NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)
1. 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
March 31, 2017
, the Company was owned approximately
58.7%
by Santander Holdings USA, Inc. (SHUSA), a subsidiary of Banco Santander, S.A. (Santander), approximately
31.5%
by public shareholders, approximately
9.7%
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.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including certain Trusts, which are considered variable interest entities (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
March 31, 2017
and
December 31, 2016
, and for the
three
months ended
March 31, 2017
and
2016
, have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. These financial statements should be read in conjunction with the 2016 Annual Report on Form 10-K.
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 2016 Annual Report on Form 10-K.
Recently Adopted Accounting Standards
Since January 1, 2017, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs"):
|
|
•
|
The Company adopted ASU 2016-09,
Compensation - Stock Compensation (Topic 718)
. This new guidance simplifies certain aspects related to income taxes, the Statement of Cash Flows (SCF), and forfeitures when accounting for share-based payment transactions. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in APIC pools, and instead requires companies to record all excess tax benefits and deficiencies at settlement, vesting or expiration in the income statement as provision for income taxes. At adoption of ASU 2016-09 on January 1, 2017, the cumulative-effect for previously unrecognized excess tax benefits totaled
$26,552
net of tax, and was recognized, as an increased, through an adjustment in beginning retained earnings. The Company recorded excess tax benefits, net of tax of
$47
in the provision for income taxes rather than as an increase to additional paid-in capital for the three months ended March 31, 2017, on a prospective basis. Therefore, the prior period presented has not been adjusted. All excess tax benefits along with other income tax cash flows will now be classified as an operating activity rather than financing activities in the SCF on a prospective basis.
|
In addition, the Company changed its accounting policy on forfeitures from previously recognizing forfeitures based on estimating the number of awards expected to be forfeited to electing to recognize forfeiture of awards as they occur to simplify the accounting for forfeitures. This resulted in a cumulative adjustment, as a decrease to, beginning retained earnings of
$1,439
.
|
|
•
|
The Company also adopted ASU 2016-05,
Derivatives and Hedging (Topic 815): Effect of Derivative Contract
Novations on Existing Hedge Accounting Relationships
. The new guidance clarifies that a change in the counterparties to a derivative contract, i.e., a novation, in and of itself, does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.
|
|
|
•
|
The Company also adopted ASU 2016-06,
Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.
This new guidance clarifies that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis of hybrid financial instruments. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. However, as required under existing guidance, companies will still need to evaluate other relevant embedded derivative guidance, such as whether the payoff from the contingent put or call option is adjusted based on changes in an index other than interest rates or credit risk, and whether the debt involves a substantial premium or discount. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.
|
|
|
•
|
The Company also adopted ASU 2016-07,
Investments-Equity Method and Joint Ventures (Topic 323)
. The new guidance eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard also provides specific guidance for available-for-sale securities that become eligible for the equity method of accounting. In those cases, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings at the date the investment initially qualifies for the use of the equity method of
|
accounting. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.
|
|
•
|
The Company also adopted ASU 2016-17,
Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control,
which amends the guidance in U.S. GAAP on related parties that are under common control. Specifically, the new ASU requires that a single decision maker consider indirect interests held by related parties under common control on a proportionate basis in a manner consistent with its evaluation of indirect interests held through other related parties. The adoption of this ASU did not have a material 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 (Topic 606)
, superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In August 2015, the FASB issued ASU 2015-14, which formalized the deferral of the effective date of the amendment for a period of one year from the original effective date. Following the issuance of ASU 2015-14, the amendment will be effective for the Company for the first annual period beginning after December 15, 2017. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09, which 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). In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB issued ASU 2016-20, a separate update for technical corrections and improvements to Topic 606 and other Topics amended by Update 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to Update 2014-09. 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.
Because ASU 2014-09 does not apply to revenue associated with leases and financial instruments (including loans and securities), the Company does not expect the new guidance to have a material impact on the elements of its Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and investment gain). The Company expects to adopt this ASU in the first quarter of 2018 with a cumulative-effect adjustment to opening retained earnings. The Company’s ongoing implementation efforts include the identification of other revenue streams that are within the scope of the new guidance and reviewing related contracts with customers to determine the effect on certain non-interest income items presented in the Consolidated Statements of Operations and on the presentation and disclosures.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities
. This amendment requires that equity investments, except those accounted for under the equity method of accounting or which result in consolidation of the investee, to be measured at fair value, with changes in the fair value being recorded in net income. However, equity investments that do not have readily determinable fair values will be measured at cost less impairment, if any, plus the effect of changes resulting from observable price transactions in orderly transactions or for the identical or similar investment of the same issuer. The amendment also simplifies the impairment assessment of equity instruments that do not have readily determinable fair values, eliminates the requirement to disclose methods and assumptions used to estimate fair value of instruments measured at their amortized cost on the balance sheet, requires that the disclosed fair values of financial instruments represent "exit price," requires entities to separately present in other
comprehensive income the portion of the total change in fair value of a liability resulting from instrument-specific credit risk when the fair value option has been elected for that liability, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes, and clarifies that an entity should evaluate the need for a valuation allowance on its deferred tax asset related to its available-for-sale securities in combination with its other deferred tax assets. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2017, with earlier adoption permitted by public entities on a limited basis. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values, for which it should be applied prospectively. While the Company is still in the process of evaluating the impacts of the adoption of this ASU, the Company does not expect the impact to be material to its financial position, results of operations or cash flows.
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 does not expect the new guidance to have a material impact on the Consolidated Statements of Income or the Consolidated Statements of Shareholders' Equity, since the Company recognizes assets and liabilities for all of its vehicle lease transactions. The Company will continue to evaluate the impact of the new guidance on its operating leases primarily for office space and computer equipment. Upon adoption, the Company will gross up its balance sheet by the present value of future minimum lease payments for these operating leases.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments-Credit Losses
, which changes the criteria under which credit losses are measured. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to establish credit loss estimates. The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. The Company does not intend to adopt the new standard early and is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the new CECL model will alter the assumptions used in calculating the Company's credit losses, given the change to estimated losses for the estimated life of the financial asset, and will likely result in material changes to the Company’s credit and capital reserves.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230), Classification of Certain Cash
Receipts and Cash Payments
. This update amends the guidance in ASC 230 on the classification of certain cash receipts and payments in the SCF. The ASU’s amendments add or clarify guidance on eight cash flow issues including debt extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The guidance will be effective for the fiscal year beginning after December 15, 2017, including interim periods within that year. Early adoption is permitted, including adoption in an interim period, however any adjustments should be reflected as of the beginning of the fiscal year that includes the period of adoption. All of the amended guidance must be adopted in the same period. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory
, which will require an entity to recognize the income tax consequences of an intra-entity transfer of an asset, other than inventory, when the transfer occurs. This eliminates the current exception for all intra-entity transfers of an asset other than inventory that requires deferral of the tax effects until the asset is sold to a third party or otherwise recovered through use. The guidance will be effective for the Company for annual reporting periods beginning after December 15, 2017, including interim reporting periods. Early adoption is permitted at the beginning of an annual reporting period for which annual or interim financial statements have not been issued or made available for issuance. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (A consensus of the FASB Emerging Issues Task Force)
, which requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown on the statement of cash flows and that the statement of cash flows explain changes in restricted cash during the period. The guidance will be effective for the Company for annual periods beginning after December 15, 2017, including interim periods within those fiscal years. Early adoption is permitted, however, adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Company does not expect the adoption of this ASU to have an impact on its financial position, results of operations or cash flows and expects the impact to be disclosure only.
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a
Business
. The new guidance revises the definition of a business, potentially affecting areas of accounting such as acquisitions, disposals, goodwill impairment, and consolidation. Under the new guidance, when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the assets acquired (or disposed of) would not represent a business. If this initial screen is met, no further analysis would be required. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create an output. In addition, the amendments narrow the definition of the term “output” so that it is consistent with how outputs are defined in ASC Topic 606,
Revenue from Contracts with Customers
. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2017, with earlier adoption permitted. Adoption of the amendments must be applied on a prospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.
On January 26, 2017, the FASB issued ASU 2017-04,
Intangibles - Goodwill & Other (Topic 350): Simplifying the Accounting for Goodwill Impairment
. It removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The new rules state that a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective January 1, 2020, with early adoption permitted for any impairment tests performed after January 1, 2017. 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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
Retail installment contracts acquired individually (a)
|
$
|
23,200,111
|
|
|
$
|
23,219,724
|
|
Purchased receivables
|
146,150
|
|
|
158,264
|
|
Receivables from dealers
|
69,643
|
|
|
68,707
|
|
Personal loans
|
7,499
|
|
|
12,272
|
|
Capital lease receivables (Note 3)
|
21,222
|
|
|
22,034
|
|
Finance receivables held for investment, net
|
$
|
23,444,625
|
|
|
$
|
23,481,001
|
|
(a) The Company has elected the fair value option for certain retail installment contracts reported in finance receivables held for investment, net. As at
March 31, 2017
and
December 31, 2016
,
$30,652
and
$24,495
of loans were recorded at fair value (Note 13).
The Company's held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans is comprised of the following at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Retail Installment Contracts
Acquired
Individually
|
|
Receivables from
Dealers
|
|
Personal Loans
|
|
Non-TDR
|
|
TDR
|
|
|
Unpaid principal balance
|
$
|
21,286,466
|
|
|
$
|
5,788,390
|
|
|
$
|
70,377
|
|
|
$
|
15,412
|
|
Credit loss allowance - specific
|
—
|
|
|
(1,604,489
|
)
|
|
—
|
|
|
—
|
|
Credit loss allowance - collective
|
(1,836,730
|
)
|
|
—
|
|
|
(734
|
)
|
|
(4,517
|
)
|
Discount
|
(409,142
|
)
|
|
(88,546
|
)
|
|
—
|
|
|
(3,822
|
)
|
Capitalized origination costs and fees
|
58,791
|
|
|
5,371
|
|
|
—
|
|
|
426
|
|
Net carrying balance
|
$
|
19,099,385
|
|
|
$
|
4,100,726
|
|
|
$
|
69,643
|
|
|
$
|
7,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Retail Installment Contracts
Acquired
Individually
|
|
Receivables from
Dealers
|
|
Personal Loans
|
|
Non-TDR
|
|
TDR
|
|
|
Unpaid principal balance
|
$
|
21,528,406
|
|
|
$
|
5,599,567
|
|
|
$
|
69,431
|
|
|
$
|
19,361
|
|
Credit loss allowance - specific
|
—
|
|
|
(1,611,295
|
)
|
|
—
|
|
|
—
|
|
Credit loss allowance - collective
|
(1,799,760
|
)
|
|
—
|
|
|
(724
|
)
|
|
—
|
|
Discount
|
(467,757
|
)
|
|
(91,359
|
)
|
|
—
|
|
|
(7,721
|
)
|
Capitalized origination costs and fees
|
56,704
|
|
|
5,218
|
|
|
—
|
|
|
632
|
|
Net carrying balance
|
$
|
19,317,593
|
|
|
$
|
3,902,131
|
|
|
$
|
68,707
|
|
|
$
|
12,272
|
|
Retail installment contracts
Retail installment contracts are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company’s retail installment contracts held for investment are pledged against warehouse lines or securitization bonds (Note 5). Most of the borrowers on the Company’s retail installment contracts held for investment are retail consumers; however,
$764,611
and
$848,918
of the unpaid principal balance represented fleet contracts with commercial borrowers as of
March 31, 2017
and
December 31, 2016
, respectively.
