SANTANDER CONSUMER USA HOLDINGS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8. "Financial Statements and Supplementary Data." This section of the Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons of 2020 to 2019. Discussions of 2018 items and year-to-year comparisons of 2019 and 2018 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 on our Annual Report on Form 10-K for the year endedDecember 31, 2019 . In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors including, but not limited to, those discussed in Item 1A. "Risk Factors" and elsewhere in this Annual Report.
Background and Overview
The Company was formed in 2013 as a corporation in the state ofDelaware and is the holding company for SCIllinois , a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. The Company is majority-owned (as ofFebruary 22, 2021 , approximately 80.2%) by SHUSA, a wholly-owned subsidiary of Santander. The Company is managed through a single reporting segment, Consumer Finance, which includes 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 MPLFA withFCA , which modified the MPLFA to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The Amendment also established an operating framework that was mutually beneficial 42 --------------------------------------------------------------------------------
for both parties for the remainder of the contract. The Company's average
penetration rate under the MPLFA for the year ended
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 year endedDecember 31, 2020 , the Company originated$14.2 billion in CCAP loans which represented 60% of total retail installment contract originations (unpaid principal balance), as well as$6.8 billion in CCAP leases. Additionally, substantially all of the leases originated by the Company during the year endedDecember 31, 2020 were under the MPLFA. Economic and Business Environment Unemployment rates increased to 6.7% as reported by theBureau of Labor Statistics forDecember 31, 2020 , the increase is caused by the loss of employment due primarily to the COVID-19 pandemic. The interest rate environment continues to be low with the federal funds rate in the range of 0.00% to 0.25% onDecember 31, 2020 . Refer to Part II, Item 7. "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. 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 and
industry-wide recovery 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 ACL.
•Other income - The Company's flow agreements and third-party servicing
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 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).
43
--------------------------------------------------------------------------------
Recent Developments and Other Factors Affecting The Company's Results of
Operations
Changes to Board of Directors and Executive Management Team
Effective as of December 7, 2020 , the Board appointed Donald Smith , as Chief
Technology Officer of the Company.
Effective as of January 1, 2021 , the Board appointed Josh Baer , formerly Chief
Risk Officer , as Head of Pricing and Strategy of the Company, and appointed RL
Prasad as Chief Risk Officer of the Company.
Effective as of January 25, 2021 , the Board appointed Leonard Coleman , Jr to the
Board.
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 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 occurred or
are probable. The following sets forth our discussion 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 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. These customer support programs,
by their nature, 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 the
pandemic and the recession 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, but such effects could be materially adverse
effects to our business, financial condition and results of operations.
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 materially negative effects on our business, financial condition and
results of operations.
•Impact on originations: Since COVID-19 outbreak, the Company has partnered with
FCA to launch new incentive programs, including, 90-day first payment deferrals
and 0% APR for 84 months on select 2019/2020 FCA models. Most dealers are open
today and operating at full capacity. However, some dealers are operating in a
modified capacity based on state requirements and/or COVID related employee
concerns. Third party sources are reporting a new car SAAR rate that is
approximately 95% of pre-COVID expectations. While an economic downturn
associated with the pandemic will impact sales, most dealers have developed
business models that will allow them to continue operation in some capacity.
•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 year ended
44
--------------------------------------------------------------------------------
December 31, 2020 , financial markets experienced significant declines and
volatility, and such market conditions may continue 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
materially adverse impacts on our liquidity, 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 FRB established the Term Asset Backed Securities Loan Facility ("TALF") to
support the flow of credit to consumers and businesses, including the investment
in certain eligible ABS bonds. Given the current state of the capital markets
and the recent tightening in ABS credit spreads, the Company did not utilize
TALF during 2020, but the Company may utilize TALF, if it becomes necessary to
do so. These governmental and regulatory actions may not be successful in the
long-term mitigating the adverse economic effects of COVID-19 and could affect
our liquidity, access to funding and 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).
The capital markets appear to have recovered in third quarter compared to the first half of the year, 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 affect materially our liquidity, access to funding 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$3.0 million in donations to a select group of organizations addressing community issues. 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 (GAAP) requires management to make certain judgments and assumptions, on the basis of information available at the time of the financial statements, in determining accounting estimates used in the preparation of these statements. The Company's significant accounting policies are described in Note 1 - "Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices" in the accompanying consolidated financial statements; critical accounting estimates are described in this section. An accounting estimate is considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the accounting estimate was made. If actual results differ from the Company's judgments and assumptions, then it may have an adverse impact on the results of operations, financial condition, and cash flows. The Company's management has discussed the development, selection, and disclosure of these critical accounting estimates with the Audit Committee of the Board, and the Audit Committee has reviewed the Company's disclosure relating to these estimates. Credit Loss Allowance The Company maintains an ACL for the Company's held-for-investment portfolio, excluding those loans measured at fair value in accordance with applicable accounting standards. 45 -------------------------------------------------------------------------------- The allowance for expected credit losses on retail installment contracts is measured based on a current expected loss model, which means that it is not necessary 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 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. 