NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices
Santander Consumer USA Holdings Inc., a Delaware Corporation (together with its subsidiaries, SC or the Company), is the holding company for Santander Consumer USA Inc., an Illinois corporation, and its subsidiaries, a specialized consumer finance company focused on vehicle finance and third-party servicing. The Company’s primary business is the indirect origination and securitization of retail installment contracts principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers.
In conjunction with a
ten
-year private label financing agreement (the Chrysler Agreement) with Fiat Chrysler Automobiles US LLC (FCA) that became effective May 1, 2013, the Company offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.
The Company also originates vehicle loans through a Web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has several relationships through which it provides personal loans, private-label credit cards and other consumer finance products.
As of
September 30, 2016
, the Company was owned approximately
58.9%
by Santander Holdings USA, Inc. (SHUSA), a subsidiary of Banco Santander, S.A. (Santander), approximately
31.3%
by public shareholders, approximately
9.8%
by DDFS LLC, an entity affiliated with Thomas G. Dundon, the Company’s former Chairman and CEO and approximately
0.1%
by other holders, primarily members of senior management. Pursuant to a Separation Agreement with Mr. Dundon, SHUSA was deemed to have delivered, as of July 3, 2015, an irrevocable notice to exercise the call option with respect to all the shares of Company common stock owned by DDFS LLC and consummate the transactions contemplated by the call option notice, subject to required bank regulatory approvals and any other approvals required by law being obtained (the Call Transaction). Pursuant to the Separation Agreement, because the Call Transaction was not consummated prior to October 15, 2015 (the Call End Date), DDFS LLC is free to transfer any or all of its shares of Company common stock, subject to the terms and conditions of the Amended and Restated Loan Agreement, dated as of July 16, 2014, between DDFS LLC and Santander (Note 11).
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including certain Trusts, which are considered VIEs. The Company also consolidates other VIEs for which it was deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements as of
September 30, 2016
and
December 31, 2015
, and for the
three and nine
months ended
September 30, 2016
and
2015
, have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. These financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the year ended
December 31, 2015
.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, as of the date of the financial statements and the amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material. These estimates include the determination of credit loss allowance, discount accretion, impairment, fair value, expected end-of-term lease residual values, values of repossessed assets, and income taxes. These estimates, although based on actual historical trends and modeling, may potentially show significant variances over time.
Business Segment Information
The Company has
one
reportable segment: Consumer Finance, which includes the Company’s vehicle financial products and services, including retail installment contracts, vehicle leases, and dealer loans, as well as financial products and services related to motorcycles, recreational vehicles, and marine vehicles. It also includes the Company’s personal loan and point-of-sale financing operations.
Accounting Policies
There have been no material changes in the Company's accounting policies from those disclosed in Part II, Item 8 - Financial Statements and Supplementary Data in the Annual Report on Form 10-K/A for the year ended December 31, 2015 except as follows:
Retail Installment Contracts
Interest is accrued when earned in accordance with the terms of the retail installment contract. The accrual of interest is discontinued and reversed once a retail installment contract becomes more than
60
days past due, and is resumed and reinstated if a delinquent account subsequently becomes
60
days or less past due. A Chrysler Capital retail installment contract is considered current if the borrower has made all prior payments in full and at least
90%
of the payment currently due, and a non-Chrysler Capital retail installment contract is considered current if the borrower has made all prior payments in full and at least
50%
of the payment currently due. Payments generally are applied to fees first, then interest, then principal, regardless of a contract's accrual status.
The amortization of discounts, subvention payments from manufacturers, and other origination costs on retail installment contracts held for investment acquired individually, or through a direct lending program, are recognized as adjustments to the yield of the related contract using the effective interest method. The Company estimates future principal prepayments in the calculation of the constant effective yield.
Change in Accounting Principle
The Company tests goodwill for impairment annually in accordance with the provisions of ASC 350,
Intangibles-Goodwill and Other
. During the second quarter of fiscal year 2016, the Company changed the date of its annual impairment test from December 31 to October 1. This new testing date is preferable under the circumstances in order to align the Company’s policy with that of SHUSA. The Company has prospectively applied the change and confirmed the change in the annual impairment testing date did not delay, accelerate, or avoid an impairment charge.
Recently Adopted Accounting Standards
In June 2014, the FASB issued ASU 2014-12,
Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period.
This standard affects entities that issue share-based payments when the terms of an award stipulate that a performance target could be achieved after an employee completes the requisite service period. This guidance became effective for the Company January 1, 2016 and implementation of this guidance did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
In January 2015, the FASB issued ASU 2015-01,
Income Statement - Extraordinary and Unusual Items.
This standard simplifies income statement classification by removing the concept of extraordinary items from U.S. GAAP, and as a result, items that are both unusual and infrequent no longer will be separately reported net of tax after continuing operations. This guidance became effective for the Company January 1, 2016 and implementation of this guidance did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
In February 2015, the FASB issued ASU 2015-02,
Consolidation: Amendments to the Consolidation Analysis.
This ASU changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance became effective for the Company January 1, 2016 and implementation of this guidance did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
In April 2015, the FASB issued ASU 2015-05,
Customer's Accounting for Fees Paid in a Cloud Computing Arrangement.
This ASU clarifies when fees paid in a cloud computing arrangement pertain to the acquisition of a software license, services, or both. This guidance became effective for the Company January 1, 2016 and
implementation of this guidance did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,
which provides guidance on a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The effective date for this ASU, which was deferred by ASU 2015-14 issued in August 2015, is for fiscal years beginning after December 15, 2017. In March 2016, the FASB issued ASU 2016-08, an amendment to the guidance in ASU 2014-09 that revises the structure of the indicators to provide indicators of when the entity is the principal or agent in a revenue transaction, and eliminated two of the indicators ("the entity’s consideration is in the form of a commission" and "the entity is not exposed to credit risk") in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. In April 2016, the FASB issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services and on determining whether an entity's promise to grant a license with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). Also, in May 2016, the FASB issued ASU 2016-12, which provides clarifying guidance in a few narrow areas and adds some practical expedient to the guidance. The amendments are expected to reduce the degree of judgment necessary to comply with the revenue recognition topic.The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. Early adoption of the guidance is not permitted. The Company is currently evaluating the impact of adopting ASU 2014-09 and the related updates on its financial position, results of operations and disclosures.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of Financial Assets and Financial Liabilities
, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In February 2016, the FASB issued ASU 2016-02,
Leases,
which will, among other impacts, change the criteria under which leases are identified and accounted for as on- or off-balance sheet. The guidance will be effective for the fiscal year beginning after December 15, 2018, including interim periods within that year. Once effective, the new guidance must be applied for all periods presented. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment award transactions. The guidance will be effective for the fiscal year beginning after December 15, 2016, including interim periods within that year. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses,
which changes the criteria under which credit losses are measured. The amendment replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to perform credit loss estimates. The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows-Classification of Certain Cash Receipts and Cash Payments,
which provides guidance on several specific cash flow issues. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In October 2016, the FASB issued ASU 2016-17,
Consolidation: Interest Held Through Related Parties That Are Under Common Control,
which will
c
hange the evaluation of whether a reporting entity is the primary beneficiary of a VIE by changing how a reporting entity that is a single decision maker of a VIE treats indirect interests in the entity held through related parties that are under common control with the reporting entity. The guidance will be effective for the fiscal year beginning after December 15, 2016, including interim periods within that year. The Company is in the process of evaluating the impacts of the adoption of this ASU.
Held For Investment
Finance receivables held for investment, net is comprised of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
Retail installment contracts acquired individually
|
$
|
23,404,055
|
|
|
$
|
23,004,065
|
|
Purchased receivables
|
174,702
|
|
|
239,551
|
|
Receivables from dealers
|
69,718
|
|
|
76,025
|
|
Personal loans
|
11,537
|
|
|
941
|
|
Capital lease receivables (Note 3)
|
26,379
|
|
|
47,206
|
|
|
$
|
23,686,391
|
|
|
$
|
23,367,788
|
|
The Company's held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans was comprised of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Retail Installment Contracts
Acquired
Individually
|
|
Receivables from
Dealers
|
|
Personal Loans
|
Unpaid principal balance
|
$
|
27,370,995
|
|
|
$
|
70,366
|
|
|
$
|
11,682
|
|
Credit loss allowance (Note 4)
|
(3,401,285
|
)
|
|
(648
|
)
|
|
—
|
|
Discount
|
(622,833
|
)
|
|
—
|
|
|
(2,577
|
)
|
Capitalized origination costs and fees
|
57,178
|
|
|
—
|
|
|
2,432
|
|
Net carrying balance
|
$
|
23,404,055
|
|
|
$
|
69,718
|
|
|
$
|
11,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Retail Installment Contracts
Acquired
Individually
|
|
Receivables from
Dealers
|
|
Personal Loans
|
Unpaid principal balance
|
$
|
26,863,946
|
|
|
$
|
76,941
|
|
|
$
|
941
|
|
Credit loss allowance (Note 4)
|
(3,197,414
|
)
|
|
(916
|
)
|
|
—
|
|
Discount
|
(722,701
|
)
|
|
—
|
|
|
—
|
|
Capitalized origination costs and fees
|
60,234
|
|
|
—
|
|
|
—
|
|
Net carrying balance
|
$
|
23,004,065
|
|
|
$
|
76,025
|
|
|
$
|
941
|
|
Retail installment contracts are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company’s retail installment contracts held for investment are pledged against warehouse facilities or securitization bonds (Note 5). Most of the borrowers on the Company’s retail installment contracts held for investment are retail consumers; however,
$911,062
and
$1,087,024
of the unpaid principal balance represented fleet contracts with commercial borrowers as of
September 30, 2016
and
December 31, 2015
, respectively.
As of
September 30, 2016
, borrowers on the Company’s retail installment contracts held for investment are located in Texas (
17%
), Florida (
13%
), California (
10%
), Georgia (
5%
) and other states each individually representing less than
5%
of the Company’s total.
Purchased receivables portfolios, which were acquired with deteriorated credit quality, were comprised of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
Outstanding balance
|
$
|
254,554
|
|
|
$
|
362,212
|
|
Outstanding recorded investment, net of impairment
|
$
|
174,702
|
|
|
$
|
239,551
|
|
Changes in accretable yield on the Company’s purchased receivables portfolios for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance — beginning of period
|
$
|
137,747
|
|
|
$
|
284,460
|
|
|
$
|
178,582
|
|
|
$
|
268,927
|
|
Accretion of accretable yield
|
(17,830
|
)
|
|
(16,770
|
)
|
|
(58,774
|
)
|
|
(66,450
|
)
|
Reclassifications from (to) nonaccretable difference
|
(8,627
|
)
|
|
(43,297
|
)
|
|
(8,518
|
)
|
|
21,916
|
|
Balance — end of period
|
$
|
111,290
|
|
|
$
|
224,393
|
|
|
$
|
111,290
|
|
|
$
|
224,393
|
|
During the
three and nine
months ended
September 30, 2016
and
2015
, the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected. However, during the
three and nine
months ended
September 30, 2016
, the Company recognized certain retail installment contracts with an unpaid principal balance of
$135,772
and
$327,443
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 are carried at amortized cost, net of allowance for credit losses. The Company elected the fair value option for all non-performing loans acquired (more than
60 days
delinquent as of re-recognition date), for which it was probable that not all contractually required payments would be collected (Note 13).
Receivables from dealers held for investment includes a term loan with a third-party vehicle dealer and lender that operates in multiple states. The loan allowed committed borrowings of
$50,000
at
September 30, 2016
and
December 31, 2015
, and the unpaid principal balance of the facility was
$50,000
at each of those dates. The term loan will mature on
December 31, 2018
. The Company had accrued interest on this term loan of
$153
and
$156
at
September 30, 2016
and
December 31, 2015
, respectively.
The remaining receivables from dealers held for investment are all Chrysler Agreement-related. As of
September 30, 2016
, borrowers on these dealer receivables are located in Virginia (
51%
), New York (
24%
), Mississippi (
15%
), Missouri (
9%
) and other states each individually representing less than
5%
of the Company’s total.
As of September 30, 2015, the Company determined that it no longer had the intent to hold its personal loans for investment and that classification of all of its personal loans as held for sale was appropriate as of that date. In connection with the reclassification to held for sale, the Company transferred the personal loan portfolio at the lower of cost or market, with the lower of cost or market adjustment being charged off against the credit loss allowance. Loan originations and purchases under the Company’s personal lending platform subsequent to September 30, 2015, also are classified as held for sale. Following the reclassification of personal loans to held for sale, further adjustments to the recorded investment in personal loans held for sale, whether due to customer default or changes in market value, are recorded in investment gains (losses), net, in the condensed consolidated statements of income and comprehensive income (Note 16). On February 1, 2016, the Company sold personal installment loans with an unpaid principal balance of
$869,349
to a third party for an immaterial gain to unpaid principal balance.
At
December 31, 2015
, the Company determined that its intent to sell certain non-performing personal installment loans had changed and now expects to hold these loans through their maturity. The Company recorded a lower of cost or market adjustment through investment gains (losses), net, immediately prior to transferring the loans to finance receivables held for investment at their new recorded investment. The carrying value of these loans was
$662
and
$941
at
September 30, 2016
and
December 31, 2015
, respectively.
At
September 30, 2016
, the Company determined that its intent to sell certain personal revolving loans had changed and now expects to hold these loans through their maturity. The Company recorded a lower of cost or market adjustment of
$1,986
through investment gains (losses), net, immediately prior to transferring the loans to finance receivables held for investment at their new recorded investment. The carrying value of these loans was
$10,875
at September 30, 2016.
Held For Sale
The carrying value of the Company's finance receivables held for sale was comprised of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
Retail installment contracts acquired individually
|
$
|
1,652,106
|
|
|
$
|
905,161
|
|
Personal loans
|
920,323
|
|
|
1,954,414
|
|
|
$
|
2,572,429
|
|
|
$
|
2,859,575
|
|
Sales of retail installment contracts to third parties and proceeds from sales of charged-off assets for the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Sales of retail installment contracts to third parties
|
$
|
793,804
|
|
|
$
|
3,057,654
|
|
|
$
|
2,312,983
|
|
|
$
|
5,993,407
|
|
Proceeds from sales of charged-off assets
|
12,521
|
|
|
13,730
|
|
|
47,594
|
|
|
117,693
|
|
The Company retains servicing of retail installment contracts and leases sold to third parties. Total contracts sold to unrelated third parties and serviced as of
September 30, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
Serviced balance of retail installment contracts and leases sold to third parties
|
$
|
10,088,086
|
|
|
$
|
12,155,844
|
|
The Company has both operating and capital leases, which are separately accounted for and recorded on the Company's condensed consolidated balance sheets. Operating leases are reported as leased vehicles, net, while capital leases are included in finance receivables held for investment, net.
Operating Leases
Leased vehicles, net, which is comprised of leases originated under the Chrysler Agreement, consisted of the following as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Leased vehicles
|
$
|
11,696,109
|
|
|
$
|
8,836,710
|
|
Less: accumulated depreciation
|
(2,143,670
|
)
|
|
(1,510,414
|
)
|
Depreciated net capitalized cost
|
9,552,439
|
|
|
7,326,296
|
|
Manufacturer subvention payments, net of accretion
|
(1,105,366
|
)
|
|
(845,142
|
)
|
Origination fees and other costs
|
20,056
|
|
|
16,156
|
|
Net book value
|
$
|
8,467,129
|
|
|
$
|
6,497,310
|
|
During the
three and nine
months ended September 30,
2015
, the Company executed bulk sales of Chrysler Capital leases with an aggregate depreciated net capitalized cost of
zero
and
$1,316,958
, respectively, and a net book value of
zero
and
$1,155,171
, respectively, to a third party. The bulk sale agreements included certain provisions whereby the Company agreed to share in residual losses for lease terminations with losses over a specific percentage threshold (Note 10). The Company retained servicing on the sold leases. Due to the accelerated depreciation permitted for tax purposes, the sales generated large taxable gains that the Company deferred through a qualified like-kind exchange program. An immaterial amount of taxable gain that did not qualify for deferral was recognized upon expiration of the reinvestment period. No such bulk sales occurred during the
three and nine
months ended
September 30, 2016
.
The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of
September 30, 2016
:
|
|
|
|
|
|
|
Remainder of 2016
|
$
|
395,131
|
|
2017
|
1,338,060
|
|
2018
|
772,340
|
|
2019
|
163,867
|
|
2020
|
2,860
|
|
Thereafter
|
—
|
|
Total
|
$
|
2,672,258
|
|
Capital Leases
Certain leases originated by the Company are accounted for as capital leases, as the contractual residual values are nominal amounts. Capital lease receivables, net consisted of the following as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Gross investment in capital leases
|
$
|
47,012
|
|
|
$
|
91,393
|
|
Origination fees and other
|
176
|
|
|
155
|
|
Less: unearned income
|
(9,765
|
)
|
|
(24,464
|
)
|
Net investment in capital leases before allowance
|
37,423
|
|
|
67,084
|
|
Less: allowance for lease losses
|
(11,044
|
)
|
|
(19,878
|
)
|
Net investment in capital leases
|
$
|
26,379
|
|
|
$
|
47,206
|
|
The following summarizes the future minimum lease payments due to the Company as lessor under capital leases as of
September 30, 2016
:
|
|
|
|
|
|
|
Remainder of 2016
|
$
|
4,261
|
|
2017
|
16,967
|
|
2018
|
16,194
|
|
2019
|
6,957
|
|
2020
|
1,915
|
|
Thereafter
|
718
|
|
Total
|
$
|
47,012
|
|
|
|
4.
|
Credit Loss Allowance and Credit Quality
|
Credit Loss Allowance
The Company estimates the allowance for credit losses on individually acquired retail installment contracts and personal loans held for investment not classified as TDRs based on delinquency status, historical loss experience, estimated values of underlying collateral, when applicable, and various economic factors. In developing the allowance, the Company utilizes a loss emergence period assumption, a loss given default assumption applied to recorded investment, and a probability of default assumption based on a loss forecasting model. The loss emergence period assumption represents the average length of time between when a loss event is first estimated to have occurred and when the account is charged off. The recorded investment represents unpaid principal balance adjusted for unaccreted net discounts, subvention from manufacturers, and origination costs. Under this approach, the resulting allowance represents the expected net losses of recorded investment inherent in the portfolio. For loans classified as TDRs, impairment is measured based on the present value of expected future cash flows discounted at the original effective interest rate.
The Company maintains a general credit loss allowance for receivables from dealers based on risk ratings, and individually evaluates loans for specific impairment as necessary. As of
September 30, 2016
, the credit loss allowance for receivables from dealers is comprised of a general allowance of
$648
.
The activity in the credit loss allowance for individually acquired, dealer, and personal loans for the
three and nine
months ended
September 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
|
Retail Installment Contracts Acquired Individually
|
|
Receivables from Dealers
|
|
Retail Installment
Contracts
Acquired
Individually
|
|
Receivables
from Dealers
|
|
Personal Loans
|
Balance — beginning of period
|
$
|
3,422,736
|
|
|
$
|
837
|
|
|
$
|
2,927,624
|
|
|
$
|
968
|
|
|
$
|
384,735
|
|
Provision for credit losses
|
609,396
|
|
|
(189
|
)
|
|
619,895
|
|
|
(42
|
)
|
|
105,813
|
|
Charge-offs
|
(1,246,760
|
)
|
|
—
|
|
|
(1,062,598
|
)
|
|
—
|
|
|
(499,010
|
)
|
Recoveries
|
615,913
|
|
|
—
|
|
|
497,778
|
|
|
—
|
|
|
8,462
|
|
Balance — end of period
|
$
|
3,401,285
|
|
|
$
|
648
|
|
|
$
|
2,982,699
|
|
|
$
|
926
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
|
Retail Installment Contracts Acquired Individually
|
|
Receivables from Dealers
|
|
Retail Installment
Contracts
Acquired
Individually
|
|
Receivables
from Dealers
|
|
Personal Loans
|
Balance — beginning of period
|
$
|
3,197,414
|
|
|
$
|
916
|
|
|
$
|
2,586,685
|
|
|
$
|
674
|
|
|
$
|
348,660
|
|
Provision for credit losses
|
1,787,277
|
|
|
(133
|
)
|
|
1,607,376
|
|
|
252
|
|
|
324,634
|
|
Charge-offs
|
(3,429,905
|
)
|
|
(135
|
)
|
|
(2,753,753
|
)
|
|
—
|
|
|
(695,918
|
)
|
Recoveries
|
1,846,499
|
|
|
—
|
|
|
1,569,508
|
|
|
—
|
|
|
22,624
|
|
Transfers to held-for-sale
|
—
|
|
|
—
|
|
|
(27,117
|
)
|
|
—
|
|
|
—
|
|
Balance — end of period
|
$
|
3,401,285
|
|
|
$
|
648
|
|
|
$
|
2,982,699
|
|
|
$
|
926
|
|
|
$
|
—
|
|
The impairment activity related to purchased receivables portfolios for the
three and nine
months ended
September 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance — beginning of period
|
$
|
168,518
|
|
|
$
|
176,754
|
|
|
$
|
172,308
|
|
|
$
|
186,126
|
|
Incremental provisions for purchased receivable portfolios
|
—
|
|
|
175
|
|
|
—
|
|
|
475
|
|
Incremental reversal of provisions for purchased receivable portfolios
|
804
|
|
|
(2,675
|
)
|
|
(2,986
|
)
|
|
(12,347
|
)
|
Balance — end of period
|
$
|
169,322
|
|
|
$
|
174,254
|
|
|
$
|
169,322
|
|
|
$
|
174,254
|
|
The Company estimates lease losses on the capital lease receivable portfolio based on delinquency status and loss experience to date, as well as various economic factors. The activity in the lease loss allowance for capital leases for the
three and nine
months ended
September 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Balance — beginning of period
|
$
|
12,752
|
|
|
$
|
15,570
|
|
|
$
|
19,878
|
|
|
$
|
9,589
|
|
Provision for lease losses
|
387
|
|
|
756
|
|
|
(1,669
|
)
|
|
14,758
|
|
Charge-offs
|
(5,712
|
)
|
|
(11,304
|
)
|
|
(28,267
|
)
|
|
(30,694
|
)
|
Recoveries
|
3,617
|
|
|
8,277
|
|
|
21,102
|
|
|
19,646
|
|
Balance — end of period
|
$
|
11,044
|
|
|
$
|
13,299
|
|
|
$
|
11,044
|
|
|
$
|
13,299
|
|
Delinquencies
Retail installment contracts are classified as non-performing when they are greater than
60 days
past due as to contractual principal or interest payments. Dealer receivables are classified as non-performing when they are greater than
90 days
past due. At the time a loan is placed in non-performing status, previously accrued and uncollected interest is reversed against interest income. If an account is returned to a performing status, the Company returns to accruing interest on the contract.
A summary of delinquencies on our retail installment contracts held for investment portfolio as of
September 30, 2016
and
December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Retail Installment Contracts Held for Investment
|
|
Loans
Acquired
Individually
|
|
Purchased
Receivables
Portfolios
|
|
Total
|
Principal, 31-60 days past due
|
$
|
2,536,940
|
|
|
$
|
14,879
|
|
|
$
|
2,551,819
|
|
Delinquent principal over 60 days
|
1,260,255
|
|
|
7,695
|
|
|
1,267,950
|
|
Total delinquent principal
|
$
|
3,797,195
|
|
|
$
|
22,574
|
|
|
$
|
3,819,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Retail Installment Contracts Held for Investment
|
|
Loans
Acquired
Individually
|
|
Purchased
Receivables
Portfolios
|
|
Total
|
Principal, 31-60 days past due
|
$
|
2,454,986
|
|
|
$
|
30,442
|
|
|
$
|
2,485,428
|
|
Delinquent principal over 60 days
|
1,191,567
|
|
|
17,297
|
|
|
1,208,864
|
|
Total delinquent principal
|
$
|
3,646,553
|
|
|
$
|
47,739
|
|
|
$
|
3,694,292
|
|
The balances in the above tables reflect total unpaid principal balance rather than net recorded investment before allowance.
As of
September 30, 2016
and
December 31, 2015
, there were
no
receivables from dealers that were 31 days or more delinquent.
FICO
®
Distribution
— A summary of the credit risk profile of the Company’s retail installment contracts held for investment by FICO
®
distribution, determined at origination, as of
September 30, 2016
and
December 31, 2015
was as follows:
|
|
|
|
|
|
FICO
®
Band
|
|
September 30, 2016
|
|
December 31, 2015
|
Commercial (a)
|
|
3.3%
|
|
4.0%
|
No-FICOs
|
|
12.4%
|
|
12.2%
|
<540
|
|
22.2%
|
|
23.4%
|
540-599
|
|
31.1%
|
|
30.9%
|
600-639
|
|
17.2%
|
|
17.3%
|
>640
|
|
13.8%
|
|
12.2%
|
(a)
No FICO score is obtained on loans to commercial borrowers
Commercial Lending Credit Quality Indicators
— The credit quality of receivables from dealers, which are considered commercial loans, is summarized according to standard regulatory classifications as follows:
Pass — Asset is well-protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value less costs to acquire and sell any underlying collateral in a timely manner.
Special Mention — Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special Mention assets are not adversely classified.
Substandard — Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
Doubtful — Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.
Loss — Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some reco very or salvage value, but there is doubt as to whether, how much or when the recovery would occur.
The Company's risk department performs a commercial analysis and classifies certain loans over an internal threshold based on the classifications above. Fleet loan credit quality indicators for retail installment contracts held for investment with commercial borrowers as of
September 30, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Pass
|
$
|
44,905
|
|
|
$
|
39,270
|
|
Special Mention
|
15,655
|
|
|
5,466
|
|
Substandard
|
990
|
|
|
—
|
|
Doubtful
|
—
|
|
|
—
|
|
Loss
|
139
|
|
|
—
|
|
Total (a)
|
$
|
61,689
|
|
|
$
|
44,736
|
|
|
|
(a)
|
Fleet loans of
$849,373
and
$1,042,288
as of
September 30, 2016
and
December 31, 2015
, respectively, were excluded from the commercial analysis as these loans did not meet the internal threshold for review.
|
Commercial loan credit quality indicators for receivables from dealers held for investment as of
September 30, 2016
and
December 31, 2015
were as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Pass
|
$
|
68,305
|
|
|
$
|
68,873
|
|
Special Mention
|
—
|
|
|
8,068
|
|
Substandard
|
2,061
|
|
|
—
|
|
Doubtful
|
—
|
|
|
—
|
|
Loss
|
—
|
|
|
—
|
|
Unpaid principal balance
|
$
|
70,366
|
|
|
$
|
76,941
|
|
Troubled Debt Restructurings
In certain circumstances, the Company modifies the terms of its finance receivables to troubled borrowers. Modifications may include a reduction in interest rate, an extension of the maturity date, rescheduling of future cash flows, or a combination thereof. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the debtor’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all individually acquired retail installment contracts that have been modified at least once, deferred for a period of
90 days
or more, or deferred at least twice. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs. The purchased receivables portfolio, operating and capital leases, and loans held for sale, including personal loans, are excluded from the scope of the applicable guidance. As of
September 30, 2016
and
December 31, 2015
, there were
no
receivables from dealers classified as a TDR.
For loans not classified as TDRs, the Company generally estimates an appropriate allowance for credit losses based on delinquency status, the Company’s historical loss experience, estimated values of underlying collateral, and various
economic factors. Once a loan has been classified as a TDR, it is assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence.
