0.1 | 2 | % | | 4.6 | 94 | % | | 4.9 | 16 | % |
| >640 | <36 | | 0.3 |
| 43 | % | | 0.2 |
| 29 | % | | 0.1 |
| 14 | % | | 0.1 |
| 14 | % | | 0.7 |
| 2 | % | >640 | <36 | | 1.2 | 71 | % | | 0.2 | 12 | % | | 0.1 | 6 | % | | 0.2 | 12 | % | | 1.7 | 6 | % |
| 36+ | | 0.1 |
| 2 | % | | 0.1 |
| 2 | % | | 0.1 |
| 2 | % | | 3.7 |
| 94 | % | | 4.0 |
| 14 | % | | 36+ | | 0.1 | 2 | % | | 0.1 | 2 | % | | 0.1 | 2 | % | | 4.3 | 93 | % | | 4.6 | 14 | % |
| Total | | $ | 4.4 |
| 15 | % | | $ | 1.6 |
| 6 | % | | $ | 1.3 |
| 5 | % | | $ | 21.2 |
| 74 | % | | $ | 28.5 |
| 100 | % | |
| Total (c) | | Total (c) | | | $5.6 | 18 | % | | $1.6 | 5 | % | | $1.1 | 4 | % | | $22.5 | 73 | % | | $30.8 | 100 | % |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 (b) | | | | | | | | | | | | | | | | |
| Trade Lines | | | 1 | | | 2 | | | 3 | | | 4+ | | | Total | |
| FICO | Months History | | $ | % | | $ | % | | $ | % | | $ | % | | $ | % |
| No-FICO (a) | <36 | | $ | 2.8 | | 97 | % | | $ | 0.1 | | 3 | % | | $ | 0.0 | | $ | 0.0 | | | | $ | 0.0 | | $ | 0.0 | | | $ | 2.9 | | 9 | % |
| 36+ | | 0.3 | | 38 | % | | 0.2 | | 25 | % | | 0.1 | | 13 | % | | 0.2 | | 25 | % | | 0.8 | | 3 | % |
| <540 | <36 | | 0.1 | | 25 | % | | 0.1 | | 25 | % | | 0.1 | | 25 | % | | 0.1 | | 25 | % | | 0.4 | | 1 | % |
| 36+ | | 0.1 | | 2 | % | | 0.2 | | 4 | % | | 0.2 | | 4 | % | | 4.4 | | 90 | % | | 4.9 | | 16 | % |
| 540-599 | <36 | | 0.3 | | 43 | % | | 0.2 | | 29 | % | | 0.1 | | 14 | % | | 0.1 | | 14 | % | | 0.7 | | 2 | % |
| 36+ | | 0.2 | | 2 | % | | 0.3 | | 3 | % | | 0.3 | | 3 | % | | 8.3 | | 91 | % | | 9.1 | | 30 | % |
| 600-639 | <36 | | 0.3 | | 43 | % | | 0.2 | | 29 | % | | 0.1 | | 14 | % | | 0.1 | | 14 | % | | 0.7 | | 2 | % |
| 36+ | | 0.1 | | 2 | % | | 0.1 | | 2 | % | | 0.2 | | 4 | % | | 4.7 | | 92 | % | | 5.1 | | 17 | % |
| >640 | <36 | | 0.5 | | 45 | % | | 0.1 | | 9 | % | | 0.1 | | 9 | % | | 0.4 | | 36 | % | | 1.1 | | 4 | % |
| 36+ | | 0.1 | | 2 | % | | 0.1 | | 2 | % | | 0.1 | | 2 | % | | 4.7 | | 94 | % | | 5.0 | | 16 | % |
| Total | | | $ | 4.8 | | 16 | % | | $ | 1.6 | | 5 | % | | $ | 1.3 | | 4 | % | | $ | 23.0 | | 75 | % | | $ | 30.8 | | 100 | % |
| | | | | | | | | | | | | | | | |
(a) Includes commercial loans
(b) The information as of December 31, 2019 includes balances based on UPB. Difference between amortized cost and UPB was not material.
(c)The amount of accrued interest excluded from the disclosed amortized cost as of March 31, 2020 is $299 million.
Delinquencies
The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.
In each case, the period of delinquency is based on the number of days payments are contractually past due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, the Company’s delinquencies have been highest in the period from November through January due to consumers’ holiday spending.
The following is a summary of delinquencies on retail installment contracts held for investment as of June 30, 2019 and December 31, 2018:
|
| | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Dollars (in thousands) | | Percent (a) | | Dollars (in thousands) | | Percent (a) |
| Principal 30-59 days past due | $ | 2,726,187 |
| | 9.4 | % | | $ | 3,121,795 |
| | 11.0 | % |
| Delinquent principal over 59 days (b) | 1,368,427 |
| | 4.7 | % | | 1,713,775 |
| | 6.0 | % |
| Total delinquent principal | $ | 4,094,614 |
| | 14.1 | % | | $ | 4,835,570 |
| | 17.0 | % |
(a) Percent of unpaid principal balance of total retail installment contracts acquired individually held for investment.
(b) Interest is generally accrued until 60 days past due in accordance with the Company’s accounting policy for retail installment contracts.
Refer to Note 4 - "Credit Loss Allowance and Credit Quality"to these Condensed Consolidated Financial Statementsthe accompanying condensed consolidated financial statements for the details on the retail installment contracts acquired individually held for investment that were placed on nonaccrual status, as of June 30, 2019March 31, 2020 and December 31, 2018.2019.
Credit Loss Experience
The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the sixthree months ended June 30, 2019March 31, 2020 and 2018.2019.
| | | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2019 | | 2018 | | 2020 | | 2019 |
| | Retail Installment Contracts | |
| | (Dollar amounts in thousands) | | (Dollar amounts in thousands) | |
| Principal outstanding at period end | $ | 28,971,311 |
| | $ | 27,511,718 |
| Principal outstanding at period end | $ | 30,741,144 | | | $ | 28,849,755 | |
| Average principal outstanding during the period | $ | 28,816,732 |
| | $ | 26,441,945 |
| Average principal outstanding during the period | $ | 30,718,119 | | | $ | 28,624,598 | |
| Number of receivables outstanding at period end | 1,824,968 |
| | 1,714,744 |
| Number of receivables outstanding at period end | 1,921,789 | | | 1,813,284 | |
| Average number of receivables outstanding during the period | 1,810,734 |
| | 1,729,592 |
| Average number of receivables outstanding during the period | 1,839,800 | | | 1,805,099 | |
| Number of repossessions (a) | 144,957 |
| | 142,625 |
| Number of repossessions (a) | 65,710 | | | 76,963 | |
| Number of repossessions as a percent of average number of receivables outstanding | 16.0 | % | | 16.5 | % | Number of repossessions as a percent of average number of receivables outstanding | 14.3 | % | | 17.1 | % |
| Net losses | $ | 1,077,631 |
| | $ | 945,941 |
| Net losses | $ | 593,046 | | | $ | 615,204 | |
| Net losses as a percent of average principal amount outstanding | 7.5 | % | | 7.2 | % | Net losses as a percent of average principal amount outstanding | 7.7 | % | | 8.6 | % |
(a) Repossessions are net of redemptions. The number of repossessions includes repossessions from the outstanding portfolio and from accounts already charged off. The Company has recently temporarily suspended involuntary repossession activities nationwide as a result of the COVID-19 outbreak.