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 been discreetly contemplated in deriving the quantitative component of the allowance, as well as potential variability in estimates. The qualitative adjustment is also established in consideration of several factors such as the interpretation of economic trends, changes in the nature and volume of our loan portfolio, trends in delinquency and collateral values, and concentration risks. 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. 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 a qualitative adjustment for macroeconomic uncertainty, and considers adjustments to macroeconomic inputs and outputs based on market volatility. The baseline scenario was based on the latest consensus forecasts available which showed an improvement in key variables in this quarter, including a sharp decrease in unemployment rates (which are a key driver to losses). Using the weighted-average of our economic forecast scenarios, we estimated atDecember 31, 2020 that unemployment rate is expected to be to be approximately 7% at the end of 2021, with the labor market continuing to recover in 2022. While the economy has seen significant recovery in recent months, there is still considerable uncertainty regarding overall lifetime loss estimates. The scenarios used are periodically updated over a reasonable and supportable time horizon with weightings assigned by management and approved through established committee governance. 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. Valuation of Automotive Lease Assets and ResidualsThe Company has significant investments in vehicles in the Company's operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of lease assets. To account for residual risk, the Company depreciates automotive operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the lease vehicle at termination based on current market conditions, and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease. 46 -------------------------------------------------------------------------------- The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values, indicates that an impairment may exist. These circumstances could include, for example, shocks to oil and gas prices (which may have a pronounced impact on certain models of vehicles) or pervasive manufacturer defects (which may systemically affect the value of a particular vehicle brand or model). Impairment is determined to exist if fair value of the leased asset is less than carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows. No impairment was recognized in 2020, 2019 or 2018. The Company's depreciation methodology for operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automotive lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) the Company's remarketing abilities, and (4) automotive manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automotive manufacturers related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted. Provision for Income Taxes In determining taxable income, the Company must make certain estimates and judgments. These estimates and judgments affect the calculation of certain tax liabilities and the determination of the recoverability of certain of the deferred tax assets, which arise from temporary differences between the tax and financial statement recognition of revenue and expense. The Company's largest deferred tax liability relates to leased vehicles. This liability is primarily due to the acceleration of depreciation for tax purposes and the deferral of tax gains through like-kind exchange transactions in prior years. 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. Because the volume of the Company's loan sales exceeds the "negligible sales" exception under section 475 of the Internal Revenue Code, the Company is classified as a dealer in securities for tax purposes. Accordingly, the Company must report its finance receivables and loans at fair value in the Company's tax returns. Changes in the fair value of Company's receivables and loans portfolios have a significant impact on the size of deferred tax assets and liabilities. Estimated fair value is dependent on key assumptions including prepayment rates, expected recovery rates, charge-off rates and timing, and discount rates. In evaluating the Company's ability to recover deferred tax assets, the Company considers all available positive and negative evidence including past operating results and the Company's forecast of future taxable income. In estimating future taxable income, the Company develops assumptions including the amount of future pre-tax operating income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require significant judgment about the forecasts of future taxable income and are consistent with the plans and estimates the Company is using to manage the Company's underlying businesses. Changes in tax laws and rates could also affect recorded deferred tax assets and liabilities in the future. Management records the effect of a tax rate or law change on the Company's deferred tax assets and liabilities in the period of enactment. Future tax rate or law changes could have a material effect on the Company's results of operations, financial condition or cash flows. In addition, the calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations inthe United States (includingPuerto Rico ). The Company recognizes potential liabilities and records tax liabilities for anticipated tax audit issues inthe United States and other tax jurisdictions based on estimates of whether, and the extent to which, additional taxes will be due in accordance with the authoritative guidance regarding the accounting for uncertain tax positions. The Company adjusts these reserves in light of changing facts and circumstances; however, due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. If the Company's estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities would result in tax benefits being recognized in the period when the Company determines the liabilities are no longer necessary. 47 -------------------------------------------------------------------------------- For additional information regarding the Company's provision for income taxes, refer to Note 13 - "Income Taxes" in the accompanying financial statements. Fair Value of Financial Instruments The Company uses fair value measurements to determine fair value adjustments to certain instruments and fair value disclosures. Refer to Note 11 - "Fair Value of Financial Instruments" in the accompanying financial statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 11 - "Fair Value of Financial Instruments" in the accompanying financial statements in order to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. As such, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value. The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations will also be benchmarked to market indices when appropriate and available. Considerable judgment is used in forming conclusions from market observable data used to estimate the Company's Level 2 fair value measurements and in estimating inputs to the Company's internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. Recent Accounting Pronouncements Information concerning the Company's implementation and impact of new accounting standards issued by theFinancial Accounting Standards Board (FASB) is discussed in Note 1 - "Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices" in the accompanying consolidated financial statements under "Recent Accounting Pronouncements." Market Data Market data used in this Annual Report on Form 10-K has been obtained from independent industry sources and publications, such as theFederal Reserve Bank of New York ; theFederal Reserve Bank of Philadelphia ; theFederal Reserve Board ;The Conference Board ; theCFPB ; Equifax Inc.;Experian Automotive ;FCA ; Fair Isaac Corporation; FICO® Banking Analytics Blog;Polk Automotive ; theUnited States Department of Commerce :Bureau of Economic Analysis ;J.D. Power ; and Ward's Automotive Reports. Forward-looking information obtained from these sources is subject to the same qualifications and the additional uncertainties regarding the other forward-looking statements in this Annual Report on Form 10-K. For purposes of this Annual Report on Form 10-K, the Company categorizes the prime segment as borrowers with FICO® scores of 640 and above and the nonprime segment as borrowers with FICO® scores below 640. 48 --------------------------------------------------------------------------------
