SANTANDER CONSUMER USA HOLDINGS INC. This Quarterly Report on Form 10-Q should be read in conjunction with the 2019 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 at 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 theSEC , 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 theSEC and other information may also be accessed at theSEC's website at www.sec.gov.
Background and Overview
Santander Consumer USA Holdings Inc. was formed in 2013 as a corporation in the state ofDelaware and is the holding company forSantander 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 ofMarch 31, 2020 , approximately 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. CCAP continues to be a focal point of the Company's strategy. In 2019, the Company entered into an Amendment to the Chrysler Agreement withFCA , 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 endedMarch 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 withFCA to continue to strengthen its relationship and create value within the CCAP program. During the three months endedMarch 31, 2020 , the Company originated$2.6 billion in CCAP loans which represented 53% of total retail installment contract originations (unpaid principal balance), as well as$2.0 billion in CCAP leases. Additionally, substantially all of the leases originated by the Company during the three months endedMarch 31, 2020 were under the Chrysler Agreement. 49 -------------------------------------------------------------------------------- Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Recent Developments and Other Factors AffectingThe 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 well as its future operational and financial planning. Economic and Business Environment Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Recent Developments and Other Factors AffectingThe 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 well as its future operational and financial planning. 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 the accompanying condensed consolidated financial statements for the details on the Company's retail installment contracts by state concentration. Regulatory Matters TheU.S. lending industry is highly regulated under variousU.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, theCFPB , theFTC , 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, theEuropean Central Bank , and theFederal 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 2019 Annual Report on Form 10-K and this Form 10Q for the three months endedMarch 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:
•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.
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). Recent Developments and Other Factors AffectingThe 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 determine with certainty the ultimate impact on our results of operations or whether other currently unanticipated consequences of the outbreak are reasonably likely to materially affect our results of operations; however, certain adverse effects have already manifest themselves or are probable. The following 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 scenarios 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 performance of our auto loan and auto 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 51 --------------------------------------------------------------------------------
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 withFCA to launch new incentive programs, including, first payment deferred 90 days on selectFCA models and 0% APR for 84 months on select 2019/2020FCA 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 theU.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 theFederal Reserve's benchmark interest rate to near zero inMarch 2020 . Further, the Company expects that theFederal 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 ofMarch 2020 . The Company also renewed an existing$1.25 billion revolving warehouse line of credit inMarch 2020 . Subsequent to the quarter end, the Company executed an ABS transaction of approximately$1 billion inApril 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, including the potential for impairment. The analysis did not support any impairment of these assets, includingGoodwill , 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 COVID-19 on our business, financial condition, liquidity and results of operations. Our initiatives may negatively impact our revenue and other 52 --------------------------------------------------------------------------------
results of operations in the near term and, if not effective in mitigating the effect of COVID-19 on our customers, may adversely affect our business and results of operations materially over a longer period of time.
Volume
The Company's originations of loans and leases, including revolving loans,
average APR, and dealer discount (net of dealer participation) for the three
months ended
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
Total originations (excluding SBNA Originations Program) (c)
(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 endedMarch 31, 2020 and 2019, respectively. (b) Included in the total origination volume is$21 million and$24 million for the three months endedMarch 31, 2020 , and 2019, respectively, related to newly opened accounts. (c) There were no asset sales during the three months endedMarch 31, 2020 and 2019. Total auto originations (excluding SBNA Origination Program) decreased$0.1 billion , or 2.1%, from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 , since the Company has initiated the SBNA originations program as described below. The company'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. CCAP volume and penetration rates are influenced by strategies implemented byFCA 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 fromFCA dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA's behalf. During the three months endedMarch 31, 2020 and 2019 the Company facilitated the purchase of$1.1 billion and$1.0 billion of retail installment contacts, respectively.
The Company's originations of retail installment contracts and leases by vehicle
type during the three months ended
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Three Months Ended
March 31, 2020 March 31, 2019
(Dollar amounts in thousands)
Retail installment contracts
Car $ 1,229,615 32.0 % $ 1,555,114 38.6 %
Truck and utility 2,425,512 63.0 % 2,322,091 57.7 %
Van and other (a) 191,099 5.0 % 149,122 3.7 %
$ 3,846,226 100.0 %
Leased vehicles Car$ 70,152 3.5 %$ 106,502 5.4 % Truck and utility 1,899,568 94.0 % 1,802,755 91.8 % Van and other (a) 51,001 2.5 % 54,323 2.8 %$ 2,020,721
100.0 %
Total originations by vehicle type Car$ 1,299,767 22.2 %$ 1,661,616 27.7 % Truck and utility 4,325,080 73.7 % 4,124,846 68.9 % Van and other (a) 242,100 4.1 % 203,445 3.4 %$ 5,866,947 100.0 %$ 5,989,907 100.0 %
(a) Other primarily consists of commercial vehicles.