During the three months ended
March 31, 2017
and
2016
, the Company originated
$1,588,506
and
$2,549,249
, respectively, in Chrysler Capital loans which represented
42%
and
49%
, respectively, of the total retail installment contract originations. Additionally, during the three months ended
March 31, 2017
and
2016
, the Company originated
$1,600,659
and
$1,617,080
in Chrysler Capital leases. As of
March 31, 2017
and
December 31, 2016
, the Company's auto retail installment contract portfolio consisted of
$7,147,687
and
$7,365,444
, respectively, of Chrysler loans which represents
31%
and
32%
, respectively, of the Company's auto retail installment contract portfolio. Retail installment contracts and vehicle leases entered into with FCA customers, as part of the Chrysler Agreement, represent a significant concentration of those portfolios and there is a risk that the Chrysler Agreement could be terminated prior to its expiration date. Termination of the Chrysler Agreement could result in a decrease in the amount of new retail installment contracts and vehicle leases entered into with FCA customers.
As of
March 31, 2017
, borrowers on the Company’s retail installment contracts held for investment are located in Texas (
16%
), Florida (
13%
), California (
9%
), Georgia (
6%
) and other states each individually representing less than
5%
of the Company’s total.
Purchased receivables
Purchased receivables portfolios, which were acquired with deteriorated credit quality, is comprised of the following at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
Outstanding balance
|
$
|
212,018
|
|
|
$
|
231,360
|
|
Outstanding recorded investment, net of impairment
|
$
|
147,094
|
|
|
$
|
159,451
|
|
Changes in accretable yield on the Company’s purchased receivables portfolios for the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Balance — beginning of period
|
$
|
107,041
|
|
|
$
|
178,582
|
|
Accretion of accretable yield
|
(11,144
|
)
|
|
(21,329
|
)
|
Reclassifications from (to) nonaccretable difference
|
2,049
|
|
|
(917
|
)
|
Balance — end of period
|
$
|
97,946
|
|
|
$
|
156,336
|
|
During the
three
months ended
March 31, 2017
and
2016
, the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected. However, during the
three
months ended
March 31, 2017
, the Company recognized certain retail installment contracts with an unpaid principal balance of
$152,208
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). No such transactions occurred during the
three
months ended March 31,
2016
.
Receivable from Dealers
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
March 31, 2017
and
December 31, 2016
, 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
$169
and
$165
at
March 31, 2017
and
December 31, 2016
, respectively.
The remaining receivables from dealers held for investment are all Chrysler Agreement-related. As of
March 31, 2017
, borrowers on these dealer receivables are located in Virginia (
50%
), New York (
23%
), Mississippi (
18%
), Missouri (
8%
) and Wisconsin (
1%
).
Personal Loans
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
$457
and
$539
at
March 31, 2017
and
December 31, 2016
, 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 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
$7,042
and
$11,733
at
March 31, 2017
and
December 31, 2016
, respectively.
Held For Sale
The carrying value of the Company's finance receivables held for sale, net is comprised of the following at
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
Retail installment contracts acquired individually
|
$
|
876,916
|
|
|
$
|
1,045,815
|
|
Personal loans
|
979,103
|
|
|
1,077,600
|
|
Finance receivables held for sale, net
|
$
|
1,856,019
|
|
|
$
|
2,123,415
|
|
Sales of retail installment contracts to third parties and proceeds from sales of charged-off assets for the
three
months ended
March 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Sales of retail installment contracts to third parties
|
$
|
230,568
|
|
|
$
|
859,955
|
|
Proceeds from sales of charged-off assets
|
21,343
|
|
|
6,230
|
|
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
March 31, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
Serviced balance of retail installment contracts and leases sold to third parties
|
$
|
8,926,456
|
|
|
$
|
10,116,788
|
|
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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Leased vehicles
|
$
|
12,442,141
|
|
|
$
|
11,939,295
|
|
Less: accumulated depreciation
|
(2,394,567
|
)
|
|
(2,326,342
|
)
|
Depreciated net capitalized cost
|
10,047,574
|
|
|
9,612,953
|
|
Manufacturer subvention payments, net of accretion
|
(1,141,194
|
)
|
|
(1,066,531
|
)
|
Origination fees and other costs
|
21,156
|
|
|
18,206
|
|
Net book value
|
$
|
8,927,536
|
|
|
$
|
8,564,628
|
|
Periodically, the Company executes bulk sales of Chrysler Capital leases to a third party. The bulk sale agreements include certain provisions whereby the Company agrees to share in residual losses for lease terminations with losses over a specific percentage threshold (Note 10). The Company has retained servicing on the sold leases. During the
three
months ended
March 31, 2017
and 2016, the Company did not execute any bulk sales of leases originated under the Chrysler Capital program.
The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of
March 31, 2017
:
|
|
|
|
|
|
|
Remainder of 2017
|
$
|
1,191,931
|
|
2018
|
1,091,466
|
|
2019
|
445,100
|
|
2020
|
28,504
|
|
2021
|
79
|
|
Thereafter
|
—
|
|
Total
|
$
|
2,757,080
|
|
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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Gross investment in capital leases
|
$
|
33,657
|
|
|
$
|
39,417
|
|
Origination fees and other
|
68
|
|
|
150
|
|
Less: unearned income
|
(5,898
|
)
|
|
(7,545
|
)
|
Net investment in capital leases before allowance
|
27,827
|
|
|
32,022
|
|
Less: allowance for lease losses
|
(6,605
|
)
|
|
(9,988
|
)
|
Net investment in capital leases
|
$
|
21,222
|
|
|
$
|
22,034
|
|
The following summarizes the future minimum lease payments due to the Company as lessor under capital leases as of
March 31, 2017
:
|
|
|
|
|
|
|
Remainder of 2017
|
$
|
10,365
|
|
2018
|
13,195
|
|
2019
|
6,280
|
|
2020
|
2,495
|
|
2021
|
1,322
|
|
Thereafter
|
—
|
|
Total
|
$
|
33,657
|
|
|
|
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 generally measured based on the present value of expected future cash flows discounted at the original effective interest rate. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. The amount of the allowance is equal to the difference between the loan’s impaired value and the recorded investment.
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
March 31, 2017
, the credit loss allowance for receivables from dealers is comprised of a general allowance as none of these receivables have been determined to be individually impaired. As of March 31, 2016, the credit loss allowance for receivables from dealers is comprised of a general allowance of
$978
, plus
$425
specific impairment for substandard commercial risk rated receivables from dealers with an unpaid principal balance of
$5,965
.
The activity in the credit loss allowance for individually acquired and dealer loans for the
three
months ended
March 31, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Retail Installment Contracts Acquired Individually
|
|
Receivables from Dealers
|
|
Personal Loans
|
|
|
|
Balance — beginning of period
|
$
|
3,411,055
|
|
|
$
|
724
|
|
|
$
|
—
|
|
Provision for credit losses
|
629,097
|
|
|
10
|
|
|
7,975
|
|
Charge-offs (a)
|
(1,224,697
|
)
|
|
—
|
|
|
(3,632
|
)
|
Recoveries
|
625,764
|
|
|
—
|
|
|
174
|
|
Balance — end of period
|
$
|
3,441,219
|
|
|
$
|
734
|
|
|
$
|
4,517
|
|
(a) Charge-offs for retail installment contracts acquired individually includes approximately
$24 million
for the partial write-down of loans to the collateral value less estimated costs to sell, for which a bankruptcy notice was received.
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Retail Installment Contracts Acquired Individually
|
|
Receivables
from Dealers
|
|
|
Balance — beginning of period
|
$
|
3,197,414
|
|
|
$
|
916
|
|
Provision for credit losses
|
663,126
|
|
|
487
|
|
Charge-offs
|
(1,150,628
|
)
|
|
—
|
|
Recoveries
|
610,315
|
|
|
—
|
|
Balance — end of period
|
$
|
3,320,227
|
|
|
$
|
1,403
|
|
The impairment activity related to purchased receivables portfolios for the
three
months ended
March 31, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Balance — beginning of period
|
$
|
169,323
|
|
|
$
|
172,308
|
|
Incremental provisions for purchased receivable portfolios
|
—
|
|
|
—
|
|
Incremental reversal of provisions for purchased receivable portfolios
|
—
|
|
|
(1,896
|
)
|
Balance — end of period
|
$
|
169,323
|
|
|
$
|
170,412
|
|
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
months ended
March 31, 2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Balance — beginning of period
|
$
|
9,988
|
|
|
$
|
19,878
|
|
Provision for lease losses
|
(2,069
|
)
|
|
(1,547
|
)
|
Charge-offs
|
(3,679
|
)
|
|
(12,359
|
)
|
Recoveries
|
2,365
|
|
|
9,888
|
|
Balance — end of period
|
$
|
6,605
|
|
|
$
|
15,860
|
|
Delinquencies
Retail installment contracts are generally classified as non-performing when they are greater than
60 days
past due as to contractual principal or interest payments. See discussion over TDR loans below. 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.
The Company considers an account delinquent when an obligor fails to pay the required minimum portion of the scheduled payment by the due date. With respect to receivables originated by the Company prior to January 1, 2017 and through its “Chrysler Capital” channel, the required minimum payment is
90%
of the scheduled payment. With respect to all other receivables originated by the Company or acquired by the Company from an unaffiliated third-party originator prior to January 1, 2017, the required minimum payment is
50%
of the scheduled payment. With respect to receivables originated by the Company or acquired by the Company from an unaffiliated third-party originator on or after January 1, 2017, the required minimum payment is
90%
of the scheduled payment, regardless of which channel the receivable was originated through. In each case, the period of delinquency is based on the number of days payments are contractually past due.
As of
March 31, 2017
and
December 31, 2016
, a summary of delinquencies on retail installment contracts held for investment portfolio is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Retail Installment Contracts Held for Investment
|
|
Loans
Acquired
Individually
|
|
Purchased
Receivables
Portfolios
|
|
Total
|
Principal, 30-59 days past due
|
$
|
2,336,113
|
|
|
$
|
9,882
|
|
|
$
|
2,345,995
|
|
Delinquent principal over 59 days (a)
|
1,148,517
|
|
|
4,852
|
|
|
1,153,369
|
|
Total delinquent principal
|
$
|
3,484,630
|
|
|
$
|
14,734
|
|
|
$
|
3,499,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Retail Installment Contracts Held for Investment
|
|
Loans
Acquired
Individually
|
|
Purchased
Receivables
Portfolios
|
|
Total
|
Principal, 30-59 days past due
|
$
|
2,911,800
|
|
|
$
|
13,703
|
|
|
$
|
2,925,503
|
|
Delinquent principal over 59 days (a)
|
1,520,105
|
|
|
6,638
|
|
|
1,526,743
|
|
Total delinquent principal
|
$
|
4,431,905
|
|
|
$
|
20,341
|
|
|
$
|
4,452,246
|
|
(a) Interest is accrued until 60 days past due in accordance with the Company's accounting policy for retail installment contracts.
The balances in the above tables reflect total unpaid principal balance rather than net recorded investment before allowance.
As of
March 31, 2017
and
December 31, 2016
, there were
no
receivables from dealers that were 30 days or more delinquent. As of
March 31, 2017
and
December 31, 2016
, there were
$27,617
and
$33,886
, respectively, of retail installment contracts held for sale that were 30 days or more delinquent.