Volume
The Company's originations of loans and leases, including revolving loans,
average APR, and dealer discount (net of dealer participation) for the year
ended
For the Year Ended December 31,
2020 2019 2018
(Dollar amounts in thousands)
Retained Originations
Retail installment contracts $ 17,563,256 $ 15,835,618 $ 15,379,778
Average APR 14.1 % 16.3 % 17.3 %
Average FICO® (a) 626 598 595
Discount/(premium) (1.1) % (0.5) % 0.2 %
Personal loans (b) $ 1,449,653 $ 1,467,452 $ 1,482,670
Average APR 29.6 % 29.8 % 29.6 %
Leased vehicles $ 6,820,062 $ 8,520,489 $ 9,742,423
Finance lease $
12,042
$
25,845,013
Sold Originations Retail installment contracts $ 761,323 $ -$ 1,820,085 Average APR 4.8 % - % 7.3 % Average FICO® (c) 734 - 727 Total Originations Sold $ 761,323 $ -$ 1,820,085 Total SC Originations 26,606,336 25,841,148 28,434,750 Total originations (excluding SBNA Originations Program) (d) $
26,606,336
(a)Unpaid principal balance excluded from the weighted average FICO score is$1.9 billion ,$1.8 billion and$1.9 billion as the borrowers on these loans did not have FICO scores at origination and of these amounts,$539 million and$582 million and$76 million , respectively, were commercial loans for the year endedDecember 31, 2020 , 2019 and 2018, respectively. (b) Included in the total origination volume is$294 million and$270 million and$304 million for the year endedDecember 31, 2020 , 2019 and 2018, respectively, related to newly opened accounts. (c) Unpaid principal balance excluded from the weighted average FICO score is$80 million , zero and$143 million for the year endedDecember 31, 2020 , 2019 and 2018, respectively, as the borrowers on these loans did not have FICO scores at origination. of these amounts, zero and zero and$76 million , respectively, were commercial loans for the year endedDecember 31, 2020 , 2019 and 2018, respectively. (d) Total originations excludes finance receivables (UPB) of zero,$1.1 billion and zero purchased from third party lenders during the years ended year endedDecember 31, 2020 , 2019 and 2018, respectively. Total auto originations (excluding SBNA Origination Program) increased$0.8 billion , or 3.2%, from the year endedDecember 31, 2019 to 2020. The Company's initiatives to improve our pricing, as well as, our dealer and customer experience have 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. 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 year endedDecember 31, 2020 and 2019 the Company facilitated the purchase of$5.4 billion and$7.0 billion of retail installment contacts, respectively. 49 --------------------------------------------------------------------------------
The Company's originations of retail installment contracts and leases by vehicle
type during the year ended
For the Year Ended December 31,
2020 2019 2018
(Dollar amounts in thousands)
Retail installment contracts
Car $ 5,287,330 28.9 % $ 5,644,541 35.6 % $ 6,291,037 36.6 %
Truck and utility 12,317,203 67.2 % 9,546,642 60.3 % 10,062,285 58.5 %
Van and other (a) 720,046 3.9 % 644,435 4.1 % 846,541 4.9 %
$ 18,324,579 100.0 % $ 15,835,618 100.0 % $ 17,199,863 100.0 %
Leased vehicles
Car $ 215,729 3.2 % $ 410,194 4.8 % $ 822,102 8.4 %
Truck and utility 6,449,471 94.5 % 7,831,086 91.9 % 8,532,819 87.6 %
Van and other (a) 154,862 2.3 % 279,209 3.3 % 387,502 4.0 %
$ 6,820,062 100.0 % $ 8,520,489 100.0 % $ 9,742,423 100.0 %
Total originations by vehicle type
Car $ 5,503,059 21.9 %
26.4 % Truck and utility 18,766,674
74.6 % 17,377,728 71.3 % 18,595,104
69.0 %
Van and other (a) 874,908 3.5 % 923,644 3.8 % 1,234,043 4.6 %
$ 25,144,641 100.0 % $ 24,356,107 100.0 % $ 26,942,286 100.0 %
(a) Other primarily consists of commercial vehicles.
The Company's portfolio of retail installment contracts held for investment and
leases by vehicle type as of
December 31, 2020 December 31, 2019
(Dollar amounts in thousands)
Retail installment contracts
Car $ 11,727,343 35.6 % $ 12,286,182 39.9 %
Truck and utility 19,939,215 60.5 % 17,238,406 56.0 %
Van and other (a) 1,270,478 3.9 % 1,251,450 4.1 %
$ 32,937,036 100.0 % $ 30,776,038 100.0 %
Leased vehicles
Car $ 766,451 4.4 % $ 1,237,803 7.1 %
Truck and utility 16,052,162 93.0 % 15,795,594 89.8 %
Van and other (a) 440,855 2.6 % 529,385 3.1 %
$ 17,259,468 100.0 % $ 17,562,782 100.0 %
Total by vehicle type
Car $ 12,493,794 24.9 % $ 13,523,985 28.0 %
Truck and utility 35,991,377 71.7 % 33,034,000 68.3 %
Van and other (a) 1,711,333 3.4 % 1,780,835 3.7 %
$ 50,196,504 100.0 % $ 48,338,820 100.0 %
(a) Other primarily consists of commercial vehicles.
The Company's asset sales for the year ended
50
--------------------------------------------------------------------------------
For the Year Ended December 31,
2020 2019 2018
(Dollar amounts in thousands)
Retail installment contracts $ 1,148,587 $ - $ 2,905,922
Average APR 5.6 % - % 7.2 %
Average FICO® 715 - 726
The unpaid principal balance, average APR, and remaining unaccreted net discount
of the Company's held for investment portfolio as of December 31, 2020 and 2019
are as follows:
December 31, 2020 December 31, 2019
(Dollar amounts in thousands)Retail installment contracts $ 32,937,036 $ 30,776,038 Average APR 15.2 % 16.1 % Discount (0.15) % 0.3 % Receivables from dealers $ - $ 12,668 Average APR - % 4.0 % Leased vehicles $ 17,259,468 $ 17,562,782 Finance leases $ 26,150 $ 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 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, and 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 9.8% to 16.2% as ofDecember 31, 2020 , and 5.1% to 11.0% as ofDecember 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. 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. During the year endedDecember 31, 2020 and 2019, the Company purchased a pool of receivables from a third party lender for zero and$1.09 billion , respectively, of which the Company elected the fair value option for zero and$22 million , respectively, deemed to be non-performing since it was determined that not all contractually required payments would be collected. In addition, during the year endedDecember 31, 2020 , 2019 and 2018 the Company did recognize certain retail installment contracts with an unpaid principal balance of$76,878 ,$74,718 and$213,973 , 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. 51 -------------------------------------------------------------------------------- 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 of revenue 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.