The table below presents the Company’s TDRs as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
|
Retail Installment Contracts
|
Outstanding recorded investment
|
$
|
5,364,656
|
|
|
$
|
4,601,502
|
|
Impairment
|
(1,588,028
|
)
|
|
(1,363,023
|
)
|
Outstanding recorded investment, net of impairment
|
$
|
3,776,628
|
|
|
$
|
3,238,479
|
|
A summary of the Company’s delinquent TDRs at
September 30, 2016
and
December 31, 2015
, is as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
|
Retail Installment Contracts
|
Principal, 31-60 days past due
|
$
|
1,089,212
|
|
|
$
|
942,021
|
|
Delinquent principal over 60 days
|
593,713
|
|
|
510,015
|
|
Total delinquent TDR principal
|
$
|
1,682,925
|
|
|
$
|
1,452,036
|
|
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. Consistent with the Company’s other retail installment contracts, TDRs are placed on nonaccrual status when the account becomes past due more than
60 days
, and returns to accrual status when the account is
60 days
or less past due. Average recorded investment and income recognized on TDR loans are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
Average outstanding recorded investment in TDRs
|
$
|
5,213,132
|
|
|
$
|
4,380,037
|
|
|
$
|
16,991
|
|
Interest income recognized
|
$
|
207,115
|
|
|
$
|
211,354
|
|
|
$
|
1,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
Average outstanding recorded investment in TDRs
|
$
|
4,940,280
|
|
|
$
|
4,302,078
|
|
|
$
|
17,150
|
|
Interest income recognized
|
$
|
576,682
|
|
|
$
|
542,679
|
|
|
$
|
2,220
|
|
The following table summarizes the financial effects of TDRs that occurred during the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
Outstanding recorded investment before TDR
|
$
|
929,871
|
|
|
$
|
845,057
|
|
|
$
|
5,270
|
|
Outstanding recorded investment after TDR
|
$
|
932,472
|
|
|
$
|
852,415
|
|
|
$
|
5,241
|
|
Number of contracts (not in thousands)
|
52,780
|
|
|
48,883
|
|
|
4,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
Outstanding recorded investment before TDR
|
$
|
2,463,409
|
|
|
$
|
2,606,384
|
|
|
$
|
15,048
|
|
Outstanding recorded investment after TDR
|
$
|
2,478,035
|
|
|
$
|
2,627,451
|
|
|
$
|
14,961
|
|
Number of contracts (not in thousands)
|
139,524
|
|
|
151,625
|
|
|
12,555
|
|
A TDR is considered to have subsequently defaulted upon charge off, which for retail installment contracts is at the earlier of the date of repossession or the month in which the loan becomes greater than
120 days
past due and for revolving personal loans is generally the month in which the receivable becomes greater than
180 days
past due. Loan restructurings accounted for as TDRs within the previous twelve months that subsequently defaulted during the
three and nine
months ended
September 30, 2016
and
2015
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
Recorded investment in TDRs that subsequently defaulted
|
$
|
206,247
|
|
|
$
|
213,945
|
|
|
$
|
2,145
|
|
Number of contracts (not in thousands)
|
11,745
|
|
|
12,360
|
|
|
1,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
Recorded investment in TDRs that subsequently defaulted
|
$
|
565,724
|
|
|
$
|
567,213
|
|
|
$
|
5,346
|
|
Number of contracts (not in thousands)
|
32,256
|
|
|
33,097
|
|
|
4,919
|
|
5. Debt
Revolving Credit Facilities
The following table presents information regarding credit facilities as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Maturity Date(s)
|
|
Utilized Balance
|
|
Committed Amount
|
|
Effective Rate
|
|
Assets Pledged
|
|
Restricted Cash Pledged
|
Warehouse line
|
January 2018
|
|
$
|
293,084
|
|
|
$
|
500,000
|
|
|
2.13%
|
|
$
|
414,103
|
|
|
$
|
—
|
|
Warehouse line (a)
|
Various
|
|
800,385
|
|
|
1,250,000
|
|
|
1.84%
|
|
1,087,050
|
|
|
36,383
|
|
Warehouse line (b)
|
July 2017
|
|
963,120
|
|
|
1,260,000
|
|
|
1.96%
|
|
1,097,091
|
|
|
47,186
|
|
Warehouse line (c)
|
July 2017
|
|
2,695,143
|
|
|
2,940,000
|
|
|
1.96%
|
|
4,097,792
|
|
|
70,008
|
|
Warehouse line (d)
|
December 2017
|
|
1,044,377
|
|
|
1,800,000
|
|
|
1.84%
|
|
1,448,568
|
|
|
27,601
|
|
Repurchase facility (e)
|
December 2016
|
|
762,440
|
|
|
762,440
|
|
|
2.65%
|
|
—
|
|
|
32,344
|
|
Repurchase facility (e)
|
April 2017
|
|
235,509
|
|
|
235,509
|
|
|
1.84%
|
|
—
|
|
|
—
|
|
Warehouse line
|
March 2018
|
|
669,399
|
|
|
1,000,000
|
|
|
1.42%
|
|
939,409
|
|
|
28,150
|
|
Warehouse line (f)
|
November 2016
|
|
175,000
|
|
|
175,000
|
|
|
2.08%
|
|
—
|
|
|
—
|
|
Warehouse line (f)
|
November 2016
|
|
250,000
|
|
|
250,000
|
|
|
2.08%
|
|
—
|
|
|
2,503
|
|
Warehouse line
|
June 2017
|
|
219,372
|
|
|
250,000
|
|
|
2.83%
|
|
417,953
|
|
|
38,791
|
|
Warehouse line
|
January 2018
|
|
191,400
|
|
|
400,000
|
|
|
2.06%
|
|
265,416
|
|
|
5,505
|
|
Total facilities with third parties
|
|
|
8,299,229
|
|
|
10,822,949
|
|
|
|
|
9,767,382
|
|
|
288,471
|
|
Lines of credit with Santander and related subsidiaries (g):
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
December 2016
|
|
500,000
|
|
|
500,000
|
|
|
2.83%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
—
|
|
|
500,000
|
|
|
3.48%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2016
|
|
1,000,000
|
|
|
1,000,000
|
|
|
2.83%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
550,000
|
|
|
1,000,000
|
|
|
2.89%
|
|
—
|
|
|
—
|
|
Line of credit
|
March 2017
|
|
300,000
|
|
|
300,000
|
|
|
2.07%
|
|
—
|
|
|
—
|
|
Line of credit (h)
|
March 2019
|
|
—
|
|
|
1,500,000
|
|
|
3.53%
|
|
—
|
|
|
—
|
|
Total facilities with Santander and related subsidiaries
|
|
|
2,350,000
|
|
|
4,800,000
|
|
|
|
|
—
|
|
|
—
|
|
Total revolving credit facilities
|
|
|
$
|
10,649,229
|
|
|
$
|
15,622,949
|
|
|
|
|
$
|
9,767,382
|
|
|
$
|
288,471
|
|
|
|
(a)
|
Half of the outstanding balance on this facility matures in March 2017 and half matures in March 2018.
|
|
|
(b)
|
This line is held exclusively for financing of Chrysler Capital loans.
|
|
|
(c)
|
This line is held exclusively for financing of Chrysler Capital leases.
|
|
|
(d)
|
On November 4, 2016, the maturity date of this facility was extended to October 2018.
|
|
|
(e)
|
These repurchase facilities are collateralized by securitization notes payable retained by the Company. These facilities have rolling maturities of up to
one year
.
|
|
|
(f)
|
These lines are collateralized by residuals retained by the Company.
|
|
|
(g)
|
These lines generally are also collateralized by securitization notes payable and residuals retained by the Company. As of
September 30, 2016
and
December 31, 2015
,
$1,800,000
and
$1,420,584
of the aggregate outstanding balances on these facilities were unsecured.
|
|
|
(h)
|
On November 1, 2016, this facility was amended to increase the committed amount to
$3,000,000
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Maturity Date(s)
|
|
Utilized Balance
|
|
Committed Amount
|
|
Effective Rate
|
|
Assets Pledged
|
|
Restricted Cash Pledged
|
Warehouse line
|
June 2016
|
|
$
|
378,301
|
|
|
$
|
500,000
|
|
|
1.48%
|
|
$
|
535,737
|
|
|
$
|
—
|
|
Warehouse line
|
Various
|
|
808,135
|
|
|
1,250,000
|
|
|
1.29%
|
|
1,137,257
|
|
|
24,942
|
|
Warehouse line
|
July 2017
|
|
682,720
|
|
|
1,260,000
|
|
|
1.35%
|
|
809,185
|
|
|
20,852
|
|
Warehouse line
|
July 2017
|
|
2,247,443
|
|
|
2,940,000
|
|
|
1.41%
|
|
3,412,321
|
|
|
48,589
|
|
Warehouse line
|
December 2017
|
|
944,877
|
|
|
2,000,000
|
|
|
1.56%
|
|
1,345,051
|
|
|
32,038
|
|
Repurchase facility
|
December 2016
|
|
850,904
|
|
|
850,904
|
|
|
2.07%
|
|
—
|
|
|
34,166
|
|
Warehouse line
|
September 2017
|
|
565,399
|
|
|
1,000,000
|
|
|
1.20%
|
|
824,327
|
|
|
15,759
|
|
Warehouse line
|
November 2016
|
|
175,000
|
|
|
175,000
|
|
|
1.90%
|
|
—
|
|
|
—
|
|
Warehouse line
|
November 2016
|
|
250,000
|
|
|
250,000
|
|
|
1.90%
|
|
—
|
|
|
2,501
|
|
Total facilities with third parties
|
|
|
6,902,779
|
|
|
10,225,904
|
|
|
|
|
8,063,878
|
|
|
178,847
|
|
Lines of credit with Santander and related subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
December 2016
|
|
500,000
|
|
|
500,000
|
|
|
2.65%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
—
|
|
|
500,000
|
|
|
3.48%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2016
|
|
1,000,000
|
|
|
1,750,000
|
|
|
2.61%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
800,000
|
|
|
1,750,000
|
|
|
2.84%
|
|
—
|
|
|
—
|
|
Line of credit
|
March 2017
|
|
300,000
|
|
|
300,000
|
|
|
1.88%
|
|
—
|
|
|
—
|
|
Total facilities with Santander and related subsidiaries
|
|
|
2,600,000
|
|
|
4,800,000
|
|
|
|
|
—
|
|
|
—
|
|
Total revolving credit facilities
|
|
|
$
|
9,502,779
|
|
|
$
|
15,025,904
|
|
|
|
|
$
|
8,063,878
|
|
|
$
|
178,847
|
|
Facilities with Third Parties
The warehouse lines and repurchase facility are fully collateralized by a designated portion of the Company’s retail installment contracts (Note 2), leased vehicles (Note 3), securitization notes payables and residuals retained by the Company.
Lines of Credit with Santander and Related Subsidiaries
Through its New York branch, Santander provides the Company with
$3,000,000
of long-term committed revolving credit facilities. Through SHUSA, Santander provides the Company with an additional
$300,000
of committed revolving credit, collateralized by residuals retained on the Company's own securitizations, and
$1,500,000
of committed revolving credit that can be drawn on an unsecured basis.
The facilities offered through the New York branch are structured as
three
- and
five
-year floating rate facilities, with current maturity dates of
December 31, 2016
and
December 31, 2018
, respectively. These facilities currently permit unsecured borrowing but generally are collateralized by retail installment contracts and retained residuals. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.
Secured Structured Financings
The following table presents information regarding secured structured financings as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Original Estimated Maturity Date(s)
|
|
Balance
|
|
Initial Note Amounts Issued
|
|
Initial Weighted Average Interest Rate
|
|
Collateral
|
|
Restricted Cash
|
2012 Securitizations
|
September 2018
|
|
$
|
247,325
|
|
|
$
|
2,525,540
|
|
|
0.92%-1.23%
|
|
$
|
368,558
|
|
|
$
|
77,598
|
|
2013 Securitizations
|
January 2019 - March 2021
|
|
1,375,371
|
|
|
6,689,700
|
|
|
0.89%-1.59%
|
|
1,712,149
|
|
|
237,995
|
|
2014 Securitizations
|
February 2020 - January 2021
|
|
1,903,310
|
|
|
6,391,020
|
|
|
1.16%-1.72%
|
|
2,674,446
|
|
|
269,996
|
|
2015 Securitizations
|
September 2019 - January 2023
|
|
4,855,706
|
|
|
9,317,032
|
|
|
1.33%-2.29%
|
|
6,476,951
|
|
|
514,289
|
|
2016 Securitizations
|
April 2022 - August 2023
|
|
3,982,411
|
|
|
4,942,980
|
|
|
1.72%-2.46%
|
|
5,100,728
|
|
|
281,603
|
|
Securitizations (a)
|
|
|
12,364,123
|
|
|
29,866,272
|
|
|
|
|
16,332,832
|
|
|
1,381,481
|
|
2010 Private issuances (b)
|
June 2011
|
|
128,476
|
|
|
516,000
|
|
|
1.29%
|
|
228,386
|
|
|
6,867
|
|
2011 Private issuances
|
December 2018
|
|
457,608
|
|
|
1,700,000
|
|
|
1.46%
|
|
727,553
|
|
|
37,493
|
|
2013 Private issuances
|
September 2018-September 2020
|
|
2,859,166
|
|
|
2,693,754
|
|
|
1.13%-1.38%
|
|
4,766,571
|
|
|
160,560
|
|
2014 Private issuances
|
March 2018 - December 2021
|
|
842,840
|
|
|
3,271,175
|
|
|
1.05%-1.40%
|
|
1,375,245
|
|
|
69,345
|
|
2015 Private issuances
|
December 2016 - July 2019
|
|
2,043,306
|
|
|
2,605,062
|
|
|
0.88%-2.81%
|
|
1,983,380
|
|
|
114,398
|
|
2016 Private issuances
|
May 2020 - June 2023
|
|
2,455,147
|
|
|
2,750,000
|
|
|
1.55%-2.86%
|
|
3,383,824
|
|
|
74,441
|
|
Privately issued amortizing notes
|
|
|
8,786,543
|
|
|
13,535,991
|
|
|
|
|
12,464,959
|
|
|
463,104
|
|
Total secured structured financings
|
|
|
$
|
21,150,666
|
|
|
$
|
43,402,263
|
|
|
|
|
$
|
28,797,791
|
|
|
$
|
1,844,585
|
|
|
|
(a)
|
Securitizations executed under Rule 144A of the Securities Act are included within this balance.
|
|
|
(b)
|
Securitization was subsequently amended to extend the maturity date to June 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Original Estimated Maturity Date(s)
|
|
Balance
|
|
Initial Note Amounts Issued
|
|
Initial Weighted Average Interest Rate
|
|
Collateral
|
|
Restricted Cash
|
2012 Securitizations
|
September 2018
|
|
$
|
433,771
|
|
|
$
|
2,525,540
|
|
|
0.92%-1.23%
|
|
$
|
580,581
|
|
|
$
|
84,231
|
|
2013 Securitizations
|
January 2019 - January 2021
|
|
2,000,915
|
|
|
6,689,700
|
|
|
0.89%-1.59%
|
|
2,577,552
|
|
|
267,623
|
|
2014 Securitizations
|
February 2020 - January 2021
|
|
2,956,273
|
|
|
6,391,020
|
|
|
1.16%-1.72%
|
|
3,894,365
|
|
|
313,356
|
|
2015 Securitizations
|
September 2019 - January 2023
|
|
7,269,037
|
|
|
9,317,032
|
|
|
1.33%-2.29%
|
|
9,203,569
|
|
|
577,647
|
|
Securitizations
|
|
|
12,659,996
|
|
|
24,923,292
|
|
|
|
|
16,256,067
|
|
|
1,242,857
|
|
2010 Private issuances
|
June 2011
|
|
108,201
|
|
|
516,000
|
|
|
1.29%
|
|
240,026
|
|
|
6,855
|
|
2011 Private issuances
|
December 2018
|
|
708,884
|
|
|
1,700,000
|
|
|
1.46%
|
|
1,142,853
|
|
|
50,432
|
|
2013 Private issuances
|
September 2018-September 2020
|
|
2,836,420
|
|
|
2,693,754
|
|
|
1.13%-1.38%
|
|
4,311,481
|
|
|
143,450
|
|
2014 Private issuances
|
March 2018 - December 2021
|
|
1,541,970
|
|
|
3,271,175
|
|
|
1.05%-1.40%
|
|
2,192,495
|
|
|
95,325
|
|
2015 Private issuances
|
November 2016 - May 2020
|
|
3,017,429
|
|
|
3,548,242
|
|
|
0.88%-2.81%
|
|
3,608,497
|
|
|
161,778
|
|
Privately issued amortizing notes
|
|
|
8,212,904
|
|
|
11,729,171
|
|
|
|
|
11,495,352
|
|
|
457,840
|
|
Total secured structured financings
|
|
|
$
|
20,872,900
|
|
|
$
|
36,652,463
|
|
|
|
|
$
|
27,751,419
|
|
|
$
|
1,700,697
|
|
Most of the Company’s secured structured financings are in the form of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company’s securitizations and private issuances are collateralized by vehicle retail installment contracts and loans or leases. As of
September 30, 2016
and
December 31, 2015
, the Company had private issuances of notes backed by vehicle leases totaling
$4,313,052
and
$3,228,240
, respectively.
Unamortized debt issuance costs are amortized as interest expense over the terms of the related notes payable using the effective interest method and are classified as a discount to the related recorded debt balance. For securitizations, the term takes into consideration the expected execution of the contractual call option, if applicable. Amortization of premium or accretion of discount on acquired notes payable is also included in interest expense using the effective interest method over the estimated remaining life of the acquired notes. Total interest expense on secured structured financings for the
three
months ended
September 30, 2016
and
2015
was
$108,720
and
$76,787
, respectively. Total interest expense on secured structured financings for the
nine
months ended
September 30, 2016
and
2015
was
$305,677
and
$207,967
, respectively.
|
|
6.
|
Variable Interest Entities
|
The Company transfers retail installment contracts and leased vehicles into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. These transactions are structured without recourse. The Trusts are considered VIEs under U.S. GAAP and, when the Company holds the residual interest, are consolidated because the Company has: (a) power over the significant activities of each entity as servicer of its financial assets and (b) through the residual interest and in some cases debt securities held by the Company, an obligation to absorb losses or the right to receive benefits from each VIE that are potentially significant to the VIE. When the Company does not retain any debt or equity interests in its securitizations or subsequently sells such interests, it records these transactions as sales of the associated retail installment contracts.
The collateral, borrowings under credit facilities and securitization notes payable of the Company's consolidated VIEs remain on the condensed consolidated balance sheets. The Company recognizes finance charges, fee income, and provision for credit losses on the retail installment contracts, and leased vehicles and interest expense on the debt. All of the Trusts are separate legal entities and the collateral and other assets held by these subsidiaries are legally owned by them and are not available to other creditors.
Revolving credit facilities generally also utilize Trusts that are considered VIEs.
The Company also uses a titling trust to originate and hold its leased vehicles and the associated leases, in order to facilitate the pledging of leases to financing facilities or the sale of leases to other parties without incurring the costs and administrative burden of retitling the leased vehicles. This titling trust is considered a VIE.
On-balance sheet variable interest entities
The Company retains servicing for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in fees, commissions and other income. As of
September 30, 2016
and
December 31, 2015
, the Company was servicing
$28,459,531
and
$27,995,907
, respectively, of gross retail installment contracts that have been transferred to consolidated Trusts. The remainder of the Company’s retail installment contracts remain unpledged.
A summary of the cash flows received from consolidated securitization trusts during the
three and nine
months ended
September 30, 2016
and
2015
, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Assets securitized
|
$
|
2,043,114
|
|
|
$
|
4,761,341
|
|
|
$
|
12,026,706
|
|
|
$
|
14,828,478
|
|
|
|
|
|
|
|
|
|
Net proceeds from new securitizations (a)
|
$
|
1,688,822
|
|
|
$
|
3,840,369
|
|
|
$
|
9,509,135
|
|
|
$
|
11,816,224
|
|
Net proceeds from sale of retained bonds
|
—
|
|
|
—
|
|
|
128,798
|
|
|
—
|
|
Cash received for servicing fees (b)
|
200,634
|
|
|
182,960
|
|
|
595,070
|
|
|
518,563
|
|
Net distributions from Trusts (b)
|
776,306
|
|
|
486,377
|
|
|
2,167,512
|
|
|
1,558,772
|
|
Total cash received from Trusts
|
$
|
2,665,762
|
|
|
$
|
4,509,706
|
|
|
$
|
12,400,515
|
|
|
$
|
13,893,559
|
|
|
|
(a)
|
Includes additional advances on existing securitizations.
|
|
|
(b)
|
These amounts are not reflected in the accompanying condensed consolidated statements of cash flows because these cash flows are intra-company and eliminated in consolidation.
|
Off-balance sheet variable interest entities
The Company has completed sales to VIEs that met sale accounting treatment in accordance with the applicable guidance. Due to the nature, purpose, and activity of the transactions, the Company determined for consolidation purposes that it either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. For such transactions, the transferred financial assets are removed from the Company's condensed consolidated balance sheets. In certain situations, the Company remains the servicer of the financial assets and receives servicing fees that represent adequate compensation, and may reacquire assets from the Trusts through the exercise of an optional clean-up call, as permitted through the respective servicing agreements. The Company also recognizes a gain or loss for the difference between the cash proceeds and carrying value of the assets sold.
During the
three and nine
months ended
September 30, 2016
, the Company executed no off-balance sheet securitizations with VIEs with which it has continuing involvement. During the
three and nine
months ended
September 30, 2015
, the Company sold
zero
and
$768,561
respectively, of gross retail installment contracts to a VIE in an off-balance sheet securitization. As of
September 30, 2016
and
December 31, 2015
, the Company was servicing
$2,313,773
and
$3,897,223
, respectively, of gross retail installment contracts that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. Other than repurchases of sold assets due to standard representations and warranties, the Company has
no
exposure to loss as a result of its involvement with these VIEs.
A summary of the cash flows received from off-balance sheet securitization trusts during the
three and nine
months ended
September 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Receivables securitized
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
768,561
|
|
|
|
|
|
|
|
|
|
Net proceeds from new securitizations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
785,983
|
|
Cash received for servicing fees
|
10,027
|
|
|
5,955
|
|
|
38,885
|
|
|
17,578
|
|
Total cash received from securitization trusts
|
$
|
10,027
|
|
|
$
|
5,955
|
|
|
$
|
38,885
|
|
|
$
|
803,561
|
|
|
|
7.
|
Derivative Financial Instruments
|
The Company manages its exposure to changing interest rates using derivative financial instruments. In certain circumstances, the Company is required to hedge its interest rate risk on its secured structured financings and the borrowings under its revolving credit facilities. The Company uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by securitization Trusts and borrowings under the Company's warehouse facilities. Certain of the Company’s interest rate swap agreements are designated as cash flow hedges for accounting purposes. Changes in the fair value of derivatives designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (AOCI), to the extent that the hedge relationships are effective, and amounts are reclassified from AOCI to earnings as the forecasted transactions impact earnings. Ineffectiveness, if any, associated with changes in the fair value of derivatives designated as cash flow hedges is recorded currently in earnings.
The Company’s remaining interest rate swap agreements, as well as its interest rate cap agreements and the corresponding options written in order to offset the interest rate cap agreements and a total return settlement agreement are not designated as hedges for accounting purposes. Changes in the fair value of derivative instruments not designated as hedges for accounting purposes are reflected in earnings.
The underlying notional amounts and aggregate fair values of these agreements at
September 30, 2016
and
December 31, 2015
, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Notional
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
Interest rate swap agreements designated as cash flow hedges
|
$
|
8,849,800
|
|
|
$
|
(43,571
|
)
|
|
$
|
9,150,000
|
|
|
$
|
1,706
|
|
Interest rate swap agreements not designated as hedges
|
1,241,600
|
|
|
(3,262
|
)
|
|
2,399,000
|
|
|
(1,306
|
)
|
Interest rate cap agreements
|
9,824,251
|
|
|
11,709
|
|
|
10,013,912
|
|
|
32,951
|
|
Options for interest rate cap agreements
|
9,824,251
|
|
|
(11,794
|
)
|
|
10,013,912
|
|
|
(32,977
|
)
|
Total return settlement
|
658,471
|
|
|
(29,864
|
)
|
|
1,404,726
|
|
|
(53,432
|
)
|
The aggregate fair value of the interest rate swap agreements is included on the Company’s condensed consolidated balance sheets in other assets or other liabilities, as appropriate. The interest rate cap agreements are included in other assets, and the related options in other liabilities, on the Company’s condensed consolidated balance sheets. See Note 13 for additional disclosure of fair value and balance sheet location of the Company's derivative financial instruments.
The Company is the holder of a warrant that gives it the right, if certain vesting conditions are satisfied, to purchase additional shares in a company in which it has a cost method investment. This warrant was issued in 2012 and is carried at its estimated fair value of
zero
at
September 30, 2016
and
December 31, 2015
.
The Company is obligated to make purchase price holdback payments on a periodic basis to a third-party originator of loans that the Company has purchased, when losses are lower than originally expected. The Company also is obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans are greater than originally expected. As of September 30, 2016, all purchase price holdback payments, and all total return settlement payments due in 2016, have been made. These purchase price holdback payments and total return settlement payments are considered to be derivatives, collectively referred to herein as “total return settlement,” and accordingly are marked to fair value each reporting period.