Credit Quality Indicators
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
March 31, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
FICO
®
Band
|
|
March 31, 2017
|
|
December 31, 2016
|
Commercial (a)
|
|
2.8%
|
|
3.1%
|
No-FICOs
|
|
12.0%
|
|
12.2%
|
<540
|
|
22.3%
|
|
22.1%
|
540-599
|
|
31.7%
|
|
31.4%
|
600-639
|
|
17.4%
|
|
17.4%
|
>640
|
|
13.8%
|
|
13.8%
|
(a)
No FICO score is obtained on loans to commercial borrowers.
(b)
FICO scores are updated quarterly.
Commercial Lending
— The Company's risk department performs a commercial analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described in Note 4 of the 2016 Annual Report on Form 10-K. Fleet loan credit quality indicators for retail installment contracts held for investment with commercial borrowers as of
March 31, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Pass
|
$
|
49,752
|
|
|
$
|
17,585
|
|
Special Mention
|
15,282
|
|
|
2,790
|
|
Substandard
|
2,696
|
|
|
1,488
|
|
Doubtful
|
—
|
|
|
—
|
|
Loss
|
125
|
|
|
—
|
|
Total
|
$
|
67,855
|
|
|
$
|
21,863
|
|
Commercial loan credit quality indicators for receivables from dealers held for investment as of
March 31, 2017
and
December 31, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Pass
|
$
|
68,672
|
|
|
$
|
67,681
|
|
Special Mention
|
—
|
|
|
—
|
|
Substandard
|
1,705
|
|
|
1,750
|
|
Doubtful
|
—
|
|
|
—
|
|
Loss
|
—
|
|
|
—
|
|
Unpaid principal balance
|
$
|
70,377
|
|
|
$
|
69,431
|
|
Troubled Debt Restructurings
In certain circumstances, the Company modifies the terms of its finance receivables to troubled borrowers. 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. The Company's TDR balance as of
March 31, 2017
and
December 31, 2016
primarily consisted of loans that had been deferred or modified to receive a temporary reduction in monthly payment. As of
March 31, 2017
and
December 31, 2016
, 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 generally assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell.
The table below presents the Company’s TDRs as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
|
Retail Installment Contracts
|
Outstanding recorded investment (a)
|
$
|
5,785,032
|
|
|
$
|
5,637,792
|
|
Impairment
|
(1,604,489
|
)
|
|
(1,611,295
|
)
|
Outstanding recorded investment, net of impairment
|
$
|
4,180,543
|
|
|
$
|
4,026,497
|
|
(a) As of March 31, 2017, the outstanding recorded investment excludes
$14.7 million
of collateral-dependent bankruptcy TDRs that has been written down by
$7.6 million
to fair value less cost to sell.
A summary of the Company’s delinquent TDRs at
March 31, 2017
and
December 31, 2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
|
Retail Installment Contracts
|
Principal, 30-59 days past due
|
$
|
1,078,637
|
|
|
$
|
1,253,848
|
|
Delinquent principal over 59 days
|
579,262
|
|
|
736,691
|
|
Total delinquent TDR principal
|
$
|
1,657,899
|
|
|
$
|
1,990,539
|
|
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest when the account becomes past due more than 60 days, and considered for return to accrual when a sustained period of repayment performance has been achieved.
Average recorded investment and income recognized on TDR loans are as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Retail Installment Contracts
|
Average outstanding recorded investment in TDRs
|
$
|
5,711,412
|
|
|
$
|
4,666,713
|
|
Interest income recognized
|
$
|
260,352
|
|
|
$
|
174,191
|
|
The following table summarizes the financial effects of TDRs that occurred during the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Retail Installment Contracts
|
Outstanding recorded investment before TDR
|
$
|
881,699
|
|
|
$
|
692,928
|
|
Outstanding recorded investment after TDR
|
$
|
866,278
|
|
|
$
|
699,286
|
|
Number of contracts (not in thousands)
|
49,499
|
|
|
39,380
|
|
Loan restructurings accounted for as TDRs within the previous twelve months that subsequently defaulted during the
three
months ended
March 31, 2017
and
2016
are summarized in the following table:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
|
Retail Installment Contracts
|
Recorded investment in TDRs that subsequently defaulted (a)
|
$
|
211,697
|
|
|
$
|
199,862
|
|
Number of contracts (not in thousands)
|
11,894
|
|
|
11,402
|
|
(a) For TDR modifications and TDR modifications that subsequently defaults, the allowance methodology remains unchanged.
5. Debt
Revolving Credit Facilities
The following table presents information regarding credit facilities as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Maturity Date(s)
|
|
Utilized Balance
|
|
Committed Amount
|
|
Effective Rate
|
|
Assets Pledged
|
|
Restricted Cash Pledged
|
Facilities with third parties:
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse line
|
January 2018
|
|
$
|
168,084
|
|
|
$
|
500,000
|
|
|
2.84%
|
|
$
|
213,200
|
|
|
$
|
—
|
|
Warehouse line
|
Various (a)
|
|
232,045
|
|
|
1,250,000
|
|
|
3.73%
|
|
326,912
|
|
|
11,207
|
|
Warehouse line (b)
|
August 2018
|
|
216,520
|
|
|
780,000
|
|
|
3.30%
|
|
281,270
|
|
|
6,946
|
|
Warehouse line (c)
|
August 2018
|
|
2,018,143
|
|
|
3,120,000
|
|
|
2.29%
|
|
3,067,595
|
|
|
64,912
|
|
Warehouse line
|
October 2018
|
|
435,477
|
|
|
1,800,000
|
|
|
3.31%
|
|
620,916
|
|
|
10,000
|
|
Repurchase facility (d)
|
December 2017
|
|
328,608
|
|
|
328,608
|
|
|
3.32%
|
|
—
|
|
|
14,012
|
|
Repurchase facility (d)
|
April 2017
|
|
235,509
|
|
|
235,509
|
|
|
2.04%
|
|
—
|
|
|
—
|
|
Repurchase facility (d)
|
March 2018
|
|
147,182
|
|
|
147,182
|
|
|
3.31%
|
|
—
|
|
|
—
|
|
Repurchase facility (d)
|
April 2017
|
|
59,202
|
|
|
59,202
|
|
|
2.09%
|
|
—
|
|
|
—
|
|
Warehouse line
|
November 2018
|
|
301,199
|
|
|
1,000,000
|
|
|
2.51%
|
|
451,750
|
|
|
7,902
|
|
Warehouse line
|
July 2018
|
|
235,784
|
|
|
250,000
|
|
|
3.25%
|
|
500,095
|
|
|
44,377
|
|
Warehouse line
|
October 2018
|
|
132,365
|
|
|
400,000
|
|
|
2.91%
|
|
189,416
|
|
|
2,671
|
|
Warehouse line
|
November 2018
|
|
174,720
|
|
|
500,000
|
|
|
2.16%
|
|
186,481
|
|
|
4,722
|
|
Warehouse line
|
October 2017
|
|
273,800
|
|
|
300,000
|
|
|
2.44%
|
|
322,183
|
|
|
10,803
|
|
Total facilities with third parties
|
|
|
4,958,638
|
|
|
10,670,501
|
|
|
|
|
6,159,818
|
|
|
177,552
|
|
Lines of credit with Santander and related subsidiaries (e, f):
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
December 2017
|
|
500,000
|
|
|
500,000
|
|
|
3.24%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
—
|
|
|
500,000
|
|
|
3.89%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2017
|
|
1,000,000
|
|
|
1,000,000
|
|
|
2.83%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
400,000
|
|
|
1,000,000
|
|
|
3.36%
|
|
—
|
|
|
—
|
|
Promissory Note
|
March 2019
|
|
300,000
|
|
|
300,000
|
|
|
2.45%
|
|
—
|
|
|
—
|
|
Promissory Note
|
March 2022
|
|
650,000
|
|
|
650,000
|
|
|
4.20%
|
|
—
|
|
|
—
|
|
Line of credit
|
March 2019
|
|
—
|
|
|
3,000,000
|
|
|
3.94%
|
|
—
|
|
|
—
|
|
Total facilities with Santander and related subsidiaries
|
|
|
2,850,000
|
|
|
6,950,000
|
|
|
|
|
—
|
|
|
—
|
|
Total revolving credit facilities
|
|
|
$
|
7,808,638
|
|
|
$
|
17,620,501
|
|
|
|
|
$
|
6,159,818
|
|
|
$
|
177,552
|
|
|
|
(a)
|
Half of the outstanding balance on this facility matures in April 2017 and half matures in March 2018. In April 2017, the facilities that matured were extended to March 2019.
|
|
|
(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)
|
These repurchase facilities are collateralized by securitization notes payable retained by the Company. These facilities have rolling maturities of up to
one year
. In April 2017, the repurchase facilities that matured were extended to May 2017.
|
|
|
(e)
|
These lines generally are also collateralized by securitization notes payable and residuals retained by the Company. As of
March 31, 2017
and
December 31, 2016
,
$1,623,538
and
$1,316,568
, respectively, of the aggregate outstanding balances on these facilities were unsecured.
|
|
|
(f)
|
SPAIN Revolving Funding LLC (a subsidiary) established a committed facility of
$750 million
with the New York branch of Santander on April 3, 2017. Borrowings under this facility bear interest at a rate equal to one-month LIBOR plus a spread (based on the quality of the collateral for the facility) ranging from
0.60%
to
0.90%
. The current maturity date of the facility is December 31, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Maturity Date(s)
|
|
Utilized Balance
|
|
Committed Amount
|
|
Effective Rate
|
|
Assets Pledged
|
|
Restricted Cash Pledged
|
Facilities with third parties:
|
|
|
|
|
|
|
|
|
|
|
|
Warehouse line
|
January 2018
|
|
$
|
153,784
|
|
|
$
|
500,000
|
|
|
3.17%
|
|
$
|
213,578
|
|
|
$
|
—
|
|
Warehouse line
|
Various
|
|
462,085
|
|
|
1,250,000
|
|
|
2.52%
|
|
653,014
|
|
|
14,916
|
|
Warehouse line
|
August 2018
|
|
534,220
|
|
|
780,000
|
|
|
1.98%
|
|
608,025
|
|
|
24,520
|
|
Warehouse line
|
August 2018
|
|
3,119,943
|
|
|
3,120,000
|
|
|
1.91%
|
|
4,700,774
|
|
|
70,991
|
|
Warehouse line
|
October 2018
|
|
702,377
|
|
|
1,800,000
|
|
|
2.51%
|
|
994,684
|
|
|
23,378
|
|
Repurchase facility
|
December 2017
|
|
507,800
|
|
|
507,800
|
|
|
2.83%
|
|
—
|
|
|
22,613
|
|
Repurchase facility
|
April 2017
|
|
235,509
|
|
|
235,509
|
|
|
2.04%
|
|
—
|
|
|
—
|
|
Warehouse line
|
November 2018
|
|
578,999
|
|
|
1,000,000
|
|
|
1.56%
|
|
850,758
|
|
|
17,642
|
|
Warehouse line
|
October 2018
|
|
202,000
|
|
|
400,000
|
|
|
2.22%
|
|
290,867
|
|
|
5,435
|
|
Warehouse line
|
November 2018
|
|
—
|
|
|
500,000
|
|
|
2.07%
|
|
—
|
|
|
—
|
|
Warehouse line
|
October 2017
|
|
243,100
|
|
|
300,000
|
|
|
2.38%
|
|
295,045
|
|
|
9,235
|
|
Total facilities with third parties
|
|
|
6,739,817
|
|
|
10,393,309
|
|
|
|
|
8,606,745
|
|
|
188,730
|
|
Lines of credit with Santander and related subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit
|
December 2017
|
|
500,000
|
|
|
500,000
|
|
|
3.04%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
175,000
|
|
|
500,000
|
|
|
3.87%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2017
|
|
1,000,000
|
|
|
1,000,000
|
|
|
2.86%
|
|
—
|
|
|
—
|
|
Line of credit
|
December 2018
|
|
1,000,000
|
|
|
1,000,000
|
|
|
2.88%
|
|
—
|
|
|
—
|
|
Line of credit
|
March 2017
|
|
300,000
|
|
|
300,000
|
|
|
2.25%
|
|
—
|
|
|
—
|
|
Line of credit
|
March 2019
|
|
—
|
|
|
3,000,000
|
|
|
3.74%
|
|
—
|
|
|
—
|
|
Total facilities with Santander and related subsidiaries
|
|
|
2,975,000
|
|
|
6,300,000
|
|
|
|
|
—
|
|
|
—
|
|
Total revolving credit facilities
|
|
|
$
|
9,714,817
|
|
|
$
|
16,693,309
|
|
|
|
|
$
|
8,606,745
|
|
|
$
|
188,730
|
|
Facilities with Third Parties
The warehouse lines and repurchase facilities are fully collateralized by a designated portion of the Company’s retail installment contracts (Note 2), leased vehicles (Note 3), securitization notes payables and residuals retained by the Company.`
Lines of Credit with Santander and Related Subsidiaries
Through SHUSA, Santander provides the Company with
$3,000,000
of committed revolving credit that can be drawn on an unsecured basis. Through its New York branch, Santander provides the Company with an additional
$3,000,000
of long-term committed revolving credit facilities. 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, 2017
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.