There were no charge-offs on the Company’s receivables from dealers for the three and six months ended June 30,March 31, 2020 and 2019. Net charge-offs on the finance lease receivables portfolio, totaled $569 and $172 for the three months ended March 31, 2020 and 2019, and 2018.respectively.
Deferrals and Troubled Debt Restructurings
In accordance with the Company’s policies and guidelines, the Company may offer extensions (deferrals) to consumers on its retail installment contracts, whereby the consumer is allowed to move a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two months. The Company’s policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of lifetime months extended for all automobile retail installment contracts iswas eight, while some marine and recreational vehicle contracts havehad a maximum of twelve months extended to reflect their longer term. In March 2020, the Company revised its servicing practices related to the maximum number of extensions to increase the permitted number of monthly extensions from eight to twelve and to increase the maximum number of months per extension from two to three. Additionally, the Company generally limits the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.
The Company is actively working with its borrowers who have been impacted by the COVID-19 and have developed loan modification programs to mitigate the adverse effects of COVID-19 to our loan customers. The predominant program offering is a two-month deferral of payments to the end of the loan term and waiver of late charges. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted.
At the time a deferral is granted, all delinquent amounts may be deferred or paid. This may result in the classification of the loan as current and therefore not considered a delinquent account. However, there are other instances when a deferral is granted but the loan is not brought completely current, such as when the account days past due is greater than the deferment period granted. Such accounts are aged based on the timely payment of future installments in the same manner as any other account. Historically, the majority of deferrals are approved for borrowers who are either 31-60 or 61-90 days delinquent, and these borrowers are typically reported as current after deferral. A customer is limited to one deferral each six months, and if a customer receives two or more deferrals over the life of the loan, the loan will advance to a TDR designation.
The following is a summary of deferrals (amortized cost) on the Company’s retail installment contracts held for investment as of the dates indicated:
| | | | June 30, 2019 | | December 31, 2018 | | March 31, 2020 | | | December 31, 2019 (a) | |
| | (Dollar amounts in thousands) | | (Dollar amounts in thousands) | |
| Never deferred | $ | 21,533,545 |
| | 74.3 | % | | $ | 20,212,452 |
| | 71.0 | % | Never deferred | $ | 22,968,068 | | | 74.6 | % | | $ | 23,830,368 | | | 77.3 | % |
| Deferred once | 3,513,241 |
| | 12.1 | % | | 3,690,522 |
| | 13.0 | % | Deferred once | 4,351,477 | | | 14.1 | % | | 3,499,477 | | | 11.4 | % |
| Deferred twice | 1,649,535 |
| | 5.7 | % | | 1,952,894 |
| | 6.9 | % | Deferred twice | 1,539,735 | | | 5.0 | % | | 1,463,503 | | | 4.8 | % |
| Deferred 3 - 4 times | 2,201,028 |
| | 7.6 | % | | 2,516,451 |
| | 8.8 | % | Deferred 3 - 4 times | 1,719,205 | | | 5.6 | % | | 1,867,546 | | | 6.1 | % |
| Deferred greater than 4 times | 99,486 |
| | 0.3 | % | | 90,917 |
| | 0.3 | % | Deferred greater than 4 times | 219,543 | | | 0.7 | % | | 115,144 | | | 0.4 | % |
| Total | $ | 28,996,835 |
| | | | $ | 28,463,236 |
| | | $ | 30,798,028 | | | $ | 30,776,038 | | |
(a) The information as of December 31, 2019 is based on UPB. Difference between amortized cost and UPB was not material.
(b) The amount of accrued interest excluded from the disclosed amortized cost as of March 31, 2020 is $299 million.
The Company evaluates the results of deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.
Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods,expected life of the loan and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the Company’s allowance for credit lossesACL are also impacted.
Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for credit losses and related provision for credit losses. Changes in the charge-off ratios and loss confirmation periods are considered in determining the appropriate level of allowance for credit losses and related provision for credit losses, including the allowance and provision for loans that are not classified as TDRs. For loans that are classified as TDRs, the Company generally compares the present value of expected cash flows to the outstanding recorded investment of TDRs to determine the amount of TDR impairment and related provision for credit losses that should be recorded. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell.
The Company also may agree, or be required by operation of law or by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in loan principal balance, a temporary reduction of monthly payment, or an extension of the maturity date. The servicer of the Company’s revolving personal loans also may grant modifications in the form of principal or interest rate reductions or payment plans. Similar to deferrals, the Company believes modifications are an effective portfolio management technique. Not all modifications are classified as TDRs as the loan may not meet the scope of the applicable guidance or the modification may have been granted for a reason other than the borrower’s financial difficulties.
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. TDRs are generally placed on nonaccrual status when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis; For loans on nonaccrual status,basis and the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due.
TDR loans are generally measured based on the present value of expected cash flows. The recognition of interest income on TDR loans reflects management’s best estimate of the amount that is reasonably assured of collection and is consistent with the estimate of future cash flows used in the impairment measurement. Any accrued but unpaid interest is fully reserved for through the recognition of additional impairment on the recorded investment, if not expected to be collected.
The following is a summary of the principalamortized cost (including accrued interest) balance as of June 30, 2019March 31, 2020 and December 31, 20182019 of loans that have received these modifications and concessions:concessions;
| | | | | | | | March 31, 2020 | | December 31, 2019 (a) |
| | June 30, 2019 | | December 31, 2018 | | Retail Installment Contracts | |
| | Retail Installment Contracts | | (Dollar amounts in thousands) | |
| | (Dollar amounts in thousands) | |
| Temporary reduction of monthly payment (a) | $ | 1,627,478 |
| | $ | 2,137,334 |
| |
| Temporary reduction of monthly payment (b) | | Temporary reduction of monthly payment (b) | $ | 984,611 | | | $ | 1,168,358 | |
| Bankruptcy-related accounts | 44,922 |
| | 54,373 |
| Bankruptcy-related accounts | 35,609 | | | 41,756 | |
| Extension of maturity date | 28,985 |
| | 25,644 |
| Extension of maturity date | 36,274 | | | 35,238 | |
| Interest rate reduction | 54,301 |
| | 54,906 |
| Interest rate reduction | 63,971 | | | 61,870 | |
| Max buy rate and fair lending (b) | 5,470,323 |
| | 4,685,522 |
| |
| Other | 126,151 |
| | 137,958 |
| |
| Max buy rate and fair lending (c) | | Max buy rate and fair lending (c) | 6,364,477 | | | 6,069,509 | |
| Other (d) | | Other (d) | 337,929 | | | 240,553 | |
| Total modified loans | $ | 7,352,160 |
| | $ | 7,095,737 |
| Total modified loans | $ | 7,822,871 | | | $ | 7,617,284 | |
(a) The table includes balances based on UPB. Difference between amortized cost and UPB was not material.
(b) Reduces a customer’s payment for a temporary time period (no more than six months)
(b)(c) Max buy rate modifications comprises of loans modified by the Company to adjust the interest rate quoted in a dealer-arranged financing. The Company reassesses the contracted APR when changes in the deal structure are made (e.g., higher down payment and lower vehicle price). If any of the changes result in a lower APR, the contracted rate is reduced. Substantially all deal structure changes occur within seven days of the date the contract is signed. These deal structure changes are made primarily to give the consumer the benefit of a lower rate due to an improved contracted deal structure compared to the deal structure that was approved during the underwriting process. Fair Lending modifications comprises of loans modified by the Company related to possible “disparate
“disparate impact” credit discrimination in indirect vehicle finance. These modifications are not considered a TDR event because they do not relate to a concession provided to a customer experiencing financial difficulty.