The Company enters into legally enforceable master netting agreements that reduce risk by permitting netting of transactions, such as derivatives and collateral posting, with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in ISDA master agreements. The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting (ISDA) agreement. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offset in the Condensed Consolidated Balance Sheet” section of the tables below. Information on the offsetting of derivative assets and derivative liabilities due to the right of offset was as follows, as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial Assets
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet
|
|
Gross
Amounts of
Recognized
Assets
|
|
Gross Amounts
Offset in the Condensed
Consolidated
Balance Sheet
|
|
Net Amounts of Assets Presented
in the
Condensed Consolidated
Balance Sheet
|
|
Financial
Instruments
|
|
Cash
Collateral
Received
|
|
Net
Amount
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - Santander & affiliates
|
$
|
169
|
|
|
$
|
—
|
|
|
$
|
169
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
169
|
|
Interest rate swaps - third party
|
490
|
|
|
—
|
|
|
490
|
|
|
—
|
|
|
—
|
|
|
490
|
|
Interest rate caps - Santander & affiliates
|
3,727
|
|
|
—
|
|
|
3,727
|
|
|
—
|
|
|
—
|
|
|
3,727
|
|
Interest rate caps - third party
|
7,990
|
|
|
—
|
|
|
7,990
|
|
|
—
|
|
|
—
|
|
|
7,990
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
12,376
|
|
|
—
|
|
|
12,376
|
|
|
—
|
|
|
—
|
|
|
12,376
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total derivative assets
|
$
|
12,376
|
|
|
$
|
—
|
|
|
$
|
12,376
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,376
|
|
Total financial assets
|
$
|
12,376
|
|
|
$
|
—
|
|
|
$
|
12,376
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,376
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - Santander & affiliates
|
$
|
4,607
|
|
|
$
|
—
|
|
|
$
|
4,607
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,607
|
|
Interest rate swaps - third party
|
3,863
|
|
|
—
|
|
|
3,863
|
|
|
—
|
|
|
—
|
|
|
3,863
|
|
Interest rate caps - Santander & affiliates
|
12,724
|
|
|
—
|
|
|
12,724
|
|
|
—
|
|
|
—
|
|
|
12,724
|
|
Interest rate caps - third party
|
20,227
|
|
|
—
|
|
|
20,227
|
|
|
—
|
|
|
—
|
|
|
20,227
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
41,421
|
|
|
—
|
|
|
41,421
|
|
|
—
|
|
|
—
|
|
|
41,421
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total derivative assets
|
$
|
41,421
|
|
|
$
|
—
|
|
|
$
|
41,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,421
|
|
Total financial assets
|
$
|
41,421
|
|
|
$
|
—
|
|
|
$
|
41,421
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offsetting of Financial Liabilities
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet
|
|
Gross
Amounts of
Recognized
Liabilities
|
|
Gross Amounts
Offset in the Condensed
Consolidated
Balance Sheet
|
|
Net Amounts of Liabilities Presented
in the Condensed
Consolidated
Balance Sheet
|
|
Financial
Instruments
|
|
Cash
Collateral
Pledged (a)
|
|
Net
Amount
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - Santander & affiliates
|
$
|
11,939
|
|
|
$
|
—
|
|
|
$
|
11,939
|
|
|
$
|
—
|
|
|
$
|
(11,939
|
)
|
|
$
|
—
|
|
Interest rate swaps - third party
|
35,552
|
|
|
—
|
|
|
35,552
|
|
|
—
|
|
|
(35,552
|
)
|
|
—
|
|
Back to back - Santander & affiliates
|
3,727
|
|
|
—
|
|
|
3,727
|
|
|
—
|
|
|
(3,727
|
)
|
|
—
|
|
Back to back - third party
|
8,075
|
|
|
—
|
|
|
8,075
|
|
|
—
|
|
|
(8,075
|
)
|
|
—
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
59,293
|
|
|
—
|
|
|
59,293
|
|
|
—
|
|
|
(59,293
|
)
|
|
—
|
|
Total return settlement
|
29,864
|
|
|
—
|
|
|
29,864
|
|
|
—
|
|
|
—
|
|
|
29,864
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
29,864
|
|
|
—
|
|
|
29,864
|
|
|
—
|
|
|
—
|
|
|
29,864
|
|
Total derivative liabilities
|
$
|
89,157
|
|
|
$
|
—
|
|
|
$
|
89,157
|
|
|
$
|
—
|
|
|
$
|
(59,293
|
)
|
|
$
|
29,864
|
|
Total financial liabilities
|
$
|
89,157
|
|
|
$
|
—
|
|
|
$
|
89,157
|
|
|
$
|
—
|
|
|
$
|
(59,293
|
)
|
|
$
|
29,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps - Santander & affiliates
|
$
|
4,977
|
|
|
$
|
—
|
|
|
$
|
4,977
|
|
|
$
|
—
|
|
|
$
|
(3,430
|
)
|
|
$
|
1,547
|
|
Interest rate swaps - third party
|
3,093
|
|
|
—
|
|
|
3,093
|
|
|
—
|
|
|
(3,093
|
)
|
|
—
|
|
Back to back - Santander & affiliates
|
12,724
|
|
|
—
|
|
|
12,724
|
|
|
—
|
|
|
(12,270
|
)
|
|
454
|
|
Back to back - third party
|
20,253
|
|
|
—
|
|
|
20,253
|
|
|
—
|
|
|
(20,253
|
)
|
|
—
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
41,047
|
|
|
—
|
|
|
41,047
|
|
|
—
|
|
|
(39,046
|
)
|
|
2,001
|
|
Total return settlement
|
53,432
|
|
|
—
|
|
|
53,432
|
|
|
—
|
|
|
—
|
|
|
53,432
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
53,432
|
|
|
—
|
|
|
53,432
|
|
|
—
|
|
|
—
|
|
|
53,432
|
|
Total derivative liabilities
|
$
|
94,479
|
|
|
$
|
—
|
|
|
$
|
94,479
|
|
|
$
|
—
|
|
|
$
|
(39,046
|
)
|
|
$
|
55,433
|
|
Total financial liabilities
|
$
|
94,479
|
|
|
$
|
—
|
|
|
$
|
94,479
|
|
|
$
|
—
|
|
|
$
|
(39,046
|
)
|
|
$
|
55,433
|
|
|
|
(a)
|
Cash collateral pledged is reported in Other assets or Due from affiliate, as applicable, in the condensed consolidated balance sheet.
|
The gross gains (losses) reclassified from accumulated other comprehensive income (loss) to net income, and gains (losses) recognized in net income, are included as components of interest expense. The impacts on the condensed consolidated statements of income and comprehensive income for the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Recognized in Earnings
|
|
Gross Gains (Losses) Recognized in Accumulated Other Comprehensive Income (Loss)
|
|
Gross Gains (Losses) Reclassified From Accumulated Other Comprehensive
Income to Interest Expense
|
Interest rate swap agreements designated as cash flow hedges
|
$
|
293
|
|
|
$
|
27,764
|
|
|
$
|
(10,799
|
)
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Gains (losses) recognized in interest expense
|
$
|
(3,769
|
)
|
|
|
|
|
Gains (losses) recognized in operating expenses
|
$
|
343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
Recognized in Earnings
|
|
Gross Gains (Losses) Recognized in Accumulated Other Comprehensive Income (Loss)
|
|
Gross Gains (Losses) Reclassified From Accumulated Other Comprehensive
Income to Interest Expense
|
Interest rate swap agreements designated as cash flow hedges
|
$
|
—
|
|
|
$
|
(43,025
|
)
|
|
$
|
(13,446
|
)
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Gains (losses) recognized in interest expense
|
$
|
(3,746
|
)
|
|
|
|
|
Gains (losses) recognized in operating expenses
|
$
|
3,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Recognized in Earnings
|
|
Gross Gains (Losses) Recognized in Accumulated Other Comprehensive Income (Loss)
|
|
Gross Gains (Losses) Reclassified From Accumulated Other Comprehensive
Income to Interest Expense
|
Interest rate swap agreements designated as cash flow hedges
|
$
|
528
|
|
|
$
|
(81,247
|
)
|
|
$
|
(35,442
|
)
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Gains (losses) recognized in interest expense
|
$
|
2,428
|
|
|
|
|
|
Gains (losses) recognized in operating expenses
|
$
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
Recognized in Earnings
|
|
Gross Gains (Losses) Recognized in Accumulated Other Comprehensive Income (Loss)
|
|
Gross Gains (Losses) Reclassified From Accumulated Other Comprehensive
Income to Interest Expense
|
Interest rate swap agreements designated as cash flow hedges
|
$
|
223
|
|
|
$
|
(80,201
|
)
|
|
$
|
(35,783
|
)
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Gains (losses) recognized in interest expense
|
$
|
677
|
|
|
|
|
|
Gains (losses) recognized in operating expenses
|
$
|
(10,197
|
)
|
|
|
|
|
The ineffectiveness related to the interest rate swap agreements designated as cash flow hedges was insignificant for the three and
nine
months ended
September 30, 2016
and
2015
. The Company estimates that approximately
$48,000
of unrealized losses included in accumulated other comprehensive income (loss) will be reclassified to interest expense within the next twelve months.
Other assets were comprised as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Vehicles (a)
|
$
|
248,127
|
|
|
$
|
203,906
|
|
Manufacturer subvention payments receivable (b)
|
93,321
|
|
|
132,856
|
|
Upfront fee (b)
|
98,750
|
|
|
110,000
|
|
Derivative assets (Note 7)
|
77,460
|
|
|
59,022
|
|
Prepaids
|
33,221
|
|
|
33,183
|
|
Accounts receivable
|
19,884
|
|
|
27,028
|
|
Other
|
15,844
|
|
|
16,296
|
|
|
$
|
586,607
|
|
|
$
|
582,291
|
|
|
|
(a)
|
Includes vehicles obtained through repossession as well as vehicles obtained due to lease terminations.
|
|
|
(b)
|
These amounts relate to the Chrysler Agreement. The Company paid a
$150,000
upfront fee upon the May 2013 inception of the agreement. The fee is being amortized into finance and other interest income over a
ten
-year term. As the preferred financing provider for FCA, the Company is entitled to subvention payments on loans and leases with below-market customer payments.
|
The Company recorded income tax expense of
$90,473
(
29.8%
effective tax rate) and
$136,539
(
36.6%
effective tax rate) during the
three
months ended
September 30, 2016
and
2015
, respectively. The
decreased
in effective tax rate is primarily due to the release of the valuation allowance for capital loss carryforwards and changes in estimated vehicle tax credits in the third quarter of 2016. The Company recorded income tax expense of
$365,334
(
34.1%
effective tax rate) and
$467,816
(
35.7%
effective tax rate) during the
nine
months ended
September 30, 2016
and
2015
, respectively. The decrease in effective tax rate year over year is primarily due to the release of the valuation allowance for capital loss carryforwards in the third quarter of 2016.
The Company is a party to a tax sharing agreement requiring that the unitary state tax liability among affiliates included in unitary state tax returns be allocated using the hypothetical separate company tax calculation method. The Company had a net receivable from affiliates under the tax sharing agreement of
$85
and
$71
at
September 30, 2016
and
December 31, 2015
, respectively, which was included in Related party taxes receivable in the condensed consolidated balance sheet.
Significant judgment is required in evaluating and reserving for uncertain tax positions. Although management believes adequate reserves have been established for all uncertain tax positions, the final outcomes of these matters may differ. Management does not believe the outcome of any uncertain tax position, individually or combined, will have a material effect on the results of operations. The reserve for uncertain tax positions, as well as associated penalties and interest, is a component of the income tax provision.
|
|
10.
|
Commitments and Contingencies
|
The Company is obligated to make purchase price holdback payments to a third-party originator of auto loans that the Company has purchased, when losses are lower than originally expected. The Company also is obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans are greater than originally expected. As of September 30, 2016, all purchase price holdback payments, and all total return settlement payments due in 2016, have been made. These obligations are accounted for as derivatives (Note 7).
The Company has extended revolving lines of credit to certain auto dealers. Under this arrangement, the Company is committed to lend up to each dealer's established credit limit. At
September 30, 2016
and
December 31, 2015
, there was an outstanding balance under these lines of credit of
$2,966
and
$2,482
, respectively, and a committed amount under these lines of credit of
$2,966
and
$2,920
, respectively.
Under terms of agreements with LendingClub, the Company was committed to purchase, at a minimum, through
September 30, 2016
, the lesser of
$30,000
per month or
50%
of LendingClub’s aggregate "near-prime" (as that term is defined in the agreements) originations and, thereafter through July 2017, the lesser of
$30,000
per month or
50%
of LendingClub’s aggregate near-prime originations. This commitment could be reduced or canceled with
90 days
' notice. On October 9, 2015, the Company sent a notice of termination to LendingClub, and, accordingly, ceased originations on this platform on January 7, 2016.
The Company is committed to purchase certain new advances on personal revolving financings originated by a third party retailer, along with existing balances on accounts with new advances, for an initial term ending in
April 2020
and renewing through April 2022 at the retailer's option. Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As these credit lines do not have a specified maturity, but rather can be terminated at any time in the event of adverse credit changes or lack of use, the Company has not recorded an allowance for unfunded commitments. As of
September 30, 2016
and
December 31, 2015
, the Company was obligated to purchase
$15,165
and
$12,486
, respectively, in receivables that had been originated by the retailer but not yet purchased by the Company. The Company also is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. The retailer also has the right to repurchase up to
9.99%
of the existing portfolio at any time
during the term of the agreement, and, provided that repurchase right is exercised, has the right to retain up to
20%
of new accounts subsequently originated.
Under terms of an application transfer agreement with an OEM other than FCA, the Company has the first opportunity to review for its own portfolio any credit applications turned down by the OEM's captive finance company. The agreement does not require the Company to originate any loans, but for each loan originated the Company pays the OEM a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee is calculated annually and is based on the amount by which losses on loans originated under the agreement are lower than an established percentage threshold.
The Company has agreements with SBNA to service recreational and marine vehicle portfolios. These agreements call for a periodic retroactive adjustment, based on cumulative return performance, of the servicing fee rate to inception of the contract. There were downward
adjustments of
zero
and
$836
for the
three and nine
months ended
September 30, 2016
, respectively. There were downward
adjustments of
$904
and
$1,051
for the
three and nine
months ended
September 30, 2015
, respectively.
In connection with the sale of retail installment contracts through securitizations and other sales, the Company has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold to on- or off-balance sheet trusts or other third parties. As of
September 30, 2016
, there were
no
loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for the Company's asset-backed securities or other sales. In the opinion of management, the potential exposure of other recourse obligations related to the Company’s retail installment contract sales agreements will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or cash flows.
Santander has provided guarantees on the covenants, agreements, and obligations of the Company under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of the Company as servicer.
Under terms of the Chrysler Agreement, the Company must make revenue sharing payments to FCA and also must make gain-sharing payments when residual gains on leased vehicles exceed a specified threshold. The Company had accrued
$14,009
and
$12,054
at
September 30, 2016
and
December 31, 2015
, respectively, related to these obligations.
The Company has a flow agreement with Bank of America whereby the Company is committed to sell up to a specified amount of eligible loans to the bank each month through
May 2018
. Prior to October 1, 2015, the amount of this monthly commitment was
$300,000
. On October 1, 2015, the Company and Bank of America amended the flow agreement to increase the maximum commitment to sell to
$350,000
of eligible loans each month, and to change the required written notice period from either party, in the event of termination of the agreement, from
120 days
to
90 days
. On July 27, 2016, the Company and Bank of America further amended the flow agreement to reduce the maximum commitment to sell eligible loans each month to the original contractual amount of
$300,000
from
$350,000
. On October 27, 2016, Bank of America notified the Company that it is terminating the flow agreement effective January 31, 2017. The Company retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at time of sale. The Company had accrued
$8,702
and
$6,331
at
September 30, 2016
and
December 31, 2015
, respectively, related to this obligation.
The Company has sold loans to CBP under terms of a flow agreement and predecessor sale agreements. On June 25, 2015, the Company and CBP amended the flow agreement to reduce, effective from and after August 1, 2015, CBP's committed purchases of Chrysler Capital prime loans from a maximum of
$600,000
and a minimum of
$250,000
per quarter to a maximum of
$200,000
and a minimum of
$50,000
per quarter, as may be adjusted according to the agreement. The Company retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at
0.5%
of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. The Company had accrued
$3,250
and
$3,375
at
September 30, 2016
and
December 31, 2015
, respectively, related to the loss-sharing obligation.
The Company provided SBNA with the first right to review and approve consumer vehicle lease applications, subject to volume constraints, under terms of a flow agreement that was terminated on May 9, 2015. The Company has indemnified SBNA for potential credit and residual losses on
$48,226
of leases that had been originated by SBNA
under this program but were subsequently determined not to meet SBNA’s underwriting requirements. This indemnification agreement is supported by an equal amount of cash collateral posted by the Company in an SBNA bank account. The collateral account balance is included in restricted cash in the Company's condensed consolidated balance sheets (Note 11). The Company additionally has agreed to indemnify SBNA for residual losses, up to a cap, on certain leases originated under the flow agreement between September 24, 2014 and May 9, 2015 for which SBNA and the Company had differing residual value expectations at lease inception.
The Company is party to a forward flow asset sale agreement with a third party under terms of which the Company is committed to sell charged off loan receivables in bankruptcy status on a quarterly basis until sales total at least
$350,000
in proceeds. Any sale after the total sales have reached
$275,000
is subject to a market price check. As of
September 30, 2016
and
December 31, 2015
, the remaining aggregate commitment was
$166,167
and
$200,707
, respectively.
In connection with the bulk sales of Chrysler Capital leases (including the sales described in Note 3), the Company is obligated to make quarterly payments to the purchaser sharing residual losses for lease terminations with losses over a specific percentage threshold. The estimated guarantee liability, net, was
zero
and
$2,893
, net, as of
September 30, 2016
and
December 31, 2015
, respectively.
Pursuant to the terms of a Separation Agreement among former CEO Thomas G. Dundon, the Company, DDFS LLC, SHUSA and Santander, upon satisfaction of applicable conditions, including receipt of required regulatory approvals, the Company will owe Mr. Dundon a cash payment of up to
$115,139
(Note 11).
Legal Proceedings
Periodically, the Company is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business.
On August 26, 2014, a purported securities class action lawsuit was filed in the United States District Court, Southern District of New York, captioned Steck v. Santander Consumer USA Holdings Inc. et al., No. 1:14-cv-06942 (the Deka Lawsuit). On October 6, 2014, another purported securities class action lawsuit was filed in the District Court of Dallas County, State of Texas, captioned Kumar v. Santander Consumer USA Holdings, et al., No. DC-14-11783, which was subsequently removed to the United States District Court, Northern District of Texas, and re-captioned Kumar v. Santander Consumer USA Holdings, et al., No. 3:14-CV-3746 (the Kumar Lawsuit).
Both the Deka Lawsuit and the Kumar Lawsuit were brought against the Company, certain of its current and former directors and executive officers and certain institutions that served as underwriters in the Company's IPO on behalf of a class consisting of those who purchased or otherwise acquired our securities between January 23, 2014 and June 12, 2014. In February 2015, the Kumar Lawsuit was voluntarily dismissed with prejudice. In June 2015, the venue of the Deka Lawsuit was transferred to the United States District Court, Northern District of Texas. In September 2015, the court granted a motion to appoint lead plaintiffs and lead counsel, and the Deka Lawsuit is now captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K.
The amended class action complaint in the Deka Lawsuit alleges that our Registration Statement and Prospectus and certain subsequent public disclosures contained misleading statements concerning the Company’s ability to pay dividends and the adequacy of the Company’s compliance systems and oversight. The amended complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933 and under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks damages and other relief. On December 18, 2015, the Company and the individual defendants moved to dismiss the amended class action complaint and on June 13, 2016, the motion to dismiss was denied.
On October 15, 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the Feldman Lawsuit). The Feldman Lawsuit names as defendants current and former members of the Company’s Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing the Company’s subprime auto lending practices, resulting in harm to the Company. The complaint seeks unspecified damages and equitable relief. On December 29, 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.
On March 18, 2016, a purported securities class action lawsuit was filed in the United States District Court, Northern District of Texas, captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783 (the Parmelee Lawsuit). On April 4, 2016, another purported securities class action lawsuit was filed in the United States District Court, Northern District of Texas, captioned Benson v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-919 (the Benson Lawsuit). Both the Parmelee Lawsuit and the Benson Lawsuit were filed against the Company and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired our securities between February 3, 2015 and March 15, 2016. The complaints in the Parmelee Lawsuit and Benson Lawsuit allege that the Company made false or misleading statements, as well as failed to disclose material adverse facts, in prior Annual and Quarterly Reports filed under the Exchange Act and certain other public disclosures, in connection with the Company’s change in its methodology for estimating its allowance for credit losses and correction of such allowance for prior periods in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The complaints assert claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seek damages and other relief. On May 25, 2016, the Benson Lawsuit was consolidated into the Parmelee Lawsuit, with the consolidated case captioned as Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783.
On September 27, 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the Jackie888 Lawsuit). The Jackie888 Lawsuit names as defendants current and former members of the Company’s Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with the Company’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief.
Further, the Company is party to, or is periodically otherwise involved in, reviews, investigations, and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the Federal Reserve, the CFPB, the DOJ, the SEC, the FTC and various state regulatory agencies. Currently, such proceedings include a civil subpoena from the DOJ, under FIRREA, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2007, and from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2013. The Company also has received civil subpoenas from various state Attorneys General requesting similar documents and communications. The Company is complying with the requests for information and document preservation and continues to discuss these matters with the relevant government authorities.
On November 4, 2015, the Company entered into an Assurance of Discontinuance (AOD) with the Office of Attorney General of the Commonwealth of Massachusetts (the Massachusetts AG). The Massachusetts AG alleged that the Company violated the maximum permissible interest rates allowed under Massachusetts law due to the inclusion of GAP charges in the calculation of finance charges. Among other things, the AOD requires the Company, with respect to any loan that exceeded the maximum rates, to issue refunds of all finance charges paid to date and to waive all future finance charges. The AOD also requires the Company to undertake certain remedial measures, including ensuring that interest rates on its loans do not exceed maximum rates (when GAP charges are included) in the future, and provides that the Company pay
$150
to the Massachusetts AG to reimburse its costs of implementing the AOD.
On February 25, 2015, the Company entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, that resolves the DOJ’s claims against the Company that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers Civil Relief Act (SCRA). The consent order requires the Company to pay a civil fine in the amount of
$55
, as well as at least
$9,360
to affected servicemembers consisting of
$10
per servicemember plus compensation for any lost equity (with interest) for each repossession by us, and
$5
per servicemember for each instance where the Company sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder, as well as requires the Company to undertake certain additional remedial measures.
On July 31, 2015, the CFPB notified the Company that it had referred to the DOJ certain alleged violations by the Company of the ECOA regarding statistical disparities in markups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by the Company and the treatment of certain types of income in the Company’s underwriting process. On September 25, 2015, the DOJ notified us that it has initiated, based on the referral from the CFPB, an investigation under the ECOA of our pricing of automobile loans.
The Company does not believe that there are any proceedings, threatened or pending, that, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company.
|
|
11.
|
Related-Party Transactions
|
Related-party transactions not otherwise disclosed in these footnotes to the condensed consolidated financial statements include the following:
Interest expense, including unused fees, for affiliate lines/letters of credit for the
three and nine
months ended
September 30, 2016
and
2015
, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Line of credit agreement with Santander - New York Branch (Note 5)
|
$
|
16,404
|
|
|
$
|
24,638
|
|
|
$
|
52,800
|
|
|
$
|
76,273
|
|
Line of credit agreement with SHUSA (Note 5)
|
6,023
|
|
|
1,337
|
|
|
14,892
|
|
|
3,940
|
|
Accrued interest for affiliate lines/letters of credit at
September 30, 2016
and
December 31, 2015
, was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
Line of credit agreement with Santander - New York Branch (Note 5)
|
$
|
6,213
|
|
|
$
|
6,015
|
|
Line of credit agreement with SHUSA (Note 5)
|
944
|
|
|
267
|
|
In 2015, under an agreement with Santander, the Company began incurring a fee of
12.5 basis points
(per annum) on certain warehouse lines, as they renew, for which Santander provides a guarantee of the Company's servicing obligations. The Company recognized guarantee fee expense of
$1,616
and
$4,783
for the
three and nine
months ended
September 30, 2016
respectively, and
$1,535
for the
three and nine
months ended
September 30, 2015
. As of
September 30, 2016
and
December 31, 2015
, the Company had
$1,616
and
$2,282
of related fees payable to Santander, respectively.
The Company has derivative financial instruments with Santander and affiliates with outstanding notional amounts of
$8,566,600
and
$13,739,000
at
September 30, 2016
and
December 31, 2015
, respectively (Note 7). The Company had a collateral overage on derivative liabilities with Santander and affiliates of
$21,233
and
$20,775
at
September 30, 2016
and
December 31, 2015
, respectively. Interest expense and mark-to-market adjustments on these agreements totaled
$1,932
and
$22,285
for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$16,098
and
$54,513
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
The Company is required to permit SBNA first right to review and assess Chrysler Capital dealer lending opportunities. Prior to April 15, 2016, SBNA paid the Company a relationship management fee based upon the performance and yields of Chrysler Capital dealer loans held by SBNA; on April 15, 2016, the relationship management fee was replaced with an origination fee and annual renewal fee for each loan. The Company recognized
zero
and
$1,186
of relationship management fee income for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$419
and
$4,257
for the
nine
months ended
September 30, 2016
and
2015
, respectively. As of
September 30, 2016
and
December 31, 2015
, the Company had relationship management fees receivable from SBNA of
zero
and
$419
, respectively. For the
three
months ended
September 30, 2016
, the Company recognized
$1,009
and
$158
of origination and renewal fee income, respectively. For the
nine
months ended
September 30, 2016
, the Company recognized
$2,292
and
$271
of origination and renewal fee income, respectively. As of
September 30, 2016
and
December 31, 2015
, the Company had origination and renewal fees receivable from SBNA of
$632
and
zero
, respectively.
All Chrysler Capital receivables from dealers, including receivables held by SBNA and by the Company, are serviced by SBNA. Servicing fee expense to SBNA for the Company's Chrysler Capital receivables from dealers totaled
$30
and
$48
for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$82
and
$218
for the
nine
months ended
September 30, 2016
and
2015
, respectively. As of
September 30, 2016
and
December 31, 2015
, the Company had
$12
and
$37
, respectively, of servicing fees payable to SBNA. The Company may provide advance funding for dealer loans originated by SBNA, which is reimbursed to the Company by SBNA. The Company had
no
outstanding receivable from SBNA as of
September 30, 2016
or
December 31, 2015
for such advances.
Under the agreement with SBNA, the Company may originate retail consumer loans in connection with sales of vehicles that are collateral held against floorplan loans by SBNA. Upon origination, the Company remits payment to SBNA, who settles the transaction with the dealer. The Company owed SBNA
$2,803
and
$2,737
related to such originations as of
September 30, 2016
and
December 31, 2015
, respectively.
The Company is amortizing a
$9,000
referral fee received from SBNA in connection with the dealer lending arrangements into income over a
ten
-year period, ending on the July 1, 2022 termination date of the governing agreements. As of
September 30, 2016
and
December 31, 2015
, the unamortized fee balance was
$6,075
and
$6,750
, respectively. The Company recognized
$225
and
$675
of income related to the referral fee for each of the
three and nine
months ended
September 30, 2016
and
2015
, respectively.
The Company also has agreements with SBNA to service auto retail installment contracts and recreational and marine vehicle portfolios. Servicing fee income recognized under these agreements totaled
$1,140
and
$1,589
for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$4,457
and
$4,222
for the
nine
months ended
September 30, 2016
and
2015
, respectively. Other information on the serviced auto loan and retail installment contract portfolios for SBNA as of
September 30, 2016
and
December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Total serviced portfolio
|
$
|
566,088
|
|
|
$
|
692,291
|
|
Cash collections due to owner
|
18,777
|
|
|
19,302
|
|
Servicing fees receivable
|
1,213
|
|
|
1,476
|
|
Until May 9, 2015, the Company was party to a flow agreement with SBNA whereby SBNA had the first right to review and approve Chrysler Capital consumer vehicle lease applications. The Company could review any applications declined by SBNA for the Company’s own portfolio. The Company received an origination fee and continues to provide servicing on all leases originated under this agreement. Pursuant to the Chrysler Agreement, the Company pays FCA on behalf of SBNA for residual gains and losses on the flowed leases. The Company also services leases it sold to SBNA in 2014. Origination fee income recognized under the agreement totaled
$0
and
$8,431
for the
three and nine
months ended
September 30, 2015
, respectively. Servicing fee income recognized on leases serviced for SBNA totaled
$1,742
and
$1,875
for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$5,741
and
$5,186
for the
nine
months ended
September 30, 2016
and
2015
, respectively. Other information on the consumer vehicle lease portfolio serviced for SBNA as of
September 30, 2016
and
December 31, 2015
is as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Total serviced portfolio
|
$
|
1,502,518
|
|
|
$
|
2,198,519
|
|
Cash collections due to owner
|
52
|
|
|
132
|
|
Servicing fees receivable
|
727
|
|
|
784
|
|
Revenue share reimbursement receivable
|
2,956
|
|
|
1,370
|
|
On June 30, 2014, the Company entered into an indemnification agreement with SBNA whereby SC indemnifies SBNA for any credit or residual losses on a pool of
$48,226
in leases originated under the flow agreement. The covered leases are non-conforming units because they did not meet SBNA’s credit criteria at origination. At the time of the agreement, SC established a
$48,226
collateral account with SBNA in restricted cash that will be released over time to SBNA, in the case of losses, and SC, in the case of payments and sale proceeds. As of
September 30, 2016
and
December 31, 2015
, the balance in the collateral account was
$13,748
and
$34,516
, respectively. For the
three and nine
months ended
September 30, 2016
, the Company recognized an indemnification expense of
zero
. For the
three and nine
months ended
September 30, 2015
, the Company recognized an indemnification expense of
$566
and
$3,142
, respectively. As of
September 30, 2016
and
December 31, 2015
, the Company had a recorded liability of
$2,691
related to the residual losses covered under the agreement.