Year Ended
For the Year Ended
December 31, Increase (Decrease)
2020 2019 Amount Percent
(Dollar amounts in thousands)
Income from retail installment contracts $ 4,784,697 $ 4,683,083 $ 101,614 2 %
Income from purchased receivables portfolios -
credit deteriorated 2,721 4,007 (1,286) (32) %
Income from receivables from dealers 78 240 (162) (68) %
Income from personal loans 338,907 362,636 (23,729) (7) %
Total interest on finance receivables and loans $ 5,126,403 $ 5,049,966 $ 76,437 1.5 %
Income from retail installment contracts increased $102 million or 2% from 2019
to 2020 primarily due to increase in average outstanding balance of company's
portfolio and new originations.
Income from personal loans decreased $24 million or 7%, from 2019 to 2020
primarily due to 6% decrease in average outstanding balance of the Company's
portfolio, respectively.
Leased Vehicle Income and Expense
For the Year Ended
December 31, Increase (Decrease)
2020 2019 Amount Percent
(Dollar amounts in thousands)
Leased vehicle income $ 2,950,641 $ 2,764,258 $ 186,383 7 %
Leased vehicle expense 2,077,759 1,862,121 215,638 12 %
Leased vehicle income, net $ 872,882 $ 902,137 $ (29,255) (3) %
Leased vehicle income, net decreased $29 million or 3% in 2020 compared to 2019
due to an increase in depreciation on a larger lease portfolio and a decrease in
liquidated units. Through the MPLFA, 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
For the Year Ended
December 31, Increase (Decrease)
2020 2019 Amount Percent
(Dollar amounts in thousands)
Interest expense on notes payable $ 1,167,801 $ 1,356,245 $ (188,444) (14) %
Interest expense on derivatives 36,534 (24,441) 60,975 (249) %
Total interest expense $ 1,204,335 $ 1,331,804 $ (127,469) (10) %
Total Interest expense decreased
52
--------------------------------------------------------------------------------
Credit Loss Expense
For the Year Ended
December 31, Increase (Decrease)
2020 2019 Amount Percent
(Dollar amounts in thousands)
Credit loss expense $ 2,364,459 $ 2,093,749 $ 270,710 13 %
Credit loss expense increased $271 million or 13% from 2019 to 2020, primarily
driven by the adoption of the 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 to address credit risk associated with
the COVID-19 outbreak and associated economic recession during the first and
second quarter of 2020.
Profit Sharing
For the Year Ended
December 31, Increase (Decrease)
2020 2019 Amount Percent
(Dollar amounts in thousands)
Profit sharing $ 120,757 $ 52,731 $ 68,026 129 %
Profit sharing expense consists of revenue sharing related to the MPLFA and profit sharing on personal loans originated pursuant to the agreements with Bluestem. Profit sharing expense increased from 2019 to 2020 primarily due to an increase in lease portfolio and average payments.
Other Income
For the Year Ended
December 31, Increase (Decrease)
2020 2019 Amount Percent
(Dollar amounts in thousands)
Investment losses, net $ (400,590) $ (406,687) $ 6,097 (1) %
Servicing fee income 74,241 91,334 (17,093) (19) %
Fees, commissions, and other 343,905 364,119 (20,214) (6) %
Total other income $ 17,556 $ 48,766 $ (31,210) (64) %
Average serviced for others portfolio $ 11,018,325 $ 9,443,908 $ 1,574,417 17 %
Servicing fee income decreased$17 million from 2019 to 2020 due to the runoff of serviced portfolio with higher servicing fee rates replaced with new loans with lower servicing fee rates. The Company records servicing fee income on loans that it services but does not own and does not report on its balance sheet. The serviced for others portfolio as ofDecember 31, 2020 and 2019 was as follows: December 31, 2020 2019 (Dollar amounts in thousands) SBNA and Santander retail installment contracts$ 9,912,043 $ 8,800,689 SBNA leases - 177 Total serviced for related parties$ 9,912,043 $ 8,800,866 CCAP securitizations 82,713 259,197 SCART securitizations 929,429 - Other third parties 638,665 1,353,524 Total serviced for third parties$ 1,650,807 $ 1,612,721 Total serviced for others portfolio$ 11,562,850 $ 10,413,587 Fees, commissions, and other, primarily includes late fees, miscellaneous, and other income. This income decreased$20 million or (6)% from 2019 to 2020, due to lower originations from SBNA and decrease in wear and tear income of$10 million due to reserve recorded for anticipated customer refunds. 53 -------------------------------------------------------------------------------- Total Operating Expenses For the Year Ended December 31, Increase (Decrease) 2020 2019 Amount Percent (Dollar amounts in thousands) Compensation expense$ 552,867 $ 510,743 $ 42,124 8 % Repossession expense 160,404 262,061 (101,657) (39) % Other operating costs 418,049 437,747 (19,698) (4) % Total operating expenses$ 1,131,320 $ 1,210,551 $ (79,231) (7) % Compensation expenses increased$42 million or 8% from 2019 to 2020, primarily due to an increase of 401 employees, and increase in claims reserve, incurred but not reported, due to higher prescription and medical claims related to additional employee count. Repossession expense decreased$102 million or 39% from 2019 to 2020, primarily due to the lower volume of involuntary repossessions nationwide as a result of the COVID-19 outbreak. Income Tax Expense For the Year Ended December 31, Increase (Decrease) 2020 2019 Amount Percent (Dollar amounts in thousands) Income tax expense$ 298,921 $ 359,898 $ (60,977) (17) % Income before income taxes 1,209,832 1,354,268 (144,436) (11) % Effective tax rate 24.7 % 26.6 % The effective tax rate decreased from 26.6% in 2019 to 24.7% in 2020, primarily due to higher increases in uncertain tax positions in the prior year and lower state return to provision true-ups in the current year.