Refer to Note 4 - "Credit Loss Allowance and Credit Quality"to these Condensed Consolidated Financial Statementsthe accompanying condensed consolidated financial statements for the details on the Company’s recorded investmentamortized cost (including accrued interest) in TDRs and a summary of delinquent TDRs, as of June 30, 2019March 31, 2020 and December 31, 2018.2019.
The following table shows the components of the changes in the recorded investmentamortized cost (including accrued interest) in retail installment contract TDRs (excluding collateral-dependent bankruptcy TDRs) duringfor the three and six months ended June 30, 2019March 31, 2020 and 2018:2019:
| | | | Three Months Ended | | Six Months Ended | | Three Months Ended | |
| | June 30, 2019 | | June 30, 2018 | | June 30, 2019 | | June 30, 2018 | | March 31, 2020 | | March 31, 2019 | |
| Balance — beginning of period | $ | 4,891,375 |
| | $ | 6,094,823 |
| | $ | 5,365,477 |
| | $ | 6,328,159 |
| |
| Balance — beginning of year | | Balance — beginning of year | $ | 3,828,892 | | | $ | 5,365,477 | | |
| New TDRs | 293,079 |
| | 711,927 |
| | 624,871 |
| | 1,294,591 |
| New TDRs | 185,767 | | | 331,792 | | |
| Charge-offs | (368,758 | ) | | (406,514 | ) | | (833,516 | ) | | (956,098 | ) | Charge-offs | (289,567) | | | (464,758) | | |
| Paydowns (a) | (309,202 | ) | | (305,296 | ) | | (650,808 | ) | | (572,600 | ) | Paydowns (a) | (288,339) | | | (341,606) | | |
| Others | (14,570 | ) | | 928 |
| | (14,100 | ) | | 1,816 |
| Others | — | | | 470 | | |
| Balance — end of period | $ | 4,491,924 |
| | $ | 6,095,868 |
| | $ | 4,491,924 |
| | $ | 6,095,868 |
| |
| Balance — end of year | | Balance — end of year | $ | 3,436,753 | | | $ | 4,891,375 | | |
(a) Includes net discount accreted in interest income for the period.
For loans not classified as TDRs, the Company generally estimates an appropriate allowance for credit losses based on delinquency status, the Company’s historical loss experience, estimated values of underlying collateral, and various economic factors. Once a loan has been classified as a TDR, it is generally assessed for impairment based on the present value of expected future cash flows discounted at the loan’s original effective interest rate considering all available evidence. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. Due to this key distinction in allowance calculations, the coverage ratio is higher for TDRs in comparison to non-TDRs.
The table below presents the Company’s allowance ratio for TDR and non-TDR individually acquired retail installment contracts as of June 30, 2019 and December 31, 2018:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (Dollar amounts in thousands) |
| TDR - Unpaid principal balance | $ | 4,519,334 |
| | $ | 5,378,603 |
|
| TDR - Impairment | 1,156,303 |
| | 1,416,743 |
|
| TDR - Allowance ratio | 25.6 | % | | 26.3 | % |
| | | | |
| Non-TDR - Unpaid principal balance | $ | 24,451,977 |
| | $ | 23,054,157 |
|
| Non-TDR - Allowance | 1,961,893 |
| | 1,819,360 |
|
| Non-TDR Allowance ratio | 8.0 | % | | 7.9 | % |
| | | | |
| Total - Unpaid principal balance | $ | 28,971,311 |
| | $ | 28,432,760 |
|
| Total - Allowance | 3,118,196 |
| | 3,236,103 |
|
| Total - Allowance ratio | 10.8 | % | | 11.4 | % |
The total allowance decreased from December 31, 2018 to June 30, 2019, primarily driven by lower TDR balances and better recovery rates.
Liquidity Management, Funding and Capital Resources
Source of Funding
The Company requires a significant amount of liquidityliquidity to originate and acquire loans and leases and to service debt. The Company funds its operations through its lending relationships with 1213 third-party banks, SHUSA and through securitizations in the ABS market and flow agreements. The Company seeks to issue debt that appropriately matches the cash flows of the assets that it originates. The Company has more than $7.3$5.1 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.
During the second quarter of 2019,three months ended March 31, 2020, the Company completed on-balance sheet funding transactions totaling approximately $4.0 billion, including:
securitizations on the Company’s SDART platform for approximately $1.0 billion;
•securitizations on the Company’s DRIVE, deeper subprime platform, for approximately $1.2$1.1 billion;
private •lease securitizationsecuritizations on our SRT platform for approximately $1.2$1.1 billion; and
•private amortizing lease facilityfacilities for approximately $0.5 billion.$1.8 billion; and
Refer to Note 5 - "Debt"to these Condensed Consolidated Financial Statementsthe accompanying condensed consolidated financial statements for the details on the Company’s total debt.
Credit Facilities
Third-party Revolving Credit Facilities
Warehouse Lines
The Company has one credit facility with seveneight banks providing an aggregate commitment of $4.4$4.0 billion for the exclusive use of providing short-term liquidity needs to support Chrysler CapitalFinance lease financing. As of June 30, 2019 and DecemberMarch 31, 2018,2020 there was an outstanding balance of approximately $3.0$1.5 billion and $2.2 billion, respectively, on this facility in aggregate. The facility requires reduced Advance Rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds.
The Company has sixeight credit facilities with nineten banks providing an aggregate commitment of $5.7$7.5 billion for the exclusive use of providing short-term liquidity needs to support Core and Chrysler CapitalCCAP Loan financing. As of June 30, 2019 and DecemberMarch 31, 2018,2020 there was an outstanding balance of approximately $3.1$4.7 billion and $2.0 billion, respectively, on these facilities in aggregate. These facilities reduced Advance Rates in the event ofof delinquency, credit loss, as well as various other metrics exceeding specific thresholds.
Repurchase Agreements
The Company obtains financing through investment management or repurchase agreements whereby the Company pledges retained subordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms rangingranging up to one year. As of June 30, 2019 and DecemberMarch 31, 2018,2020 there was an outstanding balance of $426$314 million and $299 million, respectively, under these repurchase agreements.