In December 2015, the Company formed a new wholly-owned subsidiary, Santander Consumer International Puerto Rico, LLC (SCI), and SCI opened deposit accounts with Banco Santander Puerto Rico, an affiliated entity. As of
September 30, 2016
and
December 31, 2015
, SCI had cash of
$26,620
and
$4,920
, respectively, on deposit with Banco Santander Puerto Rico.
During 2015, Santander Investment Securities Inc. (SIS), an affiliated entity, purchased a portion of the Class B notes of SDART 2013-3, a consolidated securitization Trust, with a principal balance of
$725
. As of
September 30, 2016
and
December 31, 2015
, the unpaid note balance of the Class B notes owned by SIS was
zero
and
$510
, respectively. In addition, during 2015, SIS purchased an investment of
$2,000
in the Class A3 notes of CCART 2013-A, a securitization Trust formed by the Company in 2013. As of
September 30, 2016
and
December 31, 2015
, the unpaid note balance of the Class A3 notes owned by SIS was
zero
and
$743
, respectively. Although CCART 2013-A is not a consolidated entity of the Company, the Company continues to service the assets of the associated trust. SIS also serves as co-manager on certain of the Company’s securitizations. Amounts paid to SIS as co-manager for the
three
months ended
September 30, 2016
and
2015
, totaled
zero
and
$150
, respectively, and totaled
$1,049
and
$450
for the
nine
months ended
September 30, 2016
and
2015
, respectively, which are accounted for as debt issuance costs in the accompanying condensed consolidated financial statements.
Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with the Company to provide professional services, telecommunications, and internal and/or external applications. Expenses incurred, which are included as a component of other operating costs, totaled
$16
and
$22
for the
three
months ended
September 30, 2016
and
2015
, respectively, and
$64
and
$145
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
The Company is party to an MSA with a company in which it has a cost method investment and holds a warrant to increase its ownership if certain vesting conditions are satisfied. The MSA enables SC to review credit applications of retail store customers. Under terms of the MSA, the Company had net originations of personal revolving loans of
$4,683
and
$22,971
, respectively, during the
three and nine
months ended
September 30, 2015
. As of
September 30, 2016
and
December 31, 2015
, this cost method investment was carried at a value of
zero
in the Company's condensed consolidated balance sheets as it had been fully impaired. Effective August 17, 2016, the Company ceased funding new originations from all of the retailers for which it reviews credit applications under this MSA.
On July 2, 2015, the Company announced the departure of Thomas G. Dundon from his roles as Chairman of the Board and CEO of the Company, effective as of the close of business on July 2, 2015. In connection with his departure, and subject to the terms and conditions of his Employment Agreement, including Mr. Dundon's execution of a release of claims against the Company, Mr. Dundon became entitled to receive certain payments and benefits under his Employment Agreement.
Also in connection with his departure, Mr. Dundon entered into a Separation Agreement with the Company, DDFS LLC, SHUSA and Santander. The Separation Agreement provided, among other things, that Mr. Dundon resign as Chairman of the Board, as CEO of the Company and as an officer and/or director of any of the Company’s subsidiary companies. Mr. Dundon would continue to serve as a Director of the Company's Board, and would serve as a consultant to the Company for
twelve months
from the date of the Separation Agreement at a mutually agreed rate, subject to required bank regulatory approvals. Also subject to applicable regulatory approvals and law, Mr. Dundon’s outstanding stock options would remain exercisable until the third anniversary of his resignation, and subject to certain time limitations, Mr. Dundon would be permitted to exercise such options in whole, but not in part, and settle such options for a cash payment equal to the difference between the closing trading price of a share of Company common stock as of the date immediately preceding such exercise and the exercise price of such option. Mr. Dundon exercised this cash settlement option on July 2, 2015. The Separation Agreement also provided for the modification of terms for certain other equity-based awards (Note 14), subject to limitations of banking regulators and applicable law.
As of
September 30, 2016
, the Company has not made any payments to Mr. Dundon, nor recorded any liability or obligation arising from or pursuant to the terms of the Separation Agreement. If all applicable conditions are satisfied, including receipt of required regulatory approvals, the Company will be obligated to make a cash payment to Mr. Dundon of up to
$115,139
. This amount would be recorded as compensation expense in the condensed consolidated statement of income and comprehensive income in the period in which approval is obtained.
Also, in connection with, and pursuant to, the Separation Agreement, on July 2, 2015, Mr. Dundon, the Company, DDFS LLC, SHUSA and Santander entered into an amendment to the Shareholders Agreement (the Second Amendment). The Second Amendment amended, for purposes of calculating the price per share to be paid in the event that a put or call option was exercised with respect to the shares of Company Common Stock owned by DDFS LLC in accordance with the terms and conditions of the Shareholders Agreement, the definition of the term “Average Stock Price” to mean
$26.83
. Pursuant to the Separation Agreement, SHUSA was deemed to have delivered as of July 3, 2015 an irrevocable notice to exercise the call option with respect to all
34,598,506
shares of our Common Stock owned by DDFS and consummate the transactions contemplated by such call option notice, subject to the receipt of
required bank regulatory approvals and any other approvals required by law (the Call Transaction). Because the Call Transaction was not consummated prior to the Call End Date, DDFS LLC is free to transfer any or all shares of Company Common Stock it owns, subject to the terms and conditions of the Amended and Restated Loan Agreement, dated as of July 16, 2014, between DDFS LLC and Santander (the Loan Agreement). The Loan Agreement provides for a
$300,000
loan, which, as of
September 30, 2016
and
December 31, 2015
, had an unpaid principal balance of
$290,000
. Pursuant to the Loan Agreement,
29,598,506
shares of the Company’s common stock owned by DDFS LLC are pledged as collateral under a related pledge agreement (the Pledge Agreement). Because the Call Transaction was not completed on or before the Call End Date, interest began accruing on the price paid per share in the Call Transaction at the overnight LIBOR rate on the third business day preceding the consummation of the Call Transaction plus 100 basis points with respect to any shares of Company Common Stock ultimately sold in the Call Transaction. The Shareholder Agreement further provides that Santander may, at its option, become the direct beneficiary of the Call Option. If consummated in full, SHUSA would pay DDFS LLC
$928,278
plus interest that has accrued since the Call End Date. To date, the Call Transaction has not been consummated and remains subject to receipt of applicable regulatory approvals.
Pursuant to the Loan Agreement, if at any time the value of the Common Stock pledged under the Pledge Agreement is less than
150%
of the aggregate principal amount outstanding under the Loan Agreement, DDFS LLC has an obligation to either (a) repay a portion of such outstanding principal amount such that the value of the pledged collateral is equal to at least
200%
of the outstanding principal amount, or (b) pledge additional shares of Company Common Stock such that the value of the additional shares of Common Stock, together with the
29,598,506
shares already pledged under the Pledge Agreement, is equal to at least
200%
of the outstanding principal amount. The value of the pledged collateral is less than
150%
of aggregate principal amount outstanding under the Loan Agreement, and DDFS LLC has not taken any of the collateral posting actions described in clauses (a) or (b) above. If Santander declares the borrower’s obligations under the Loan Agreement due and payable as a result of an event of default (including with respect to the collateral posting obligations described above), under the terms of the Loan Agreement and the Pledge Agreement, Santander’s ability to rely upon the shares of Company Common Stock subject to the Pledge Agreement is, subject to certain exceptions, limited to the exercise by SHUSA and/or Santander of the right to deliver the call option notice and to consummate the Call Transaction at the price specified in the Shareholders Agreement. If the borrower fails to pay obligations under the Loan Agreement when due, including because of Santander’s declaration of such obligations as due and payable as a result of an event of default, a higher default interest rate will apply to such overdue amounts.
On August 31, 2016, Mr. Dundon, DDFS, the Company, Santander and SHUSA entered into a Second Amendment to the Separation Agreement, and Mr. Dundon, DDFS, Santander and SHUSA entered into a Third Amendment to the Shareholders Agreement, whereby the price per share to be paid to DDFS in connection with the Call Transaction was reduced from
$26.83
to
$26.17
, the arithmetic mean of the daily volume-weighted average price for a share of Company common stock for each of the
ten
consecutive complete trading days immediately prior to July 2, 2015, the date on which the call option was exercised.
During the
three and nine
months ended
September 30, 2015
, the Company paid certain expenses incurred by Mr. Dundon in the operation of a private plane in which he owns a partial interest when used for SC business within the contiguous 48 states. Under this practice, payment was based on a set flight time hourly rate, and the amount of reimbursement was not subject to a maximum cap per fiscal year. For the
three and nine
months ended
September 30, 2015
, the Company paid
$59
and
$367
, respectively, to Meregrass, Inc., the Company managing the plane's operations, with an average rate of
$5.8
per hour.
Under an agreement with Mr. Dundon, the Company is provided access to a suite at an event center that is leased by Mr. Dundon, and which the Company uses for business purposes. The Company reimburses Mr. Dundon for the use of this space on a periodic basis.
As of
September 30, 2016
, Jason Kulas, the Company's CEO, Mr. Dundon, and a Santander employee who was a member of the SC Board until the second quarter of 2015, each had a minority equity investment in a property in which the Company leases
373,000
square feet as its corporate headquarters. For the
three
months ended
September 30, 2016
and
2015
, the Company recorded
$1,361
and
$1,315
, respectively, in lease expenses on this property. For the
nine
months ended
September 30, 2016
and
2015
, the Company recorded
$3,832
and
$3,894
, respectively, in lease expenses on this property. Future minimum lease payments for the
12
-year term of the lease total
$70,645
. The Company subleases approximately
13,000
square feet of its corporate office space to SBNA. For the
three
months ended
September 30, 2016
and
2015
, the Company recorded
$40
in sublease revenue on this property.
For the
nine
months ended
September 30, 2016
and
2015
, the Company recorded
$122
in sublease revenue on this property.
The Company is party to certain agreements with Bluestem whereby the Company is committed to purchase receivables originated by Bluestem for an initial term ending in April 2020 and renewable through April 2022 at Bluestem's option. Bluestem is owned by Capmark, a company in which affiliates of Centerbridge own an interest. Centerbridge decreased its ownership in SC from approximately
1%
as of January 1, 2015, to
zero
as of
September 30, 2015
. Further, an individual that was a member of SC's Board until July 15, 2015, is a member of Centerbridge management and also serves on the board of directors of Capmark. During the
three and nine
months ended
September 30, 2015
, but only through the date these individuals were considered related parties (July 15, 2015), the Company advanced
$33,423
and
$442,339
, respectively, to the retailer, and received
$48,236
and
$575,179
, respectively, in payments on receivables originated under its agreements with the retailer.
|
|
12.
|
Computation of Basic and Diluted Earnings per Common Share
|
Earnings per common share (EPS) is computed using the two-class method required for participating securities. Restricted stock awards whereby the holders of such shares have non-forfeitable dividend rights in the event of a declaration of a dividend on the Company’s common shares are considered to be participating securities.
The calculation of diluted EPS excludes
1,933,659
and
760,340
employee stock option awards for the
three
months ended
September 30, 2016
and
2015
, respectively, and
1,933,659
and
760,340
for the
nine
months ended
September 30, 2016
and
2015
, respectively, as the effect of those securities would be anti-dilutive.
The following table represents EPS numbers for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30,
|
|
Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Earnings per common share
|
|
|
|
|
|
|
|
Net income
|
$
|
213,547
|
|
|
$
|
236,435
|
|
|
$
|
705,191
|
|
|
$
|
843,595
|
|
Weighted average number of common shares outstanding before restricted participating shares
(in thousands)
|
357,994
|
|
|
357,380
|
|
|
357,830
|
|
|
353,684
|
|
Weighted average number of participating restricted common shares outstanding
(in thousands)
|
350
|
|
|
467
|
|
|
350
|
|
|
467
|
|
Weighted average number of common shares outstanding
(in thousands)
|
358,344
|
|
|
357,847
|
|
|
358,180
|
|
|
354,151
|
|
Earnings per common share
|
$
|
0.60
|
|
|
$
|
0.66
|
|
|
$
|
1.97
|
|
|
$
|
2.38
|
|
Earnings per common share - assuming dilution
|
|
|
|
|
|
|
|
Net income
|
$
|
213,547
|
|
|
$
|
236,435
|
|
|
$
|
705,191
|
|
|
$
|
843,595
|
|
Weighted average number of common shares outstanding
(in thousands)
|
358,344
|
|
|
357,847
|
|
|
358,180
|
|
|
354,151
|
|
Effect of employee stock-based awards
(in thousands)
|
1,743
|
|
|
1,261
|
|
|
1,455
|
|
|
585
|
|
Weighted average number of common shares outstanding - assuming dilution
(in thousands)
|
360,088
|
|
|
359,108
|
|
|
359,635
|
|
|
354,736
|
|
Earnings per common share - assuming dilution
|
$
|
0.59
|
|
|
$
|
0.66
|
|
|
$
|
1.96
|
|
|
$
|
2.38
|
|
|
|
13.
|
Fair Value of Financial Instruments
|
Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that categorizes into three levels the inputs to valuation techniques used to measure fair value as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 inputs are those that are unobservable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.
Fair value estimates, methods, and assumptions are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Level
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
Cash and cash equivalents (a)
|
1
|
$
|
75,873
|
|
|
$
|
75,873
|
|
|
$
|
18,893
|
|
|
$
|
18,893
|
|
Finance receivables held for sale, net (b)
|
3
|
2,572,429
|
|
|
2,593,035
|
|
|
2,859,575
|
|
|
2,872,354
|
|
Finance receivables held for investment, net (c)
|
3
|
23,686,391
|
|
|
25,266,036
|
|
|
23,367,788
|
|
|
24,943,560
|
|
Restricted cash (a)
|
1
|
2,696,500
|
|
|
2,696,500
|
|
|
2,236,329
|
|
|
2,236,329
|
|
Notes payable — credit facilities (d)
|
3
|
8,299,229
|
|
|
8,299,229
|
|
|
6,902,779
|
|
|
6,902,779
|
|
Notes payable — secured structured financings (e)
|
2
|
21,150,666
|
|
|
21,313,962
|
|
|
20,872,900
|
|
|
20,917,733
|
|
Notes payable — related party (f)
|
3
|
2,350,000
|
|
|
2,350,000
|
|
|
2,600,000
|
|
|
2,600,000
|
|
|
|
(a)
|
Cash and cash equivalents and restricted cash
— The carrying amount of cash and cash equivalents, including restricted cash, is at an approximated fair value as the instruments mature within 90 days or less and bear interest at market rates.
|
|
|
(b)
|
Finance receivables held for sale, net
— Finance receivables held for sale, net are comprised of retail installment contracts acquired individually and personal loans and are carried at the lower of cost or market, as determined on an aggregate basis for each type of receivable.
|
|
|
•
|
Retail installment contracts acquired individually
—
The estimated fair value is calculated based on a discounted cash flow (DCF) analysis in which the Company uses significant unobservable inputs on key assumptions, including expected default rates, prepayment rates, recovery rates, and discount rates reflective of the cost of funds and appropriate rate of returns.
|
|
|
•
|
Personal loans
—
The estimated fair value for personal loans held for sale is calculated based on a combination of estimated cash flows and market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations.
|
|
|
(c)
|
Finance receivables held for investment, net
— Finance receivables held for investment, net are carried at amortized cost, net of an allowance. The estimated fair value for the underlying financial instruments are determined as follows:
|
|
|
•
|
Retail installment contracts held for investment, net
— The estimated fair value is calculated based on a DCF in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates, expected recovery rates, discount rates reflective of the cost of funding, and credit loss expectations.
|
|
|
•
|
Receivables from dealers held for investment and Capital lease receivables, net
— Receivables from dealers held for investment are carried at amortized cost, net of credit loss allowance. Capital lease receivables are carried at gross investment, net of unearned income and allowance for lease losses. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
|
|
|
(d)
|
Notes payable — credit facilities
— The carrying amount of notes payable related to revolving credit facilities is estimated to approximate fair value. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
|
|
|
(e)
|
Notes payable — secured structured financings
— The estimated fair value of notes payable related to secured structured financings is calculated based on market quotes for the Company’s publicly traded debt and estimated market rates currently available from recent transactions involving similar debt with similar credit risks.
|
|
|
(f)
|
Notes payable — related party
— The carrying amount of notes payable to a related party is estimated to approximate fair value as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
|
The following table presents the Company’s assets and liabilities that are measured at fair value on a recurring basis at
September 30, 2016
and
December 31, 2015
, and are categorized using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2016
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Other assets — trading interest rate caps (a)
|
$
|
7,990
|
|
|
$
|
—
|
|
|
$
|
7,990
|
|
|
$
|
—
|
|
Due from affiliates — trading interest rate caps (a)
|
3,727
|
|
|
—
|
|
|
3,727
|
|
|
—
|
|
Other assets — cash flow hedging interest rate swaps (a)
|
490
|
|
|
—
|
|
|
490
|
|
|
—
|
|
Due from affiliates — cash flow hedging interest rate swaps (a)
|
167
|
|
|
—
|
|
|
167
|
|
|
—
|
|
Due from affiliates — trading interest rate swaps (a)
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
Other liabilities — trading options for interest rate caps (a)
|
8,075
|
|
|
—
|
|
|
8,075
|
|
|
—
|
|
Due to affiliates — trading options for interest rate caps (a)
|
3,727
|
|
|
—
|
|
|
3,727
|
|
|
—
|
|
Other liabilities — cash flow hedging interest rate swaps (a)
|
33,765
|
|
|
—
|
|
|
33,765
|
|
|
—
|
|
Due to affiliates — cash flow hedging interest rate swaps (a)
|
10,463
|
|
|
—
|
|
|
10,463
|
|
|
—
|
|
Other liabilities — trading interest rate swaps (a)
|
1,788
|
|
|
—
|
|
|
1,788
|
|
|
—
|
|
Due to affiliates — trading interest rate swaps (a)
|
1,476
|
|
|
—
|
|
|
1,476
|
|
|
—
|
|
Other liabilities — total return settlement (a)
|
29,864
|
|
|
—
|
|
|
—
|
|
|
29,864
|
|
Retail installment contracts acquired individually (b)
|
18,700
|
|
|
—
|
|
|
—
|
|
|
18,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
Other assets — trading interest rate caps (a)
|
$
|
20,227
|
|
|
$
|
—
|
|
|
$
|
20,227
|
|
|
$
|
—
|
|
Due from affiliates — trading interest rate caps (a)
|
12,724
|
|
|
—
|
|
|
12,724
|
|
|
—
|
|
Other assets — cash flow hedging interest rate swaps (a)
|
3,863
|
|
|
—
|
|
|
3,863
|
|
|
—
|
|
Due from affiliates — cash flow hedging interest rate swaps (a)
|
3,431
|
|
|
—
|
|
|
3,431
|
|
|
—
|
|
Due from affiliates — trading interest rate swaps (a)
|
1,176
|
|
|
—
|
|
|
1,176
|
|
|
—
|
|
Other liabilities — trading options for interest rate caps (a)
|
20,253
|
|
|
—
|
|
|
20,253
|
|
|
—
|
|
Due to affiliates — trading options for interest rate caps (a)
|
12,724
|
|
|
—
|
|
|
12,724
|
|
|
—
|
|
Other liabilities — cash flow hedging interest rate swaps (a)
|
3,093
|
|
|
—
|
|
|
3,093
|
|
|
—
|
|
Due to affiliates — cash flow hedging interest rate swaps (a)
|
2,496
|
|
|
—
|
|
|
2,496
|
|
|
—
|
|
Due to affiliates — trading interest rate swaps (a)
|
2,481
|
|
|
—
|
|
|
2,481
|
|
|
—
|
|
Other liabilities — total return settlement (a)
|
53,432
|
|
|
—
|
|
|
—
|
|
|
53,432
|
|
Retail installment contracts acquired individually (b)
|
6,770
|
|
|
—
|
|
|
—
|
|
|
6,770
|
|
|
|
(a)
|
The valuation is determined using widely accepted valuation techniques including a DCF on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees. The Company utilizes the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for instruments (Note 7).
|
|
|
(b)
|
For certain retail installment contracts reported in finance receivables held for investment, net, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using a DCF model. When estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding of debt issuance and recent historical equity yields, and recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3.
|
The table below presents the changes in all Level 3 balances for the
three and nine
months ended
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
Retail Installment Contracts Held for Investment
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
Balance — beginning of period
|
$
|
12,602
|
|
|
$
|
6,770
|
|
Net collection activities
|
(5,740
|
)
|
|
(11,782
|
)
|
Additions / issuances
|
11,838
|
|
|
23,712
|
|
Balance — end of period
|
$
|
18,700
|
|
|
$
|
18,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Return Settlement
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
Balance — beginning of period
|
$
|
53,543
|
|
|
$
|
53,432
|
|
|
$
|
59,065
|
|
|
$
|
48,893
|
|
(Gains)/losses recognized in earnings
|
(343
|
)
|
|
2,337
|
|
|
(3,836
|
)
|
|
10,197
|
|
Settlements
|
(23,336
|
)
|
|
(25,905
|
)
|
|
(1,907
|
)
|
|
(5,768
|
)
|
Balance — end of period
|
$
|
29,864
|
|
|
$
|
29,864
|
|
|
$
|
53,322
|
|
|
$
|
53,322
|
|
The Company did not have any transfers between Levels 1 and 2 during the
three and nine
months ended
September 30, 2016
and
September 30, 2015
. There were no amounts transferred into or out of Level 3 during the
three and nine
months ended
September 30, 2015
.
The following table presents the Company’s assets and liabilities that are measured at fair value on a nonrecurring basis at
September 30, 2016
and
December 31, 2015
, and are categorized using the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at September 30, 2016
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Lower of cost or fair value expense (c)
|
Other assets — vehicles (a)
|
$
|
248,127
|
|
|
$
|
—
|
|
|
$
|
248,127
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Personal loans held for sale (b)
|
920,323
|
|
|
—
|
|
|
—
|
|
|
920,323
|
|
|
266,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 2015
|
|
Total
|
|
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Lower of cost or fair value expense (c)
|
Other assets — vehicles (a)
|
$
|
203,906
|
|
|
$
|
—
|
|
|
$
|
203,906
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Personal loans held for sale (b)
|
1,954,414
|
|
|
—
|
|
|
—
|
|
|
1,954,414
|
|
|
613,994
|
|
|
|
(a)
|
The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market levels of used car prices.
|
|
|
(b)
|
Represents the portion of the portfolio specifically impaired as of period-end. The estimated fair value for personal loans held for sale is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations.
|
|
|
(c)
|
The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.
|
14. Employee Benefit Plans
The Company has granted stock options to certain executives, other employees, and independent directors under the 2011 Management Equity Plan (the Plan), which enabled the Company to make stock awards up to a total of
approximately
29 million
common shares (net of shares canceled and forfeited), and expired on January 31, 2015. The Company has granted stock options, restricted stock awards and restricted stock units (RSUs) under the Omnibus Incentive Plan, which was established in 2013 and enables the Company to grant awards of cash and of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, RSUs, and other awards that may be settled in or based upon the value of the Company's common stock up to a total of
5,192,640
common shares. The Omnibus Incentive Plan was amended and restated as of June 16, 2016.
Stock options granted have an exercise price based on the estimated fair market value of the Company’s common stock on the grant date. The stock options expire
ten
years after grant date and include both time vesting options and performance vesting options. The fair value of the stock options is amortized into income over the vesting period as time and performance vesting conditions are met.
Compensation expense related to the
583,890
shares of restricted stock the Company has issued to certain executives is recognized over a
five
-year vesting period, with
$182
and
$7,423
recorded for the
three
months ended
September 30, 2016
and
2015
, respectively and
$543
and
$8,639
recorded for the
nine
months ended
September 30, 2016
and
2015
, respectively.
A summary of the Company’s stock options and related activity as of and for the
nine
months ended
September 30, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at January 1, 2016
|
5,675,327
|
|
|
$
|
12.30
|
|
|
6.5
|
|
|
$
|
20,151
|
|
Granted
|
456,662
|
|
|
10.84
|
|
|
—
|
|
|
—
|
|
Exercised
|
(303,145
|
)
|
|
9.35
|
|
|
—
|
|
|
795
|
|
Expired
|
(492,622
|
)
|
|
10.46
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(300,168
|
)
|
|
15.20
|
|
|
—
|
|
|
—
|
|
Options outstanding at September 30, 2016
|
5,036,054
|
|
|
12.35
|
|
|
5.4
|
|
|
—
|
|
Options exercisable at September 30, 2016
|
3,153,210
|
|
|
$
|
11.13
|
|
|
4.9
|
|
|
$
|
3,239
|
|
In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the Capital Requirements Directive IV prudential rules, which require a portion of such officers' and employees' variable compensation to be paid in the form of equity, the Company periodically grants RSUs. Such RSUs were granted during the
nine
months ended
September 30, 2016
. Under the Omnibus Incentive Plan, a portion of these RSUs vest immediately upon grant, and a portion vest annually over the following
three years
. The Company also has granted certain officers RSUs that vest over a
three
-year period, with vesting dependent on Banco Santander performance over that time. After vesting, stock obtained by employees and officers through RSUs must be held for
one year
. The Company also has granted certain directors RSUs that vest either upon the earlier of the first anniversary of grant date or the first annual meeting following the grant date.
On July 2, 2015, Mr. Dundon exercised a right under the Separation Agreement to settle his vested options for a cash payment. Subject to limitations of banking regulators and applicable law, Mr. Dundon’s Separation Agreement also provided that his unvested stock options would vest in full and his unvested restricted stock awards would continue to vest in accordance with their terms as if he remained employed by the Company. In addition, any service-based vesting requirements that were applicable to Mr. Dundon’s outstanding RSUs in respect of his 2014 annual bonus were waived, and such RSUs continue to vest and be settled in accordance with the underlying award agreement. However, because the Separation Agreement did not receive the required regulatory approvals within
60
days of Mr. Dundon’s termination without cause, both the vested and unvested stock options are considered to have expired. If the required regulatory approvals are obtained, the cash payment will be recorded as an expense in the period in which approved, rather than as a stock option exercise.
Treasury Stock
The Company had
69,005
shares of treasury stock outstanding, with a cost of
$1,250
, as of
September 30, 2016
and
December 31, 2015
. These shares include
3,154
shares the Company repurchased prior to the IPO as a result of an employee leaving the Company, and
65,851
shares withheld to cover income taxes related to the vesting of RSUs awarded to certain executive officers. The value of the treasury stock is immaterial and included within additional paid-in-capital.