Other Comprehensive Income (Loss)
For the Year Ended
December 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 $ (23,873) $ (60,208) $ 36,335 (60) %
The change in unrealized gains (losses) for 2020 as compared to 2019, was
primarily driven by a decrease in cash flow hedge portfolio related to
mark-to-market valuation due to decreasing interest rates, as shown in Note 10
"Derivative Financial Instruments".
Credit Quality
Loans and Other Finance Receivables
Allowance for Credit losses
Non-prime loans comprise 76% of the Company's portfolio as of December 31, 2020 .
The Company records an ACL at a level considered adequate to cover current
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 3 - "Credit Loss Allowance and Credit Quality" to
the accompanying consolidated financial statements for the details on the
Company's held for investment portfolio of retail installment contracts as of
December 31, 2020 and 2019.
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 (represents
number of approved credit accounts reported to credit reporting agencies), and
length of credit
54
--------------------------------------------------------------------------------
history, each as determined at origination, as of December 31, 2020 and 2019 was
as follows (dollar amounts in billions, totals may not foot due to rounding):
December 31, 2020
Trade Lines 1 2 3 4+ Total
FICO Months History $ % $ % $ % $ % $ %
No-FICO (a) <36 $3.0 97 % $0.1 3 % $0.0 - % $0.0 - % $3.1 9 %
36+ 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 2 %
<540 <36 0.0 - % 0.0 - % 0.1 50 % 0.1 50 % 0.2 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+ 0.2 2 % 0.2 2 % 0.3 3 % 9.0 93 % 9.7 28 %
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 % 5.0 94 % 5.3 16 %
>640 <36 1.0 59 % 0.3 18 % 0.2 12 % 0.2 12 % 1.7 5 %
36+ 0.1 2 % 0.1 2 % 0.1 2 % 5.5 95 % 5.8 18 %
Total (c) $5.5 17 % $1.6 5 % $1.3 4 % $24.7 75 % $33.1 100 %
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 - % $ 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 December 31, 2020 is $416 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. For the year endedDecember 31, 2020 , delinquency rates have been positively impacted (lower) due to the historic volume of deferrals granted to borrowers impacted by COVID-19 and benefits of government stimulus. Refer to Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying consolidated financial statements for the details on the retail installment contracts held for investment that were placed on nonaccrual status, as ofDecember 31, 2020 and 2019. Credit Loss Experience 55 -------------------------------------------------------------------------------- The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the year endedDecember 31, 2020 and 2019.
For the Year Ended
2020 2019
(Dollar amounts in thousands)
Principal outstanding at period end $ 32,937,036 $ 30,776,038
Average principal outstanding during the period $ 31,519,595 $ 29,248,201
Number of receivables outstanding at period end 1,938,764 1,810,973
Average number of receivables outstanding during the period 1,904,749 1,814,454
Number of repossessions (a) 177,639 285,661
Number of repossessions as a percent of average number of receivables outstanding
9.3 % 15.7 %
Net losses $ 1,395,703 $ 2,288,812
Net losses as a percent of average principal amount outstanding (b) 4.4 % 7.8 %
(a) Repossessions are net of redemptions. The number of repossessions includes
repossessions from the outstanding portfolio and from accounts already charged
off. The Company temporarily suspended involuntary repossession activities
nationwide during the onset of COVID-19 and restarted these activities during Q3
2020.
(b) Decrease is due to reduction in number of repossessions (refer to note (a)
above), and increase in number of deferrals (explained in detail under
"Deferrals and Troubled Debt Restructurings" below) as it relates to COVID-19.
There were no charge-offs on the Company's receivables from dealers for the year
ended December 31, 2020 and 2019. Net charge-offs on the finance lease
receivables portfolio, totaled $3,913 and $769 for the year ended December 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 customers on its retail installment contracts, whereby
the customer is allowed to defer a maximum of three payments per event to the
end of the loan. Prior to March 2020 , the Company's policies and guidelines
limited the frequency of each new deferral to one deferral every six months,
regardless of the length of any prior deferral. Further, 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. Additionally, the Company
generally limited the granting of deferrals on new accounts until a requisite
number of months have passed since origination. During the deferral period, the
Company continues to accrue and collect interest on the loan in accordance with
the terms of the deferral agreement.
However, in March 2020 , the Company began actively working with its borrowers
impacted by COVID-19 and provided loan modification programs to mitigate the
adverse effects of COVID-19. These programs temporarily revised the practices
noted above by 1) increasing the maximum number of months extended, 2) allowing
more than one deferral every six months and 3) removing the requirement that a
requisite number of months have passed since origination. The Company's
predominant program offering is a two-month deferral of payments to the end of
the loan term and waiver of late charges.
Since the implementation of the program in March 2020 , we have experienced a
sharp increase in requests for extensions related to COVID-19 and over 1 million
loan extensions have been granted. As of December 31, 2020 , approximately one
third (or $11 billion in balances) of our customers have received a COVID-19
deferral. The following table provides a summary of loan balances with active
payment deferrals as of the end of each reporting period:
December 31, 2020 September 30, 2020 June 30, 2020
(Dollar amounts in thousands)
Loan balance of Loan balance of Loan balance of
active deferrals active active deferrals
(a) % of portfolio deferrals (a) % of portfolio (a) % of portfolio
Retail
installment
contracts $ 1,067,072 3.2 % $ 959,236 2.9 % $ 3,753,717 12.3 %
(a) Excludes deferrals with payments due in December 31, 2020
Through December 31, 2020 , over 697,000 unique accounts have received COVID-19
deferrals. Of these accounts, 79% have exited deferral status, 8% remain in
active deferral, 8% have paid-off, and 5% have charged off. Of the loans that
have exited deferral status, 80% are less than 30 days past due and 98% of these
accounts have made at least one payment since their first COVID-19 extension.
