SANTANDER CONSUMER USA HOLDINGS INC. This Quarterly Report on Form 10-Q should be read in conjunction with the 2019 Annual Report on Form 10-K and in conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere in this report. Additional information, not part of this filing, about the Company is available on the Company's website at www.santanderconsumerusa.com. The Company's recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, as well as other filings with theSEC , are available free of charge through the Company's website by clicking on the "Investors" page and selecting "SEC Filings." The Company's filings with theSEC and other information may also be accessed at theSEC's website at www.sec.gov.
Background and Overview
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Santander Consumer USA Holdings Inc. was formed in 2013 as a corporation in the
state of Delaware and is the holding company for Santander Consumer USA Inc. , a
full-service, technology-driven consumer finance company focused on vehicle
finance and third-party servicing. The Company is majority-owned (as of June 30,
2020 , approximately 77.7%) by SHUSA, a wholly-owned subsidiary of Santander.
The Company is managed through a single reporting segment, Consumer Finance,
which includes its vehicle financial products and services, including retail
installment contracts, vehicle leases, and Dealer Loans, as well as financial
products and services related to recreational and marine vehicles, and other
consumer finance products.
CCAP continues to be a focal point of the Company's strategy. In 2019, the
Company entered into an Amendment to the Chrysler Agreement with FCA , which
modified the Chrysler Agreement to, among other things, adjust certain
performance metrics, exclusivity commitments and payment provisions. The
Amendment also established an operating framework that was mutually beneficial
for both parties for the remainder of the contract. The Company's average
penetration rate under the Chrysler Agreement for the second quarter of 2020 was
37%, an increase from 36% for the same period in 2019.
The Company has dedicated financing facilities in place for its CCAP business
and has worked strategically and collaboratively with FCA to continue to
strengthen its relationship and create value within the CCAP program. During the
six months ended June 30, 2020 , the Company originated $7.3 billion in CCAP
loans which represented 62% of total retail installment contract originations
(unpaid principal balance), as well as $3.0 billion in CCAP leases.
Additionally, substantially all of the leases originated by the Company during
the six months ended June 30, 2020 were under the Chrysler Agreement.
Economic and Business Environment
Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial
Conditions and Results of Operations - Recent Developments and Other Factors
Affecting The Company's Results of Operations" for additional details on the
impact of the COVID-19 outbreak on Company's current financial and operating
status, as well as its future operational and financial planning.
Additionally, the Company is exposed to geographic customer concentration risk,
which could have an adverse effect on the Company's business, financial
position, results of operations or cash flow. Refer to Note 2 - "Finance
Receivables" to the accompanying condensed consolidated financial statements for
the details on the Company's retail installment contracts by state
concentration.
Regulatory Matters
The U.S. lending industry is highly regulated under various U.S. federal laws,
including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting,
Fair Debt Collection Practices, SCRA, and Unfair, Deceptive, or Abusive Acts or
Practices, Credit CARD, Telephone Consumer Protection, FIRREA, and
Gramm-Leach-Bliley Acts, as well as various state laws. The Company is subject
to inspections, examinations, supervision, and regulation by the Commission, the
CFPB , the FTC , and the DOJ and by regulatory agencies in each state in which the
Company is licensed. In addition, the Company is directly and indirectly,
through its relationship with SHUSA, subject to certain bank regulations,
including oversight by the OCC, the European Central Bank , and the Federal
Reserve , which have the ability to limit certain of the Company's activities,
such as the timing and amount of dividends and certain transactions that the
Company might otherwise desire to enter into, such as merger and acquisition
opportunities, or to impose other limitations on the Company's growth.
Additional legal and regulatory matters affecting the Company's activities are
further discussed in Part I, Item 1A - Risk Factors of the 2019 Annual Report on
Form 10-K and Quarterly Report on Form 10Q for the six months ended June 30,
2020 .
How the Company Assesses its Business Performance
Net income, and the associated return on assets and equity, are the primary metrics by which the Company judges the performance of its business. Accordingly, the Company closely monitors the primary drivers of net income:
•Net financing income - The Company tracks the spread between the interest and
finance charge income earned on assets and the interest expense incurred on
liabilities, and continually monitors the components of its yield and cost of
funds. The Company's effective interest rate on borrowing is driven by various
items including, but not limited to, credit quality of the collateral assigned,
used/unused portion of facilities, and reference rate for the credit spread.
These drivers, as well as external rate trends, including the swap curve, spot
and forward rates are monitored.
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•Net credit losses - The Company performs net credit loss analysis at the
vintage level for retail installment contracts, loans and leases, and at the
pool level for purchased portfolios - credit deteriorated, enabling it to
pinpoint drivers of any unusual or unexpected trends. The Company also monitors
its recovery rates as well as industry-wide rates. Additionally, because
delinquencies are an early indicator of future net credit losses, the Company
analyzes delinquency trends, adjusting for seasonality, to determine if the
Company's loans are performing in line with original estimations. The net credit
loss analysis does not include considerations of the Company's estimated
allowance for credit losses.