Accumulated Other Comprehensive Income (Loss)
A summary of changes in accumulated other comprehensive income (loss), net of tax, for the
three and nine
months ended
September 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Beginning balance, unrealized gains (losses) on cash flow hedges
|
$
|
(50,766
|
)
|
|
$
|
(5,726
|
)
|
|
$
|
2,125
|
|
|
$
|
3,553
|
|
Other comprehensive loss before reclassifications
|
17,391
|
|
|
(26,929
|
)
|
|
(50,949
|
)
|
|
(50,178
|
)
|
Amounts reclassified out of accumulated other comprehensive income (loss) (a)
|
6,777
|
|
|
8,416
|
|
|
22,226
|
|
|
22,386
|
|
Ending balance, unrealized losses on cash flow hedges
|
$
|
(26,598
|
)
|
|
$
|
(24,239
|
)
|
|
$
|
(26,598
|
)
|
|
$
|
(24,239
|
)
|
|
|
(a)
|
Amounts reclassified out of accumulated other comprehensive income (loss) during the
three and nine
months ended
September 30, 2016
and
2015
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Three Months Ended September 30, 2015
|
Reclassification
|
Amount reclassified
|
|
Income statement line item
|
|
Amount reclassified
|
|
Income statement line item
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Settlements of derivatives
|
$
|
10,799
|
|
|
Interest expense
|
|
$
|
13,446
|
|
|
Interest expense
|
Tax expense (benefit)
|
(4,022
|
)
|
|
|
|
(5,030
|
)
|
|
|
Net of tax
|
$
|
6,777
|
|
|
|
|
$
|
8,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Nine Months Ended September 30, 2015
|
Reclassification
|
Amount reclassified
|
|
Income statement line item
|
|
Amount reclassified
|
|
Income statement line item
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Settlements of derivatives
|
$
|
35,442
|
|
|
Interest expense
|
|
$
|
35,783
|
|
|
Interest expense
|
Tax benefit
|
(13,216
|
)
|
|
|
|
(13,397
|
)
|
|
|
Net of tax
|
$
|
22,226
|
|
|
|
|
$
|
22,386
|
|
|
|
Dividend Restrictions
The Dodd-Frank Act requires certain banks and bank holding companies, including SHUSA, to perform stress testing and submit a capital plan to the Federal Reserve on an annual basis. On June 29, 2016, the FRB informed SHUSA that, based on qualitative concerns, the FRB objected to SHUSA’s capital plan pursuant to CCAR that SHUSA had previously submitted to the FRB. This objection followed the FRB's objections to the capital plans submitted in previous years, following which SHUSA entered into a written agreement with the FRB memorializing discussions under which, among other things, SHUSA is prohibited from allowing its non-wholly-owned nonbank subsidiaries, including the Company, to declare or pay any dividend, or to make any capital distribution, until such time as SHUSA has submitted to the FRB a capital plan and the FRB has issued a written non-objection to the plan, or the FRB otherwise issues its written non-objection to the proposed capital action. The Company will not pay any future dividends until such time as the FRB issues a written non-objection to a capital plan submitted by SHUSA or the FRB otherwise issues its written non-objection to the payment of a dividend by the Company.
|
|
16.
|
Investment Gains (Losses), Net
|
When the Company sells individually acquired retail installment contracts, personal loans or leases, the Company recognizes a gain or loss for the difference between the cash proceeds and carrying value of the assets sold. The gain or loss is recorded in investment gains (losses), net. Lower of cost or market adjustments on the recorded investment of finance receivables held for sale are also recorded in investment gains (losses), net.
Investment gains (losses), net was comprised of the following for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Gain (loss) on sale of loans and leases
|
$
|
(3,765
|
)
|
|
$
|
27,388
|
|
|
$
|
(1,418
|
)
|
|
$
|
138,702
|
|
Lower of cost or market adjustments
|
(97,532
|
)
|
|
—
|
|
|
(266,506
|
)
|
|
—
|
|
Other gains, losses and impairments, net
|
(4,753
|
)
|
|
(4,704
|
)
|
|
(8,491
|
)
|
|
(4,704
|
)
|
|
$
|
(106,050
|
)
|
|
$
|
22,684
|
|
|
$
|
(276,415
|
)
|
|
$
|
133,998
|
|
The lower of cost or market adjustments for the
three and nine
months ended
September 30, 2016
included
$114,477
and
$312,993
in customer default activity, respectively, and net favorable adjustments of
$18,831
and
$48,373
, respectively, related to net changes in the unpaid principal balance on the personal lending portfolio, most of which has been classified as held for sale since September 30, 2015. Additionally, the Company had lower of cost or market adjustments on individually acquired retail installment contracts of
$1,886
during the
three and nine
months ended
September 30, 2016
.
|
|
|
Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
This Quarterly Report on Form 10-Q should be read in conjunction with the Company’s Annual Report on Form 10-K/A for the year ended
December 31, 2015
filed with the SEC on October 27, 2016 (
2015
Annual Report on Form 10-K/A) and in conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere in this report. Additional information, not part of this filing, about the Company is available on the Company’s website at
www.santanderconsumerusa.com
. The Company’s recent annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, as well as other filings with the SEC, are available free of charge through the Company’s website by clicking on the “Investors” page and selecting “All SEC Filings.” The SEC’s website also contains current reports and other information regarding the Company at
www.sec.gov
.
Overview
Santander Consumer USA Holdings Inc. is the holding company for Santander Consumer USA Inc., a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. We are majority-owned (as of
September 30, 2016
, approximately
58.9%
) by SHUSA, a wholly-owned subsidiary of Santander.
The Company is managed through a single reporting segment, Consumer Finance, which includes our vehicle financial products and services, including retail installment contracts, vehicle leases, and dealer loans, as well as financial products and services related to motorcycles, RVs, and marine vehicles. It also includes our personal loan and point-of-sale financing operations.
Since May 1, 2013, we have been the preferred provider for FCA’s consumer loans and leases and dealer loans under terms of a ten-year agreement. Business generated under terms of the Chrysler Agreement is branded as Chrysler Capital. In conjunction with the Chrysler Agreement, the Company offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.
Under the terms of the Chrysler Agreement, the parties agreed to certain standards, including SC meeting specified penetration rates that escalate over the first five years, and FCA treating SC in a manner consistent with comparable OEMs' treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its obligations under the agreement could result in the agreement being terminated. The targeted and actual penetration rates under the terms of the Chrysler Agreement are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Program Year (a)
|
|
1
|
2
|
3
|
4
|
5-10
|
Retail
|
20
|
%
|
30
|
%
|
40
|
%
|
50
|
%
|
50
|
%
|
Lease
|
11
|
%
|
14
|
%
|
14
|
%
|
14
|
%
|
15
|
%
|
Total
|
31
|
%
|
44
|
%
|
54
|
%
|
64
|
%
|
65
|
%
|
|
|
|
|
|
|
Actual Penetration
|
33
|
%
|
29
|
%
|
26
|
%
|
19
|
% (b)
|
—
|
|
(a) Program years run from May 1 to April 30. Retail and lease penetration is based on a percentage of FCA retail sales.
(b) As of September 30, 2016.
The target penetration rate as of April 30, 2016 (the end of the third year of the Chrysler Agreement) was
54%
. Our actual penetration rate as of
September 30, 2016
was
19%
due to the competitive landscape and low interest rates causing our subvented loan offers not to be materially more attractive than other lenders' offers. While we have not achieved the target penetration rates to date, Chrysler Capital continues to be a focal point of our strategy, and we continue to work with FCA to improve penetration rates. We recently partnered with FCA to roll out two pilot programs, including a dealer rewards program and a nonprime subvention program. Since its May 1, 2013, launch, Chrysler Capital has originated
$37.0 billion
in retail loans and
$16.6 billion
in leases, and facilitated the origination of
$3.0 billion
in leases and dealer loans for an affiliate.
The Company also originates vehicle loans through a Web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has several relationships through which it has provided personal loans, private-label credit cards and other consumer finance products. In October 2015, we announced our planned exit from the personal lending business, and in February 2016, we completed the sale of
$869 million
in loans from that platform.
We have flow agreements and dedicated financing facilities in place for our Chrysler Capital business. We periodically sell consumer retail installment contracts through these flow agreements, and, when market conditions are favorable, we will access the ABS market through securitizations of consumer retail installment contracts. We also periodically enter into bulk sales of consumer vehicle leases with a third party. We typically retain servicing of loans and leases sold or securitized, and may also retain some residual risk in sales of leases. We have also entered into an agreement with a third party whereby we will periodically sell charged-off loans.
Economic and Business Environment
The U.S. economy has continued its slow-paced recovery into
2016
. According to the Bureau of Labor Statistics, after decreasing earlier in the year from the 5.0% rate at the beginning of the year, the unemployment rate returned to
5.0%
as of
September 30, 2016
. In December 2015, the Federal Reserve raised its key interest rate by
25 basis points
, the first increase since rates bottomed out in 2008, in an effort to stimulate the economy and boost the housing market. The increase in interest rates, which had been signaled by the Federal Reserve throughout 2015, indicates that the economy continues to strengthen. The Federal Reserve has signaled that additional interest rate increases could be on the short-term horizon. New cars are selling at a pace estimated to exceed
16 million
for
2016
.
The following table shows the percentage of unpaid principal balance on our retail installment contracts by state concentration. Total unpaid principal balance of retail installment contracts held for investment was
$27,624,259
and
$27,223,768
at
September 30, 2016
and
December 31, 2015
, respectively.
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
|
Retail Installment Contracts Held for Investment
|
Texas
|
16.8
|
%
|
|
16.9
|
%
|
Florida
|
13.2
|
%
|
|
12.8
|
%
|
California
|
9.7
|
%
|
|
9.7
|
%
|
Georgia
|
5.3
|
%
|
|
5.1
|
%
|
Illinois
|
3.8
|
%
|
|
3.8
|
%
|
North Carolina
|
3.7
|
%
|
|
3.8
|
%
|
New York
|
3.7
|
%
|
|
3.6
|
%
|
Pennsylvania
|
2.9
|
%
|
|
2.8
|
%
|
Louisiana
|
2.5
|
%
|
|
2.6
|
%
|
Ohio
|
2.4
|
%
|
|
2.5
|
%
|
Arizona
|
2.4
|
%
|
|
2.5
|
%
|
Other states
|
33.6
|
%
|
|
33.9
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Regulatory Matters
The U.S. lending industry is highly regulated under various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practices, SCRA, and Unfair, Deceptive, or Abusive Acts or Practices, Credit CARD, Telephone Consumer Protection, FIRREA, and Gramm-Leach-Bliley Acts, as well as various state laws. We are subject to inspections, examinations, supervision, and regulation by the Commission, the CFPB, the FTC, the DOJ and by regulatory agencies in each state in which we are licensed. In addition, we are directly and indirectly, through our relationship with SHUSA, subject to certain bank regulations, including oversight by the OCC, the European Central Bank, and the Federal Reserve, which have the ability to limit certain of our activities, such as the timing and amount of dividends and certain transactions that we might otherwise desire to enter into, such as merger and acquisition opportunities, or to impose other limitations on our growth.
Regulation AB II
On August 27, 2014, the Commission unanimously voted to adopt final rules known as Regulation AB II, that, among other things, expanded disclosure requirements and modified the offering and shelf registration process. All offerings of publicly registered ABS and all reports under the Exchange Act for outstanding publicly registered ABS must comply with the new rules and disclosures on or after November 23, 2015, except asset-level disclosures. These rules affect the Company's public securitization platform. Compliance with the new rules regarding asset-level disclosures is required for all offerings of publicly registered ABS on or after November 23, 2016.
The Dodd-Frank Act also included risk retention requirements. In 2014, six federal agencies approved a final rule implementing these requirements. The rule generally requires sponsors of ABS to retain not less than five percent of the credit risk of the assets collateralizing the ABS issuance. The rule also sets forth prohibitions on transferring or hedging the credit risk that the sponsor is required to retain. Compliance with the risk retention rules is required with respect to offerings of ABS (other than ABS collateralized by residential mortgages) beginning December 24, 2016.
Additional legal and regulatory matters affecting the Company's activities are further discussed in Part I, Item 1A - Risk Factors of our 2015 Annual Report on Form 10-K/A.
How We Assess Our Business Performance
Net income, and the associated return on assets and equity, are the primary metrics by which we judge the performance of our business. Accordingly, we closely monitor the primary drivers of net income:
|
|
•
|
Net financing income
— We track the spread between the interest and finance charge income earned on our assets and the interest expense incurred on our liabilities, and continually monitor the components of our yield and our cost of funds. In addition, we monitor external rate trends, including the Treasury swap curve and spot and forward rates.
|
|
|
•
|
Net credit losses
— We perform net credit loss analysis at the vintage level for individually acquired retail installment contracts, loans and leases, and at the pool level for purchased portfolios, enabling us to pinpoint drivers of any unusual or unexpected trends. We also monitor recovery rates, both industry-wide and our own. Additionally, because delinquencies are an early indicator of future net credit losses, we analyze delinquency trends, adjusting for seasonality, to determine whether or not our loans are performing in line with our original estimation.
|
|
|
•
|
Other income
— The various flow agreements in connection with our Chrysler Agreement have resulted in a growing portfolio of assets serviced for others. These assets provide a steady stream of servicing income and may provide a gain or loss on sale. We monitor the size of the portfolio and average servicing fee rate and gain. Additionally, due to the classification of most of our personal lending portfolio as held for sale as the result of our 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
— We assess our operational efficiency using our cost-to-managed assets ratio. We perform extensive analysis to determine whether observed fluctuations in operating expense levels indicate a trend or are the nonrecurring impact of large projects. Our operating expense analysis also includes a loan- and portfolio-level review of origination and servicing costs to assist us 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 our earnings, we also closely monitor origination and sales volume along with APR and discounts (including subvention and net of dealer participation).
Third Quarter
2016
Summary of Results
Key highlights of our performance in the
third quarter
of
2016
included:
|
|
•
|
Decline of
3.0%
in net finance and other interest income compared to the same quarter in
2015
;
|
|
|
•
|
Net income of
$213.5 million
compared with
$236.4 million
for the same quarter in
2015
, or a
9.7%
decrease year-over-year;
|
|
|
•
|
Originations of
$5.2 billion
, down from
$5.4 billion
in the prior quarter and down from
$7.6 billion
originated in the same quarter in
2015
;
|
|
|
•
|
Asset sales of
$0.8 billion
, an increase from
$0.7 billion
in the prior quarter, and a decrease from
$3.1 billion
in the same quarter in
2015
;
|
|
|
•
|
Serviced for others portfolio of
$12.2 billion
, down from
$13.0 billion
in the prior quarter and down from
$14.8 billion
in the same period last year;
|
|
|
•
|
Expense ratio of
2.2%
, up from
2.0%
in the prior quarter and
2.1%
in the same quarter last year.
|
Recent Developments and Other Factors Affecting Our Results of Operations
Personal Lending
As a result of the strategic evaluation of our personal lending portfolio, in the third quarter of 2015, we began reviewing strategic alternatives for exiting our personal loan portfolios. In connection with this review, on October 9, 2015, we delivered a 90-day notice of termination of our loan purchase agreement with LendingClub. On February 1, 2016, we completed the sale of substantially all of our LendingClub loans to a third-party buyer at an immaterial premium to par value. The portfolio was comprised of personal installment loans with an unpaid principal balance of
$869 million
as of the date of the sale.
Our other significant personal lending relationship is with Bluestem. We continue to perform in accordance with the terms and operative provisions of agreements under which we are obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem portfolio is carried as held for sale in our condensed consolidated financial statements. Accordingly, we have recorded $
256 million
year-to-date in lower of cost or market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. We are currently evaluating alternatives for the Bluestem portfolio, which had a carrying value of
$0.9 billion
at
September 30, 2016
.
Dividend Restrictions
The Dodd-Frank Act requires certain banks and bank holding companies, including SHUSA, to perform stress testing and submit a capital plan to the Federal Reserve on an annual basis. On June 29, 2016, the FRB informed SHUSA that, based on qualitative concerns, the FRB objected to SHUSA’s capital plan pursuant to CCAR that SHUSA had previously submitted to the FRB. This objection followed the FRB's objections to the capital plans submitted in previous years, following which SHUSA entered into a written agreement with the FRB memorializing discussions under which, among other things, SHUSA is prohibited from allowing its non-wholly-owned nonbank subsidiaries, including the Company, to declare or pay any dividend, or to make any capital distribution, until such time as SHUSA has submitted to the FRB a capital plan and the FRB has issued a written non-objection to the plan, or the FRB otherwise issues its written non-objection to the proposed capital action. The Company will not pay any future dividends until such time as the FRB issues a written non-objection to a capital plan submitted by SHUSA or the FRB otherwise issues its written non-objection to the payment of a dividend by the Company.
Volume
Our originations of individually acquired loans and leases, including net balance increases on revolving loans, average APR, and discount during the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
|
(Dollar amounts in thousands)
|
Retained Originations
|
|
|
|
|
|
|
|
Retail installment contracts
|
$
|
3,281,112
|
|
|
$
|
4,650,381
|
|
|
$
|
10,545,592
|
|
|
$
|
13,602,409
|
|
Average APR
|
14.7
|
%
|
|
16.1
|
%
|
|
15.1
|
%
|
|
17.2
|
%
|
Average FICO® (a)
|
612
|
|
|
596
|
|
|
606
|
|
|
584
|
|
Discount
|
0.1
|
%
|
|
1.1
|
%
|
|
0.4
|
%
|
|
2.1
|
%
|
|
|
|
|
|
|
|
|
Personal loans
|
$
|
—
|
|
|
$
|
158,328
|
|
|
$
|
9,281
|
|
|
$
|
582,735
|
|
Average APR
|
—
|
|
|
21.0
|
%
|
|
25.0
|
%
|
|
19.4
|
%
|
Discount
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Leased vehicles
|
$
|
1,300,375
|
|
|
$
|
1,568,104
|
|
|
$
|
4,612,284
|
|
|
$
|
4,122,527
|
|
|
|
|
|
|
|
|
|
Capital lease receivables
|
$
|
2,319
|
|
|
$
|
1,103
|
|
|
$
|
5,977
|
|
|
$
|
64,906
|
|
Total originations retained
|
$
|
4,583,806
|
|
|
$
|
6,377,916
|
|
|
$
|
15,173,134
|
|
|
$
|
18,372,577
|
|
|
|
|
|
|
|
|
|
Sold Originations
|
|
|
|
|
|
|
|
Retail installment contracts
|
$
|
580,242
|
|
|
$
|
1,243,456
|
|
|
$
|
2,201,659
|
|
|
$
|
3,580,539
|
|
Average APR
|
3.2
|
%
|
|
2.4
|
%
|
|
3.0
|
%
|
|
4.1
|
%
|
Average FICO® (b)
|
760
|
|
|
753
|
|
|
759
|
|
|
745
|
|
|
|
|
|
|
|
|
|
Total SC originations
|
$
|
5,164,048
|
|
|
$
|
7,621,372
|
|
|
$
|
17,374,793
|
|
|
$
|
21,953,116
|
|
|
|
|
|
|
|
|
|
Facilitated Originations
|
|
|
|
|
|
|
|
Leased vehicles
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
632,471
|
|
|
|
|
|
|
|
|
|
Total originations
|
$
|
5,164,048
|
|
|
$
|
7,621,372
|
|
|
$
|
17,374,793
|
|
|
$
|
22,585,587
|
|
|
|
(a)
|
Unpaid principal balance excluded from the weighted average FICO score is
$492 million
and
$938 million
for the
three
months ended
September 30, 2016
and
2015
, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts,
$74 million
and
$202 million
, respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is
$1.8 billion
and
$2.7 billion
for the
nine
months ended
September 30, 2016
and
2015
, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts,
$370 million
and
$516 million
, respectively, were commercial loans.
|
|
|
(b)
|
Unpaid principal balance excluded from the weighted average FICO score is
$59 million
and
$160 million
for the
three
months ended
September 30, 2016
and
2015
, respectively, as the borrowers on these loans did not have FICO scores at origination. Unpaid principal balance excluded from the weighted average FICO score is
$263 million
and
$391 million
for the
nine
months ended
September 30, 2016
and
2015
, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts,
zero
and
$25 million
, respectively, were commercial loans.
|
Our originations of individually acquired retail installment contracts and leases by vehicle type during the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
2016
|
|
September 30,
2015
|
|
September 30,
2016
|
|
September 30,
2015
|
|
(Dollars amounts in thousands)
|
Retail installment contracts
|
|
|
|
|
|
|
|
|
|
|
Car
|
$
|
1,599,590
|
|
41.4
|
%
|
|
$
|
2,621,096
|
|
44.5
|
%
|
|
$
|
5,356,793
|
|
42.0
|
%
|
|
$
|
8,133,172
|
|
47.3
|
%
|
Truck and utility
|
1,938,720
|
|
50.2
|
%
|
|
2,876,022
|
|
48.8
|
%
|
|
6,402,820
|
|
50.2
|
%
|
|
7,844,526
|
|
45.7
|
%
|
Van and other (a)
|
323,044
|
|
8.4
|
%
|
|
396,719
|
|
6.7
|
%
|
|
987,638
|
|
7.7
|
%
|
|
1,205,250
|
|
7.0
|
%
|
|
$
|
3,861,354
|
|
100.0
|
%
|
|
$
|
5,893,837
|
|
100.0
|
%
|
|
$
|
12,747,251
|
|
100.0
|
%
|
|
$
|
17,182,948
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Leased vehicles
|
|
|
|
|
|
|
|
|
|
|
|
Car
|
$
|
193,759
|
|
14.9
|
%
|
|
$
|
157,943
|
|
10.1
|
%
|
|
$
|
522,437
|
|
11.3
|
%
|
|
$
|
725,139
|
|
15.3
|
%
|
Truck and utility
|
944,137
|
|
72.6
|
%
|
|
1,278,542
|
|
81.5
|
%
|
|
3,588,033
|
|
77.8
|
%
|
|
3,646,783
|
|
76.7
|
%
|
Van and other (a)
|
162,479
|
|
12.5
|
%
|
|
131,619
|
|
8.4
|
%
|
|
501,814
|
|
10.9
|
%
|
|
383,076
|
|
8.0
|
%
|
|
$
|
1,300,375
|
|
100.0
|
%
|
|
$
|
1,568,104
|
|
100.0
|
%
|
|
$
|
4,612,284
|
|
100.0
|
%
|
|
$
|
4,754,998
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Total originations by vehicle type
|
|
|
|
|
|
|
|
|
|
|
Car
|
$
|
1,793,349
|
|
34.7
|
%
|
|
$
|
2,779,039
|
|
37.2
|
%
|
|
$
|
5,879,230
|
|
33.9
|
%
|
|
$
|
8,858,311
|
|
40.4
|
%
|
Truck and utility
|
2,882,857
|
|
55.9
|
%
|
|
4,154,564
|
|
55.7
|
%
|
|
9,990,853
|
|
57.6
|
%
|
|
11,491,309
|
|
52.4
|
%
|
Van and other (a)
|
485,523
|
|
9.4
|
%
|
|
528,338
|
|
7.1
|
%
|
|
1,489,452
|
|
8.6
|
%
|
|
1,588,326
|
|
7.2
|
%
|
|
$
|
5,161,729
|
|
100.0
|
%
|
|
$
|
7,461,941
|
|
100.0
|
%
|
|
$
|
17,359,535
|
|
100.0
|
%
|
|
$
|
21,937,946
|
|
100.0
|
%
|
(a) Other primarily consists of commercial vehicles.
Our asset sales for the
three and nine
months ended
September 30, 2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
|
(Dollar amounts in thousands)
|
Retail installment contracts
|
$
|
793,804
|
|
|
$
|
3,057,654
|
|
|
$
|
2,312,983
|
|
|
$
|
5,993,407
|
|
Average APR
|
3.0
|
%
|
|
10.7
|
%
|
|
2.9
|
%
|
|
8.0
|
%
|
Average FICO®
|
762
|
|
|
661
|
|
|
762
|
|
|
694
|
|
|
|
|
|
|
|
|
|
Personal loans
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
869,349
|
|
|
$
|
—
|
|
Average APR
|
—
|
|
|
—
|
|
|
17.9
|
%
|
|
—
|
|
|
|
|
|
|
|
|
|
Leased vehicles
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,316,958
|
|
Total asset sales
|
$
|
793,804
|
|
|
$
|
3,057,654
|
|
|
$
|
3,182,332
|
|
|
$
|
7,310,365
|
|
Our portfolio of retail installment contracts held for investment and leases by vehicle type as of
September 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
|
(Dollars amounts in thousands)
|
Retail installment contracts
|
|
|
|
|
|
Car
|
$
|
15,063,090
|
|
54.5
|
%
|
|
$
|
15,095,256
|
|
55.4
|
%
|
Truck and utility
|
10,936,125
|
|
39.6
|
%
|
|
10,276,231
|
|
37.7
|
%
|
Van and other (a)
|
1,625,044
|
|
5.9
|
%
|
|
1,852,281
|
|
6.9
|
%
|
|
$
|
27,624,259
|
|
100.0
|
%
|
|
$
|
27,223,768
|
|
100.0
|
%
|
|
|
|
|
|
|
Leased vehicles
|
|
|
|
|
|
Car
|
$
|
1,311,515
|
|
13.7
|
%
|
|
$
|
1,224,830
|
|
16.7
|
%
|
Truck and utility
|
7,296,045
|
|
76.4
|
%
|
|
5,428,189
|
|
74.1
|
%
|
Van and other (a)
|
944,879
|
|
9.9
|
%
|
|
673,277
|
|
9.2
|
%
|
|
$
|
9,552,439
|
|
100.0
|
%
|
|
$
|
7,326,296
|
|
100.0
|
%
|
|
|
|
|
|
|
Total by vehicle type
|
|
|
|
|
|
Car
|
$
|
16,374,605
|
|
44.0
|
%
|
|
$
|
16,320,086
|
|
47.2
|
%
|
Truck and utility
|
18,232,170
|
|
49.0
|
%
|
|
15,704,420
|
|
45.5
|
%
|
Van and other (a)
|
2,569,923
|
|
6.9
|
%
|
|
2,525,558
|
|
7.3
|
%
|
|
$
|
37,176,698
|
|
100.0
|
%
|
|
$
|
34,550,064
|
|
100.0
|
%
|
(a) Other primarily consists of commercial vehicles.
The unpaid principal balance, average APR, and remaining unaccreted discount of our held for investment portfolio as of
September 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31, 2015
|
|
(Dollar amounts in thousands)
|
Retail installment contracts (a)
|
$
|
27,624,259
|
|
|
$
|
27,223,768
|
|
Average APR
|
16.4
|
%
|
|
16.8
|
%
|
Discount
|
2.3
|
%
|
|
2.7
|
%
|
|
|
|
|
Personal loans
|
$
|
11,682
|
|
|
$
|
941
|
|
Average APR
|
24.1
|
%
|
|
20.9
|
%
|
|
|
|
|
Receivables from dealers
|
$
|
70,366
|
|
|
$
|
76,941
|
|
Average APR
|
4.7
|
%
|
|
4.6
|
%
|
|
|
|
|
Leased vehicles
|
$
|
9,552,439
|
|
|
$
|
7,326,296
|
|
|
|
|
|
Capital leases
|
$
|
37,247
|
|
|
$
|
66,929
|
|
|
|
(a)
|
Of this balance as of
September 30, 2016
,
$8.2 billion
,
$9.9 billion
,
$4.9 billion
, and
$3.1 billion
was originated during the
nine
months ended
September 30, 2016
, and the years ended 2015, 2014, and 2013, respectively.
|
We record interest income from individually acquired retail installment contracts, personal loans and receivables from dealers in accordance with the terms of the loans, generally discontinuing and reversing accrued income once a loan becomes more than 60 days past due, except in the case of revolving personal loans, for which we continue to accrue interest until charge-off, in the month in which the loan becomes 180 days past due, and receivables from dealers, for which we continue to accrue interest until the loan becomes more than 90 days past due. Receivables from dealers and term personal loans generally are not acquired at a discount. We amortize discounts, subvention payments from manufacturers, and origination costs as adjustments
to income from individually acquired retail installment contracts using the effective yield method. We amortize the discount, if applicable, on revolving personal loans straight-line over the estimated period over which the receivables are expected to be outstanding.