Lines of Credit with Santander and Related Subsidiaries
Santander and certain of its subsidiaries, such as SHUSA, historically have provided, and continue to provide, the Company with significant funding support in the form of committed credit facilities. The Company’s debt with these affiliated entities consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2020 (amounts in thousands) | | | | | | | | |
| Counterparty | | Utilized Balance | | Committed Amount | | Average Outstanding Balance | | Maximum Outstanding Balance |
| Promissory Note | SHUSA | | | $ | 250,000 | | | $ | 250,000 | | | $ | 250,000 | | | $ | 250,000 | |
| Promissory Note | SHUSA | | | 250,000 | | | 250,000 | | | 250,000 | | | 250,000 | |
| Promissory Note | SHUSA | | | 250,000 | | | 250,000 | | | 250,000 | | | 250,000 | |
| Promissory Note | SHUSA | | | 250,000 | | | 250,000 | | | 250,000 | | | 250,000 | |
| Promissory Note | SHUSA | | | 300,000 | | | 300,000 | | | 300,000 | | | 300,000 | |
| Promissory Note | SHUSA | | | 400,000 | | | 400,000 | | | 400,000 | | | 400,000 | |
| Promissory Note | SHUSA | | | 400,000 | | | 400,000 | | | 400,000 | | | 400,000 | |
| Promissory Note | SHUSA | | | 500,000 | | | 500,000 | | | 500,000 | | | 500,000 | |
| Promissory Note | SHUSA | | | 500,000 | | | 500,000 | | | 500,000 | | | 500,000 | |
| Promissory Note | SHUSA | | | 500,000 | | | 500,000 | | | 500,000 | | | 500,000 | |
| Promissory Note | SHUSA | | | 650,000 | | | 650,000 | | | 650,000 | | | 650,000 | |
| Promissory Note | SHUSA | | | 650,000 | | | 650,000 | | | 650,000 | | | 650,000 | |
| Promissory Note | SHUSA | | | 750,000 | | | 750,000 | | | 750,000 | | | 750,000 | |
| Line of Credit | SHUSA | | | — | | | 500,000 | | | 184,176 | | | 485,000 | |
| Line of Credit | SHUSA | | | — | | | 2,500,000 | | | — | | | — | |
| | | $ | 5,650,000 | | | $ | 8,650,000 | | | | | |
|
| | | | | | | | | | | | | | | | | |
| | As of June 30, 2019 (amounts in thousands) |
| | Counterparty | | Utilized Balance | | Committed Amount | | Average Outstanding Balance | | Maximum Outstanding Balance |
| Promissory Note | SHUSA | | $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| Promissory Note | SHUSA | | $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| Promissory Note | SHUSA | | $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| Promissory Note | SHUSA | | $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| $ | 250,000 |
|
| Promissory Note | SHUSA | | $ | 300,000 |
|
| $ | 300,000 |
|
| $ | 193,923 |
|
| $ | 300,000 |
|
| Promissory Note | SHUSA | | $ | 400,000 |
|
| $ | 400,000 |
|
| $ | 400,000 |
|
| $ | 400,000 |
|
| Promissory Note | SHUSA | | $ | 500,000 |
|
| $ | 500,000 |
|
| $ | 500,000 |
|
| $ | 500,000 |
|
| Promissory Note | SHUSA | | $ | 500,000 |
|
| $ | 500,000 |
|
| $ | 46,961 |
|
| $ | 500,000 |
|
| Promissory Note | SHUSA | | $ | 650,000 |
|
| $ | 650,000 |
|
| $ | 650,000 |
|
| $ | 650,000 |
|
| Promissory Note | SHUSA | | $ | 650,000 |
|
| $ | 650,000 |
|
| $ | 650,000 |
|
| $ | 650,000 |
|
| Line of Credit | SHUSA | | $ | — |
|
| $ | 500,000 |
|
| $ | 109,917 |
|
| $ | 435,000 |
|
| Line of Credit | SHUSA | | $ | — |
|
| $ | 3,000,000 |
|
| $ | — |
|
| $ | — |
|
| | | | $ | 4,000,000 |
| | $ | 7,500,000 |
| |
| | |
|
| | | | | | | | | | | | | | | | | |
| | As of June 30, 2018 (amounts in thousands) |
| | Counterparty | | Utilized Balance | | Committed Amount | | Average Outstanding Balance | | Maximum Outstanding Balance |
| Line of credit | Santander-NY | | $ | — |
| | $ | 1,000,000 |
| | $ | 107,253 |
| | $ | 595,000 |
|
| Line of credit | Santander-NY | | 122,200 |
| | 750,000 |
| | 575,135 |
| | 687,900 |
|
| Line of credit | SHUSA | | 250,000 |
| | 250,000 |
| | 250,000 |
| | 250,000 |
|
| Promissory Note | SHUSA | | 250,000 |
| | 250,000 |
| | 250,000 |
| | 250,000 |
|
| Promissory Note | SHUSA | | 300,000 |
| | 300,000 |
| | 300,000 |
| | 300,000 |
|
| Promissory Note | SHUSA | | 400,000 |
| | 400,000 |
| | 400,000 |
| | 400,000 |
|
| Promissory Note | SHUSA | | 500,000 |
| | 500,000 |
| | 500,000 |
| | 500,000 |
|
| Promissory Note | SHUSA | | 650,000 |
| | 650,000 |
| | 650,000 |
| | 650,000 |
|
| Promissory Note | SHUSA | | 650,000 |
| | 650,000 |
| | 650,000 |
| | 650,000 |
|
| Line of Credit | SHUSA | | — |
| | 3,000,000 |
| | — |
| | — |
|
| | | | $ | 3,122,200 |
| | $ | 7,750,000 |
| | | | |
SHUSA provides the Company with $3.5 $3.0 billion of committed revolving credit that can be drawn on an unsecured basis. SHUSA also provides the Company with $4.0$5.7 billion of term promissory notes with maturities ranging from May 2020 to December 2023.July 2024.
Secured Structured Financings
The Company’s secured structured financings primarily consist of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act and privately issues amortizing notes. The Company has on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $26 billion. $28 billion.
Flow Agreements
In addition to the Company’s credit facilities and secured structured financings, the Company has a flow agreement in place with a third party for charged off assets. Loans and leases sold under these flow agreements are not on the Company’s balance sheet but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. The Company continues to actively seek additional flow agreements.
Off-Balance Sheet Financing
Beginning in 2017, the Company had the option to sell a contractually determined amount of eligible prime loans to Santander, through securitization platforms. As all of the notes and residual interests in the securitizations were issued to Santander, the
Company recorded these transactions as true sales of the retail installment contracts securitized, and removed the sold assets from the Company’s consolidated balance sheets. Beginning in 2018, this program has been replaced with a new program with SBNA, whereby the Company has agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchasing of retail loans, primarily from FCA dealers, all of which are serviced by the Company.
Cash Flow Comparison
The Company has historically produced positive net cash from operating activities. The Company’s investing activities primarily consist of originations, acquisitions, and collections from retail installment contracts. SC’s financing activities primarily consist of borrowing, repayments of debt, share repurchases, and payment of dividends.
| | | | Six Months Ended June 30, | | Three Months Ended March 31, | |
| | 2019 | | 2018 | | 2020 | | 2019 | |
| | (Dollar amounts in thousands) | | (Dollar amounts in thousands) | |
| Net cash provided by operating activities | $ | 2,862,369 |
| | $ | 3,512,239 |
| Net cash provided by operating activities | $ | 1,395,116 | | | $ | 1,476,283 | | |
| Net cash used in investing activities | (4,363,359 | ) | | (4,872,968 | ) | Net cash used in investing activities | (1,542,427) | | | (1,906,965) | | |
| Net cash provided by financing activities | 1,622,883 |
| | 724,120 |
| Net cash provided by financing activities | 474,816 | | | 671,123 | | |
Net Cash Provided by Operating Activities
Net cash provided by operating activities decreased by $0.6 billion remained materially unchanged from the sixthree months ended June 30, 2018March 31, 2019 to the sixthree months ended June 30, 2019, mainly due to lower origination of assets held for sale.March 31, 2020.
Net Cash Used in Investing Activities
Net cash used in investing activities decreased by $0.5 billion$365 million from the sixthree months ended June 30, 2018March 31, 2019 to the sixthree months ended June 30, 2019,March 31, 2020, primarily due to an increase of $0.7 billion$286 million in collections on finance receivables held for investment offset by increaseand a decrease of $0.2 billion for$102 million in originations of finance receivables held for investment.
Net Cash Provided by Financing Activities
Net cash provided by financing activities increaseddecreased by $0.9 billion$196 million from the sixthree months ended June 30, 2018March 31, 2019 to the sixthree months ended June 30, 2019,March 31, 2020, primarily duerelated to the increase of proceeds from notes payable.tender offer program which expired on February 27, 2020.