The Company's portfolio of retail installment contracts held for investment and leases by vehicle type as ofMarch 31, 2020 andDecember 31, 2019 are as follows: March 31, 2020 December 31, 2019 (Dollar amounts in thousands) Retail installment contracts Car$ 11,864,775 38.6 %$ 12,286,182 39.9 % Truck and utility 17,587,709 57.2 % 17,238,406 56.0 % Van and other (a) 1,288,660 4.2 % 1,251,450 4.1 %$ 30,741,144 100.0 %$ 30,776,038 100.0 % Leased vehicles Car$ 1,106,266 6.2 %$ 1,237,803 7.1 % Truck and utility 16,202,518 90.9 % 15,795,594 89.8 % Van and other (a) 508,849 2.9 % 529,385 3.1 %$ 17,817,633 100.0 %$ 17,562,782 100.0 % Total by vehicle type Car$ 12,971,041 26.7 %$ 13,523,985 28.0 % Truck and utility 33,790,227 69.6 % 33,034,000 68.3 % Van and other (a) 1,797,509 3.7 % 1,780,835 3.7 %$ 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 net discount of the Company's held for investment portfolio as ofMarch 31, 2020 andDecember 31, 2019 are as follows: 54 --------------------------------------------------------------------------------
March 31, 2020 December 31, 2019
(Dollar amounts in thousands)
Retail installment contracts $ 30,741,144 $ 30,776,038
Average APR 15.8 % 16.1 %
Discount 0.1 % 0.3 %
Receivables from dealers $ 12,496 $ 12,668
Average APR 4.0 % 4.0 %
Leased vehicles $ 17,817,633 $ 17,562,782
Finance leases $ 27,710 $ 27,584
The Company records interest income from retail installment contracts 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 at a discount.
The Company amortizes discounts, subvention payments from manufacturers, and
origination costs as adjustments to income from 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 5.0% to 11.0% as of
March 31, 2020 , and 5.4% to 11.0% as of 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.
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 purchases pools of receivables and
had significant volumes of these purchases during the credit crisis. While the
Company continues to pursue such opportunities when
available, during the three months ended March 31, 2020 , the Company did not
acquire any vehicle 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.
However, during the three months ended March 31, 2020 and 2019 the Company did
recognize certain retail installment contracts with an unpaid principal balance
of $76,878 and $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 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. 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 records 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.
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Selected Financial Data
Three Months Ended
March 31, 2020 March 31, 2019
(Dollar amounts in thousands, except per
Income Statement Data 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
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Three Months Ended
March 31, 2020 March 31, 2019
Other Information
(Dollar amounts in thousands)
Charge-offs, net of recoveries, on retail installment contracts
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 %
(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
an amortized cost 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 finance leases.
(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
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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 Dividends 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 months endedMarch 31, 2020 has not been disclosed since the earnings per share for the three months endedMarch 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:
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 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.