The following is a summary of all deferrals (amortized cost) on the Company's
retail installment contracts held for investment as of the dates indicated:
56
--------------------------------------------------------------------------------
December 31, 2020 December 31, 2019 (a)
(Dollar amounts in thousands)
Never deferred $ 20,824,336 63.0 % $ 23,830,368 77.3 %
Deferred once 5,245,471 15.8 % 3,499,477 11.4 %
Deferred twice 3,083,542 9.3 % 1,463,503 4.8 %
Deferred 3 - 4 times 2,842,870 8.6 % 1,867,546 6.1 %
Deferred greater than 4 times 1,104,369 3.3 % 115,144 0.4 %
Total (b) $ 33,100,588 $ 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 December 31, 2020 is $416 million .
The historic volume of deferrals granted in response to COVID-19 impacts have
caused the percentage of retail installment contracts that have never been
deferred to decrease significantly year over year, and the percentage of retail
installment contracts deferred more than four times to increase significantly.
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. If a customer
receives two or more deferrals over the life of the loan, the loan would
generally advance to a TDR designation.
However, in March 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
and concludes 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 deferrals executed in response to COVID-19
and did not designate borrowers who were less than 30 days past due at the time
of the COVID-19 extension program as TDR's, even if they would have otherwise
qualified. Upon exceeding six months of COVID-19 extensions, borrowers are
designated as a TDR. This guidance (or exception) prevented approximately
$3.5 billion in retail installment contract balances from being TDR designated
as of December 31, 2020 . Approximately 34% of all accounts that have received a
COVID-19 deferral and are active as of December 31, 2020 are classified as
TDR's.
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,
57
--------------------------------------------------------------------------------
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 December 31, 2020 and 2019 of loans that have received these
modifications and concessions;
December 31,
December 31, 2020 2019 (a)
Retail Installment Contracts
(Dollar amounts in thousands)
Temporary reduction of monthly payment (b) $ 579,187 $ 1,168,358
Bankruptcy-related accounts 23,865 41,756
Extension of maturity date 69,613 35,238
Interest rate reduction 76,786 61,870
Max buy rate and fair lending (c) 7,459,761 6,069,509
Other (d) 391,424 240,553
Total modified loans $ 8,600,636 $ 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 comprise 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
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 3 - "Credit Loss Allowance and Credit Quality" to these
accompanying consolidated financial statements for the details on the Company's
amortized cost (including accrued interest) in TDRs and a summary of delinquent
TDRs, as of December 31, 2020 and 2019.
The following table shows the components of the changes in the amortized cost
(including accrued interest) in retail installment contract TDRs for the year
ended December 31, 2020 and 2019:
For the Year Ended December 31,
2020 2019
Balance - beginning of period $ 3,828,892 $ 5,365,477
New TDRs 2,094,802 1,275,300
Charge-offs (825,355) (1,555,474)
Paydowns (a) (1,117,844) (1,256,801)
Others 31,285 390
Balance - end of period (b) $ 4,011,780 $ 3,828,892 (a) Includes net discount accreted in interest income for the period. (b) excluding collateral-dependent bankruptcy TDRs
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, Santander and 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$5.6 billion of stockholders' equity that supports its access to the securitization markets, credit facilities, and flow agreements. During the year endedDecember 31, 2020 , the Company completed on-balance sheet funding transactions totaling approximately$14.1 billion , including: •private amortizing lease facilities for approximately$4.0 billion ; 58 -------------------------------------------------------------------------------- •securitizations on the Company's SDART platform for approximately$5.7 billion ; •securitizations on the Company's DRIVE, deeper subprime platform, for approximately$2.0 billion ; •lease securitizations on our SRT platform for approximately$2.3 billion ; and •issuance of a retained bond on the Company's SRT platform for approximately$54.1 million
The Company also completed approximately
Refer to Note 8 - "Debt" to the accompanying consolidated financial statements for the details on the Company's total debt. Credit Facilities Third-party Revolving Credit Facilities Warehouse Lines The Company uses warehouse facilities to fund its originations. Each facility specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. The Company's warehouse facilities generally are backed by auto retail installment contracts or auto leases. These facilities generally have one- or two-year commitments, staggered maturities and floating interest rates. The Company maintains daily and long term funding forecasts for originations, acquisitions, and other large outflows such as tax payments to balance the desire to minimize funding costs with liquidity needs. The Company's warehouse facilities generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain warehouse facilities, delinquency and net loss ratios are calculated with respect to the serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurs under one of these agreements, the lenders could elect to declare all amounts outstanding under the impacted agreement to be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict the Company's ability to obtain additional borrowings under the agreement, and/or remove it as servicer. The Company has never had a warehouse facility terminated due to failure to comply with any ratio or a failure to meet any covenant. A default under one of these agreements can be enforced only with respect to the impacted facility. The Company has one credit facility with eight banks providing an aggregate commitment of$3.5 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Finance lease financing. As ofDecember 31, 2020 there was an outstanding balance of approximately$0.4 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 eleven banks providing an aggregate commitment of$8.3 billion for the exclusive use of providing short-term liquidity needs to support Core and CCAP Loan financing. As ofDecember 31, 2020 there was an outstanding balance of approximately$3.6 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. 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 ofDecember 31, 2020 there was an outstanding balance of$168 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:
59
--------------------------------------------------------------------------------
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 250,000 250,000 250,000 250,000
Promissory Note SHUSA 300,000 300,000 300,000 300,000
Promissory Note SHUSA 350,000 350,000 350,000 350,000
Promissory Note SHUSA 400,000 400,000 400,000 400,000
Promissory Note SHUSA 450,000 450,000 450,000 450,000
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
Promissory Note SHUSA 1,000,000 1,000,000 1,000,000 1,000,000
Promissory Note Santander 2,000,000 2,000,000 2,000,000 2,000,000
Promissory Note Santander 2,000,000 2,000,000 2,000,000 2,000,000
Line of Credit SHUSA - 500,000 140,669 -
Line of Credit SHUSA - 2,500,000 - -
$ 10,800,000 $ 13,800,000
SHUSA provides the Company with $0.5 billion of committed revolving credit and
$2.5 billion of contingent liquidity that can be drawn on an unsecured basis.