•Other income - The Company's flow agreements have resulted in a large portfolio
of assets serviced for others. These assets provide a steady stream of servicing
income and may provide a gain or loss on sale. The Company monitors the size of
the portfolio and average servicing fee rate and gain. Additionally, due to the
classification of the Company's personal lending portfolio as held for sale upon
the decision to exit the personal lending line of business, adjustments to
record this portfolio at the lower of cost or market are included in investment
gains (losses), net, which is a component of other income (losses).
•Operating expenses - The Company assesses its operational efficiency using the
cost-to-managed assets ratio. The Company performs extensive analysis to
determine whether observed fluctuations in operating expense levels indicate a
trend or are the nonrecurring impact of large projects. The operating expense
analysis also includes a loan- and portfolio-level review of origination and
servicing costs to assist the Company in assessing profitability by pool and
vintage.
Because volume and portfolio size determine the magnitude of the impact of each
of the above factors on the Company's earnings, the Company also closely
monitors origination and sales volume along with APR and discounts (including
subvention and net of dealer participation).
Recent Developments and Other Factors Affecting The Company's Results of
Operations
Outbreak of COVID-19
The current outbreak of a novel strain of coronavirus, or COVID-19, has
materially impacted our business, and the continuance of this outbreak or any
future outbreak of any other highly contagious diseases or other public health
emergency, could materially and adversely impact our business, financial
condition, liquidity and results of operations.
Due the unpredictable and rapidly changing nature of this outbreak and the
resulting economic distress, it is not possible to determine with certainty the
ultimate impact on our results of operations or whether other currently
unanticipated consequences of the outbreak are reasonably likely to materially
affect our results of operations; however, certain adverse effects have already
occured or are probable. The following sets forth our expectations of the impact
of COVID-19 on Company's current financial and operating status, as well as its
future operational and financial planning as of the date hereof:
•Impact on workforce: The health and well-being of our colleagues and customers
is a top priority for the Company. The Company has implemented business
continuity plans and has followed guidelines issued by government
authorities regarding social distancing and work-from-home arrangements.
Currently, approximately 95-97% of our
workforce is working remotely. The Company has established a Temporary Emergency
Paid Leave Program that provides employees with up to 120 hours of additional
paid time off to use - either continuously or intermittently, and before
exhausting other paid time off - to assist with dependent care needs related to
COVID-19. Further, the Company provided $250 a week in pay premiums for
frontline customer support workers to help defray additional costs incurred
while coming to work during the outbreak. While our business continuity plans
are place, if significant portions of our or our vendors' workforces are unable
to work effectively as a result of the COVID-19 outbreak including because of
illness, stay-at-home orders, facility closures reductions in services or hours
of operation, or ineffective remote work arrangements, there may be servicing
disruptions, which could result in reduced collection effectiveness or impair
our ability to operate our business and satisfy our obligations under our
third-party servicing agreements. Each of these scenarios could have negative
effects on our business, financial condition and results of operations.
•Impact on customers and loans and lease performance: The COVID-19 outbreak and
the associated economic crisis have led to negative effects on our customers.
Unlike the regional impact of natural disasters, such as hurricanes, the
COVID-19 outbreak is impacting customers nationwide and is expected to have a
materially more significant impact on the performance of our auto loan and auto
lease portfolio than even the most severe historical natural disaster.
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Similar to many other financial institutions, we have taken and will continue to
take measures to mitigate our customers' COVID-19 related economic challenges.
We have experienced a sharp increase in requests for extensions and
modifications related to COVID-19 nationwide and a significant number of such
extensions and modifications have been granted. These customer support programs,
by their nature, are expected to negatively impact our financial performance and
other results of operations in the near term. Our business, financial condition
and results of operations may be materially and adversely affected in the longer
term if the COVID-19 outbreak leads us to continue to conduct such programs for
a significant period of time, if the number of customers experiencing hardship
related directly or indirectly to the outbreak of COVID-19 increases or if our
customer support programs are not effective in mitigating the effects of
COVID-19 on our customers' financial situations. Given the unpredictable nature
of this situation, the nature and extent of such effects cannot be predicted at
this time.
Further, government or regulatory authorities could also enact laws,
regulations, executive orders or other guidance that allow customers to forgo
making scheduled payments for some period of time, require modifications to
receivables (e.g., waiving accrued interest), preclude creditors from exercising
certain rights or taking certain actions with respect to collateral, including
repossession or liquidation of the financed vehicles, or mandate limited
operations or temporary closures of the Company or our vendors as "non-essential
businesses" or otherwise. Such actions by government or regulatory authorities
could have negative effects on our business, financial condition and results of
operations.