Santander Consumer ABS Funding 2, LLC (a subsidiary) established a committed facility of
$300 million
with SHUSA on March 6, 2014. This facility matured on March 6, 2017 and was replaced on the same day with a
$300 million
term promissory note executed by SC Illinois (a subsidiary) as the borrower and SHUSA as the lender. During the three months ended March 31, 2017, the Company paid
zero
in principal and
zero
in interest and fees on this note. Interest accrues on this note at a rate equal to three-month LIBOR plus
1.35%
. The note has a maturity date of March 6, 2019.
SC Illinois as borrower executed a
$650 million
term promissory note with SHUSA as lender on March 31, 2017. During the three months ended March 31, 2017, the Company paid
zero
in principal and
zero
in interest and fees on this note. Interest accrues on this note at the rate of
4.20%
. The note has a maturity date of March 31, 2022.
Secured Structured Financings
The following table presents information regarding secured structured financings as of
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Original Estimated Maturity Date(s)
|
|
Balance
|
|
Initial Note Amounts Issued
|
|
Initial Weighted Average Interest Rate
|
|
Collateral
|
|
Restricted Cash
|
2012 Securitizations
|
September 2018
|
|
$
|
69,677
|
|
|
$
|
1,025,540
|
|
|
1.23%
|
|
$
|
113,867
|
|
|
$
|
31,277
|
|
2013 Securitizations
|
January 2019 - March 2021
|
|
992,709
|
|
|
6,689,700
|
|
|
0.89%-1.59%
|
|
1,272,176
|
|
|
228,108
|
|
2014 Securitizations
|
February 2020 - April 2022
|
|
1,648,799
|
|
|
6,391,020
|
|
|
1.16%-1.72%
|
|
2,071,309
|
|
|
257,629
|
|
2015 Securitizations
|
September 2019 - January 2023
|
|
3,802,864
|
|
|
9,264,432
|
|
|
1.33%-2.29%
|
|
5,073,548
|
|
|
489,225
|
|
2016 Securitizations
|
April 2022 - March 2024
|
|
5,266,504
|
|
|
7,462,790
|
|
|
1.63%-2.80%
|
|
6,802,736
|
|
|
459,748
|
|
2017 Securitizations
|
April 2023 - July 2024
|
|
3,010,805
|
|
|
3,125,430
|
|
|
2.01%-2.43%
|
|
3,764,454
|
|
|
175,497
|
|
Public securitizations (a)
|
|
|
14,791,358
|
|
|
33,958,912
|
|
|
|
|
19,098,090
|
|
|
1,641,484
|
|
2010 Private issuances
|
June 2011
|
|
99,172
|
|
|
516,000
|
|
|
1.29%
|
|
198,524
|
|
|
7,117
|
|
2011 Private issuances
|
December 2018
|
|
237,745
|
|
|
1,700,000
|
|
|
1.46%
|
|
517,516
|
|
|
33,863
|
|
2013 Private issuances
|
September 2018
|
|
2,988,296
|
|
|
2,044,054
|
|
|
1.28%-1.38%
|
|
5,064,575
|
|
|
237,078
|
|
2014 Private issuances
|
March 2018 - November 2021
|
|
264,411
|
|
|
1,530,125
|
|
|
1.05%-1.40%
|
|
382,536
|
|
|
50,425
|
|
2015 Private issuances
|
December 2016 - July 2019
|
|
1,984,521
|
|
|
2,605,062
|
|
|
0.88%-2.81%
|
|
1,998,100
|
|
|
169,635
|
|
2016 Private issuances
|
May 2020 - September 2024
|
|
2,262,387
|
|
|
3,050,000
|
|
|
1.55%-2.86%
|
|
3,218,736
|
|
|
117,809
|
|
2017 Private issuances
|
April 2021 - September 2021
|
|
1,038,776
|
|
|
1,000,000
|
|
|
1.85%-2.27%
|
|
1,501,121
|
|
|
16,826
|
|
Privately issued amortizing notes
|
|
|
8,875,308
|
|
|
12,445,241
|
|
|
|
|
12,881,108
|
|
|
632,753
|
|
Total secured structured financings
|
|
|
$
|
23,666,666
|
|
|
$
|
46,404,153
|
|
|
|
|
$
|
31,979,198
|
|
|
$
|
2,274,237
|
|
|
|
(a)
|
Securitizations executed under Rule 144A of the Securities Act are included within this balance.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Original Estimated Maturity Date(s)
|
|
Balance
|
|
Initial Note Amounts Issued
|
|
Initial Weighted Average Interest Rate
|
|
Collateral
|
|
Restricted Cash
|
2012 Securitizations
|
September 2018
|
|
$
|
197,470
|
|
|
$
|
2,525,540
|
|
|
0.92%-1.23%
|
|
$
|
312,710
|
|
|
$
|
73,733
|
|
2013 Securitizations
|
January 2019 - January 2021
|
|
1,172,904
|
|
|
6,689,700
|
|
|
0.89%-1.59%
|
|
1,484,014
|
|
|
222,187
|
|
2014 Securitizations
|
February 2020 - January 2021
|
|
1,858,600
|
|
|
6,391,020
|
|
|
1.16%-1.72%
|
|
2,360,939
|
|
|
250,806
|
|
2015 Securitizations
|
September 2019 - January 2023
|
|
4,326,292
|
|
|
9,317,032
|
|
|
1.33%-2.29%
|
|
5,743,884
|
|
|
468,787
|
|
2016 Securitizations
|
April 2022 - March 2024
|
|
5,881,216
|
|
|
7,462,790
|
|
|
1.63%-2.46%
|
|
7,572,977
|
|
|
408,086
|
|
Securitizations
|
|
|
13,436,482
|
|
|
32,386,082
|
|
|
|
|
17,474,524
|
|
|
1,423,599
|
|
2010 Private issuances
|
June 2011
|
|
113,157
|
|
|
516,000
|
|
|
1.29%
|
|
213,235
|
|
|
6,270
|
|
2011 Private issuances
|
December 2018
|
|
342,369
|
|
|
1,700,000
|
|
|
1.46%
|
|
617,945
|
|
|
31,425
|
|
2013 Private issuances
|
September 2018-September 2020
|
|
2,375,964
|
|
|
2,693,754
|
|
|
1.13%-1.38%
|
|
4,122,963
|
|
|
164,740
|
|
2014 Private issuances
|
March 2018 - December 2021
|
|
643,428
|
|
|
3,271,175
|
|
|
1.05%-1.40%
|
|
1,129,506
|
|
|
68,072
|
|
2015 Private issuances
|
December 2016 - July 2019
|
|
2,185,166
|
|
|
2,855,062
|
|
|
0.88%-2.81%
|
|
2,384,661
|
|
|
140,269
|
|
2016 Securitizations
|
May 2020 - September 2024
|
|
2,512,323
|
|
|
3,050,000
|
|
|
1.55%-2.86%
|
|
3,553,577
|
|
|
90,092
|
|
Privately issued amortizing notes
|
|
|
8,172,407
|
|
|
14,085,991
|
|
|
|
|
12,021,887
|
|
|
500,868
|
|
Total secured structured financings
|
|
|
$
|
21,608,889
|
|
|
$
|
46,472,073
|
|
|
|
|
$
|
29,496,411
|
|
|
$
|
1,924,467
|
|
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
March 31, 2017
and
December 31, 2016
, the Company had private issuances of notes backed by vehicle leases totaling
$5,158,859
and
$3,862,274
, respectively.
Unamortized debt issuance costs are amortized as interest expense over the terms of the related notes payable using the effective interest method and are classified as a discount to the related recorded debt balance. Amortized debt issuance costs were
$8,729
and
$6,119
for the
three
months ended
March 31, 2017
and
2016
, respectively. For securitizations, the term takes into consideration the expected execution of the contractual call option, if applicable. Amortization of premium or accretion of discount on 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
March 31, 2017
and
2016
was
$124,065
and
$94,376
, 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. The Trusts are considered VIEs under U.S. GAAP and the Company may or may not consolidate these VIEs on the condensed consolidated balance sheets.
For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Note 7 of the 2016 Annual Report on Form 10-K.
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
March 31, 2017
and
December 31, 2016
, the Company was servicing
$27,651,173
and
$27,802,971
, 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
months ended
March 31, 2017
and
2016
, is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
Assets securitized
|
$
|
7,646,625
|
|
|
$
|
3,657,955
|
|
|
|
|
|
Net proceeds from new securitizations (a)
|
$
|
5,576,801
|
|
|
$
|
2,702,004
|
|
Net proceeds from sale of retained bonds
|
115,970
|
|
|
—
|
|
Cash received for servicing fees (b)
|
208,923
|
|
|
194,365
|
|
Net distributions from Trusts (b)
|
678,229
|
|
|
629,726
|
|
Total cash received from Trusts
|
$
|
6,579,923
|
|
|
$
|
3,526,095
|
|
|
|
(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
During the
three
months ended
March 31, 2017
, the Company sold
$700,022
of gross retail installment contracts to VIEs in off-balance sheet securitizations for a loss of
$2,719
which is recorded in investment losses, net in the accompanying condensed consolidated statements of income. The transaction was executed under the new securitization platform-SPAIN, with Santander.
S
antander, as a majority owned affiliate, will hold eligible vertical interest in Notes and Certificates of not less than 5% to comply with the Dodd-Frank Act risk retention rules. For the three months ended March 31, 2016, the Company executed no off-balance sheet securitizations with VIEs with which it has continuing involvement.