For individually acquired retail installment contracts, personal loans, capital leases, and receivables from dealers, we also establish a credit loss allowance. We estimate probable losses based on contractual delinquency status, historical loss experience, expected recovery rates from sale of repossessed collateral, bankruptcy trends, and general economic conditions such as unemployment rates. For loans within these portfolios that are classified as TDRs, impairment is measured based on the present value of expected future cash flows discounted at the original effective interest rate.
We classify most of our vehicle leases as operating leases. The net capitalized cost of each lease is recorded as an asset, which is depreciated straight-line over the contractual term of the lease to the expected residual value. Lease payments due from customers are recorded 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 accrual is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. Subvention payments from the manufacturer, down payments from the customer, and initial direct costs incurred in connection with originating the lease are amortized straight-line over the contractual term of the lease.
Historically, our primary means of acquiring retail installment contracts has been through individual acquisitions immediately after origination by a dealer. We also periodically purchase pools of receivables and had significant volumes of these purchases during the credit crisis. While we continue to pursue such opportunities when available, we did not purchase any pools during the
nine
months ended
September 30, 2016
and
2015
. However, during the
three and nine
months ended
September 30, 2016
, we recognized certain retail installment contracts with an unpaid principal balance of
$135,772
and
$327,443
, respectively, held by non-consolidated securitization Trusts under optional clean-up calls. Following the initial recognition of these loans at fair value, the performing loans in the portfolio will be carried at amortized cost, net of allowance for credit losses. We 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 our existing purchased receivables portfolios, which were acquired at a discount partially attributable to credit deterioration since origination, we estimate the expected yield on each portfolio at acquisition and record monthly accretion income based on this expectation. We periodically re-evaluate performance expectations and may increase the accretion rate if a pool is performing better than expected. If a pool is performing worse than expected, we are required to continue to record accretion income at the previously established rate and to record impairment to account for the worsening performance.
Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Income Statement Data
|
(Dollar amounts in thousands, except per share data)
|
Interest on individually acquired retail installment contracts
|
$
|
1,148,669
|
|
|
$
|
1,152,994
|
|
|
$
|
3,485,106
|
|
|
$
|
3,354,050
|
|
Interest on purchased receivables portfolios
|
17,830
|
|
|
16,770
|
|
|
58,774
|
|
|
66,450
|
|
Interest on receivables from dealers
|
1,176
|
|
|
1,060
|
|
|
2,822
|
|
|
3,528
|
|
Interest on personal loans
|
78,711
|
|
|
114,261
|
|
|
257,620
|
|
|
337,729
|
|
Interest on finance receivables and loans
|
1,246,386
|
|
|
1,285,085
|
|
|
3,804,322
|
|
|
3,761,757
|
|
Net leased vehicle income
|
135,771
|
|
|
92,666
|
|
|
369,421
|
|
|
224,519
|
|
Other finance and interest income
|
3,638
|
|
|
9,334
|
|
|
11,440
|
|
|
23,413
|
|
Interest expense
|
207,175
|
|
|
171,420
|
|
|
590,504
|
|
|
470,898
|
|
Net finance and other interest income
|
1,178,620
|
|
|
1,215,665
|
|
|
3,594,679
|
|
|
3,538,791
|
|
Provision for credit losses on individually acquired retail installment contracts
|
609,396
|
|
|
619,895
|
|
|
1,787,277
|
|
|
1,607,376
|
|
Increase (decrease) in impairment related to purchased receivables portfolios
|
804
|
|
|
(2,500
|
)
|
|
(2,986
|
)
|
|
(11,872
|
)
|
Provision for credit losses on receivables from dealers
|
(189
|
)
|
|
(42
|
)
|
|
(133
|
)
|
|
252
|
|
Provision for credit losses on personal loans
|
—
|
|
|
105,813
|
|
|
—
|
|
|
324,634
|
|
Provision for credit losses on capital leases
|
387
|
|
|
756
|
|
|
(1,669
|
)
|
|
14,758
|
|
Provision for credit losses
|
610,398
|
|
|
723,922
|
|
|
1,782,489
|
|
|
1,935,148
|
|
Profit sharing
|
6,400
|
|
|
11,818
|
|
|
35,640
|
|
|
46,835
|
|
Other income
|
26,682
|
|
|
154,336
|
|
|
141,542
|
|
|
519,230
|
|
Operating expenses
|
284,484
|
|
|
261,287
|
|
|
847,567
|
|
|
764,627
|
|
Income before tax expense
|
304,020
|
|
|
372,974
|
|
|
1,070,525
|
|
|
1,311,411
|
|
Income tax expense
|
90,473
|
|
|
136,539
|
|
|
365,334
|
|
|
467,816
|
|
Net income
|
$
|
213,547
|
|
|
$
|
236,435
|
|
|
$
|
705,191
|
|
|
$
|
843,595
|
|
Share Data
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
358,343,781
|
|
|
357,846,564
|
|
|
358,179,618
|
|
|
354,150,973
|
|
Diluted
|
360,087,749
|
|
|
359,108,197
|
|
|
359,635,034
|
|
|
354,735,772
|
|
Earnings per share
|
|
|
|
|
|
|
|
Basic
|
$
|
0.60
|
|
|
$
|
0.66
|
|
|
$
|
1.97
|
|
|
$
|
2.38
|
|
Diluted
|
$
|
0.59
|
|
|
$
|
0.66
|
|
|
$
|
1.96
|
|
|
$
|
2.38
|
|
Balance Sheet Data
|
|
|
|
|
|
|
|
Finance receivables held for investment, net
|
$
|
23,686,391
|
|
|
$
|
23,478,376
|
|
|
$
|
23,686,391
|
|
|
$
|
23,478,376
|
|
Finance receivables held for sale, net
|
2,572,429
|
|
|
2,709,643
|
|
|
2,572,429
|
|
|
2,709,643
|
|
Goodwill and intangible assets
|
107,084
|
|
|
110,966
|
|
|
107,084
|
|
|
110,966
|
|
Total assets
|
38,771,636
|
|
|
36,035,625
|
|
|
38,771,636
|
|
|
36,035,625
|
|
Total borrowings
|
31,799,895
|
|
|
30,206,295
|
|
|
31,799,895
|
|
|
30,206,295
|
|
Total liabilities
|
33,653,979
|
|
|
31,583,641
|
|
|
33,653,979
|
|
|
31,583,641
|
|
Total equity
|
5,117,657
|
|
|
4,451,984
|
|
|
5,117,657
|
|
|
4,451,984
|
|
Allowance for credit losses
|
3,412,977
|
|
|
2,996,924
|
|
|
3,412,977
|
|
|
2,996,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Other Information
|
(Dollar amounts in thousands)
|
Charge-offs, net of recoveries, on individually acquired retail installment contracts
|
$
|
630,847
|
|
|
$
|
564,820
|
|
|
$
|
1,583,406
|
|
|
$
|
1,184,245
|
|
Charge-offs, net of recoveries, on purchased receivables portfolios
|
254
|
|
|
1,563
|
|
|
(807
|
)
|
|
(6,103
|
)
|
Charge-offs, net of recoveries, on receivables from dealers
|
—
|
|
|
—
|
|
|
135
|
|
|
—
|
|
Charge-offs, net of recoveries, on personal loans
|
—
|
|
|
490,548
|
|
|
—
|
|
|
673,294
|
|
Charge-offs, net of recoveries, on capital leases
|
2,095
|
|
|
3,027
|
|
|
7,165
|
|
|
11,048
|
|
Total charge-offs, net of recoveries
|
633,196
|
|
|
1,059,958
|
|
|
1,589,899
|
|
|
1,862,484
|
|
End of period delinquent principal over 60 days, individually acquired retail installment contracts held for investment
|
1,260,255
|
|
|
1,012,042
|
|
|
1,260,255
|
|
|
1,012,042
|
|
End of period personal loans delinquent principal over 60 days
|
179,443
|
|
|
165,759
|
|
|
179,443
|
|
|
165,759
|
|
End of period delinquent principal over 60 days, loans held for investment
|
1,267,950
|
|
|
1,034,471
|
|
|
1,267,950
|
|
|
1,034,471
|
|
End of period assets covered by allowance for credit losses
|
27,490,290
|
|
|
26,907,346
|
|
|
27,490,290
|
|
|
26,907,346
|
|
End of period gross individually acquired retail installment contracts held for investment
|
27,370,995
|
|
|
26,718,576
|
|
|
27,370,995
|
|
|
26,718,576
|
|
End of period gross personal loans
|
1,337,692
|
|
|
2,261,789
|
|
|
1,337,692
|
|
|
2,261,789
|
|
End of period gross finance receivables and loans held for investment
|
27,706,307
|
|
|
27,319,991
|
|
|
27,706,307
|
|
|
27,319,991
|
|
End of period gross finance receivables, loans, and leases held for investment
|
37,295,993
|
|
|
34,188,834
|
|
|
37,295,993
|
|
|
34,188,834
|
|
Average gross individually acquired retail installment contracts
|
28,970,039
|
|
|
27,687,564
|
|
|
28,710,402
|
|
|
26,596,429
|
|
Average gross purchased receivables portfolios
|
266,749
|
|
|
467,643
|
|
|
301,026
|
|
|
618,362
|
|
Average Gross receivables from dealers
|
70,392
|
|
|
81,490
|
|
|
72,735
|
|
|
93,817
|
|
Average Gross personal loans
|
1,343,099
|
|
|
2,284,951
|
|
|
1,572,297
|
|
|
2,201,551
|
|
Average Gross capital leases
|
39,974
|
|
|
120,334
|
|
|
49,625
|
|
|
122,366
|
|
Average Gross finance receivables and loans
|
30,690,253
|
|
|
30,641,982
|
|
|
30,706,085
|
|
|
29,632,525
|
|
Average Gross finance receivables, loans, and leases
|
40,037,873
|
|
|
37,040,857
|
|
|
39,299,213
|
|
|
35,701,048
|
|
Average managed assets
|
52,675,379
|
|
|
50,961,182
|
|
|
52,983,740
|
|
|
47,812,496
|
|
Average total assets
|
38,473,832
|
|
|
36,035,588
|
|
|
37,844,330
|
|
|
34,753,501
|
|
Average debt
|
31,671,237
|
|
|
30,416,494
|
|
|
31,343,204
|
|
|
29,575,308
|
|
Average total equity
|
4,994,511
|
|
|
4,268,855
|
|
|
4,736,826
|
|
|
3,991,071
|
|
Ratios
|
|
|
|
|
|
|
|
Yield on individually acquired retail installment contracts
|
15.9
|
%
|
|
16.7
|
%
|
|
16.2
|
%
|
|
16.8
|
%
|
Yield on purchased receivables portfolios
|
26.7
|
%
|
|
14.3
|
%
|
|
26.0
|
%
|
|
14.3
|
%
|
Yield on receivables from dealers
|
6.7
|
%
|
|
5.2
|
%
|
|
5.2
|
%
|
|
5.0
|
%
|
Yield on personal loans (1)
|
23.4
|
%
|
|
20.0
|
%
|
|
21.8
|
%
|
|
20.5
|
%
|
Yield on earning assets (2)
|
13.8
|
%
|
|
15.0
|
%
|
|
14.2
|
%
|
|
15.0
|
%
|
Cost of debt (3)
|
2.6
|
%
|
|
2.3
|
%
|
|
2.5
|
%
|
|
2.1
|
%
|
Net interest margin (4)
|
11.8
|
%
|
|
13.1
|
%
|
|
12.2
|
%
|
|
13.2
|
%
|
Expense ratio (5)
|
2.2
|
%
|
|
2.1
|
%
|
|
2.1
|
%
|
|
2.1
|
%
|
Return on average assets (6)
|
2.2
|
%
|
|
2.6
|
%
|
|
2.5
|
%
|
|
3.2
|
%
|
Return on average equity (7)
|
17.1
|
%
|
|
22.2
|
%
|
|
19.8
|
%
|
|
28.2
|
%
|
Net charge-off ratio on individually acquired retail installment contracts (8)
|
8.7
|
%
|
|
8.2
|
%
|
|
7.4
|
%
|
|
5.9
|
%
|
Net charge-off ratio on purchased receivables portfolios (8)
|
0.4
|
%
|
|
1.3
|
%
|
|
(0.4
|
)%
|
|
(1.3
|
)%
|
Net charge-off ratio on receivables from dealers (8)
|
—
|
|
|
—
|
|
|
0.2
|
%
|
|
—
|
|
Net charge-off ratio on personal loans (8)
|
—
|
|
|
85.9
|
%
|
|
—
|
|
|
40.8
|
%
|
Net charge-off ratio (8)
|
8.3
|
%
|
|
13.8
|
%
|
|
6.9
|
%
|
|
8.4
|
%
|
Delinquency ratio on individually acquired retail installment contracts held for investment, end of period (9)
|
4.6
|
%
|
|
3.8
|
%
|
|
4.6
|
%
|
|
3.8
|
%
|
Delinquency ratio on personal loans, end of period (9)
|
13.4
|
%
|
|
7.3
|
%
|
|
13.4
|
%
|
|
7.3
|
%
|
Delinquency ratio on loans held for investment, end of period (9)
|
4.6
|
%
|
|
3.8
|
%
|
|
4.6
|
%
|
|
3.8
|
%
|
Equity to assets ratio
|
13.2
|
%
|
|
12.4
|
%
|
|
13.2
|
%
|
|
12.4
|
%
|
Tangible common equity to tangible assets (10)
|
13.0
|
%
|
|
12.1
|
%
|
|
13.0
|
%
|
|
12.1
|
%
|
Allowance ratio (11)
|
12.4
|
%
|
|
11.1
|
%
|
|
12.4
|
%
|
|
11.1
|
%
|
Common Equity Tier 1 capital ratio (12)
|
13.1
|
%
|
|
11.5
|
%
|
|
13.1
|
%
|
|
11.5
|
%
|
|
|
(1)
|
Includes finance and other interest income; excludes fees
|
|
|
(2)
|
“Yield on earning assets” is defined as the ratio of annualized Total finance and other interest income, net of Leased vehicle expense, to Average gross finance receivables, loans and leases
|
|
|
(3)
|
“Cost of debt” is defined as the ratio of annualized Interest expense to Average debt
|
|
|
(4)
|
“Net interest margin” is defined as the ratio of annualized Net finance and other interest income to Average gross finance receivables, loans and leases
|
|
|
(5)
|
"Expense ratio" is defined as the ratio of annualized Operating expenses to Average managed assets
|
|
|
(6)
|
“Return on average assets” is defined as the ratio of annualized Net income to Average total assets
|
|
|
(7)
|
“Return on average equity” is defined as the ratio of annualized Net income to Average total equity
|
|
|
(8)
|
“Net charge-off ratio” is defined as the ratio of annualized Charge-offs on a recorded investment basis, net of recoveries, to average unpaid principal balance of the respective portfolio. During the three and months ended September 30, 2015, we recorded non-recurring impairment charges on finance receivables held for sale and on finance receivables sold during the period. The associated impairment was recorded through charge-off expense. The charge-off ratio for the three and nine months ended September 30, 2015, adjusted for these non-recurring impairments, is presented in the tables below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2015
|
|
Retail Installment Contracts Acquired Individually
|
|
Purchased Receivables
|
|
Personal Loans
|
|
Capital Lease
|
|
Receivables from
Dealers Held
for Investment
|
|
Total
|
Charge-offs, net of recoveries
|
$
|
564,820
|
|
|
$
|
1,563
|
|
|
$
|
490,548
|
|
|
$
|
3,027
|
|
|
$
|
—
|
|
|
$
|
1,059,958
|
|
Less: Non-recurring impairment charge
|
64,140
|
|
|
—
|
|
|
377,598
|
|
|
—
|
|
|
—
|
|
|
441,738
|
|
Adjusted charge-offs, net of recoveries
|
$
|
500,680
|
|
|
$
|
1,563
|
|
|
$
|
112,950
|
|
|
$
|
3,027
|
|
|
$
|
—
|
|
|
$
|
618,220
|
|
Average gross balance
|
$
|
27,687,564
|
|
|
$
|
467,643
|
|
|
$
|
2,284,951
|
|
|
$
|
120,334
|
|
|
$
|
81,490
|
|
|
$
|
30,641,982
|
|
Adjusted charge-off ratio
|
7.2
|
%
|
|
1.3
|
%
|
|
19.8
|
%
|
|
10.1
|
%
|
|
—
|
|
|
8.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
Retail Installment Contracts Acquired Individually
|
|
Purchased Receivables
|
|
Personal Loans
|
|
Capital Lease
|
|
Receivables from
Dealers Held
for Investment
|
|
Total
|
Charge-offs, net of recoveries
|
$
|
1,184,245
|
|
|
$
|
(6,103
|
)
|
|
$
|
673,294
|
|
|
$
|
11,048
|
|
|
$
|
—
|
|
|
$
|
1,862,484
|
|
Less: Non-recurring impairment charge
|
73,388
|
|
|
—
|
|
|
377,598
|
|
|
—
|
|
|
—
|
|
|
450,986
|
|
Adjusted charge-offs net of recoveries
|
$
|
1,110,857
|
|
|
$
|
(6,103
|
)
|
|
$
|
295,696
|
|
|
$
|
11,048
|
|
|
$
|
—
|
|
|
$
|
1,411,498
|
|
Average gross balance
|
$
|
26,596,429
|
|
|
$
|
618,362
|
|
|
$
|
2,201,551
|
|
|
$
|
122,366
|
|
|
$
|
93,817
|
|
|
$
|
29,632,525
|
|
Adjusted charge-off ratio
|
5.6
|
%
|
|
(1.3
|
)%
|
|
17.9
|
%
|
|
12.0
|
%
|
|
—
|
|
|
6.4
|
%
|
|
|
(9)
|
“Delinquency ratio” is defined as the ratio of End of period Delinquent principal over 60 days to End of period gross balance of the respective portfolio, excludes capital leases
|
|
|
(10)
|
“Tangible common equity to tangible assets” is defined as the ratio of Total equity, excluding Goodwill and intangible assets, to Total assets, excluding Goodwill and intangible assets. Our Board utilizes this non-GAAP financial measure to assess and monitor the adequacy of our capitalization. This additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with U.S. GAAP and may not be comparable to similarly-titled measures used by other financial institutions. A reconciliation from GAAP to this non-GAAP measure for the periods ended
September 30, 2016
and
2015
is as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
September 30, 2015
|
|
(Dollar amounts in thousands)
|
Total equity
|
$
|
5,117,657
|
|
|
$
|
4,451,984
|
|
Deduct: Goodwill and intangibles
|
107,084
|
|
|
110,966
|
|
Tangible common equity
|
$
|
5,010,573
|
|
|
$
|
4,341,018
|
|
|
|
|
|
Total assets
|
$
|
38,771,636
|
|
|
$
|
36,035,625
|
|
Deduct: Goodwill and intangibles
|
107,084
|
|
|
110,966
|
|
Tangible assets
|
$
|
38,664,552
|
|
|
$
|
35,924,659
|
|
|
|
|
|
Equity to assets ratio
|
13.2
|
%
|
|
12.4
|
%
|
Tangible common equity to tangible assets
|
13.0
|
%
|
|
12.1
|
%
|
|
|
(11)
|
“Allowance ratio” is defined as the ratio of Allowance for credit losses, which excludes impairment on purchased receivables portfolios, to End of period assets covered by allowance for credit losses.
|
|
|
(12)
|
"Common Equity Tier 1 Capital ratio" is defined as the ratio of Total common equity tier 1 capital to Total risk-weighted assets.
|
The following tables present an analysis of net yield on interest earning assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
(Dollar amounts in thousands)
|
|
Average Balances
|
|
Interest Income/Interest Expense
|
|
Yield/Rate
|
|
Average Balances
|
|
Interest Income/Interest Expense
|
|
Yield/Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Retail installment contracts acquired individually
|
$
|
28,970,039
|
|
|
$
|
1,148,669
|
|
|
15.9
|
%
|
|
$
|
27,687,564
|
|
|
$
|
1,152,994
|
|
|
16.7
|
%
|
Purchased receivables
|
266,749
|
|
|
17,830
|
|
|
26.7
|
%
|
|
467,643
|
|
|
16,770
|
|
|
14.3
|
%
|
Receivables from dealers
|
70,392
|
|
|
1,176
|
|
|
6.7
|
%
|
|
81,490
|
|
|
1,060
|
|
|
5.2
|
%
|
Personal loans
|
1,343,099
|
|
|
78,711
|
|
|
23.4
|
%
|
|
2,284,951
|
|
|
114,261
|
|
|
20.0
|
%
|
Capital lease receivables
|
39,974
|
|
|
2,062
|
|
|
20.6
|
%
|
|
120,334
|
|
|
8,969
|
|
|
29.8
|
%
|
Finance receivables held for investment, net
|
30,690,253
|
|
|
1,248,448
|
|
|
16.3
|
%
|
|
30,641,982
|
|
|
1,294,054
|
|
|
16.9
|
%
|
Leased vehicles, net
|
9,347,620
|
|
|
135,771
|
|
|
5.8
|
%
|
|
6,398,875
|
|
|
92,666
|
|
|
5.8
|
%
|
Other assets
|
1,866,410
|
|
|
1,576
|
|
|
0.3
|
%
|
|
2,320,544
|
|
|
365
|
|
|
0.1
|
%
|
Allowance for credit losses
|
(3,430,451
|
)
|
|
—
|
|
|
—
|
|
|
(3,325,813
|
)
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
38,473,832
|
|
|
$
|
1,385,795
|
|
|
|
|
$
|
36,035,588
|
|
|
$
|
1,387,085
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
$
|
31,671,237
|
|
|
$
|
207,175
|
|
|
2.6
|
%
|
|
$
|
30,416,494
|
|
|
$
|
171,420
|
|
|
2.3
|
%
|
Other liabilities
|
1,808,084
|
|
|
—
|
|
|
—
|
|
|
1,350,239
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
33,479,321
|
|
|
207,175
|
|
|
|
|
31,766,733
|
|
|
171,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
4,994,511
|
|
|
—
|
|
|
|
|
4,268,855
|
|
|
—
|
|
|
|
Total liabilities and equity
|
$
|
38,473,832
|
|
|
$
|
207,175
|
|
|
|
|
$
|
36,035,588
|
|
|
$
|
171,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
(Dollar amounts in thousands)
|
|
Average Balances
|
|
Interest Income/Interest Expense
|
|
Yield/Rate
|
|
Average Balances
|
|
Interest Income/Interest Expense
|
|
Yield/Rate
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
Retail installment contracts acquired individually
|
$
|
28,710,402
|
|
|
$
|
3,485,106
|
|
|
16.2
|
%
|
|
$
|
26,596,429
|
|
|
$
|
3,354,050
|
|
|
16.8
|
%
|
Purchased receivables
|
301,026
|
|
|
58,774
|
|
|
26.0
|
%
|
|
618,362
|
|
|
66,450
|
|
|
14.3
|
%
|
Receivables from dealers
|
72,735
|
|
|
2,822
|
|
|
5.2
|
%
|
|
93,817
|
|
|
3,528
|
|
|
5.0
|
%
|
Personal loans
|
1,572,297
|
|
|
257,620
|
|
|
21.8
|
%
|
|
2,201,551
|
|
|
337,729
|
|
|
20.5
|
%
|
Capital lease receivables
|
49,625
|
|
|
7,093
|
|
|
19.1
|
%
|
|
122,366
|
|
|
22,549
|
|
|
24.6
|
%
|
Finance receivables held for investment, net
|
30,706,085
|
|
|
3,811,415
|
|
|
16.6
|
%
|
|
29,632,525
|
|
|
3,784,306
|
|
|
17.0
|
%
|
Leased vehicles, net
|
8,593,128
|
|
|
369,421
|
|
|
5.7
|
%
|
|
6,068,523
|
|
|
224,519
|
|
|
4.9
|
%
|
Other assets
|
1,953,562
|
|
|
4,347
|
|
|
0.3
|
%
|
|
2,240,043
|
|
|
864
|
|
|
0.1
|
%
|
Allowance for credit losses
|
(3,408,445
|
)
|
|
—
|
|
|
—
|
|
|
(3,187,590
|
)
|
|
—
|
|
|
—
|
|
Total assets
|
$
|
37,844,330
|
|
|
$
|
4,185,183
|
|
|
|
|
$
|
34,753,501
|
|
|
$
|
4,009,689
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
$
|
31,343,204
|
|
|
$
|
590,504
|
|
|
2.5
|
%
|
|
$
|
29,575,308
|
|
|
$
|
470,898
|
|
|
2.1
|
%
|
Other liabilities
|
1,764,300
|
|
|
—
|
|
|
—
|
|
|
1,187,122
|
|
|
—
|
|
|
—
|
|
Total liabilities
|
33,107,504
|
|
|
590,504
|
|
|
|
|
30,762,430
|
|
|
470,898
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
4,736,826
|
|
|
—
|
|
|
|
|
3,991,071
|
|
|
—
|
|
|
|
Total liabilities and equity
|
$
|
37,844,330
|
|
|
$
|
590,504
|
|
|
|
|
$
|
34,753,501
|
|
|
$
|
470,898
|
|
|
|
Results of Operations
The following table presents our results of operations for the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended
September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(Dollar amounts in thousands)
|
Interest on finance receivables and loans
|
$
|
1,246,386
|
|
|
$
|
1,285,085
|
|
|
$
|
3,804,322
|
|
|
$
|
3,761,757
|
|
Leased vehicle income
|
388,501
|
|
|
267,211
|
|
|
1,086,651
|
|
|
742,684
|
|
Other finance and interest income
|
3,638
|
|
|
9,334
|
|
|
11,440
|
|
|
23,413
|
|
Total finance and other interest income
|
1,638,525
|
|
|
1,561,630
|
|
|
4,902,413
|
|
|
4,527,854
|
|
Interest expense
|
207,175
|
|
|
171,420
|
|
|
590,504
|
|
|
470,898
|
|
Leased vehicle expense
|
252,730
|
|
|
174,545
|
|
|
717,230
|
|
|
518,165
|
|
Net finance and other interest income
|
1,178,620
|
|
|
1,215,665
|
|
|
3,594,679
|
|
|
3,538,791
|
|
Provision for credit losses
|
610,398
|
|
|
723,922
|
|
|
1,782,489
|
|
|
1,935,148
|
|
Net finance and other interest income after provision for credit losses
|
568,222
|
|
|
491,743
|
|
|
1,812,190
|
|
|
1,603,643
|
|
Profit sharing
|
6,400
|
|
|
11,818
|
|
|
35,640
|
|
|
46,835
|
|
Net finance and other interest income after provision for credit losses and profit sharing
|
561,822
|
|
|
479,925
|
|
|
1,776,550
|
|
|
1,556,808
|
|
Total other income
|
26,682
|
|
|
154,336
|
|
|
141,542
|
|
|
519,230
|
|
Total operating expenses
|
284,484
|
|
|
261,287
|
|
|
847,567
|
|
|
764,627
|
|
Income before income taxes
|
304,020
|
|
|
372,974
|
|
|
1,070,525
|
|
|
1,311,411
|
|
Income tax expense
|
90,473
|
|
|
136,539
|
|
|
365,334
|
|
|
467,816
|
|
Net income
|
$
|
213,547
|
|
|
$
|
236,435
|
|
|
$
|
705,191
|
|
|
$
|
843,595
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
213,547
|
|
|
$
|
236,435
|
|
|
$
|
705,191
|
|
|
$
|
843,595
|
|
Change in unrealized gains (losses) on cash flow hedges, net of tax
|
24,168
|
|
|
(18,513
|
)
|
|
(28,723
|
)
|
|
(27,792
|
)
|
Comprehensive income
|
$
|
237,715
|
|
|
$
|
217,922
|
|
|
$
|
676,468
|
|
|
$
|
815,803
|
|
Three and Nine
Months Ended
September 30, 2016
Compared to
Three and Nine
Months Ended
September 30, 2015
Interest on Finance Receivables and Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Income from individually acquired retail installment contracts
|
$
|
1,148,669
|
|
|
$
|
1,152,994
|
|
|
$
|
(4,325
|
)
|
|
—
|
|
|
$
|
3,485,106
|
|
|
$
|
3,354,050
|
|
|
$
|
131,056
|
|
|
4
|
%
|
Income from purchased receivables portfolios
|
17,830
|
|
|
16,770
|
|
|
1,060
|
|
|
6
|
%
|
|
58,774
|
|
|
66,450
|
|
|
(7,676
|
)
|
|
(12
|
)%
|
Income from receivables from dealers
|
1,176
|
|
|
1,060
|
|
|
116
|
|
|
11
|
%
|
|
2,822
|
|
|
3,528
|
|
|
(706
|
)
|
|
(20
|
)%
|
Income from personal loans
|
78,711
|
|
|
114,261
|
|
|
(35,550
|
)
|
|
(31
|
)%
|
|
257,620
|
|
|
337,729
|
|
|
(80,109
|
)
|
|
(24
|
)%
|
Total interest on finance receivables and loans
|
$
|
1,246,386
|
|
|
$
|
1,285,085
|
|
|
$
|
(38,699
|
)
|
|
(3
|
)%
|
|
$
|
3,804,322
|
|
|
$
|
3,761,757
|
|
|
$
|
42,565
|
|
|
1
|
%
|
Income from individually acquired retail installment contracts
increased
$131 million
, or
4%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
, less than the 8% growth in the average outstanding balance of our portfolio of these contracts due to the higher average credit quality.