58
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Three Months Ended
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
2 %
Income from retail installment contracts increased
Income from purchased receivables - credit deteriorated portfolios decreased$1 million , or 44%, from the first quarter of 2019 to the 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 decreased$2 million , or 3%, from the first quarter of 2019 to the first quarter of 2020, primarily due to a 4% decrease in average outstanding balance of company's portfolio. Leased Vehicle Income and Expense Three Months Ended March 31, Increase (Decrease) 2020 2019 Amount Percent (Dollar amounts in thousands) Leased vehicle income$ 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) % Leased vehicle income, net decreased in the first quarter of 2020 as compared to the first quarter of 2019. This change was primarily due to depreciation on a larger lease portfolio and a decrease in 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) % Total Interest expense decreased$6 million , or 2%, from the first quarter of 2019 to the first quarter of 2020 primarily due to lower interest rate environment partially offset by an increase in average outstanding debt balance by 13%. Credit Loss Expense Three Months Ended March 31, Increase (Decrease) 2020 2019 Amount Percent (Dollar amounts in thousands) Credit loss expense$ 907,887 $ 550,879 $ 357,008 65 % 59
-------------------------------------------------------------------------------- Credit loss expense increased$357 million , or 65%, from the first quarter of 2019 to the first quarter of 2020. The change is primarily driven by the adoption of CECL standard in 2020, which replaced the incurred loss impairment framework with one that reflects expected credit losses over the full expected life of financial assets. In addition, the Company added a significant amount of additional reserve in the first quarter of 2020 to address credit risk associated with the COVID-19 outbreak. Profit Sharing Three Months Ended March 31, Increase (Decrease) 2020 2019 Amount Percent (Dollar amounts in thousands) Profit sharing$ 14,295 $ 6,968 $ 7,327 105 %
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 first quarter
of 2020 compared to the first quarter of 2019, primarily due to increase in
lease portfolio and an increase in profit sharing eligible portfolio due to
amendment to the Chrysler Agreement with
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 %
Investment losses, net, decreased
Servicing fee income decreased$5 million in the first quarter of 2020, as compared to the first quarter of 2019, due to the lower average balances for serviced portfolio that had higher servicing fee rates. The Company records servicing fee income on loans that it services but does not own and does not report on its balance sheet. The serviced for others portfolio as ofMarch 31, 2020 and 2019 was as follows:March 31, 2020 2019 (Dollar amounts in thousands)
SBNA and Santander retail installment contracts
131 202
Total serviced for related parties 8,761,129 5,735,850 CCAP securitizations 152,950 520,842 Other third parties 1,417,358 2,487,473 Total serviced for third parties 1,570,308
3,008,315
Total serviced for others portfolio$ 10,331,437 $
8,744,165
Fees, commissions, and other, primarily includes late fees, miscellaneous, and
other income. This income remained flat from the first quarter of 2019 to the
first quarter of 2020.
60
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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) %
Compensation expenses remained flat from the first quarter of 2019 to the first
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 the first quarter of 2019 to
38.1% in the first quarter of 2020, primarily due to discrete tax adjustments
that increased the tax benefit recorded on the pre-tax loss in the first quarter
of 2020.
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 % The change in unrealized gains (losses) in the first quarter of 2020 as compared to the first quarter of 2019, was primarily driven by interest income realized into the Statement of Income in 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 Non-prime loans comprise 77% of the Company's portfolio as ofMarch 31, 2020 . The Company records an allowance for credit loss at a level considered adequate to cover lifetime expected credit losses in the Company's retail installment contracts and other loans and receivables held for investment, based upon a holistic assessment including both quantitative and qualitative considerations. Refer to Note 2 - "Finance Receivables" and Note 4 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the Company's held for investment portfolio of retail installment contracts and receivables from dealers, as ofMarch 31, 2020 andDecember 31, 2019 . Credit risk profile 61
-------------------------------------------------------------------------------- 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 ofMarch 31, 2020 andDecember 31, 2019 was as follows (dollar amounts in billions, totals may not foot due to rounding): March 31, 2020Trade Lines 1 2 3 4+ Total FICO Months History $ % $ % $ % $ % $ % No-FICO (a) <36$2.9 97 %$0.1 3 %$0.0 - %$0.0 - %$3.0 10 % 36+ 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 3 % <540 <36 0.1 33 % 0.1 33 % 0.0 - % 0.1 33 % 0.3 1 % 36+ 0.1 2 % 0.2 4 % 0.2 4 % 4.3 90 % 4.8 15 % 540-599 <36 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 3 % 36+ 0.1 1 % 0.2 2 % 0.3 3 % 8.4 93 % 9.0 29 % 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 % 4.6 94 % 4.9 16 % >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 % 4.3 93 % 4.6 14 % 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 ofDecember 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 ofMarch 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. Refer to Note 4 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the retail installment contracts held for investment that were placed on nonaccrual status, as ofMarch 31, 2020 andDecember 31, 2019 . Credit Loss Experience The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the three months endedMarch 31, 2020 and 2019. 62 --------------------------------------------------------------------------------
Three Months Ended March 31,
2020 2019
(Dollar amounts in thousands)
Principal outstanding at period end $ 30,741,144 $ 28,849,755
Average principal outstanding during the period $ 30,718,119 $ 28,624,598
Number of receivables outstanding at period end 1,921,789 1,813,284
Average number of receivables outstanding during the period 1,839,800 1,805,099
Number of repossessions (a) 65,710 76,963
Number of repossessions as a percent of average number of receivables outstanding
14.3 % 17.1 %
Net losses $ 593,046 $ 615,204
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 months ended 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, 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. 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 was eight, while some marine and
recreational vehicle contracts had 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.