As of
March 31, 2017
and
December 31, 2016
, the Company was servicing
$2,943,905
and
$2,741,101
, respectively, of gross retail installment contracts that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
SPAIN
|
$
|
666,346
|
|
|
$
|
—
|
|
Total serviced for related parties
|
666,346
|
|
|
—
|
|
Chrysler Capital securitizations
|
2,188,452
|
|
|
2,472,756
|
|
Other third parties
|
89,107
|
|
|
268,345
|
|
Total serviced for third parties
|
2,277,559
|
|
|
2,741,101
|
|
Total serviced for others portfolio
|
$
|
2,943,905
|
|
|
$
|
2,741,101
|
|
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
months ended
March 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
Receivables securitized (a)
|
$
|
700,022
|
|
|
$
|
—
|
|
|
|
|
|
Net proceeds from new securitizations
|
$
|
702,319
|
|
|
$
|
—
|
|
Cash received for servicing fees
|
1,398
|
|
|
15,701
|
|
Total cash received from securitization trusts
|
$
|
703,717
|
|
|
$
|
15,701
|
|
(a)
Represents the unpaid principal balance at the time of original securitization.
|
|
7.
|
Derivative Financial Instruments
|
The Company uses derivatives financial instruments such as interest rate swaps, interest rate caps and the corresponding options written in order to offset the interest rate caps to manage the Company's exposure to changing interest rates. The Company uses both derivatives that qualify for hedge accounting treatment and economic hedges.
The Company has purchase price holdback payments and total return settlement payments that 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 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. All purchase price holdback payments and all total return settlement payments due in 2016 have been made.
The underlying notional amounts and aggregate fair values of these derivatives financial instruments at
March 31, 2017
and
December 31, 2016
, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Notional
|
|
Fair Value
|
|
Notional
|
|
Fair Value
|
Interest rate swap agreements designated as cash flow hedges
|
$
|
7,045,800
|
|
|
$
|
56,573
|
|
|
$
|
7,854,700
|
|
|
$
|
44,618
|
|
Interest rate swap agreements not designated as hedges
|
813,700
|
|
|
3,258
|
|
|
1,019,900
|
|
|
1,939
|
|
Interest rate cap agreements
|
10,690,797
|
|
|
104,625
|
|
|
9,463,935
|
|
|
76,269
|
|
Options for interest rate cap agreements
|
10,690,797
|
|
|
(104,692
|
)
|
|
9,463,935
|
|
|
(76,281
|
)
|
Total return settlement
|
658,471
|
|
|
(31,123
|
)
|
|
658,471
|
|
|
(30,618
|
)
|
In addition to the above, 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
March 31, 2017
and
December 31, 2016
.
See Note 13 for disclosure of fair value and balance sheet location of the Company's derivative financial instruments.
The Company enters into legally enforceable master netting agreements that reduce risk by permitting netting of transactions, such as derivatives and collateral posting, with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in ISDA master agreements. The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting (ISDA) agreement. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not 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
March 31, 2017
and
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet
|
|
Assets Presented
in the
Condensed Consolidated
Balance Sheet
|
|
Cash
Collateral
Received (a)
|
|
Net
Amount
|
March 31, 2017
|
|
|
|
|
|
Interest rate swaps - Santander and affiliates
|
$
|
8,194
|
|
|
$
|
—
|
|
|
$
|
8,194
|
|
Interest rate swaps - third party
|
51,957
|
|
|
(9,783
|
)
|
|
42,174
|
|
Interest rate caps - Santander and affiliates
|
7,812
|
|
|
—
|
|
|
7,812
|
|
Interest rate caps - third party
|
96,813
|
|
|
(11,586
|
)
|
|
85,227
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
164,776
|
|
|
(21,369
|
)
|
|
143,407
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
—
|
|
|
—
|
|
|
—
|
|
Total derivative assets
|
$
|
164,776
|
|
|
$
|
(21,369
|
)
|
|
$
|
143,407
|
|
Total financial assets
|
$
|
164,776
|
|
|
$
|
(21,369
|
)
|
|
$
|
143,407
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
Interest rate swaps - Santander and affiliates
|
$
|
5,372
|
|
|
$
|
—
|
|
|
$
|
5,372
|
|
Interest rate swaps - third party
|
42,254
|
|
|
(22,100
|
)
|
|
20,154
|
|
Interest rate caps - Santander and affiliates
|
7,593
|
|
|
—
|
|
|
7,593
|
|
Interest rate caps - third party
|
68,676
|
|
|
—
|
|
|
68,676
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
123,895
|
|
|
(22,100
|
)
|
|
101,795
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
—
|
|
|
—
|
|
|
—
|
|
Total derivative assets
|
$
|
123,895
|
|
|
$
|
(22,100
|
)
|
|
$
|
101,795
|
|
Total financial assets
|
$
|
123,895
|
|
|
$
|
(22,100
|
)
|
|
$
|
101,795
|
|
|
|
(a)
|
Cash collateral pledged is reported in Other liabilities or Due to affiliate, as applicable, in the condensed consolidated balance sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet
|
|
Liabilities Presented
in the Condensed
Consolidated
Balance Sheet
|
|
Cash
Collateral
Pledged (a)
|
|
Net
Amount
|
March 31, 2017
|
|
|
|
|
|
Interest rate swaps - Santander & affiliates
|
$
|
87
|
|
|
$
|
(87
|
)
|
|
$
|
—
|
|
Interest rate swaps - third party
|
234
|
|
|
(234
|
)
|
|
—
|
|
Back to back - Santander & affiliates
|
7,812
|
|
|
(7,812
|
)
|
|
—
|
|
Back to back - third party
|
96,880
|
|
|
(81,503
|
)
|
|
15,377
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
105,013
|
|
|
(89,636
|
)
|
|
15,377
|
|
Total return settlement
|
31,123
|
|
|
—
|
|
|
31,123
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
31,123
|
|
|
—
|
|
|
31,123
|
|
Total derivative liabilities
|
$
|
136,136
|
|
|
$
|
(89,636
|
)
|
|
$
|
46,500
|
|
Total financial liabilities
|
$
|
136,136
|
|
|
$
|
(89,636
|
)
|
|
$
|
46,500
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
Interest rate swaps - Santander & affiliates
|
$
|
546
|
|
|
$
|
(546
|
)
|
|
$
|
—
|
|
Interest rate swaps - third party
|
524
|
|
|
(524
|
)
|
|
—
|
|
Back to back - Santander & affiliates
|
7,593
|
|
|
(7,593
|
)
|
|
—
|
|
Back to back - third party
|
68,688
|
|
|
(68,688
|
)
|
|
—
|
|
Total derivatives subject to a master netting arrangement or similar arrangement
|
77,351
|
|
|
(77,351
|
)
|
|
—
|
|
Total return settlement
|
30,618
|
|
|
—
|
|
|
30,618
|
|
Total derivatives not subject to a master netting arrangement or similar arrangement
|
30,618
|
|
|
—
|
|
|
30,618
|
|
Total derivative liabilities
|
$
|
107,969
|
|
|
$
|
(77,351
|
)
|
|
$
|
30,618
|
|
Total financial liabilities
|
$
|
107,969
|
|
|
$
|
(77,351
|
)
|
|
$
|
30,618
|
|
|
|
(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
months ended
March 31, 2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
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
|
$
|
383
|
|
|
$
|
7,332
|
|
|
$
|
4,240
|
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Gains (losses) recognized in interest expense
|
$
|
(1,204
|
)
|
|
|
|
|
Gains (losses) recognized in operating expenses
|
$
|
(505
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 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
|
$
|
208
|
|
|
$
|
(73,005
|
)
|
|
$
|
(12,082
|
)
|
|
|
|
|
|
|
Derivative instruments not designated as hedges:
|
|
|
|
|
|
Gains (losses) recognized in interest expense
|
$
|
(5,499
|
)
|
|
|
|
|
Gains (losses) recognized in operating expenses
|
$
|
(1,316
|
)
|
|
|
|
|
The ineffectiveness related to the interest rate swap agreements designated as cash flow hedges was insignificant for the
three
months ended
March 31, 2017
and
2016
. The Company estimates that approximately
$8,000
of unrealized gains included in accumulated other comprehensive income (loss) will be reclassified to interest expense within the next twelve months.
Other assets were comprised as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Vehicles (a)
|
$
|
314,960
|
|
|
$
|
257,382
|
|
Manufacturer subvention payments receivable (b)
|
134,347
|
|
|
161,447
|
|
Upfront fee (b)
|
91,250
|
|
|
95,000
|
|
Derivative assets at fair value (c)
|
148,770
|
|
|
110,930
|
|
Derivative - third party collateral
|
81,737
|
|
|
75,089
|
|
Prepaids
|
46,613
|
|
|
46,177
|
|
Accounts receivable
|
29,872
|
|
|
22,480
|
|
Other
|
14,322
|
|
|
16,905
|
|
Other assets
|
$
|
861,871
|
|
|
$
|
785,410
|
|
|
|
(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.
|
|
|
(c)
|
Derivative assets at fair value represent the gross amount of derivatives presented in the condensed consolidated financial statements. Refer to Note 7 to these Condensed Consolidated Financial Statements for the detail of these amounts.
|
The Company recorded income tax expense of
$78,001
(
35.2%
effective tax rate) and
$120,643
(
36.7%
effective tax rate) during the
three
months ended
March 31, 2017
and
2016
, respectively. The decline in the effective tax rate was primarily due to changes in estimated electric vehicle tax credits.
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
$467
and
$1,087
at
March 31, 2017
and
December 31, 2016
, 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 following table summarizes liabilities recorded for commitments and contingencies as of
March 31, 2017
and
December 31, 2016
, all of which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agreement or Legal Matter
|
|
Commitment or Contingency
|
|
March 31, 2017
|
|
December 31, 2016
|
Chrysler Agreement
|
|
Revenue-sharing and gain-sharing payments
|
|
$
|
9,234
|
|
|
$
|
10,134
|
|
Agreement with Bank of America
|
|
Servicer performance fee
|
|
10,814
|
|
|
9,797
|
|
Agreement with CBP
|
|
Loss-sharing payments
|
|
4,612
|
|
|
4,563
|
|
Legal and regulatory proceedings
|
|
Aggregate legal and regulatory liabilities
|
|
43,170
|
|
|
39,200
|
|
Following is a description of the agreements and legal matters pursuant to which the liabilities in the preceding table were recorded.
Chrysler Agreement
Under terms of the Chrysler Agreement, the Company must make revenue sharing payments to FCA and gain-sharing payments when residual gains on leased vehicles exceed a specified threshold. The Company had accrued
$9,234
and $
10,134
at
March 31, 2017
and
December 31, 2016
, respectively, related to these obligations.
The Chrysler Agreement requires, among other things, that the Company bear the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that the Company maintain at least
$5.0 billion
in funding available for dealer inventory financing and
$4.5 billion
of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to the Company. The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations under the Chrysler Agreement. These obligations include the Company's meeting specified escalating penetration rates for the first
five years
of the agreement. The Company has not met these penetration rates at
March 31, 2017
. If the Chrysler Agreement were to terminate, there could be a materially adverse impact to the Company's financial condition and results of operations.
Agreement with Bank of America
Until January 31, 2017, the Company had a flow agreement with Bank of America whereby the Company was committed to sell up to
$300,000
of eligible loans to the bank each month. On October 27, 2016, Bank of America notified the Company that it was terminating the flow agreement effective January 31, 2017, and accordingly, the flow agreement is terminated. The Company retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse,
respectively, than expected performance at time of sale. Servicer performance payments are due
six years
from the cut-off date of each loan sale. The Company had accrued
$10,814
and
$9,797
at
March 31, 2017
and
December 31, 2016
, respectively, related to this obligation.