SHUSA also provides the Company with $6.8 billion of term promissory notes with
maturities ranging from March 2021 to May 2025 . Santander provides the Company
with $4 billion of unsecured promissory notes with maturities ranging from June
2022 and September 2022 .
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 .
The Company obtains long-term funding for its receivables through securitization
in the ABS market. ABS provides an attractive source of funding due to the cost
efficiency of the market, a large and deep investor base, and tenors that
appropriately match the cash flows of the debt to the cash flows of the
underlying assets. The term structure of a securitization generally locks in
fixed rate funding for the life of the underlying fixed rate assets, and the
matching amortization of the assets and liabilities provides committed funding
for the collateralized loans throughout their terms. In certain cases, SC may
choose to issue floating rate securities based on market conditions.
The Company executes each securitization transaction by selling receivables to
securitization Trusts that issue ABS to investors. To attain specified credit
ratings for each class of bonds, these securitization transactions have credit
enhancement requirements in the form of subordination, restricted cash accounts,
excess cash flow, and overcollateralization, whereby more receivables are
transferred to the Trusts than the amount of ABS issued by the Trusts.
Excess cash flows result from the difference between the finance and interest
income received from the obligors on the receivables and the interest paid to
the ABS investors, net of credit losses and expenses. Initially, excess cash
flows generated by the Trusts are used to pay down outstanding debt in the
Trusts, increasing overcollateralization until a targeted percentage has been
reached. Once the targeted overcollateralization is reached it is maintained and
excess cash flows generated by the Trusts are released to the holder of the
residual (generally the Company) as distributions from the Trusts. The Company
also receives monthly servicing fees as servicer for the Trusts. The Company's
securitizations may require an increase in credit
60
--------------------------------------------------------------------------------
enhancement levels if Cumulative Net Losses, as defined in the documents in
certain ABS transactions, exceed a specified percentage of the pool balance. For
outstanding securitizations, as of December 31, 2020 , none have Cumulative Net
Loss percentages above their respective limits.
The Company's on-balance sheet securitization transactions utilize
bankruptcy-remote special purpose entities, which are considered VIEs and meet
the requirements to be consolidated in the Company's financial statements.
Following a securitization, the finance receivables and the notes payable
related to the securitized retail installment contracts remain on the
consolidated balance sheets. The Company recognizes finance and interest income
as well as fee income on the collateralized retail installment contracts and
interest expense on the ABS issued. The Company also records a provision for
credit losses to cover the estimate of inherent credit losses on the retail
installment contracts. While these Trusts are consolidated in the Company's
financial statements, these Trusts are separate legal entities. Thus, the
finance receivables and other assets sold to these Trusts are legally owned by
these Trusts, are available only to satisfy the notes payable related to the
securitized retail installment contracts, and are not available to the Company's
creditors or its other subsidiaries.
The Company's securitizations generally have several classes of notes, with
principal paid sequentially based on seniority and any excess spread, once
targeted levels are reached, distributed to the residual holder. The company, at
times when economically favorable, retains the lowest bond class and the
residual, except in the case of off-balance sheet securitizations, which are
described further below. The Company uses the proceeds from securitization
transactions to repay borrowings outstanding under its credit facilities,
originate and acquire loans and leases, and for general corporate purposes. The
Company generally exercises clean-up call options on its securitizations when
the collateral pool balance reaches 10% of its original balance.
The Company also periodically privately issues amortizing notes in transactions
that are structured similarly to its public and Rule 144A securitizations but
are issued to banks and conduits. The Company's securitizations and private
issuances are collateralized by vehicle retail installment contracts, loans and
vehicle leases.
Deficiency and Debt Forward Flow Agreement
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.