Contingencies and Off-Balance Sheet Arrangements
For information regarding the Company’s contingencies and off-balance sheet arrangements, refer to Note 6 - "Variable Interest Entities" and Note 10 - "Commitments and ContingenciesContingencies" in the accompanying condensed consolidated financial statements.
Contractual Obligations
The Company leases its headquarters in Dallas, Texas, its servicing centers in Texas, Colorado, Arizona, and Puerto Rico, and an operations facilities in California, Texas and Colorado under non-cancelable operating leases that expire at various dates through 2027. The Company also has various debt obligations entered into in the normal course of business as a source of funds.
The following table summarizes the Company’s contractual obligations as of June 30, 2019:March 31, 2020:
| | | | Less than 1 year | | 1-3
years | | 3-5
years | | More than
5 years | | Total | | Less than 1 year | | 1-3
years | | 3-5
years | | More than
5 years | | Total |
| | (In thousands) | | (In thousands) | |
| Operating lease obligations | $ | 8,382 |
| | $ | 29,917 |
| | $ | 25,233 |
| | $ | 32,391 |
| | $ | 95,923 |
| Operating lease obligations | $ | 12,579 | | | $ | 25,911 | | | $ | 25,456 | | | $ | 19,690 | | | $ | 83,636 | |
| Notes payable - credit facilities and related party | 425,695 |
| | 9,338,469 |
| | 750,000 |
| | — |
| | 10,514,164 |
| Notes payable - credit facilities and related party | 2,386,255 | | | 8,285,424 | | | 1,500,000 | | | — | | | 12,171,679 | |
| Notes payable - secured structured financings (a) | 431,135 |
| | 7,434,332 |
| | 12,636,638 |
| | 5,811,270 |
| | 26,313,375 |
| Notes payable - secured structured financings (a) | 225,665 | | | 9,047,623 | | | 11,198,129 | | | 7,637,927 | | | 28,109,344 | |
| Contractual interest on debt | 1,138,671 |
| | 1,076,721 |
| | 211,103 |
| | 26,111 |
| | 2,452,606 |
| Contractual interest on debt | 1,036,664 | | | 1,033,547 | | | 252,475 | | | 90,209 | | | 2,412,895 | |
| Total | $ | 2,003,883 |
|
| $ | 17,879,439 |
|
| $ | 13,622,974 |
|
| $ | 5,869,772 |
|
| $ | 39,376,068 |
| Total | $ | 3,661,163 | | | $ | 18,392,505 | | | $ | 12,976,060 | | | $ | 7,747,826 | | | $ | 42,777,554 | |
(a)Adjusted for unamortized costs of $65 million.$66 million.
Risk Management Framework
The Company’s risk management framework is overseen by its Board, the RC, its management committees, its executive management team, an independent risk management function, an internal audit function and all of its associates. The RC, along with the Company’s full Board, is responsible for establishing the governance over the risk management process, providing oversight in managing the aggregate risk position and reporting on the comprehensive portfolio of risk categories and the potential impact these risks can have on the Company’s risk profile. The Company’s primary risks include, but are not limited to, credit risk, market risk, liquidity risk, operational risk and model risk. For more information regarding the Company’s risk management framework, please refer to the Risk Management Framework section of the Company’s 20182019 Annual Report on Form 10-K.
Credit Risk
Company applies qualitative framework to exercise judgment about matters that are inherently uncertain and that are not considered by the quantitative framework. These adjustments are documented and reviewed through the Company’s risk management processes. Furthermore, management reviews, updates, and validates its process and loss assumptions on a periodic basis. This process involves an analysis of data integrity, review of loss and credit trends, a retrospective evaluation of actual loss information to loss forecasts, and other analyses.
ACL levels are collectively reviewed for adequacy and approved quarterly. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Credit Losses Committee.The risk inherentACL levels are approved by the board level committees quarterly.
Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ACL and reserve for unfunded lending commitments in the Company’s loan and lease portfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide factors such as changes in employment. The Company manages this risk through its underwriting, pricing and credit approval guidelines and servicing policies and practices, as well as geographic and other concentration limits.Consolidated Balance Sheets.
The Company’s automated originations process is intended to reflect a disciplined approach to credit risk management. The Company’s robust historical data on both organically originated and acquired loans is used by Company to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary loss forecasting score using information such as FICO®, debt-to-income ratio, loan-to-value ratio, and more than 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The Company continuously maintains and adjusts the pricing in each tier to reflect market and risk trends. In addition to the automated process, the Company maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers. The Company generally tightens its underwriting requirements in times of greater economic uncertainty to compete in the market at loss and approval rates acceptable for meeting the Company’s required returns. The Company’s underwriting policy has also been adjusted to meet the requirements of the Company’s contracts such as the Chrysler Agreement. In both cases, the Company has accomplished this by adjusting risk-based pricing, the material components of which include interest rate, down payment, and loan-to-value.
The Company monitors early payment defaults and other potential indicators of dealer or customer fraud and uses the monitoring results to identify dealers who will be subject to more extensive requirements when presenting customer applications, as well as dealers with whom the Company will not do business at all.
Market Risk
Interest Rate Risk
The Company measures and monitors interest rate risk on at least a monthly basis. The Company borrows money from a
variety of market participants to provide loans and leases to the Company’s customers. The Company’s gross interest rate
spread, which is the difference between the income earned through the interest and finance charges on the Company’s finance
receivables and lease contracts and the interest paid on the Company’s funding, will be negatively affected if the expense
incurred on the Company’s borrowings increases at a faster pace than the income generated by the Company’s assets.
The Company’s Interest Rate Risk policy isCompany has policies in place designed to measure, monitor and manage the potential volatility in earnings stemming from changes in interest rates. The Company generates finance receivables which are predominantly fixed rate and
borrow with a mix of fixed and variable rate funding. To the extent that the Company’s asset and liability re-pricing characteristics are not effectively matched, the Company may utilize interest rate derivatives, such as interest rate swap agreements, to mitigatemitigate against interest rate risk. As of June 30, 2019,March 31, 2020, the notional value of the Company’s interest rate swap agreements was $6.3$2.9 billion. The Company also enters into Interest Rate Cap agreements as required under certain lending agreements. In order to mitigate any interest rate risk assumed in the Cap agreement required under the lending agreement, the Company may enter into a second interest rate cap (Back-to-Back). As of June 30, 2019March 31, 2020 the notional value of the Company’s interest rate cap agreements was $18.4$20.2 billion, under which, all notional was executed Back-to-Back.
The Company monitors its interest rate exposure by conducting interest rate sensitivity analysis. For purposes of reflecting a
possible impact to earnings, the twelve-month net interest income impact of an instantaneous 100 basis point parallel shift in
prevailing interest rates is measured. As of June 30, 2019,March 31, 2020, the twelve-month impact of a 100 basis point parallel increase
in the interest rate curve would decrease the Company’s net interest income by $35$69 million. In addition to the sensitivity
analysis on net interest income, the Company also measures Market Value of Equity (MVE) to view the interest rate risk
position. MVE measures the change in value of Balance Sheet instruments in response to an instantaneous 100 basis point
parallel increase, including and beyond the net interest income twelve-month horizon. As of June 30, 2019,March 31, 2020, the impact of
a 100 basis point parallel increase in the interest rate curve would decrease the Company’s MVE by $135$151 million.