Agreement with CBP
The Company has sold loans to CBP under terms of a flow agreement and predecessor sale agreements. 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. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. 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. In January 2016, the Company executed an amendment to the servicing agreement with CBP which decreased the servicing fee the Company receives on loans sold to CBP by the Company under the flow agreement. On February 13, 2017, the Company and CBP entered into a mutual agreement to terminate the flow agreement effective May 1, 2017. The Company had accrued
$4,612
and
$4,563
at
March 31, 2017
and
December 31, 2016
, respectively, related to the loss-sharing obligation.
Legal and regulatory proceedings
Periodically, the Company is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, regulatory matter and legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. Accordingly, except as provided below, the Company is unable to reasonably estimate its potential exposure, if any, to these lawsuits, regulatory matters and other legal proceedings at this time. However, it is reasonably possible that actual outcomes or losses may differ materially from the Company's current assessments and estimates and any adverse resolution of any of these matters against it could have a material adverse effect on the Company's financial position, liquidity, and results of operation.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, regulatory matter or other legal proceeding develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency. The Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.
As of
March 31, 2017
, the Company has accrued aggregate legal and regulatory liabilities of
$43,170
. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject.
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 December 2, 2016, the plaintiffs moved to certify the proposed classes, on February 17, 2017, the Company filed an opposition to the plaintiffs' motion to certify the proposed classes, and on March 31, 2017, the plaintiffs filed their reply brief.
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 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. 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 December 20, 2016, the plaintiffs filed an amended class action complaint.
The amended class action complaint in the Parmelee Lawsuit alleges 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, among other things, the Company’s change in its methodology for estimating its allowance for credit losses and correction of such allowance for prior periods in, among other public disclosures, the Company’s Annual Report on Form 10-K for the year ended December 31, 2015, the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, and the Company’s amended filings for prior reporting periods. The amended class action complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks damages and other relief. On March 14, 2017, the Company filed a motion to dismiss the Parmelee Lawsuit.
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 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.
The Company is also party to various lawsuits pending in federal and state courts alleging violations of state and federal consumer lending laws, including, without limitation, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.
The Company is party to, or is periodically otherwise involved in, reviews, investigations, examinations and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the FRBB, the CFPB, the DOJ, the SEC, the FTC and various state regulatory and enforcement agencies. Currently, such proceedings include, but are not limited to, 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.
On March 21, 2017, the Company and SHUSA entered into a written agreement (the “2017 Written Agreement”) with the FRBB. Under the terms of the 2017 Written Agreement, the Company is required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of SC’s management and operations.
In October 2014, May 2015, and July 2015 the Company received subpoenas and/or Civil Investigative Demands (CIDs) from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. The Company has been informed that these states will serve as an executive committee on behalf of a group of 28 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contain broad requests for information and the production of documents related to the Company's underwriting and securitization of nonprime auto loans. The Company believes that several other companies in the auto finance sector have received similar subpoenas and CIDs. The Company is cooperating with the Attorneys General of the states involved. The Company believes that it is reasonably possible that it will suffer a loss related to the Attorneys General, however, any such loss is not currently estimable.
In August and September 2014, the Company also received civil subpoenas and/or CIDs from the Attorney General of Massachusetts (the Massachusetts AG) and Delaware Department of Justice (the Delaware DOJ) under the authority of each state’s consumer protection statutes requesting information and the production of documents related to our underwriting and securitizations of nonprime auto loans. On March 29, 2017, the Company entered into an Assurance of Discontinuance (AOD) with the Massachusetts AG and a Cease and Desist by Agreement (C&D) with the Delaware DOJ to settle allegations that it facilitated the origination of certain Massachusetts and Delaware loans that it knew - or should have known - were in violation of applicable state consumer protection laws. In the AOD, filed in the Superior Court of Suffolk County, State of Massachusetts, captioned In the Matter of Santander Consumer USA Holdings Inc., C.A. # 17-946E, the Company agreed to pay
$16,300
to an independent trust for the benefit of eligible customers and
$5,800
to the Commonwealth of Massachusetts. In the C&D, filed before the Consumer Protection Director of the Delaware Department of Justice, captioned In the Matter of Santander Consumer USA Holdings Inc., C.P.U. # 17-17-17001637, the Company agreed to pay
$2,875
to an independent trust for the benefit of eligible customers and
$1,025
to the State of Delaware. The Company also agreed to make certain changes to its business practices. Among other things, it agreed to enhance certain aspects of its dealer oversight and monitoring processes.
On January 10, 2017, the Attorney General of the State of Mississippi (the Mississippi AG) filed a lawsuit against the Company in the Chancery Court of the First Judicial District of Hinds County, State of Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that the Company engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act and seeks unspecified civil penalties, equitable relief and other relief. On March 31, 2017, the Company filed motions to dismiss the Mississippi AG’s lawsuit.
On November 4, 2015, the Company entered into an AOD with 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 the Company, and
$5
per servicemember for each instance where the Company sought to collect repossession-related fees on accounts where a repossession was conducted by a
prior account holder. The consent order also provides for monitoring by the DOJ for the Company’s SCRA compliance for a period of
five years
and requires the Company to undertake certain additional remedial measures.
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 the Company that it has initiated, based on the referral from the CFPB, an investigation under the ECOA of the Company's pricing of automobile loans.
Other commitments and contingencies
Agreements
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 2017 if returns on the purchased loans are greater than originally expected. 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
March 31, 2017
and
December 31, 2016
, there was an outstanding balance under these lines of credit of
$3,656
and
$2,529
, respectively, and a committed amount under these lines of credit of
$3,656
and
$2,920
, respectively.
The Company 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 of
March 31, 2017
and
December 31, 2016
, the Company was obligated to purchase
$11,281
and
$12,634
, 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. During the year ended December 31, 2015, the Company and the third-party retailer executed an amendment that, among other provisions, increases the profit-sharing percentage retained by the Company, gives the retailer 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, gives the retailer the right to retain up to
20%
of new accounts subsequently originated.
Under terms of an application transfer agreement with another original equipment manufacturer (OEM), 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 will pay the OEM a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee will be 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 also 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 upward
adjustments of
zero
and
$836
for the
three
months ended
March 31, 2017
and 2016, 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
March 31, 2017
, 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 lines and privately issued amortizing notes. These guarantees are limited to the obligations of the Company as servicer.
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. In January 2015, the Company additionally 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.
On March 31, 2015, the Company executed a forward flow asset sale agreement with a third party under terms of which the Company committed to sell charged off loan receivables in bankruptcy status on a quarterly basis until sales total at least
$200,000
in proceeds. On June 29, 2015, the Company and the third party executed an amendment to the forward flow asset sale agreement, which increased the committed sales of charged off loan receivables in bankruptcy status to
$275,000
. On September 30, 2015, the Company and the third party executed a second amendment to the forward flow asset sale agreement, which required sales to occur quarterly. On November 13, 2015, the Company and the third party executed a third amendment to the forward flow asset sale agreement, which increased the committed sales of charged off loan receivables in bankruptcy status to
$350,000
. However, any sale more than
$275,000
is subject to a market price check. As of
March 31, 2017
and
December 31, 2016
, the remaining aggregate commitment was
$152,054
and
$166,167
, respectively.
Employment Agreements
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).
Leases
The Company has entered into various operating leases, primarily for office space and computer equipment. Lease expense incurred totaled
$2,739
and
$2,950
for the
three
months ended
March 31, 2017
and 2016, respectively. The remaining obligations under lease commitments at
March 31, 2017
are as follows:
|
|
|
|
|
|
|
2017
|
$
|
11,858
|
|
2018
|
12,781
|
|
2019
|
12,866
|
|
2020
|
13,074
|
|
2021
|
12,691
|
|
Thereafter
|
53,690
|
|
Total
|
$
|
116,960
|
|
|
|
11.
|
Related-Party Transactions
|
Related-party transactions not otherwise disclosed in these footnotes to the condensed consolidated financial statements include the following:
Credit Facilities
Interest expense, including unused fees, for affiliate lines/letters of credit for the
three
months ended
March 31, 2017
and
2016
, was as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
Line of credit agreement with Santander - New York Branch (Note 5)
|
$
|
22,976
|
|
|
$
|
20,273
|
|
Line of credit agreement with SHUSA (Note 5)
|
12,634
|
|
|
2,864
|
|
Accrued interest for affiliate lines/letters of credit at
March 31, 2017
and
December 31, 2016
, was as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31, 2016
|
Line of credit agreement with Santander - New York Branch (Note 5)
|
$
|
7,569
|
|
|
$
|
6,297
|
|
Line of credit agreement with SHUSA (Note 5)
|
5,095
|
|
|
1,737
|
|
In August 2015, under an agreement with Santander, the Company agreed to begin incurring a fee of
12.5 basis points
(per annum) on certain warehouse lines, as they renew, for which Santander provides a guarantee of the Company's servicing obligations. The Company recognized guarantee fee expense of
$1,465
and
$1,578
for the
three
months ended
March 31, 2017
and 2016, respectively. As of
March 31, 2017
and
December 31, 2016
, the Company had
$3,085
and
$1,620
of related fees payable to Santander, respectively.
Derivatives
The Company has derivative financial instruments with Santander and affiliates with outstanding notional amounts of
$5,936,700
and
$7,259,400
at
March 31, 2017
and
December 31, 2016
, respectively (Note 7). The Company had a collateral overage on derivative liabilities with Santander and affiliates of
$10,637
and
$15,092
at
March 31, 2017
and
December 31, 2016
, respectively. Interest expense and mark-to-market adjustments on these agreements totaled
$29
and
$10,150
for the
three
months ended
March 31, 2017
and
2016
, respectively.
Originations
The Company is required to permit SBNA a first right to review and assess Chrysler Capital dealer lending opportunities, and SBNA is required to pay 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
$1,279
of relationship management fee income for the
three months ended
March 31,
2016
and recognized
$600
and
$306
of origination and renewal fee income, respectively, for the three months ended
March 31, 2017
. As of
March 31, 2017
and
December 31, 2016
, the Company had origination and renewal fees receivable from SBNA of
$320
and
$552
. The agreement also transferred the servicing of all Chrysler Capital receivables from dealers, including receivables held by SBNA and by the Company, from the Company to SBNA. Servicing fee expense under this agreement totaled
$30
for the
three months ended
March 31, 2017
. As of
March 31, 2017
and
December 31, 2016
, the Company had
$13
and
$21
, 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
March 31, 2017
or
December 31, 2016
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
$2,698
and
$2,761
related to such originations as of
March 31, 2017
and
December 31, 2016
, respectively.
The Company received a
$9,000
referral fee in connection with the original arrangement and was amortizing the fee into income over the
ten
-year term of the agreement. The remaining balance of the referral fee SBNA paid to the Company in connection with the original sourcing and servicing agreement is considered a referral fee in connection with the new agreements and will continue to be amortized into income through the July 1, 2022 termination date of the new agreements. As of
March 31, 2017
and
December 31, 2016
, the unamortized fee balance was
$5,625
and
$5,850
, respectively. The Company recognized
$225
of income related to the referral fee for the
three months ended
March 31, 2017
and
2016
.