Income from purchased receivables portfolios
decreased
$8 million
, or
12%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
due to the continued runoff of the portfolios, as we have made no portfolio acquisitions accounted for under ASC 310-30 since 2012. The average balance of the portfolios decreased from
$618 million
from the
nine
months ended
September 30, 2015
to
$301 million
for the
nine
months ended
September 30, 2016
.
Income from personal loans
decreased
$36 million
, or
31%
, from the
third
quarter of
2015
to the
third
quarter of
2016
, and
decreased
$80 million
, or
24%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
given the sale of the LendingClub loans in February 2016. The average balance of the portfolios decreased from
$2.3 billion
in the
third
quarter of
2015
, to
$1.3 billion
in the
third
quarter of
2016
, and decreased from
$2.2 billion
from the
nine
months ended
September 30, 2015
to
$1.6 billion
for the
nine
months ended
September 30, 2016
.
Leased Vehicle Income and Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Leased vehicle income
|
$
|
388,501
|
|
|
$
|
267,211
|
|
|
$
|
121,290
|
|
|
45
|
%
|
|
$
|
1,086,651
|
|
|
$
|
742,684
|
|
|
$
|
343,967
|
|
|
46
|
%
|
Leased vehicle expense
|
252,730
|
|
|
174,545
|
|
|
78,185
|
|
|
45
|
%
|
|
717,230
|
|
|
518,165
|
|
|
199,065
|
|
|
38
|
%
|
Leased vehicle income, net
|
$
|
135,771
|
|
|
$
|
92,666
|
|
|
$
|
43,105
|
|
|
47
|
%
|
|
$
|
369,421
|
|
|
$
|
224,519
|
|
|
$
|
144,902
|
|
|
65
|
%
|
Leased vehicle income and expense
increased
significantly in the
three and nine
months ended
September 30, 2016
when compared to the same periods in
2015
, due to the continual growth in the portfolio since we launched Chrysler Capital in 2013.
Interest Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Interest expense on notes payable
|
$
|
194,602
|
|
|
$
|
146,777
|
|
|
$
|
47,825
|
|
|
33
|
%
|
|
$
|
547,160
|
|
|
$
|
412,934
|
|
|
$
|
134,226
|
|
|
33
|
%
|
Interest expense on derivatives
|
12,573
|
|
|
24,643
|
|
|
(12,070
|
)
|
|
(49
|
)%
|
|
43,344
|
|
|
57,964
|
|
|
(14,620
|
)
|
|
(25
|
)%
|
Total interest expense
|
$
|
207,175
|
|
|
$
|
171,420
|
|
|
$
|
35,755
|
|
|
21
|
%
|
|
$
|
590,504
|
|
|
$
|
470,898
|
|
|
$
|
119,606
|
|
|
25
|
%
|
Interest expense on notes payable
increased
$48 million
, or
33%
, from the
third
quarter of
2015
to the
third
quarter of
2016
, and
increased
$134 million
, or
33%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
, higher than the growth in average debt outstanding of 4% and
6%
for the respective periods. Our cost of funds has increased due to higher market rates and wider spreads.
Interest expense on derivatives decreased
$12 million
, or
49%
, from the third quarter of 2015 to the third quarter of 2016, and decreased
$15 million
, or
25%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
primarily due to a favorable mark-to-market based on interest rate changes in 2016 versus an unfavorable mark-to-market in 2015.
Provision for Credit Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Provision for credit losses on individually acquired retail installment contracts
|
$
|
609,396
|
|
|
$
|
619,895
|
|
|
$
|
(10,499
|
)
|
|
(2
|
)%
|
|
$
|
1,787,277
|
|
|
$
|
1,607,376
|
|
|
$
|
179,901
|
|
|
11
|
%
|
Incremental increase (decrease) in impairment related to purchased receivables portfolios
|
804
|
|
|
(2,500
|
)
|
|
3,304
|
|
|
(132
|
)%
|
|
(2,986
|
)
|
|
(11,872
|
)
|
|
8,886
|
|
|
(75
|
)%
|
Provision for credit losses on receivables from dealers
|
(189
|
)
|
|
(42
|
)
|
|
(147
|
)
|
|
350
|
%
|
|
(133
|
)
|
|
252
|
|
|
(385
|
)
|
|
(153
|
)%
|
Provision for credit losses on personal loans
|
—
|
|
|
105,813
|
|
|
(105,813
|
)
|
|
(100
|
)%
|
|
—
|
|
|
324,634
|
|
|
(324,634
|
)
|
|
(100
|
)%
|
Provision for credit losses on capital leases
|
387
|
|
|
756
|
|
|
(369
|
)
|
|
(49
|
)%
|
|
(1,669
|
)
|
|
14,758
|
|
|
(16,427
|
)
|
|
(111
|
)%
|
Provision for credit losses
|
$
|
610,398
|
|
|
$
|
723,922
|
|
|
$
|
(113,524
|
)
|
|
(16
|
)%
|
|
$
|
1,782,489
|
|
|
$
|
1,935,148
|
|
|
$
|
(152,659
|
)
|
|
(8
|
)%
|
Provision for credit losses on our individually acquired retail installment contracts
increased
$180 million
, or
11%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
primarily due to unfavorable variances in net charge-offs which increased by $399 million. The increases in net charge-offs were primarily attributable to portfolio aging and mix shift, lower realized recovery rates, and smaller benefit from bankruptcy sales. These increases in net charge-offs were partially offset by smaller builds of the allowance for credit losses primarily due to lower volume and higher credit quality originations during the
nine
months ended
September 30, 2016
as compared to the same period in 2015.
Change in incremental increase (decrease) in impairment related to purchased receivables portfolios resulted from the release of less impairment on purchased receivables as the portfolios continued to run off.
Provision for credit losses on personal loans
decreased
from
$106 million
in the
third quarter
of
2015
to
zero
in the
third quarter
of
2016
, and
decreased
from
$325 million
for the
nine
months ended
September 30, 2015
to zero in the
nine
months ended
September 30, 2016
, due to the reclassification of this portfolio from held for investment to held for sale in the third quarter of 2015. We now recognize customer defaults and other lower of cost or market adjustments on this portfolio through investment gains (losses), net.
In early 2015 we ceased originations in the primary program that gave rise to our capital lease portfolio, and provisions for credit losses on this portfolio have decreased as the portfolio liquidates.
Profit Sharing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Profit sharing
|
$
|
6,400
|
|
|
$
|
11,818
|
|
|
$
|
(5,418
|
)
|
|
(46
|
)%
|
|
$
|
35,640
|
|
|
$
|
46,835
|
|
|
$
|
(11,195
|
)
|
|
(24
|
)%
|
Profit sharing consists of revenue sharing related to the Chrysler Agreement and profit sharing on personal loans originated pursuant to our agreements with Bluestem. Profit sharing with Bluestem
decreased
in the
three and nine
months ended
September 30, 2016
compared to the same periods in
2015
, primarily due to amendments to the agreement governing the profit sharing calculation, including an increase in the percentage of profit retained by the Company. This effect was partially offset by an increase in Chrysler Capital revenue sharing due to continued growth in the portfolio as well as, for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, an increase in the revenue sharing rate in May 2015.
Other Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Investment gains (losses), net
|
$
|
(106,050
|
)
|
|
$
|
22,684
|
|
|
$
|
(128,734
|
)
|
|
(568
|
)%
|
|
$
|
(276,415
|
)
|
|
$
|
133,998
|
|
|
$
|
(410,413
|
)
|
|
(306
|
)%
|
Servicing fee income
|
36,447
|
|
|
35,910
|
|
|
537
|
|
|
1
|
%
|
|
123,929
|
|
|
88,756
|
|
|
35,173
|
|
|
40
|
%
|
Fees, commissions, and other
|
96,285
|
|
|
95,742
|
|
|
543
|
|
|
1
|
%
|
|
294,028
|
|
|
296,476
|
|
|
(2,448
|
)
|
|
(1
|
)%
|
Total other income
|
$
|
26,682
|
|
|
$
|
154,336
|
|
|
$
|
(127,654
|
)
|
|
(83
|
)%
|
|
$
|
141,542
|
|
|
$
|
519,230
|
|
|
$
|
(377,688
|
)
|
|
(73
|
)%
|
Average serviced for others portfolio
|
$
|
12,622,328
|
|
|
$
|
13,912,095
|
|
|
$
|
(1,289,767
|
)
|
|
(9
|
)%
|
|
$
|
13,674,454
|
|
|
$
|
12,356,122
|
|
|
$
|
1,318,332
|
|
|
11
|
%
|
Investment gains (losses), net changed from net gains to net losses in the
three and nine
months ended
September 30, 2016
compared to the same periods in
2015
, primarily due to current year lower of cost or market adjustments of
$98 million
and
$267 million
, respectively, on our personal loan portfolio, which was reclassified to held for sale in the third quarter of 2015. Additionally, we had
$36 million
and
$149 million
less favorable gains on loan, lease and other miscellaneous sales for the
three and nine
months ended
September 30, 2016
, respectively, compared to the same periods in
2015
, primarily due to a lack of bulk loan and lease sales in the 2016.
We record servicing fee income on loans that we service but do not own and do not report on our balance sheet. Servicing fee income
increased
$35 million
, or
40%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
due to the growth in our serviced portfolio. Our serviced for others portfolio as of
September 30, 2016
and
2015
was as follows:
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
2016
|
|
2015
|
|
(Dollar amounts in thousands)
|
SBNA retail installment contracts
|
$
|
566,088
|
|
|
$
|
735,359
|
|
SBNA leases
|
1,502,518
|
|
|
2,327,624
|
|
Total serviced for related parties
|
2,068,606
|
|
|
3,062,983
|
|
Chrysler Capital securitizations
|
1,840,684
|
|
|
2,157,189
|
|
Other third parties
|
8,247,402
|
|
|
9,567,976
|
|
Total serviced for third parties
|
10,088,086
|
|
|
11,725,165
|
|
Total serviced for others portfolio
|
$
|
12,156,692
|
|
|
$
|
14,788,148
|
|
Servicing fee income increased, despite the decrease in the serviced for others portfolio, due to the greater proportion of lower credit quality, higher servicing fee assets in the portfolio in the current year, the result of the sale during the third quarter of 2015 of residual interests in aged securitizations.
Total Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Compensation expense
|
$
|
128,056
|
|
|
$
|
114,070
|
|
|
$
|
13,986
|
|
|
12
|
%
|
|
$
|
371,242
|
|
|
$
|
325,583
|
|
|
$
|
45,659
|
|
|
14
|
%
|
Repossession expense
|
75,920
|
|
|
60,770
|
|
|
15,150
|
|
|
25
|
%
|
|
217,816
|
|
|
175,066
|
|
|
42,750
|
|
|
24
|
%
|
Other operating costs
|
80,508
|
|
|
86,447
|
|
|
(5,939
|
)
|
|
(7
|
)%
|
|
258,509
|
|
|
263,978
|
|
|
(5,469
|
)
|
|
(2
|
)%
|
Total operating expenses
|
$
|
284,484
|
|
|
$
|
261,287
|
|
|
$
|
23,197
|
|
|
9
|
%
|
|
$
|
847,567
|
|
|
$
|
764,627
|
|
|
$
|
82,940
|
|
|
11
|
%
|
Compensation expense
increased
$14 million
, or
12%
, in
third quarter
2016
as compared to the same period in prior year, and
increased
$46 million
, or
14%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
, primarily due to an increase in average headcount of
5%
and 6% for the respective periods. Repossession expense
increased
$15 million
, or
25%
, from the
third quarter
of
2015
to the
third quarter
of
2016
, and
increased
$43 million
, or
24%
, from the
nine
months ended
September 30, 2015
to the
nine
months ended
September 30, 2016
, primarily due to an increase in repossession rate for the respective periods, increase in units repossessed, and an overall increase in impound and auction expenses.
Income Tax Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Income tax expense
|
$
|
90,473
|
|
|
$
|
136,539
|
|
|
$
|
(46,066
|
)
|
|
(34
|
)%
|
|
$
|
365,334
|
|
|
$
|
467,816
|
|
|
$
|
(102,482
|
)
|
|
(22
|
)%
|
Income before income taxes
|
304,020
|
|
|
372,974
|
|
|
(68,954
|
)
|
|
(18
|
)%
|
|
1,070,525
|
|
|
1,311,411
|
|
|
(240,886
|
)
|
|
(18
|
)%
|
Effective tax rate
|
29.8
|
%
|
|
36.6
|
%
|
|
|
|
|
|
34.1
|
%
|
|
35.7
|
%
|
|
|
|
|
Our effective tax rate
decreased
from
36.6%
in the
third quarter
of
2015
to
29.8%
in the
third quarter
of
2016
, primarily due to the release of the valuation allowance for capital loss carryforwards and changes in estimated electric vehicle tax credits in the third quarter of 2016, and
decreased
from
35.7%
in the
nine
months ended
September 30, 2015
to
34.1%
in the
nine
months ended
September 30, 2016
, primarily due to the release of the valuation allowance for capital loss carryforwards in the third quarter of 2016.
Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30,
|
|
Increase (Decrease)
|
|
September 30,
|
|
Increase (Decrease)
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
2016
|
|
2015
|
|
Amount
|
|
Percent
|
|
(Dollar amounts in thousands)
|
Change in unrealized gains (losses) on cash flow hedges, net of tax
|
$
|
24,168
|
|
|
$
|
(18,513
|
)
|
|
$
|
42,681
|
|
|
231
|
%
|
|
$
|
(28,723
|
)
|
|
$
|
(27,792
|
)
|
|
$
|
(931
|
)
|
|
(3
|
)%
|
The change in unrealized gains (losses) on cash flow hedges for the three months ended
September 30, 2016
as compared to the three months ended
September 30, 2015
was primarily driven by more favorable interest rate movements in
2016
than in
2015
.
Credit Quality
Finance Receivables
Nonprime loans comprise
83%
of our portfolio as of
September 30, 2016
. We record an allowance for credit losses on our individually acquired retail installment contracts and other loans and receivables held for investment. The Company's held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans was comprised of the following at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Retail Installment Contracts
Acquired
Individually (a)
|
|
Receivables from
Dealers
|
|
Personal Loans (b)
|
|
(Dollar amounts in thousands)
|
Unpaid principal balance
|
$
|
27,370,995
|
|
|
$
|
70,366
|
|
|
$
|
11,682
|
|
Credit loss allowance
|
(3,401,285
|
)
|
|
(648
|
)
|
|
—
|
|
Discount
|
(622,833
|
)
|
|
—
|
|
|
(2,577
|
)
|
Capitalized origination costs and fees
|
57,178
|
|
|
—
|
|
|
2,432
|
|
Net carrying balance
|
$
|
23,404,055
|
|
|
$
|
69,718
|
|
|
$
|
11,537
|
|
Allowance as a percentage of unpaid principal balance
|
12.4
|
%
|
|
0.9
|
%
|
|
—
|
|
Allowance and discount as a percentage of unpaid principal balance
|
14.7
|
%
|
|
0.9
|
%
|
|
22.1
|
%
|
|
|
(a)
|
As of
September 30, 2016
, used car financing represented 61% of our outstanding retail installment contracts acquired individually. 88% of this used car financing consisted of nonprime auto loans.
|
|
|
(b)
|
As of
September 30, 2016
, substantially all of the Company's personal loans were classified as held for sale.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Retail Installment Contracts
Acquired
Individually
|
|
Receivables from
Dealers
|
|
Personal Loans
|
|
(Dollar amounts in thousands)
|
Unpaid principal balance
|
$
|
26,863,946
|
|
|
$
|
76,941
|
|
|
$
|
941
|
|
Credit loss allowance
|
(3,197,414
|
)
|
|
(916
|
)
|
|
—
|
|
Discount
|
(722,701
|
)
|
|
—
|
|
|
—
|
|
Capitalized origination costs and fees
|
60,234
|
|
|
—
|
|
|
—
|
|
Net carrying balance
|
$
|
23,004,065
|
|
|
$
|
76,025
|
|
|
$
|
941
|
|
Allowance as a percentage of unpaid principal balance
|
11.9
|
%
|
|
1.2
|
%
|
|
—
|
|
Allowance and discount as a percentage of unpaid principal balance
|
14.6
|
%
|
|
1.2
|
%
|
|
—
|
|
For most retail installment contracts that we acquired in pools at a discount due to credit deterioration subsequent to their origination, we anticipate the expected credit losses at purchase and record income thereafter based on the expected effective yield, recording impairment if performance is worse than expected at purchase. The balances of these purchased receivables portfolios were as follows at
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30,
2016 (a)
|
|
December 31, 2015
|
|
(Dollar amounts in thousands)
|
Outstanding balance
|
$
|
254,554
|
|
|
$
|
362,212
|
|
Outstanding recorded investment, net of impairment
|
$
|
174,702
|
|
|
$
|
239,551
|
|
|
|
(a)
|
As of
September 30, 2016
, used car financing represented 27% of our outstanding purchased pool loans. 67% of this used car financing consisted of nonprime auto loans.
|
In early 2015, we increased our origination volume of loans to borrowers with limited credit experience, such as those with less than 36 months of credit history or less than four trade lines. For these borrowers, many of whom do not have a FICO
®
score, other factors such as the LexisNexis risk view score, loan-to-value ratio, and payment-to-income ratio are utilized to assign an internal credit score. Our risk-based pricing methodology generally captures these credit bureau attributes in establishing a risk-appropriate annual percentage rate at the time of origination. Origination volume of loans with less than four trade lines and less than 36 months of credit history was
$562 million
and
$1.0 billion
for the
three
months ended
September 30, 2016
and
September 30, 2015
, respectively. Origination volume of loans with less than four trade lines and less than 36 months of credit history was
$2.1 billion
and
$3.0 billion
for the
nine
months ended
September 30, 2016
and
September 30, 2015
, respectively. Remaining unpaid principal balance of these loans was
$4.9 billion
as of
September 30, 2016
and
December 31, 2015
, respectively. We recorded a qualitative adjustment of
$149 million
as of
December 31, 2015
to account for the higher concentration of loans with limited bureau information. However, this qualitative adjustment was reduced to zero as of
September 30, 2016
as origination metrics have improved and the additional charge-offs expected on this portfolio are included in the estimated credit loss allowance.
A summary of the credit risk profile of our consumer loans by FICO® score, number of trade lines, and length of credit history, each as determined at origination, as of
September 30, 2016
and
December 31, 2015
was as follows (dollar amounts in billions, totals may not foot due to rounding):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
Trade Lines
|
|
1
|
|
2
|
|
3
|
|
4+
|
|
Total
|
FICO
|
Months History
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
No-FICO
|
<36
|
|
$
|
2.9
|
|
97
|
%
|
|
$
|
0.1
|
|
3
|
%
|
|
$
|
—
|
|
—
|
|
|
$
|
—
|
|
—
|
|
|
$
|
3.0
|
|
10
|
%
|
36+
|
|
0.5
|
|
42
|
%
|
|
0.2
|
|
17
|
%
|
|
0.1
|
|
8
|
%
|
|
0.4
|
|
33
|
%
|
|
1.2
|
|
4
|
%
|
<540
|
<36
|
|
0.2
|
|
40
|
%
|
|
0.1
|
|
20
|
%
|
|
0.1
|
|
20
|
%
|
|
0.1
|
|
20
|
%
|
|
0.5
|
|
2
|
%
|
36+
|
|
0.2
|
|
4
|
%
|
|
0.3
|
|
5
|
%
|
|
0.3
|
|
5
|
%
|
|
4.8
|
|
86
|
%
|
|
5.6
|
|
20
|
%
|
540-599
|
<36
|
|
0.3
|
|
38
|
%
|
|
0.2
|
|
25
|
%
|
|
0.1
|
|
13
|
%
|
|
0.2
|
|
25
|
%
|
|
0.8
|
|
3
|
%
|
36+
|
|
0.2
|
|
3
|
%
|
|
0.3
|
|
4
|
%
|
|
0.3
|
|
4
|
%
|
|
7.1
|
|
90
|
%
|
|
7.9
|
|
29
|
%
|
600-639
|
<36
|
|
0.2
|
|
40
|
%
|
|
0.1
|
|
20
|
%
|
|
0.1
|
|
20
|
%
|
|
0.1
|
|
20
|
%
|
|
0.5
|
|
2
|
%
|
36+
|
|
—
|
|
—
|
|
|
0.1
|
|
2
|
%
|
|
0.1
|
|
2
|
%
|
|
4.1
|
|
95
|
%
|
|
4.3
|
|
16
|
%
|
>640
|
<36
|
|
0.3
|
|
50
|
%
|
|
0.1
|
|
17
|
%
|
|
0.1
|
|
—
|
|
|
0.1
|
|
17
|
%
|
|
0.6
|
|
2
|
%
|
36+
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
3.2
|
|
100
|
%
|
|
3.2
|
|
12
|
%
|
Total
|
|
$
|
4.8
|
|
17
|
%
|
|
$
|
1.5
|
|
5
|
%
|
|
$
|
1.2
|
|
4
|
%
|
|
$
|
20.1
|
|
73
|
%
|
|
$
|
27.6
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
Trade Lines
|
|
1
|
|
2
|
|
3
|
|
4+
|
|
Total
|
FICO
|
Months History
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
|
$
|
%
|
No-FICO
|
<36
|
|
$
|
3.0
|
|
97
|
%
|
|
$
|
0.1
|
|
3
|
%
|
|
$
|
—
|
|
—
|
|
|
$
|
—
|
|
—
|
|
|
$
|
3.1
|
|
11
|
%
|
36+
|
|
0.5
|
|
38
|
%
|
|
0.3
|
|
23
|
%
|
|
0.2
|
|
15
|
%
|
|
0.4
|
|
31
|
%
|
|
1.3
|
|
5
|
%
|
<540
|
<36
|
|
0.3
|
|
50
|
%
|
|
0.1
|
|
17
|
%
|
|
0.1
|
|
17
|
%
|
|
0.1
|
|
17
|
%
|
|
0.6
|
|
2
|
%
|
36+
|
|
0.2
|
|
3
|
%
|
|
0.3
|
|
5
|
%
|
|
0.4
|
|
7
|
%
|
|
4.9
|
|
84
|
%
|
|
5.8
|
|
21
|
%
|
540-599
|
<36
|
|
0.3
|
|
43
|
%
|
|
0.1
|
|
14
|
%
|
|
0.1
|
|
14
|
%
|
|
0.2
|
|
29
|
%
|
|
0.7
|
|
3
|
%
|
36+
|
|
0.2
|
|
3
|
%
|
|
0.3
|
|
4
|
%
|
|
0.3
|
|
4
|
%
|
|
7.0
|
|
91
|
%
|
|
7.7
|
|
28
|
%
|
600-639
|
<36
|
|
0.2
|
|
50
|
%
|
|
0.1
|
|
25
|
%
|
|
0.1
|
|
25
|
%
|
|
0.1
|
|
25
|
%
|
|
0.4
|
|
1
|
%
|
36+
|
|
—
|
|
—
|
|
|
0.1
|
|
2
|
%
|
|
0.1
|
|
2
|
%
|
|
4.1
|
|
95
|
%
|
|
4.3
|
|
16
|
%
|
>640
|
<36
|
|
0.2
|
|
50
|
%
|
|
0.1
|
|
25
|
%
|
|
—
|
|
—
|
|
|
0.1
|
|
25
|
%
|
|
0.4
|
|
1
|
%
|
36+
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
—
|
|
—
|
|
|
2.8
|
|
97
|
%
|
|
2.9
|
|
11
|
%
|
Total
|
|
$
|
4.9
|
|
18
|
%
|
|
$
|
1.4
|
|
5
|
%
|
|
$
|
1.2
|
|
4
|
%
|
|
$
|
19.7
|
|
72
|
%
|
|
$
|
27.2
|
|
100
|
%
|
Delinquency
An account is considered delinquent if a substantial portion of a scheduled payment has not been received by the date such payment was contractually 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, our delinquencies have been highest in the period from November through January due to consumers’ holiday spending.
The following is a summary of delinquencies on our retail installment contracts held for investment as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Dollars (in thousands)
|
|
Percent (a)
|
|
Dollars (in thousands)
|
|
Percent (a)
|
Principal 31-60 days past due
|
$
|
2,551,819
|
|
|
9.2
|
%
|
|
$
|
2,485,428
|
|
|
9.1
|
%
|
Delinquent principal over 60 days
|
1,267,950
|
|
|
4.6
|
%
|
|
1,208,864
|
|
|
4.4
|
%
|
Total delinquent principal
|
$
|
3,819,769
|
|
|
13.8
|
%
|
|
$
|
3,694,292
|
|
|
13.6
|
%
|
|
|
(a)
|
Percent of unpaid principal balance.
|
All of our receivables from dealers were current as of
September 30, 2016
and
December 31, 2015
.
Credit Loss Experience
The following is a summary of our net losses and repossession activity on our finance receivables held for investment for the
nine
months ended
September 30, 2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016 (1)
|
|
2015
|
|
Retail Installment
Contracts
|
|
Retail Installment
Contracts
|
|
Personal Loans
|
|
(Dollar amounts in thousands)
|
Principal outstanding at period end
|
$
|
27,624,259
|
|
|
$
|
27,131,221
|
|
|
$
|
—
|
|
Average principal outstanding during the period
|
$
|
27,577,929
|
|
|
$
|
26,338,639
|
|
|
$
|
2,201,551
|
|
Number of receivables outstanding at period end
|
1,656,786
|
|
|
1,634,261
|
|
|
1,935,420
|
|
Average number of receivables outstanding during the period
|
1,669,992
|
|
|
1,658,194
|
|
|
1,942,177
|
|
Number of repossessions (2)
|
221,298
|
|
|
183,430
|
|
|
n/a
|
|
Number of repossessions as a percent of average number of receivables outstanding (3)
|
17.7
|
%
|
|
14.7
|
%
|
|
n/a
|
|
Net losses
|
$
|
1,582,599
|
|
|
$
|
1,178,142
|
|
|
$
|
673,294
|
|
Net losses as a percent of average principal amount outstanding (3)
|
7.7
|
%
|
|
6.0
|
%
|
|
40.8
|
%
|
(1) As of
September 30, 2016
, most of the Company's personal loans were classified as held for sale.
|
|
(2)
|
Repossessions are net of redemptions. The number of repossessions includes repossessions from the outstanding portfolio and from accounts already charged off.
|
(3) Annualized; not necessarily indicative of a full year's actual results.