Collateral Risk
The Company’s lease portfolio presents an inherent risk that residual values recognized upon lease termination will be lower
than those used to price the contracts at inception. Although the Company has elected not to purchase residual value insurance
at the present time, the Company’s residual risk is somewhat mitigated by the residual risk-sharing agreement with FCA. Under
the agreement, the Company is responsible for incurring the first portion of any residual value gains or losses up to the first 8%.
The Company and FCA then equally share the next 4% of any residual value gains or losses (i.e., those gains or losses that
exceed 8% but are less than 12%). Finally, FCA is responsible for residual value gains or losses over 12%, capped at a certain
limit, after which the Company incurs any remaining gains or losses. From the inception of the agreement with FCA through
the secondfirst quarter of 2019, approximately2020, approximately 89% of full term leases have not exceeded the first and second portions of any residual
losses under the agreement. The Company also utilizes industry data, including the ALG benchmark for residual values, and
employ a team of individuals experienced in forecasting residual values.
Similarly, lower used vehicle prices also reduce the amount that can be recovered when remarketing repossessed vehicles that
serve as collateral underlying loans. The Company manages this risk through loan-to-value limits on originations, monitoring
of new and used vehicle values using standard industry guides, and active, targeted management of the repossession process.
The Company does not currently have material exposure to currency fluctuations or inflation.
Liquidity Risk
The Company views liquidity as integral to other key elements such as capital adequacy, asset quality and profitability. The
Company’s primary liquidity risk relates to the ability to finance new originations through the Bank and ABS securitization
markets. The Company cannot predict how the COVID-19 outbreak and the legal and regulatory responses to the COVID-19 outbreak and related economic disruptions will affect businesses, including liquidity or the ability to access the capital markets. If access to funding is reduced or if the costs to obtain such funding significantly increases, there may be a material impact to business and financial condition.The Company has a robust liquidity policy that is intended to manage this risk. The liquidity risk policy establishes the following guidelines:
•that the Company maintain at leastleast eight external credit providers (as of June 30, 2019,March 31, 2020, it had 12) thirteen);
•that the Company relies on Santander and affiliates for no more than 30%30% of its funding (as of June 30, 2019,March 31, 2020, Santander and affiliates provided 11%14% of its funding);
•that no single lender’s commitment should comprise more thanthan 33% of the overall committed external lines (as of June 30, 2019,March 31, 2020, the highest single lender’s commitment was 23% (not24% (not including repo)); and
•that no more thanthan 35% and 65% ofof the Company’s warehouse facilities mature in the next six months and twelve months respectively (as of June 30, 2019, none March 31, 2020, one of the Company’s warehouse facilities isare scheduled to mature in the next six or twelve months).
The Company’s liquidity risk policy also requires that the Company’s Asset Liability Committee monitor many indicators, both
market-wide and company-specific, to determine if action may be necessary to maintain the Company’s liquidity position. The
Company’s liquidity management tools include daily, monthly and twelve-month rolling cash requirements forecasts, long term
strategic planning forecasts, monthly funding usage and availability reports, daily sources and uses reporting, structural
liquidity risk exercises, key risk indicators, and the establishment of liquidity contingency plans. The Company also performs
monthly stress tests in which it forecasts the impact of various negative scenarios (alone and in combination), including
reduced credit availability, higher funding costs, lower Advance Rates, lending covenant breaches, lower dealer discount rates,
and higher credit losses.
The Company generally seeks funding from the most efficient and cost effective source of liquidity from the ABS markets,
third-party facilities, and Santander. Additionally, the Company can reduce originations to significantly lower levels, if
necessary, during times of limited liquidity.
The Company had established a qualified like-kind exchange program to defer tax liability on gains on sale of vehicle assets at
lease termination. If the Company does not meet the safe harbor requirements of IRS Revenue Procedure 2003-39, the
Company may be subject to large, unexpected tax liabilities, thereby generating immediate liquidity needs. The Company
believes that its compliance monitoring policies and procedures are adequate to enable the Company to remain in compliance
with the program requirements. The Tax Cuts and Jobs Act permanently eliminated the ability to exchange personal property
after January 1, 2018, which resulted in the like-kind exchange program being discontinued in 2018.
Operational Risk
The Company is exposed to operational risk loss arising from failures in the execution of our business activities. These relate to
failures arising from inadequate or failed processes, failures in its people or systems, or from external events. The Company’s
operational risk management program Third Party Risk Management, Business Continuity Management, Information Risk Management, Information Risk
Management, Fraud Risk Management, and Operational Risk Management, with key program elements covering Loss Event, Issue Management, Risk Reporting and Monitoring, and Risk Control Self-Assessment (RCSA).
To mitigate operational risk, the Company maintains an extensive compliance, internal control, and monitoring framework, which includes the gathering of corporate control performance threshold indicators, Sarbanes-Oxley testing, monthly quality control tests, ongoing compliance monitoring with applicable regulations, internal control documentation and review of processes, and internal audits. The Company also utilizes internal and external legal counsel for expertise when needed. Upon hire and annually, all associates receive comprehensive mandatory regulatory compliance training. In addition, the Board receives annual regulatory and compliance training. The Company uses industry-leading call mining that assist the Company in analyzing potential breaches of regulatory requirements and customer service. The Company’s call mining software analyzes all customer service calls, converting speech to text, and mining for specific words and phrases that may indicate inappropriate comments by a representative. The software also detects escalated voice volume, enabling a supervisor to intervene if necessary. This tool is intended to enable the Company to effectively manage and identify training opportunities for associates, as well as track and resolve customer complaints through a robust quality assurance program.
Model Risk
The Company mitigates model risk through a robust model validation process, which includes committee governance and a
series of tests and controls. The Company utilizes SHUSA’s Model Risk Management group for all model validation to verify
models are performing as expected and in line with their design objectives and business uses.
Critical Accounting Estimates
Accounting policies are integral to understanding the Company’s Management’s Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company reviews its accounting policies, assumptions, estimates and judgments to ensure that its financial statements are presented fairly and in accordance with U.S. GAAP.There have been no material changes (except as disclosed below) in the Company’s critical accounting estimates from those disclosed in Item 7 of the 20182019 Annual Report on Form 10-K. The change is as a result of the Company's adoption of CECL standard, on January 1, 2020. Refer to footnote 1 "Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices", and footnote 4 " Credit Loss Allowance and Credit Quality" in the accompanying condensed consolidated financial statements and Part II, Item 2 - "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Credit Quality" for a detailed discussion around accounting policy, estimation process and assumptions used in ACL.
Recent Accounting Pronouncements
Information concerning the Company’s implementation and impact of new accounting standards issued by the Financial
Accounting Standards Board (FASB) is discussed in Note 1- Recently Issued Accounting Pronouncements, in the
accompanying condensed consolidated financial statements.
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ItemITEM 3. | Quantitative and Qualitative Disclosures About Market RiskQUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Incorporated by reference from Part I, Item 2 - “Management’s“Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Risk—Risk Management Framework” above.
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Item 4. | Controls and Procedures |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our CEO and CFO, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. March 31, 2020 (the “Evaluation Date”).Based on suchthat evaluation, our CEO and CFO have concluded that as of June 30, 2019, we did not maintain effectivethe Evaluation Date, our disclosure controls and procedures because of the material weakness in internal control over financial reporting described below. In light of this material weakness, management completed additional procedures and analysis to validate the accuracy and completeness of the reported financial results. In addition, management engaged the Audit Committee directly, in detail, to discuss the procedures and analysis performedprocedures: (a) are effective to ensure that information required to be disclosed by the reliability ofCompany in the Company’s financial reporting. Notwithstanding this material weakness, based on additional analyses and other procedures performed, management concluded that the financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.