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
$925
and
$2,108
for the
three
months ended
March 31, 2017
and
2016
, respectively. Other information on the serviced auto loan and retail installment contract portfolios for SBNA as of
March 31, 2017
and
December 31, 2016
is as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Total serviced portfolio
|
$
|
495,885
|
|
|
$
|
531,117
|
|
Cash collections due to owner
|
20,980
|
|
|
21,427
|
|
Servicing fees receivable
|
1,060
|
|
|
1,123
|
|
Beginning in 2016, the Company agreed to pay SBNA a market rate-based fee expense for payments made at SBNA retail branch locations for accounts originated/serviced by the Company and the costs associated with modifying the Advanced Teller platform to the payments. The Company incurred
$40
for these services during the
three
months ended
March 31, 2017
. As of
March 31, 2017
, the Company owed SBNA
$197
related to these service obligations.
Flow Agreements
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 on all leases originated under this agreement and continues to service these vehicles leases. Pursuant to the Chrysler Agreement, the Company pays FCA on behalf of SBNA for residual gains and losses on the flowed leases. Servicing fee income recognized on leases serviced for SBNA totaled
$1,393
and
$1,549
for the
three months ended
March 31, 2017
and
2016
, respectively. Other information on the consumer vehicle lease portfolio serviced for SBNA as of
March 31, 2017
and December 31,
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
March 31,
2017
|
|
December 31,
2016
|
Total serviced portfolio
|
$
|
926,377
|
|
|
$
|
1,297,317
|
|
Cash collections due to owner
|
303
|
|
|
78
|
|
Origination and servicing fees receivable
|
645
|
|
|
926
|
|
Revenue share reimbursement receivable
|
813
|
|
|
612
|
|
On June 30, 2014, the Company entered into an indemnification agreement with SBNA whereby the Company 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, the Company 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 the Company, in the case of payments and sale proceeds. As of
March 31, 2017
and
December 31, 2016
, the balance in the collateral account was
$7,513
and
$11,329
, respectively. The Company recognized no indemnification expense for the
three
months ended
March 31, 2017
, and
2016
. As of
March 31, 2017
and
December 31, 2016
, the Company had a recorded liability of
$2,691
related to the residual losses covered under the agreement.
Securitizations
On March 29, 2017, the Company entered into a Master Securities Purchase Agreement (“MSPA”) with Santander, whereby it has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term ending in December 2018. The Company will provide servicing on all loans originated under this arrangement. For the three months ended March 31, 2017, the Company sold
$700 million
of loans under this agreement and recognized a loss of
$2.7 million
which is included in investment losses in the accompanying condensed consolidated financial statements. The Company had
$37,467
of collections due to Santander as of March 31, 2017.
Employment Agreements
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. Subject to applicable regulatory approvals and law, the Separation Agreement provided, among other things, that 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. The Separation Agreement also provided that Mr. Dundon 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 regulatory approvals.
As of
March 31, 2017
, 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 and satisfaction of any conditions thereto, 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 the Company's Common Stock owned by DDFS LLC 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
revolving loan which as of
March 31, 2017
and
December 31, 2016
had an unpaid principal balance of
$290,000
and
$290,000
, respectively. 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.
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 SC 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.
In connection with, and pursuant to, the Separation Agreement, on July 2, 2015, DDFS LLC and Santander entered into an amendment to the Loan Agreement and an amendment to the Pledge Agreement that provide, among other things, that outstanding balance under the Loan Agreement shall become due and payable upon the consummation of the Call Transaction and that the amount otherwise payable to DDFS LLC under the Call Transaction shall be reduced by the amount outstanding under the Loan Agreement, including principal, interest and fees, and further that any net cash proceeds received by DDFS LLC on account of sales of Company Common Stock after the Call End Date shall be applied to the outstanding balance under the Loan Agreement.
On August 31, 2016, Mr. Dundon, DDFS LLC, the Company, Santander and SHUSA entered into a Second Amendment to the Separation Agreement, and Mr. Dundon, DDFS LLC, Santander and SHUSA entered into a Third Amendment to the Shareholders Agreement, whereby the price per share to be paid to DDFS LLC 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.
On April 17, 2017, the Loan Agreement matured and became due and payable with an unpaid principal balance of approximately
$290,000
as of that date. Because the borrower failed to pay obligations under the Loan Agreement on April 17, 2017, the borrower is in default and is currently being charged the default interest rate as defined by the Loan Agreement. The Loan Agreement generally defines the default interest rate as the Base Rate plus
2%
. The Base Rate as defined in the Loan Agreement is the higher of (i) the federal funds rate plus ½ of 1% or (ii) the prime rate, which is the annual rate of interest publicly announced by the New York Branch of Santander from time to time. As of April 21, 2017, the prime rate as announced by the New York Branch of Santander was
4%
.
Other related-party transactions
As of
March 31, 2017
, Jason Kulas, a director of the Company and the Company's current CEO, Mr. Dundon, and a Santander employee who was a member of the 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
March 31, 2017
and
2016
, the Company recorded
$1,275
and
$1,266
, respectively, in lease expenses on this property. The Company subleases approximately
13,000
square feet of its corporate office space to SBNA. For the
three
months ended
March 31, 2017
and
2016
, the Company recorded
$41
in sublease revenue on this property. Future minimum lease payments over the remainder of the
12
-year term of the lease, which extends through 2026, total
$67,386
.
The Company's wholly-owned subsidiary, Santander Consumer International Puerto Rico, LLC (SCI), opened deposit accounts with Banco Santander Puerto Rico, an affiliated entity. As of
March 31, 2017
and
December 31, 2016
, SCI had cash of
$93,013
and
$98,836
, respectively, on deposit with Banco Santander Puerto Rico.
During 2015, Santander Investment Securities Inc. (SIS), an affiliated entity, purchased an investment of
$2,000
in the Class A3 notes of CCART 2013-A, a securitization Trust formed by the Company in 2013. 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
March 31, 2017
and
2016
, totaled
$150
and
$100
, respectively, and are included in 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 in the accompanying consolidated statements of income, totaled
$21
and
$24
for the
three
months ended
March 31, 2017
and
2016
, 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. This cost method investment was carried at a value of
zero
in the Company's condensed consolidated balance sheets as of March 31, 2017, as it had been fully impaired. The MSA enables the Company to review point-of-sale credit applications of retail store customers. During the three months ending March 31, 2016, the Company did not originate any loans under the MSA and effective August 17,
2016, the Company ceased funding new originations from all of the retailers for which it reviews credit applications under this MSA.
Beginning in 2017, the Company and SBNA entered into a Credit Card Agreement (Card Agreement) whereby SBNA will provide credit card services for travel and related business expenses and for vendor payments. This service is at zero cost but generate rebates based on purchases made. As at March 31, 2017, the activities associated with the program were de minimis.
|
|
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
973,230
and
1,504,790
employee stock option awards for the
three
months ended
March 31, 2017
and
2016
, respectively, as the effect of those securities would be anti-dilutive.
The following table represents EPS numbers for the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
2017
|
|
2016
|
Earnings per common share
|
|
|
|
Net income
|
$
|
143,427
|
|
|
$
|
208,299
|
|
Weighted average number of common shares outstanding before restricted participating shares
(in thousands)
|
358,939
|
|
|
357,625
|
|
Weighted average number of participating restricted common shares outstanding
(in thousands)
|
166
|
|
|
350
|
|
Weighted average number of common shares outstanding
(in thousands)
|
359,105
|
|
|
357,975
|
|
Earnings per common share
|
$
|
0.40
|
|
|
$
|
0.58
|
|
Earnings per common share - assuming dilution
|
|
|
|
Net income
|
$
|
143,427
|
|
|
$
|
208,299
|
|
Weighted average number of common shares outstanding
(in thousands)
|
359,105
|
|
|
357,975
|
|
Effect of employee stock-based awards
(in thousands)
|
1,511
|
|
|
865
|
|
Weighted average number of common shares outstanding - assuming dilution
(in thousands)
|
360,616
|
|
|
358,840
|
|
Earnings per common share - assuming dilution
|
$
|
0.40
|
|
|
$
|
0.58
|
|
|
|
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.
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following tables present the carrying value and estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at
March 31, 2017
and
December 31, 2016
, and the level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (a)
|
$
|
420,826
|
|
|
$
|
420,826
|
|
|
$
|
420,826
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables held for investment, net (b)
|
23,413,973
|
|
|
24,585,906
|
|
|
—
|
|
|
—
|
|
|
24,585,906
|
|
Restricted cash (a)
|
2,946,736
|
|
|
2,946,736
|
|
|
2,946,736
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
26,781,535
|
|
|
$
|
27,953,468
|
|
|
$
|
3,367,562
|
|
|
$
|
—
|
|
|
$
|
24,585,906
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes payable — credit facilities (c)
|
$
|
4,958,638
|
|
|
$
|
4,958,638
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,958,638
|
|
Notes payable — secured structured financings (d)
|
23,666,666
|
|
|
23,814,779
|
|
|
—
|
|
|
14,927,192
|
|
|
8,887,587
|
|
Notes payable — related party (e)
|
2,850,000
|
|
|
2,850,000
|
|
|
—
|
|
|
—
|
|
|
2,850,000
|
|
Total
|
$
|
31,475,304
|
|
|
$
|
31,623,417
|
|
|
$
|
—
|
|
|
$
|
14,927,192
|
|
|
$
|
16,696,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Carrying
Value
|
|
Estimated
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (a)
|
$
|
160,180
|
|
|
$
|
160,180
|
|
|
$
|
160,180
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Finance receivables held for investment, net (b)
|
23,456,506
|
|
|
24,630,599
|
|
|
—
|
|
|
—
|
|
|
24,630,599
|
|
Restricted cash (a)
|
2,757,299
|
|
|
2,757,299
|
|
|
2,757,299
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
26,373,985
|
|
|
$
|
27,548,078
|
|
|
$
|
2,917,479
|
|
|
$
|
—
|
|
|
$
|
24,630,599
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Notes payable — credit facilities (c)
|
$
|
6,739,817
|
|
|
$
|
6,739,817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,739,817
|
|
Notes payable — secured structured financings (d)
|
21,608,889
|
|
|
21,712,691
|
|
|
—
|
|
|
13,530,045
|
|
|
8,182,646
|
|
Notes payable — related party (e)
|
2,975,000
|
|
|
2,975,000
|
|
|
—
|
|
|
—
|
|
|
2,975,000
|
|
Total
|
$
|
31,323,706
|
|
|
$
|
31,427,508
|
|
|
$
|
—
|
|
|
$
|
13,530,045
|
|
|
$
|
17,897,463
|
|
|
|
(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 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.
|
|
|
(c)
|
Notes payable — credit facilities
— The carrying amount of notes payable related to revolving credit facilities is estimated to approximate fair value. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
|
|
|
(d)
|
Notes payable — secured structured financings
— The estimated fair value of notes payable related to secured structured financings is calculated based on market observable prices and spreads for the Company's publicly traded debt and market observed prices of similar notes issued by the Company, or recent market transactions involving similar debt with similar credit risks, which are considered level 2 inputs. The estimated fair value of notes payable related to privately issued amortizing notes is calculated based on a combination of discounted cash flow analysis and market observable spreads for similar liabilities 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, which are considered level 3 inputs.
|
|
(e)
|
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.