On March 22, 2020 , the federal bank regulatory agencies issued an "Interagency
Statement on Loan Modifications and Reporting for Financial Institutions Working
with Customers Affected by the Coronavirus." This guidance encourages financial
institutions to work prudently with borrowers that may be unable to meet their
contractual obligations because of the effects of COVID-19. The guidance goes on
to explain that, in consultation with the FASB staff, the federal bank
regulatory agencies conclude that short-term modifications (e.g. six months)
made on a good faith basis to borrowers who were impacted by COVID-19 and who
were less than 30 days past due as of the implementation date of a relief
program are not TDRs. The Company applied this guidance to extensions /
deferrals executed on loans following the COVID-19 outbreak. Historically, the
majority of deferrals are approved for borrowers who are either 31-60 or 61-90
days delinquent, however a majority of these COVID-19 specific extensions have
been granted to borrowers who were less than 30 days past due at the
implementation date of the Company's COVID-19 modification program.
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.
The following is a summary of deferrals (amortized cost) on the Company's retail
installment contracts held for investment as of the dates indicated:
63
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March 31, 2020 December 31, 2019 (a)
(Dollar amounts in thousands)
Never deferred $ 22,968,068 74.6 % $ 23,830,368 77.3 %
Deferred once 4,351,477 14.1 % 3,499,477 11.4 %
Deferred twice 1,539,735 5.0 % 1,463,503 4.8 %
Deferred 3 - 4 times 1,719,205 5.6 % 1,867,546 6.1 %
Deferred greater than 4 times 219,543 0.7 % 115,144 0.4 %
Total (b) $ 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, 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 ACL are also impacted.
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 and the accrual of
interest is resumed and reinstated if a delinquent account subsequently becomes
60 days or less past due.
The following is a summary of the amortized cost (including accrued interest)
balance as of March 31, 2020 and December 31, 2019 of loans that have received
these modifications and concessions;
March 31, 2020 December 31, 2019 (a)
Retail Installment Contracts
(Dollar amounts in thousands)
Temporary reduction of monthly payment (b)
1,168,358 Bankruptcy-related accounts 35,609 41,756 Extension of maturity date 36,274 35,238 Interest rate reduction 63,971 61,870 Max buy rate and fair lending (c) 6,364,477 6,069,509 Other (d) 337,929 240,553 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) (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 64 --------------------------------------------------------------------------------
"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. (d) Includes various other types of modifications and concessions, such as hardship modifications that are considered a TDR event.
Refer to Note 4 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the Company's amortized cost (including accrued interest) in TDRs and a summary of delinquent TDRs, as ofMarch 31, 2020 andDecember 31, 2019 . The following table shows the components of the changes in the amortized cost (including accrued interest) in retail installment contract TDRs (excluding collateral-dependent bankruptcy TDRs) for the three months endedMarch 31, 2020 and 2019: Three Months Ended March 31, 2020 March 31, 2019 Balance - beginning of year$ 3,828,892 $ 5,365,477 New TDRs 185,767 331,792 Charge-offs (289,567) (464,758) Paydowns (a) (288,339) (341,606) Others - 470 Balance - end of year$ 3,436,753 $ 4,891,375
(a) Includes net discount accreted in interest income for the period.