A material weakness (as defined in Rule 12b-2reports filed or submitted under the Exchange Act)Act is a deficiency, or combination of deficiencies,recorded, processed, summarized, and reported within the time periods specified in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.
These deficiencies inthe SEC’s rules and forms; and (b) include controls could result in a misstatement of any account balance or disclosure that in turn, would result in a material misstatement of the annual or interim consolidated financial statements that would not be prevented or detected.
Control Environment, Risk Assessment, Control Activities and Monitoring
We did not maintain effective internal control over financial reporting related to our control environment, risk assessment, control activities and monitoring as follows:
Management did not effectively execute a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting.
The tone at the top was insufficientprocedures designed to ensure there were adequate mechanismsthat information required to be disclosed by
the Company in such reports is accumulated and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities and to ensure corrective actions were appropriately prioritized and implemented in a timely manner.
There was not adequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conformcommunicated to the Company’s policies and GAAP.
There was not an adequate assessment of changes in risks by management, that could significantly impact internal control over financial reporting or an adequate determination and prioritization of how those risks should be managed.
There was not adequate management oversight and identification of models, spreadsheets and completeness and accuracy of data material to financial reporting.
There were insufficiently documented Company accounting policies and insufficiently detailed Company procedures to put policies into effective action.
There was a lack of appropriate tone at the top in establishing an effective control owner risk and controls self-assessment process which contributed to a lack of clarity about ownership of risk assessments and control design and effectiveness.
There was insufficient governance, oversight and monitoring of the credit loss allowance and accretion processes and a lack of defined roles and responsibilities in monitoring functions.
This material weakness resulted in the revision of the Company’s consolidated financial statements for the year ended December 31, 2017, as well as the unaudited condensed consolidated financial statements for the quarters ended June 30, 2018, March 31, 2018, September 30, 2017, June 30, 2017 and March 31, 2017.
Remediation Status of Reported Material Weakness
The Company is currently working to remediate the material weakness described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weakness. The Company is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with GAAP.
To address the material weakness, noted above, the Company has taken the following measures:
Appointed an additional independent director to the Audit Committee of the Board with extensive experience as a financial expert in our industry to provide further experience on the committee.
Established regular working group meetings, with appropriate oversight by management of both the Company and its parent to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.
Hired a Chief Accounting Officer and other key personnel with significant public-company financial reporting experienceCEO and the requisite skillsets in areas importantCFO, as appropriate, to financial reporting.allow timely decisions regarding required disclosure.
Developed and implemented a plan to enhance its risk assessment processes, control procedures and documentation.
Reallocated additional Company resources to improve the oversight for certain financial models.
Increased accounting resources with qualified permanent resources to ensure sufficient staffing to conduct enhanced financial reporting procedures and to continue the remediation efforts.
Improved management documentation, review controls and oversight of accounting and financial reporting activities to ensure accounting practices conform to the Company’s policies and GAAP.
Increased accounting participation in critical governance activities to ensure an adequate assessment of risk activities which may impact financial reporting or the related internal controls.
Completed a comprehensive review and update of all accounting policies, process descriptions and control activities.
Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.
Conducted internal training courses over Sarbanes-Oxley regulations and the Company’s internal control over financial reporting program for Company personnel that take part and assist in the execution of the program.
While progress has been made to remediate this material weakness, as of June 30, 2019, we are still in the process of testing the operating effectiveness of the new and enhanced controls. We believe our actions will be effective in remediating the material weakness, and we continue to devote significant time and attention to these efforts. However, the material weakness will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weakness was not remediated as of June 30, 2019.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation required by RuleRules 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the quarter ended June 30, 2019March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluatingresponse to the disclosure controls and procedures, management recognizesCOVID-19 outbreak, certain Company employees began working from home in March 2020. Management has taken measures to ensure that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desiredCompany’s internal control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgmentover financial reporting has not been adversely impacted in evaluating the benefits of possible controls and procedures relative to their costs.
a material way by this change.
PART II: OTHER INFORMATION
Reference should be made to Note 10 to the accompanying condensed consolidated financial statements, which is incorporated herein by reference, for information regarding legal proceedingsproceedings in which the Company is involved, which supplements the discussion of legal proceedings set forth inin Note 11 toto the accompanying consolidated financial statements of the 20182019 Annual Report on Form 10-K.
The Company is subject to a number of risks potentially impacting its business, financial condition, results of operations and cash flow that areincluding those set forth under Part I, Item IA,1A, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, 2018. The information presented below should be read in conjunction with2019. In addition to the risk factors disclosed in that Form 10-K.10-K, the Company is subject to (1) risks related to the new credit reserving framework set forth below, and (2) risks related to the COVID-19 outbreak, as noted in the Form 8-K filed with the SEC on April 10, 2020, which is incorporated herein by reference.
Uncertainty regarding LIBOROur adoption of the new standard on the measurement of credit losses on financial instruments and its resulting impact on our allowance for credit losses and impairments may adversely affectprove to be insufficient to absorb expected lifetime losses in our businessloan portfolio.
The UK Financial Conduct Authority,CECL standard introduced a new credit reserving framework, which regulates LIBOR, announcedreplaces the incurred loss impairment framework in July 2017current GAAP with one that reflects expected credit losses over the full expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for purchased credit deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the current OTTI framework.
The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost and net investment in leases.Results for reporting periods beginning after January 1, 2020 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previous applicable GAAP.
Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts and other relevant factors in accordance with US GAAP and based on regulatory requirements. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.Future reserves may be different due to changes in macroeconomic conditions. Credit loss expenses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Company’s HFI loan portfolios.
The process for determining our allowance for credit losses is complex, and we may from time to time make changes to our process for determining our allowance for credit losses. In addition, regulatory agencies periodically review our allowance for credit losses, as well as our methodology for calculating our allowance for credit losses and may require an increase in the provision for loan losses or the recognition of additional loan charge-offs, based on judgments different than those of management. Changes that we make to enhance our process for determining our allowance for credit losses may lead to an increase in our allowance for credit losses. Any increase in our allowance for credit losses will no longer persuaderesult in a decrease in net income and capital, and may have a material adverse effect on us. Material changes to our methodology for determining our allowance for credit losses could result in the need to restate our financial statements or require banksfines, penalties, potential regulatory action and damage to submit rates for the calculationour reputation.
The impact of LIBOR after 2021. This announcementCOVID-19 are not fully known at this time and while management has resulted in uncertainty aboutconsidered the future impact in our projections of LIBORACL, actual losses may be higher.Management has factored the uncertainty and other rates used as interest rate “benchmarks,”management’s potential responses (including the impact of defaults and suggests thatextension requests) into the continuationfuture projections of LIBOR on the current basis will not be guaranteed after 2021,expected credit losses and that LIBOR could be discontinued or modified by 2021.
Several international working groups are focused on transition plansreasonable and alternative contract language seeking to address potential market disruption that could arise from the replacement of LIBOR with a new reference rate. For example, in the U.S., the Alternative Reference Rates Committee, a group convened by the Federal Reserve Board and the Federal Reserve Bank of New York and comprised of private sector entities, banking regulators and other financial regulators, including the SEC, has identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative for LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on observable U.S. Treasury-backed repurchase transactions. In addition, ISDA is working to develop alternative contract language applicable in the event of LIBOR’s discontinuation that could apply to derivatives entered into on ISDA documentation. Separately, the SEC issued a statement in July 2019 encouraging market participants to focus on managing the transition from LIBOR prior to 2021 to avoid business and market disruptions, including incorporating fallback language in contracts in the event LIBOR is unavailable and proactive negotiations with counterparties to existing contracts that utilize LIBOR as a reference rate.