|
Financial Instruments Measured At Fair Value On A Recurring Basis
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at
March 31, 2017
and
December 31, 2016
, and the level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2017
|
|
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)
|
$
|
96,813
|
|
|
$
|
—
|
|
|
$
|
96,813
|
|
|
$
|
—
|
|
Due from affiliates — trading interest rate caps (a)
|
7,812
|
|
|
—
|
|
|
7,812
|
|
|
—
|
|
Other assets — cash flow hedging interest rate swaps (a)
|
50,535
|
|
|
—
|
|
|
50,535
|
|
|
—
|
|
Due from affiliates — cash flow hedging interest rate swaps (a)
|
6,330
|
|
|
—
|
|
|
6,330
|
|
|
—
|
|
Other assets — trading interest rate swaps (a)
|
1,422
|
|
|
—
|
|
|
1,422
|
|
|
—
|
|
Due from affiliates — trading interest rate swaps (a)
|
1,864
|
|
|
—
|
|
|
1,864
|
|
|
—
|
|
Other liabilities — trading options for interest rate caps (a)
|
96,880
|
|
|
—
|
|
|
96,880
|
|
|
—
|
|
Due to affiliates — trading options for interest rate caps (a)
|
7,812
|
|
|
—
|
|
|
7,812
|
|
|
—
|
|
Other liabilities — cash flow hedging interest rate swaps (a)
|
220
|
|
|
—
|
|
|
220
|
|
|
—
|
|
Due to affiliates — cash flow hedging interest rate swaps (a)
|
74
|
|
|
—
|
|
|
74
|
|
|
—
|
|
Other liabilities — trading interest rate swaps (a)
|
14
|
|
|
—
|
|
|
14
|
|
|
—
|
|
Due to affiliates — trading interest rate swaps (a)
|
13
|
|
|
—
|
|
|
13
|
|
|
—
|
|
Other liabilities — total return settlement (a,b)
|
31,123
|
|
|
—
|
|
|
—
|
|
|
31,123
|
|
Retail installment contracts acquired individually (c)
|
30,652
|
|
|
—
|
|
|
—
|
|
|
30,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 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)
|
$
|
68,676
|
|
|
$
|
—
|
|
|
$
|
68,676
|
|
|
$
|
—
|
|
Due from affiliates — trading interest rate caps (a)
|
7,593
|
|
|
—
|
|
|
7,593
|
|
|
—
|
|
Other assets — cash flow hedging interest rate swaps (a)
|
41,471
|
|
|
—
|
|
|
41,471
|
|
|
—
|
|
Due from affiliates — cash flow hedging interest rate swaps (a)
|
4,080
|
|
|
—
|
|
|
4,080
|
|
|
—
|
|
Other assets — trading interest rate swaps (a)
|
783
|
|
|
—
|
|
|
783
|
|
|
—
|
|
Due from affiliates — trading interest rate swaps (a)
|
1,292
|
|
|
—
|
|
|
1,292
|
|
|
—
|
|
Other liabilities — trading options for interest rate caps (a)
|
68,688
|
|
|
—
|
|
|
68,688
|
|
|
—
|
|
Due to affiliates — trading options for interest rate caps (a)
|
7,593
|
|
|
—
|
|
|
7,593
|
|
|
—
|
|
Other liabilities — cash flow hedging interest rate swaps (a)
|
482
|
|
|
—
|
|
|
482
|
|
|
—
|
|
Due to affiliates — cash flow hedging interest rate swaps (a)
|
451
|
|
|
—
|
|
|
451
|
|
|
—
|
|
Other liabilities — trading interest rate swaps (a)
|
42
|
|
|
—
|
|
|
42
|
|
|
—
|
|
Due to affiliates — trading interest rate swaps (a)
|
95
|
|
|
—
|
|
|
95
|
|
|
—
|
|
Other liabilities — total return settlement (a,b)
|
30,618
|
|
|
—
|
|
|
—
|
|
|
30,618
|
|
Retail installment contracts acquired individually (c)
|
24,495
|
|
|
—
|
|
|
—
|
|
|
24,495
|
|
|
|
(a)
|
The valuation is determined using widely accepted valuation techniques including a DCF on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees. The Company utilizes the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for instruments (Note 7).
|
|
|
(b)
|
The significant unobservable inputs for total return settlement derivative contracts used in the fair value measurement of the Company's liabilities are discount percentages, which are based on comparable financial instruments.
|
|
|
(c)
|
For certain retail installment contracts reported in finance receivables held for investment, net, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using a DCF model. When estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding of debt issuance and recent historical equity yields, and recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3. Changes in the fair value are recorded in investment gains (losses), net in the condensed consolidated statement of income.
|
The following table presents the changes in retail installment contracts held for investment balances classified as Level 3 balances for the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Balance — beginning of period
|
$
|
24,495
|
|
|
$
|
6,770
|
|
Additions / issuances
|
13,331
|
|
|
—
|
|
Net collection activities
|
(10,113
|
)
|
|
(3,924
|
)
|
Transfers to held for sale
|
(12
|
)
|
|
—
|
|
Gains recognized in earnings
|
2,951
|
|
|
1,293
|
|
Balance — end of period
|
$
|
30,652
|
|
|
$
|
4,139
|
|
The following table presents the changes in the total return settlement balance, which is classified as Level 3, for the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2016
|
Balance — beginning of period
|
$
|
30,618
|
|
|
$
|
53,432
|
|
Losses recognized in earnings
|
505
|
|
|
1,316
|
|
Settlements
|
—
|
|
|
(955
|
)
|
Balance — end of period
|
$
|
31,123
|
|
|
$
|
53,793
|
|
The Company did not have any transfers between Levels 1 and 2 during the
three
months ended
March 31, 2017
and
2016
. There were no amounts transferred into or out of Level 3 during the
three
months ended and
March 31, 2017
and
2016
.
Financial Instruments Measured At Fair Value On A Nonrecurring Basis
The following table presents the Company’s assets that are measured at fair value on a nonrecurring basis at
March 31, 2017
and
December 31, 2016
, and the level within the fair value hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 31, 2017
|
|
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
|
Other assets — vehicles (a)
|
$
|
314,960
|
|
|
$
|
—
|
|
|
$
|
314,960
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Personal loans held for sale (b)
|
$
|
979,103
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
979,103
|
|
|
$
|
64,639
|
|
Retail installment contracts held for sale (c)
|
$
|
876,916
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
876,916
|
|
|
$
|
1,482
|
|
Auto loans impaired due to bankruptcy (d)
|
$
|
54,929
|
|
|
$
|
—
|
|
|
$
|
54,929
|
|
|
$
|
—
|
|
|
$
|
23,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at December 31, 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
|
Other assets — vehicles (a)
|
$
|
257,382
|
|
|
$
|
—
|
|
|
$
|
257,382
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Personal loans held for sale (b)
|
$
|
1,077,600
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,077,600
|
|
|
$
|
414,703
|
|
Retail installment contracts held for sale (c)
|
$
|
1,045,815
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,045,815
|
|
|
$
|
8,913
|
|
|
|
(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 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. The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.
|
|
|
(c)
|
The estimated fair value is calculated based on a 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.
|
|
|
(d)
|
For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.
|
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
$178
and
$858
recorded for the
three
months ended
March 31, 2017
and
2016
, respectively.
A summary of the Company’s stock options and related activity as of and for the
three
months ended
March 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Weighted
Average
Remaining
Contractual
Term (Years)
|
|
Aggregate
Intrinsic
Value
|
Options outstanding at January 1, 2017
|
4,295,830
|
|
|
$
|
12.70
|
|
|
5.6
|
|
|
$
|
12,982
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Exercised
|
(263,703
|
)
|
|
9.38
|
|
|
—
|
|
|
1,202
|
|
Expired
|
(60,768
|
)
|
|
9.63
|
|
|
—
|
|
|
—
|
|
Forfeited
|
(443,617
|
)
|
|
10.05
|
|
|
—
|
|
|
—
|
|
Options outstanding at March 31, 2017 (a)
|
3,527,742
|
|
|
13.34
|
|
|
5.5
|
|
|
—
|
|
Options exercisable at March 31, 2017
|
2,953,556
|
|
|
$
|
11.59
|
|
|
5.1
|
|
|
$
|
5,122
|
|
(a) The stock options outstanding at March 31, 2017 had aggregate intrinsic values of zero as the aggregate exercise price was greater than the aggregate market value.
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
three
months ended
March 31, 2017
. Under the Company's Omnibus Incentive Plan, a portion of these RSUs vest immediately upon grant, and a portion vest annually over the following
three
or
five years
. The Company also has granted certain officers RSUs that vest over either a
three
or
five
year period, with vesting dependent on Banco Santander performance over that time. After the shares subject to the RSUs vest and are settled, they are subject to transfer and sale restrictions 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.
Treasury Stock
The Company had
94,595
shares of treasury stock outstanding, with a cost of
$1,600
, as of
March 31, 2017
and
December 31, 2016
. Prior to the IPO, the Company repurchased
3,154
shares as a result of an employee leaving the Company. Additionally,
91,441
shares were 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
months ended
March 31, 2017
and
2016
is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
Beginning balance, unrealized gains (losses) on cash flow hedges
|
$
|
28,259
|
|
|
$
|
2,125
|
|
Other comprehensive income (loss) before reclassifications
|
9,900
|
|
|
(45,762
|
)
|
Amounts reclassified out of accumulated other comprehensive income (loss) (a)
|
(2,655
|
)
|
|
7,572
|
|
Ending balance, unrealized losses on cash flow hedges
|
$
|
35,504
|
|
|
$
|
(36,065
|
)
|
|
|
(a)
|
Amounts reclassified out of accumulated other comprehensive income (loss) during the
three
months ended
March 31, 2017
and
2016
consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Three Months Ended March 31, 2016
|
Reclassification
|
Amount reclassified
|
|
Income statement line item
|
|
Amount reclassified
|
|
Income statement line item
|
Cash flow hedges:
|
|
|
|
|
|
|
|
Settlements of derivatives
|
$
|
(4,240
|
)
|
|
Interest expense
|
|
$
|
12,082
|
|
|
Interest expense
|
Tax expense (benefit)
|
1,585
|
|
|
|
|
(4,510
|
)
|
|
|
Net of tax
|
$
|
(2,655
|
)
|
|
|
|
$
|
7,572
|
|
|
|
Dividend Restrictions
The Company is restricted from declaring or paying any future dividends, or making any capital distribution, until such time as the FRBB issues a written non-objection to a revised capital plan submitted by SHUSA or the FRBB otherwise issues its written non-objection to the payment of a dividend by the Company. For a more detailed description of these dividend restrictions, refer to the 2016 Annual Report on Form 10-K under Item 1 - Business - Dividend Restrictions.
|
|
16.
|
Investment 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 losses, net was comprised of the following for the
three
months ended
March 31, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31, 2017
|
|
March 31, 2016
|
Gain (loss) on sale of loans and leases
|
$
|
(10,882
|
)
|
|
$
|
1,608
|
|
Lower of cost or market adjustments
|
(66,121
|
)
|
|
(64,213
|
)
|
Other gains, losses and impairments, net
|
604
|
|
|
(6,451
|
)
|
|
$
|
(76,399
|
)
|
|
$
|
(69,056
|
)
|
The lower of cost or market adjustments for the
three
months ended
March 31, 2017
and
2016
included
$116,641
and
$101,347
in customer default activity, respectively, and net favorable adjustments of
$50,520
and
$37,134
, respectively, primarily 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.