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 fromFCA dealers, all of which are serviced by the Company. The Company also continues to periodically execute securitizations under Rule 144A of the Securities Act. After retaining the required credit risk retention via a 5% vertical interest, the Company transfers all remaining notes and residual interests in these securitizations to third parties. The Company subsequently records these transactions as true sales of the retail installment contracts securitized, and removes the sold assets from the Company's consolidated balance sheet. 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. For the Year Ended December 31, 2020 2019 2018 (Dollar amounts in thousands) Net cash provided by operating activities$ 4,012,489 $ 5,533,233 $ 6,244,869 Net cash used in investing activities (4,767,646) (9,272,431) (10,415,788) Net cash provided by financing activities 924,217 3,649,801 3,339,696 61 -------------------------------------------------------------------------------- Net Cash Provided by Operating Activities Net cash provided by operating activities decreased by$1.5 billion from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 , primarily due to$2.3 billion increase to receivables held for sale offset by$0.5 billion increase in proceeds on receivables held for sale and$0.2 billion increase in depreciation and amortization.Net Cash Used in Investing Activities Net cash used in investing activities decreased by$4.5 billion from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 , primarily due to decrease of$2.5 billion in leased vehicles purchased (net) and$1.8 billion decrease in originations of finance receivables held for investment (net). Net Cash Provided by Financing Activities Net cash provided by financing activities decreased by$2.7 billion from the year endedDecember 31, 2019 to the year endedDecember 31, 2020 , primarily due to increase in payments for notes payable of$2.4 billion , and 0.4 billion increase of shares repurchased primarily due 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 7 - "Variable Interest Entities" and Note 15 - "Commitments and Contingencies" in the accompanying consolidated financial statements. Contractual Obligations The Company leases its headquarters inDallas, Texas , its servicing centers inTexas ,Colorado ,Arizona , andPuerto Rico , and 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 ofDecember 31, 2020 : 1-3 3-5 More than Less than 1 year years years 5 years Total (In thousands) Operating lease obligations $ 13,343$ 25,401
1,617,967 11,841,988 1,500,000 - 14,959,955
Notes payable - secured structured
financings (a) 225,410 9,066,879 11,284,738 5,676,390 26,253,417
Contractual interest on debt 869,735 883,327 211,280 54,684 2,019,026
Total $ 2,726,455 $ 21,817,595 $ 13,021,484 $ 5,737,999 $ 43,303,533
(a)Adjusted for unamortized costs of $76 million .
Risk Management Framework
The Company has established a Board-approved Governance Framework that outlines
governance principles organized into the following sections: strategic plan;
risk identification and assessment; risk appetite; delegation of authority,
decision making and accountability; risk management, risk taking and risk
ownership; oversight and controls; monitoring, reporting and escalation;
incentive compensation; shared services; recovery and resolution planning. The
Company also uses three lines of defense risk governance structure that assigns
responsibility for risk management among front-line business personnel, an
independent risk management function, and internal audit. The Chief Risk Officer
(CRO), who reports to the CEO and to the Risk Committee of the Board and is
independent of any business line, is responsible for developing and maintaining
a risk framework designed to ensure that risks are appropriately identified and
mitigated, and for reporting on the overall level of risk in the Company. The
CRO is also accountable to SHUSA's Chief Risk Officer .
The Risk Committee is charged with responsibility 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 Risk Committee meets no less often than quarterly and is chartered
to assist the Board in promoting the best interests of the Company by overseeing
policies, procedures and risk
62
--------------------------------------------------------------------------------
practices relating to enterprise-wide risk and compliance with regulatory
guidance. Members of the Risk Committee are individuals whose experiences and
qualifications provide broad and informed views on risk matters facing the
Company and the financial services industry, including, but not limited to, risk
matters that address credit, market, liquidity, operational, compliance and
other general business conditions. A comprehensive risk report is submitted by
the CRO to the Risk Committee of the Board at least quarterly providing
management's view of the Company's risk position.
In addition to the Board and the Risk Committee, the CEO and CRO delegate risk
responsibility to management committees. These committees include the Asset
Liability Committee (ALCO), the Enterprise Risk Management Committee (EMRC), and
the Executive Risk Committee. The CRO is a member of each of these committees
and chairs the ERMC.
Additionally, the Company has established an Enterprise Risk Management (ERM)
function and implemented a Board-approved Enterprise Risk Management Framework
to manage risks across the organization in a comprehensive, consistent and
effective fashion, enabling the firm to achieve its strategic priorities,
including its business plan, within its expressed risk appetite. Accordingly,
ERM oversees the implementation of the Board-approved Enterprise Risk Appetite
Framework through which ERM manages the Company's Risk Appetite Statement, which
details the type of risk and size of risk-taking activities permissible in the
course of executing business strategy.
Credit Risk
The risk inherent 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. 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 risk score using information fromCredit Bureau and credit application, placing the applicant in one of multiple 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 targeted returns. The Company's underwriting policy has also been adjusted to meet the requirements of the Company's contracts such as the MPLFA. 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 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 that are predominantly fixed rate and borrows 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 interest rate risk. As ofDecember 31, 2020 , the notional value of the Company's interest rate swap agreements was$2.7 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 ofDecember 31, 2020 the notional value of the Company's interest rate cap agreements was$20.4 billion , under which, all notional was executed Back-to-Back. 63 -------------------------------------------------------------------------------- The Company monitors its interest rate exposure by conducting interest rate sensitivity analysis. For purposes of estimating an 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 ofDecember 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$26 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 ofDecember 31, 2020 , the impact of a 100 basis point parallel increase in the interest rate curve would decrease the Company's MVE by$73 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 currently elected not to purchase residual value insurance, the Company's residual risk is somewhat mitigated by the residual risk-sharing agreement withFCA . 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 andFCA 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 withFCA through the year endedDecember 31, 2020 , approximately 90% 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 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 ofDecember 31, 2020 , it had thirteen); •that the Company relies on Santander and affiliates for no more than 30% of its funding (as ofDecember 31, 2020 , Santander and affiliates provided 26% of its funding); •that no single lender's commitment should comprise more than 33% of the overall committed external lines (as ofDecember 31, 2020 , the highest single lender's commitment was 16% (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 ofDecember 31, 2020 , one of the Company's warehouse facilities is 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 64 -------------------------------------------------------------------------------- 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 is designed to identify, measure, manage and report operational risks with increased focus on Third Party Risk Management, Business Continuity Management,Information Risk Management , Fraud Risk Management, and Regulatory Compliance Risk Management. Key program elements include Internal and External Event Reviews, Loss Monitoring and Reporting, Scenario Analysis, 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. Other Information Further information on risk factors can be found under Part I, Item 1A - "Risk Factors". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Part II, Item 7 - "Management's Discussion and Analysis of Financial Conditions and Results of Operations -Risk Management Framework" above.
65--------------------------------------------------------------------------------
© Edgar Online, source