While we have begun the process of identifying existing contracts that extend past 2021 to determine their exposure to LIBOR, theresupportable forecast periods. There can be no assurance that wethe impact of COVID-19 will improve in the near term and other market participants will be adequately prepared for an actual discontinuationany negative impact could in turn materially and adversely affect our business, financial condition and results of LIBOR,operation.
On a quarterly basis, macroeconomic scenarios with various different assumptions surrounding economic growth or ofdecline in the timing of the adoptioneconomy are reviewed and degree of integration of alternative reference rates in financial markets relevant to us.approved by management’s Committee. If LIBOR ceasesThe selection of scenarios and their associated weightings are critical inputs to exist, or if new methodsdetermining management’s view of calculating LIBOR are established, interest rates on our loans, deposits, derivativesfuture economic conditions to support a reasonable and other financial instruments tied to LIBOR, as well as revenuesupportable forecast period and expenses associated with those financial instruments, may be adversely affected, and financial markets relevant to usinclude significant assumptions of future economic performance, which could be disrupted.differ materially from actual outcomes.
Even if financial instruments are transitioned to alternative reference rates successfully, the new reference rates are likely to differ from the previous reference rates, and the value and return on those instruments could be adversely impacted. We could also be subject to increased costs due to paying higher interest rates on our existing financial instruments. We could incur legal risks in the event of such changes, as renegotiation and changes to documentation for new and existing transactions may be required, especially if parties to an instrument cannot agree on how to effect the transition. We could also incur further operational risks due to the potential need to adapt information technology systems, trade reporting infrastructure, and operational processes and controls, including models and hedging strategies.
In addition, it is possible that LIBOR quotes will become unavailable prior to 2021. This could result, for example, if a sufficient number of banks decline to make submissions to the LIBOR administrator. In that scenario, risks associated with the transition away from LIBOR would be accelerated for us and the rest of the financial industry.
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
There were no unregistered sales of the Company’s common stock during the period covered by this Quarterly Report on Form 10-Q.
Share RepurchasesDuring the three months ended March 31, 2020, the Company purchased a total of 18,361,168 shares of its common stock through a tender offer and Treasury Stockother share repurchase program at a total cost of approximately $467 million, excluding commission (see below for details).
The following table presents information regarding our repurchases of the Company’s common stock as part of publicly announced plans or programs during the quarter ended JuneMarch 31, 2020:
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| Period | Total Number of Shares Purchased | | Average Price paid per Share | | Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs | | Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| | | | | | | $ | 866,849 | |
| January 1 - January 31 | — | | | $ | — | | | — | | | 866,849 | |
| February 1 - February 29 | — | | | — | | | — | | | 866,849 | |
| March 1 - March 31 (a)(b) | 18,361,168 | | | $ | 25.44 | | | 18,361,168 | | | 399,741 | |
| Total | 18,361,168 | | | $ | 25.44 | | | 18,361,168 | | | | |
(a) On January 30, 2019: 2020, the Company commenced a modified Dutch Auction tender offer to purchase shares of its common stock, at a range of between $23 and $26 per share, or such lesser number of shares of its common stock as are properly tendered and not properly withdrawn by the seller, in cash. The tender offer expired on February 27, 2020. On March 3, 2020, the Company announced the final results of its “modified Dutch Auction” tender offer, which commenced on January 30, 2020. The Company accepted for purchase 17,514,707 shares of its common stock, $0.01 par value per share, at a price of $26 per share, for an aggregate cost of approximately $455 million, excluding fees and expenses related to the tender offer. These shares represent approximately 5.2 percent of the shares outstanding.
(b) During the three months ended March 31, 2020, the Company purchased 846,461 shares of its common stock under its share repurchase program at a cost of approximately $12 million, excluding commissions. |
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| Period | Total Number of Shares Purchased | | Average Price paid per Share | | Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs |
| April 1-April 31 | — |
| | $ | — |
| | $ | 400,000 |
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| May 1-May 31 | 365,055 |
| | 22.79 |
| | 391,680 |
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| June 1-June 30 | 3,384,637 |
| | 23.19 |
| | 313,174 |
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| Total | 3,749,692 |
| | $ | 23.16 |
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Refer to Note 15 of the accompanying condensed consolidated financial statements for additional details on share repurchases.
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| Item 3. | Defaults upon Senior Securities |
None.
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| Item 4. | Mine Safety Disclosures |
Not applicable.
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
(Amounts presented as actuals)
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the Exchange Act)“Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to Santander UKthe Group and certain other affiliates of Santander (collectively, the Group).its affiliates. During the period covered by this report:
•Santander UK holds accounts for two customers, with the first customer holding one GBP Savings Account and one GBP Current Account, and the second customer holding one GBP Savings Account. Both customers, who are resident in the UK, are currently designated by the US under the Specially Designated Global Terrorist (SDGT) sanctions programme. Revenues and profits generated by Santander UK on these accounts in the first halfquarter of 20192020 were negligible relative to the overall profits of Santander.Santander UK.
•Santander UK holds two frozen current accounts for two U.K.UK nationals who are designated by the U.S.US under the SDGT sanctions program.programme. The accounts held by each customer have been frozen since their UK designation and have remained frozen throughthroughout the first halfquarter of 2019.2020. These accounts are frozen in order to comply with Articles 2, 3 and 7 of Council Regulation (EC) No 881/2002 imposing certain specific restrictive measures directed against certain persons and entities associated with the Al-Qaeda network, by virtue of Commission Implementing Regulation (EU) 2015/1815. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the first halfquarter of 2019.2020.
•The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations -– either under tender documents or under contracting agreements -– of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the first halfquarter of 2019,2020 which were negligible relative to the overall revenues and profits of Santander.Banco Santander, S.A. The Group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
The following exhibits are included herein:
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10.2 | | |
| 31.1* | | |
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| 32.1* | | |
| 32.2* | | |
| 101.INS* | |
Inline XBRL Instance Document - this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL Document |
| 101.SCH* | |
Inline XBRL Taxonomy Extension Schema |
| 101.CAL* | |
Inline XBRL Taxonomy Extension Calculation Linkbase |
| 101.DEF* | |
Inline XBRL Taxonomy Extension Definition Linkbase |
| 101.LAB* | |
Inline XBRL Taxonomy Extension Label Linkbase |
| 101.PRE* | |
Inline XBRL Taxonomy Extension Presentation Linkbase |
| 104* | | Cover page formatted as Inline XBRL and contained in Exhibit 101 |
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| * | Filed herewith. |
| # | Indicates management contract or compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | Santander Consumer USA Holdings Inc. (Registrant) |
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| By: | | /s/ Scott PowellMahesh Aditya |
| | Name: Scott PowellMahesh Aditya |
| | Title: President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
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| Signature | | Title | | Date |
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Signature/s/Mahesh Aditya | | Title | | Date |
/s/ Scott Powell
| | President and Chief Executive Officer | | July 31, 2019May 1, 2020 |
Scott PowellMahesh Aditya | | (Principal Executive Officer) | | |
/s/ Juan Carlos Alvarez de SotoFahmi Karam | | Chief Financial Officer | | July 31, 2019May 1, 2020 |
Juan Carlos Alvarez de SotoFahmi Karam | | (Principal Financial and Accounting Officer) | | |
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