We have had charge-offs on our receivables from dealers of
$135
for the
nine
months ended
September 30, 2016
. There were no charge-offs on our receivables from dealers in 2015.
Deferrals and Troubled Debt Restructurings
In accordance with our policies and guidelines, we, at times, offer extensions (deferrals) to consumers on our retail installment contracts, whereby the consumer is allowed to move a maximum of three payments per event to the end of the loan. Over 90% of deferrals granted are for two months. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of lifetime months extended for all automobile retail installment contracts is eight, while some marine and recreational vehicle contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.
At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, such account is aged based on the timely payment of future installments in the same manner as any other account.
The following is a summary of deferrals on our retail installment contracts held for investment as of the dates indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
(Dollar amounts in thousands)
|
Never deferred
|
$
|
19,181,173
|
|
|
69.4
|
%
|
|
$
|
19,946,478
|
|
|
73.3
|
%
|
Deferred once
|
4,338,413
|
|
|
15.7
|
%
|
|
3,923,705
|
|
|
14.4
|
%
|
Deferred twice
|
2,059,732
|
|
|
7.5
|
%
|
|
1,660,482
|
|
|
6.1
|
%
|
Deferred 3 - 4 times
|
1,983,577
|
|
|
7.2
|
%
|
|
1,639,092
|
|
|
6.0
|
%
|
Deferred greater than 4 times
|
61,364
|
|
|
0.2
|
%
|
|
54,011
|
|
|
0.2
|
%
|
Total
|
$
|
27,624,259
|
|
|
|
|
$
|
27,223,768
|
|
|
|
We evaluate the results of our 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, we believe that payment deferrals granted according to our 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 by us. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of our allowance for credit losses are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for credit losses and related provision for credit losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for credit losses and related provision for credit losses, including the allowance and provision for loans that are not classified as TDRs. For loans that are classified as TDRs, the present value of expected cash flows is compared to the outstanding recorded investment of our TDRs to determine the amount of TDR impairment and related provision for credit losses that should be recorded.
We 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 our revolving personal loans also may grant modifications in the form of principal or interest rate reductions or payment plans. Similar to deferrals, we believe 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. The following is a summary of the principal balance as of
September 30, 2016
and
December 31, 2015
of loans that have received these modifications and concessions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
Retail Installment Contracts
|
|
Retail Installment Contracts
|
|
Personal Loans
|
|
(Dollar amounts in thousands)
|
Temporary reduction of monthly payment
|
$
|
2,222,605
|
|
|
$
|
1,746,399
|
|
|
$
|
—
|
|
Bankruptcy-related accounts
|
109,863
|
|
|
104,355
|
|
|
—
|
|
Extension of maturity date
|
26,679
|
|
|
45,119
|
|
|
—
|
|
Interest rate reduction
|
69,433
|
|
|
77,976
|
|
|
15,145
|
|
Other
|
759,765
|
|
|
59,179
|
|
|
—
|
|
Total modified loans
|
$
|
3,188,345
|
|
|
$
|
2,033,028
|
|
|
$
|
15,145
|
|
A summary of our recorded investment in TDRs as of the dates indicated is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31,
2015
|
|
Retail Installment Contracts
|
|
(Dollar amounts in thousands)
|
Outstanding recorded investment
|
$
|
5,364,656
|
|
|
$
|
4,601,502
|
|
Impairment
|
(1,588,028
|
)
|
|
(1,363,023
|
)
|
Outstanding recorded investment, net of impairment
|
$
|
3,776,628
|
|
|
$
|
3,238,479
|
|
A summary of the principal balance on our delinquent TDRs as of the dates indicated is as follows:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31,
2015
|
|
Retail Installment Contracts
|
|
(Dollar amounts in thousands)
|
Principal 31-60 days past due
|
$
|
1,089,212
|
|
|
$
|
942,021
|
|
Delinquent principal over 60 days
|
593,713
|
|
|
510,015
|
|
Total delinquent TDRs
|
$
|
1,682,925
|
|
|
$
|
1,452,036
|
|
As of
September 30, 2016
and
December 31, 2015
, we did not have any dealer loans classified as TDRs and had not granted deferrals or modifications on any of these loans.
The following table shows the components of the changes in the recorded investment in retail installment contract TDRs during the
three and nine
months ended
September 30, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
September 30, 2016
|
|
September 30, 2015
|
|
September 30, 2016
|
|
September 30, 2015
|
Balance — beginning of period
|
$
|
5,061,608
|
|
|
$
|
4,439,192
|
|
|
$
|
4,601,502
|
|
|
$
|
4,044,070
|
|
New TDRs
|
932,472
|
|
|
852,415
|
|
|
2,478,035
|
|
|
2,627,451
|
|
Charge-offs
|
(448,418
|
)
|
|
(342,151
|
)
|
|
(1,119,730
|
)
|
|
(917,071
|
)
|
Repurchases/(sales)
|
1,443
|
|
|
(457,036
|
)
|
|
7,115
|
|
|
(465,026
|
)
|
Paydowns
|
(180,396
|
)
|
|
(169,584
|
)
|
|
(594,695
|
)
|
|
(538,975
|
)
|
Transfers to held for sale
|
(2,053
|
)
|
|
(1,955
|
)
|
|
(7,571
|
)
|
|
(429,568
|
)
|
Balance — end of period
|
$
|
5,364,656
|
|
|
$
|
4,320,881
|
|
|
$
|
5,364,656
|
|
|
$
|
4,320,881
|
|
For loans not classified as TDRs, the Company generally estimates an appropriate allowance for credit losses based on delinquency status, the Company’s historical loss experience, estimated values of underlying collateral, and various economic factors. Once a loan has been classified as a TDR, it is assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence. Due to this key distinction in allowance calculations, the coverage ratio is higher for TDRs in comparison to non-TDRs. The table below presents the Company’s allowance ratio for TDR and non-TDR individually acquired retail installment contracts as of
September 30, 2016
and
December 31, 2015
:
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
December 31, 2015
|
|
(Dollar amounts in thousands)
|
TDR - Unpaid principal balance
|
$
|
5,332,767
|
|
|
$
|
4,579,931
|
|
TDR - Impairment
|
1,588,028
|
|
|
1,363,023
|
|
TDR allowance ratio
|
29.8
|
%
|
|
29.8
|
%
|
|
|
|
|
Non-TDR - Unpaid principal balance
|
$
|
22,038,228
|
|
|
$
|
22,284,015
|
|
Non-TDR - Allowance
|
1,813,257
|
|
|
1,834,391
|
|
Non-TDR allowance ratio
|
8.2
|
%
|
|
8.2
|
%
|
|
|
|
|
Total - Unpaid principal balance
|
$
|
27,370,995
|
|
|
$
|
26,863,946
|
|
Total - Allowance
|
3,401,285
|
|
|
3,197,414
|
|
Total allowance ratio
|
12.4
|
%
|
|
11.9
|
%
|
The allowance ratios for both TDR non-TDR retail installment contracts remained flat from December 31, 2015 to September 30, 2016. However, our total allowance ratio on retail installment contracts increased from
11.9%
at
December 31, 2015
to
12.4%
at
September 30, 2016
, due to an increase in the proportion of assets classified as TDRs as the portfolio average increases.
Liquidity Management, Funding and Capital Resources
We require a significant amount of liquidity to originate and acquire loans and leases and to service debt. We fund our operations through our lending relationships with
15
third-party banks, SHUSA and Santander, as well as through securitization in the ABS market and large flow agreements. We seek to issue debt that appropriately matches the cash flows of the assets that we originate. We have over
$5.1 billion
of stockholders’ equity that supports our access to the securitization markets, credit facilities, and flow agreements.
During the
nine
months ended
September 30, 2016
, we completed on-balance sheet funding transactions totaling approximately
$9.7 billion
, including:
|
|
•
|
two
securitizations on our SDART platform for
$2.1 billion
;
|
|
|
•
|
issuances of retained bonds on our SDART platform for
$127 million
;
|
|
|
•
|
two
securitizations on our DRIVE, deeper subprime platform, for
$1.9 billion
;
|
|
|
•
|
a securitization on our CCART platform for
$945 million
;
|
|
|
•
|
four
private amortizing lease facilities for
$1.4 billion
;
|
|
|
•
|
four
top-ups of private amortizing lease facilities for
$1.8 billion
; and
|
|
|
•
|
three
private amortizing loan facilities for
$1.4 billion
.
|
We also completed
$3.2 billion
in asset sales, which consists of
$2.3 billion
of recurring monthly sales with our third party flow partners, and the sale of LendingClub assets of
$869 million
to an unrelated third party.
As of
September 30, 2016
and
December 31, 2015
, our debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
December 31,
2015
|
Third party revolving credit facilities
|
$
|
8,299,229
|
|
|
$
|
6,902,779
|
|
Related party revolving credit facilities
|
2,350,000
|
|
|
2,600,000
|
|
Total revolving credit facilities
|
10,649,229
|
|
|
9,502,779
|
|
|
|
|
|
Public securitizations
|
12,364,123
|
|
|
12,659,996
|
|
Privately issued amortizing notes
|
8,786,543
|
|
|
8,212,904
|
|
Total secured structured financings
|
21,150,666
|
|
|
20,872,900
|
|
Total debt
|
$
|
31,799,895
|
|
|
$
|
30,375,679
|
|
Credit Facilities
Third-party Revolving Credit Facilities
Warehouse Lines
We use warehouse lines to fund our originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. Our warehouse lines generally are backed by auto retail installment contracts and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. We maintain daily funding forecasts for originations, acquisitions, and other large outflows such as tax payments in order to balance the desire to minimize funding costs with our liquidity needs.
Our warehouse lines 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 of our warehouse lines, delinquency and net loss ratios are calculated with respect to our 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 our ability to obtain additional borrowings under the agreement, and/or remove us as servicer. We have never had a warehouse line 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 warehouse line.
We have two credit facilities with eight banks providing an aggregate commitment of
$4.2 billion
for the exclusive use of providing short-term liquidity needs to support Chrysler Capital retail financing. As of
September 30, 2016
and
December 31, 2015
, there was an outstanding balance of
$3.7 billion
and
$2.9 billion
, respectively, on these facilities in aggregate. One of the facilities can be used exclusively for loan financing and the other for lease financing. Both facilities require reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.
Repurchase Facility
We also obtain financing through two investment management agreements whereby we pledge retained subordinate bonds on our own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 180 days. As of
September 30, 2016
, there was an outstanding balance of
$1.0 billion
under these repurchase facilities.
Lines of Credit with Santander and Related Subsidiaries
Santander historically has provided, and continues to provide, our business with significant funding support in the form of committed credit facilities. Through its New York branch, Santander provides us with
$3 billion
of long-term committed revolving credit facilities. As of September 30, 2016, SHUSA provided us with an additional
$1.8 billion
of committed revolving credit,
$300 million
of which is collateralized by residuals retained on our own securitizations and
$1.5 billion
of which is unsecured. On November 1, 2016, the unsecured commitment was increased to $3.0 billion. As part of our strategy to reduce our reliance on borrowings under funding commitments from Santander and SHUSA, we have reduced our outstanding balances under these facilities during 2016. As of
September 30, 2016
and
December 31, 2015
the Company had borrowed
$2.4 billion
and
$2.6 billion
, respectively, under the lines of credit with Santander and SHUSA.
The facilities offered through the New York branch are structured as three- and five-year floating rate facilities, with current maturity dates of December 31, 2016 and 2018. These facilities currently permit unsecured borrowing but generally are collateralized by retail installment contracts as well as securitization notes payables and residuals by the Company. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.
Until March 4, 2016, when the facilities offered through the New York branch were lowered to
$3.0 billion
, the commitments from the branch totaled
$4.5 billion
. There was an average outstanding balance of
$2.4 billion
and
$3.7 billion
under these facilities during the
nine
months ended
September 30, 2016
and
2015
, respectively. The maximum outstanding balance during each period was
$3.0 billion
and $4.4 billion, respectively.
Until March 4, 2016, when the SHUSA commitments were increased to
$1.8 billion
, the commitment from SHUSA consisted of one
$300 million
facility. There was an average outstanding balance of
$300 million
under this facility during the
nine
months ended
September 30, 2016
and
2015
, respectively; the maximum outstanding balance during each of those periods was
$300 million
. There was an average outstanding balance of
zero
and
$5.8 million
under the new
$1.5 billion
backup facility during the
three
and
nine
months ended
September 30, 2016
, respectively. The maximum outstanding balance on the backup facility was zero and
$200 million
during the
three
and
nine
months ended
September 30, 2016
, respectively. On November 1, 2016, the SHUSA commitment was increased to $3.3 billion.
We also have derivative financial instruments with Santander and affiliates as counterparty with outstanding notional amounts of
$8.6 billion
and
$13.7 billion
at
September 30, 2016
and
December 31, 2015
, respectively. The Company had a collateral overage on derivative liabilities with Santander and affiliates of
$21 million
at
September 30, 2016
and
December 31, 2015
. Interest expense on these agreements includes amounts totaling
$16 million
and
$55 million
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
Beginning in 2015, the Company began incurring a fee of
12.5 basis points
(per annum) on certain warehouse facilities, as they renew, for which Santander provides a guarantee of the Company's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee will be paid against each month's ending balance. The guarantee fee will be applicable only for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by an executed counter-guaranty agreement. The Company recognized guarantee fee expense of
$5 million
and
$2 million
for the
nine
months ended
September 30, 2016
and
2015
, respectively.
Secured Structured Financings
Our secured structured financings primarily consist of public, SEC-registered securitizations. We also execute private securitizations under Rule 144A of the Securities Act and privately issue amortizing notes.
We obtain long-term funding for our 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, we may choose to issue floating rate securities based on market conditions; in such cases, we generally execute hedging arrangements outside of the Trust to lock in our cost of funds. Because of prevailing market rates, we did not issue ABS transactions in 2008 and 2009, but we began issuing ABS again in 2010. We were the largest issuer of retail auto ABS every year from 2011 through 2015, and have issued a total of over
$51 billion
in retail auto ABS since 2010.
We execute each securitization transaction by selling receivables to securitization Trusts that issue ABS to investors. In order 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 the targeted percentage level of assets has been reached. Once the targeted percentage level of overcollateralization is reached and maintained, excess cash flows generated by the Trusts are released to us as distributions from the Trusts. We also receive monthly servicing fees as servicer for the Trusts. Our securitizations may require an increase in credit enhancement levels if cumulative net losses exceed a specified percentage of the pool balance. None of our securitizations have cumulative net loss percentages above their respective limits.
Our on-balance sheet securitization transactions utilize bankruptcy-remote special purpose entities, which are considered variable interest entities, that meet the requirements to be consolidated in our financial statements. Following a securitization, the finance receivables and the notes payable related to the securitized retail installment contracts remain on the condensed consolidated balance sheets. We recognize finance and interest income and fee income, as well as provision for credit losses, on the collateralized retail installment contracts, and interest expense on the ABS issued. While these Trusts are consolidated in our 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 our creditors or our other subsidiaries.
ABS credit spreads have been widening, beginning in the second half of 2015 and continuing into 2016. Highly liquid, frequent issuers with public shelf registrations, such as the Company, have remained active in the market while smaller, newer market entrants have experienced significant spread widening. We have completed
five
securitizations year-to-date in
2016
. We currently have
40
securitizations outstanding in the market with a cumulative ABS balance of approximately
$14.1 billion
. Our securitizations generally have several classes of notes, with principal paid sequentially based on seniority and any excess spread distributed to the residual holder. We generally retain the lowest bond class and the residual, except in the case of off-balance sheet securitizations, which are described further below. We use the proceeds from securitization transactions to repay borrowings outstanding under our credit facilities, originate and acquire loans and leases, and for general corporate purposes. We generally exercise clean-up call options on our securitizations when the collateral pool balance reaches 10% of its original balance.
We also periodically privately issue amortizing notes, in transactions that are structured similarly to our public and Rule 144A securitizations but are issued to banks and conduits. Our securitizations and private issuances are collateralized by vehicle retail installment contracts, loans and leases.
Flow Agreements
In addition to our credit facilities and secured structured financings, we have flow agreements in place with Bank of America and CBP for Chrysler Capital retail installment contracts, and with another third party for charged off assets. The Bank of America flow agreement will terminate effective January 31, 2017. Loans and leases sold under these flow agreements are not on our balance sheet but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. We continue to actively seek additional such flow agreements.
Off-Balance Sheet Financing
We periodically execute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Historically, as all of the notes and residual interests in these securitizations were issued to third parties, we recorded these transactions as true sales of the retail installment contracts securitized, and removed the sold assets from our condensed consolidated balance sheets. In April and November 2016, we executed Chrysler Capital securitizations for which we have not sold the residuals and as a result have retained the associated assets and bonds on our condensed consolidated balance sheet.
In 2015, we sold our residual interests in certain aged securitization Trusts, resulting in the deconsolidation of the assets and liabilities of the Trusts. As these Trusts season to the point of reaching the threshold for the optional clean-up call, we have been exercising the call options, paying off the remaining debt, and returning the remaining assets to our books.
Cash Flow Comparison
We have produced positive net cash from operating activities every year since 2003. Our investing activities primarily consist of originations and acquisitions of finance receivables and leased vehicles. Our financing activities primarily consist of borrowing and repayments of debt.
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
(Dollar amounts in thousands)
|
Net cash provided by operating activities
|
$
|
2,676,133
|
|
|
$
|
2,684,236
|
|
Net cash used in investing activities
|
(4,026,681
|
)
|
|
(6,285,026
|
)
|
Net cash provided by financing activities
|
1,407,528
|
|
|
3,672,185
|
|
Net Cash Provided by Operating Activities
Net cash provided by operating activities remained flat from the nine months ended
September 30, 2015
to the nine months ended
September 30, 2016
.
Net Cash Used in Investing Activities
Net cash used in investing activities decreased by
$2.3 billion
from the nine months ended
September 30, 2015
to the nine months ended
September 30, 2016
, primarily due to the decrease of
$3.5 billion
in originations held for investment,
$560 million
change in activity related to personal loans originated as held for investment, and
$282 million
increase in subvention payments received, partly offset by the
$1.0 billion
decrease in sales of loans held for investment,
$589 million
decrease in sales of leased vehicles, and
$485 million
increase in leased vehicle originations.
Net Cash Provided by Financing Activities
Net cash provided by financing activities decreased by
$2.3 billion
from the nine months ended
September 30, 2015
to the nine months ended
September 30, 2016
, primarily due to lower net proceeds from borrowings in line with the decrease in net cash used in investing activities.
Contingencies and Off-Balance Sheet Arrangements
For information regarding the Company's contingencies and off-balance sheet arrangements, refer to Note 10 -
Commitments and Contingencies
in the accompanying condensed consolidated financial statements.
Contractual Obligations
We lease our headquarters in Dallas, Texas, our servicing centers in Texas, Colorado, Arizona, and Puerto Rico, and an operations facility in California under non-cancelable operating leases that expire at various dates through 2026. Other than described herein, there have been no material modifications to our contractual obligations since
December 31, 2015
. For additional information on our contractual obligations, refer to our
2015
Annual Report on Form 10-K/A.
Risk Management Framework
Our risk management framework is overseen by our board of directors, our risk committee (RC), our management committees, our executive management team, an independent risk management function, an internal audit function and all of our associates. The RC, along with our full board of directors, is responsible for establishing the governance over the risk management process, providing oversight in managing the aggregate risk position and reporting on the comprehensive portfolio of risk categories and the potential impact these risks can have on our risk profile. Our primary risks include, but are not limited to, credit risk, market risk, liquidity risk, operational risk and model risk. For more information regarding our risk management framework, please refer to the Risk Management Framework section of our
2015
Annual Report on Form 10-K/A.
Credit Risk
The risk inherent in our loan and lease portfolios is driven by credit quality and is affected by borrower-specific and economy-wide factors such as changes in employment. We manage this risk through our underwriting and credit approval guidelines and servicing policies and practices, as well as geographic and manufacturer concentration limits.
Our automated originations process reflects a disciplined approach to credit risk management. Our robust historical data on both organically originated and acquired loans provides us with the ability to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary loss forecasting score (LFS) using information such as FICO
®
, debt-to-income ratio, loan-to-value ratio, and over 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The pricing in each tier is continuously monitored and adjusted to reflect market and risk trends. In addition to our automated process, we maintain a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers. We generally tighten our underwriting requirements in times of greater economic uncertainty (including during the recent financial crisis) to compete in the market at loss and approval rates acceptable for meeting our required returns. We also have adjusted our underwriting standards to meet the requirements of our contracts such as the Chrysler Agreement. In both cases, we have accomplished this by adjusting our risk-based pricing, the material components of which include interest rate, down payment, and loan-to-value.
We monitor early payment defaults and other potential indicators of dealer or customer fraud, and use the monitoring results to identify dealers who will be subject to more extensive stipulations when presenting customer applications, as well as dealers with whom we will not do business at all.
Market Risk
Interest Rate Risk
We measure and monitor interest rate risk on a monthly basis. We borrow money from a variety of market participants in order to provide loans and leases to our customers. Our gross interest rate spread, which is the difference between the income we earn through the interest and finance charges on our finance receivables and lease contracts and the interest we pay on our funding, will be negatively affected if the expense incurred on our borrowings increases at a faster pace than the income generated by our assets.
Our Interest Rate Risk policy is designed to measure, monitor and manage the potential volatility in earnings stemming from changes in interest rates. We generate finance receivables which are predominantly fixed rate and borrow with a mix of fixed and variable rate funding. To the extent that our asset and liability re-pricing characteristics are not effectively matched, we may utilize interest rate derivatives, such as interest rate swap agreements, to manage to our desired outcome. As of
September 30, 2016
, the notional value of our interest rate swap agreements was
$10.1 billion
.
We monitor our interest rate exposure by conducting interest rate sensitivity analysis. For purposes of reflecting a possible impact to earnings, we measure the twelve-month net interest income impact of an instantaneous 100 basis point parallel shift in prevailing interest rates. As of
September 30, 2016
, the twelve-month impact of a 100 basis point parallel increase in the interest rate curve would decrease our net interest income by
$70 million
. In addition to the sensitivity analysis on net interest income, we also measure Market Value of Equity (MVE) to view our interest rate risk position. MVE measures the change in value of Balance Sheet instruments in response to an instantaneous 100 basis point parallel increase, including and beyond the net interest income twelve-month horizon. As of
September 30, 2016
, the impact of a 100 basis point parallel increase in the interest rate curve would decrease our MVE by
$129 million
.
Collateral Risk
Our 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 we have elected not to purchase residual value insurance at the present time,
our residual risk is somewhat mitigated by our residual risk-sharing agreement with FCA. We also utilize 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 we can recover when remarketing repossessed vehicles that serve as collateral underlying loans. We manage 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.
We do not currently have material exposure to currency fluctuations or inflation.
Liquidity Risk
We view liquidity as integral to other key elements such as capital adequacy, asset quality and profitability. Because our debt is nearly entirely serviced by collections on consumer receivables, our primary liquidity risk relates to the ability to fund originations. We have a robust liquidity policy in place to manage this risk. The liquidity policy establishes the following guidelines:
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that we maintain at least
eight
external credit providers (as of
September 30, 2016
, we had
fourteen
);
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that we rely on Santander and affiliates for no more than
30%
of our funding (as of
September 30, 2016
, Santander and affiliates provided
7%
of our funding);
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that no single lender's commitment should comprise more than
33%
of the overall committed external lines (as of
September 30, 2016
, the highest single lender's commitment was
20%
);
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that no more than
35%
of our debt mature in the next six months and no more than
65%
of our debt mature in the next twelve months (as of
September 30, 2016
,
13%
of our debt is scheduled to mature in these timeframes); and
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that we maintain unused capacity of at least
$6.0 billion
, including flow agreements, in excess of our expected peak usage over the following twelve months (as of
September 30, 2016
, we had twelve-month rolling unused capacity of
$8.4 billion
).
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Our liquidity policy also requires that our Asset Liability Committee monitor many indicators, both market-wide and company-specific, to determine if action may be necessary to maintain our liquidity position. Our liquidity management tools include daily, monthly and twelve-month rolling cash requirements forecasts, monthly funding usage and availability reports, daily sources and uses reporting, structural liquidity risk exercises, and the establishment of liquidity contingency plans. We also perform quarterly stress tests in which we forecast the impact of various negative scenarios (alone and in combination), including reduced credit availability, higher funding costs, lower advance rates, lower customer interest rates, lower dealer discount rates, and higher credit losses.
We generally look for funding first from structured secured financings, second from third-party credit facilities, and last from Santander. We believe this strategy helps us avoid being overly reliant on Santander for funding. Additionally, we can reduce originations to significantly lower levels if necessary during times of limited liquidity.
We have established a qualified like-kind exchange program in order to defer tax liability on gains on sale of vehicle assets at lease termination. If we do not meet the safe harbor requirements of IRS Revenue Procedure 2003-39, we may be subject to large, unexpected tax liabilities, thereby generating immediate liquidity needs. We believe that our compliance monitoring policies and procedures are adequate to enable us to remain in compliance with the program requirements.
Operational Risk
We are exposed to loss that occurs in the process of carrying out our business activities. These relate to failures arising from inadequate or failed processes, failures in our people or systems, or from external events. Our operational risk management program encompasses risk event reporting, analysis, and remediation; key risk indicator monitoring; and risk profile assessments. It also includes unit, system, regression, load, performance and user acceptance testing for our IT programs.
To mitigate operational risk in regards to servicing practices, we maintain 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 monitoring of compliance with all applicable regulations, internal control documentation and review of processes, and internal audits. We also utilize internal and external legal counsel for expertise when needed. All associates upon hire and annually receive comprehensive mandatory regulatory compliance training. In addition, the Board receives annual regulatory and compliance training. We use industry-leading call mining and other software solutions that assist us in analyzing potential breaches of regulatory requirements and customer service. Our call mining
software analyzes all customer service calls, converting speech to text and mining for specific words and phrases that may indicate inappropriate comments by a representative. The software also detects escalated voice volume, enabling a supervisor to intervene if necessary. This tool enables us to effectively manage and identify training opportunities for associates, as well as track and resolve customer complaints through a robust quality assurance program.
Model Risk
We mitigate model risk through a robust model validation process, which includes committee governance and a series of tests and controls. We utilize SHUSA's Model Risk Management group for all model validation to verify models are performing as expected and in line with their design objectives and business uses.
Critical Accounting Estimates
Accounting policies are integral to understanding our Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we review our accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S. GAAP. There have been no material changes in our critical accounting estimates from those disclosed in Item 7 of our Annual Report on Form 10-K/A for the year ended December 31, 2015.
Recent Accounting Pronouncements
Information concerning the Company's implementation and impact of new accounting standards issued by the Financial Accounting Standards Board (FASB) is discussed in Note 1 to the Consolidated Financial Statements under "Recently Issued Accounting Pronouncements."
Other Information
Further information on risk factors can be found under Part II, Item 1A - “Risk Factors.”