Liquidity Management, Funding and Capital Resources Source of Funding The Company requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. The Company funds its operations through its lending relationships with 13 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$5.1 billion of stockholders' equity that supports its access to the securitization markets, credit facilities, and flow agreements. During the three months endedMarch 31, 2020 , the Company completed on-balance sheet funding transactions totaling approximately$4.0 billion , including: •securitizations on the Company's DRIVE, deeper subprime platform, for approximately$1.1 billion ; •lease securitizations on our SRT platform for approximately$1.1 billion ; •private amortizing lease facilities for approximately$1.8 billion ; and •issuance of a retained bond on the Company's SRT platform for approximately$52.6 million Refer to Note 5 - "Debt" to the 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 eight banks providing an aggregate commitment of$4.0 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Finance lease financing. As ofMarch 31, 2020 there was an outstanding balance of approximately$1.5 billion 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 eight credit facilities with ten banks providing an aggregate commitment of$7.5 billion for the exclusive use of providing short-term liquidity needs to support Core and CCAP Loan financing. As ofMarch 31, 2020 there was an outstanding balance of approximately$4.7 billion on these facilities in aggregate. These facilities reduced Advance Rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds. 65 -------------------------------------------------------------------------------- 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 ranging up to one year. As ofMarch 31, 2020 there was an outstanding balance of$314 million 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
Average Maximum
Outstanding Outstanding
Counterparty Utilized Balance Committed Amount Balance 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
SHUSA provides the Company with $3.0 billion of committed revolving credit that
can be drawn on an unsecured basis. SHUSA also provides the Company with $5.7
billion of term promissory notes with maturities ranging from May 2020 to 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 $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
66
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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.
Three Months Ended March 31,
2020 2019
(Dollar amounts in thousands)
Net cash provided by operating activities
(1,542,427) (1,906,965)
Net cash provided by financing activities 474,816
671,123
Net Cash Provided by Operating Activities Net cash provided by operating activities remained materially unchanged from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 .Net Cash Used in Investing Activities Net cash used in investing activities decreased by$365 million from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 , primarily due to an increase of$286 million in collections on finance receivables held for investment and a decrease of$102 million in originations of finance receivables held for investment. Net Cash Provided by Financing Activities Net cash provided by financing activities decreased by$196 million from the three months endedMarch 31, 2019 to the three months endedMarch 31, 2020 , primarily related to tender offer program which expired onFebruary 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 Contingencies" in the accompanying condensed consolidated financial statements. Contractual Obligations The Company leases its headquarters inDallas, Texas , its servicing centers inTexas ,Colorado ,Arizona , andPuerto Rico , and an operations facilities inCalifornia ,Texas andColorado 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 ofMarch 31, 2020 : 1-3 3-5 More than Less than 1 year years years 5 years Total (In thousands) Operating lease obligations $ 12,579$ 25,911
2,386,255 8,285,424 1,500,000 - 12,171,679
Notes payable - secured structured
financings (a) 225,665 9,047,623 11,198,129 7,637,927 28,109,344
Contractual interest on debt 1,036,664 1,033,547 252,475 90,209 2,412,895
Total $ 3,661,163 $ 18,392,505 $ 12,976,060 $ 7,747,826 $ 42,777,554 (a)Adjusted for unamortized costs of
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--------------------------------------------------------------------------------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 2019 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 ACL 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 Consolidated Balance Sheets.
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 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 mitigate against interest rate risk. As ofMarch 31, 2020 , the notional value of the Company's interest rate swap agreements was$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 ofMarch 31, 2020 the notional value of the Company's interest rate cap agreements was$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 ofMarch 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$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 ofMarch 31, 2020 , the impact of a 100 basis point parallel increase in the interest rate curve would decrease the Company's MVE by$151 million .
Collateral Risk
The Company's lease portfolio presents an inherent risk that residual values recognized upon lease termination will be lower
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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 first quarter of 2020, 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.
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 least eight external credit providers (as ofMarch 31, 2020 , it had thirteen); •that the Company relies on Santander and affiliates for no more than 30% of its funding (as ofMarch 31, 2020 , Santander and affiliates provided 14% of its funding); •that no single lender's commitment should comprise more than 33% of the overall committed external lines (as ofMarch 31, 2020 , the highest single lender's commitment was 24% (not including repo); and •that no more than 35% and 65% of the Company's warehouse facilities mature in the next six months and twelve months respectively (as ofMarch 31, 2020 , one of the Company's warehouse facilities are 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 ofIRS 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 afterJanuary 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 69 -------------------------------------------------------------------------------- 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. 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 withU.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 withU.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 2019 Annual Report on Form 10-K. The change is as a result of the Company's adoption of CECL standard, onJanuary 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 FinancialAccounting Standards Board (FASB) is discussed in Note 1- Recently Issued Accounting Pronouncements, in the accompanying condensed consolidated financial statements.
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