•Impact on originations: In many jurisdictions, businesses such as automobile
dealers have been required to temporarily close or restrict their operations.
Further, even for dealerships that have remained open, consumer demand has
deteriorated rapidly. In response, the Company has partnered with FCA to launch
new incentive programs, including, first payment deferred 90 days on select FCA
models and 0% APR for 84 months on select 2019/2020 FCA models. However, if the
economic slowdown caused by the outbreak is sustained, it could result in
further declines in new and used vehicle sales and downward pressure on used
vehicle values, which could materially adversely affect our origination of auto
loans and leases and the performance of our existing loans and leases.
•Impact on Debt and Liquidity: We rely upon four primary sources to fund our
operations, including private financing, warehouse lines of credit, the
asset-backed securitization market, and support from Santander. As international
trade and business activity has slowed and supply chains have been disrupted,
global credit and financial markets have recently experienced, and may continue
to experience, significant disruption and volatility. During the first and
second quarter of 2020, financial markets experienced significant declines and
volatility, and such market conditions may continue and/or precede recessionary
conditions in the U.S. economy. Under these circumstances, we may experience
some or all of the risks related to market volatility and recessionary
conditions described in the Risk Factors section of our Form 10-K. These include
reduced demand for our products and services and reduced access to capital
markets funding. These risks could have significant adverse impacts on our
financial condition, results of operations and cash flows.
Governmental and regulatory authorities have recently implemented fiscal and
monetary policies and initiatives to mitigate the effects of the outbreak on the
economy and individual businesses and households, such as the reduction of the
Federal Reserve's benchmark interest rate to near zero in March 2020 . Further,
the Federal Reserve's Term Asset Backed Securities Loan Facility ("TALF") is
available, if necessary, to support investment in the Company's eligible ABS
bonds. However, the Company does not expect to need to utilize TALF, given
recent tightening in ABS credit spreads, These governmental and regulatory
actions may not be successful in mitigating the adverse economic effects of
COVID-19 and could affect our net interest income and reduce our profitability.
Sustained adverse economic effects from the outbreak may also result in
downgrades in our credit ratings or adversely affect the interest rate
environment. If our access to funding is reduced or if our costs to obtain such
funding significantly increases, our business, financial condition and results
of operations could be materially and adversely affected.
In addition, the Company's ability to make payments on the notes could be
adversely affected if its customers were unable to make timely payments or if
the Company elected to, or was required to, implement forbearance programs in
connection with customers suffering a hardship (including hardships related to
the outbreak of COVID-19).
However, due to the rapidly evolving nature of the COVID-19 outbreak, it is not
possible to predict whether unanticipated consequences of the outbreak are
reasonably likely to materially affect our liquidity and capital resources in
the future.
•Impact on impairment of goodwill, indefinite-lived and long-lived assets: In accordance with accounting policy, the Company has analyzed the impact of COVID-19 on its financial statements, including the potential for impairment.
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The analysis did not support any impairment of these assets, including Goodwill ,
Leased Vehicles and other non-financial assets such as Upfront fee and other
Intangibles.
•Impact on communities: The Company is committed to supporting our communities
impacted by the COVID-19 outbreak and the Company's non-profit foundation has
begun responding to the COVID-19 crisis with $1.3 million in donations to a
select group of organizations addressing community issues.
Volume
The Company's originations of loans and leases, including revolving loans,
average APR, and dealer discount (net of dealer participation) for the six
months ended
Three Months Ended Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
(Dollar amounts in thousands)
Retained Originations
Retail installment contracts $ 5,098,496 $ 3,949,648 $ 8,832,741 $ 7,975,975
Average APR 11.7 % 16.2 % 13.3 % 16.7 %
Average FICO® (a) 657 601 635 597
Discount (0.9) % (0.5) % (0.8) % (0.3) %
Personal loans (b) $ 347,238 $ 343,214 $ 618,073 $ 631,770
Average APR 29.6 % 29.7 % 29.5 % 29.8 %
Leased vehicles $ 986,617 $ 2,520,130 $ 3,007,338 $ 4,483,710
Finance lease $ 1,927 $
4,822
$ 6,434,278 $
6,817,814
Sold Originations Retail installment contracts $ - $ -$ 111,981 $ - Average APR - % - % 4.4 % - % Average FICO® (c) - - 722 - Total Originations Sold $ - $ - 111,981 $ - Total SC Originations 6,434,278 6,817,814 12,575,062 13,099,584 Total originations (excluding SBNA Originations Program)$ 6,434,278 $
6,817,814
(a)Unpaid principal balance excluded from the weighted average FICO score is$586 million and$448 million for the three months endedJune 30, 2020 and 2019, as the borrowers on these loans did not have FICO scores at origination. Of these amounts,$102 million and$141 million , respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is$1.0 billion and$941 million for the six months endedJune 30, 2020 and 2019, as the borrowers on these loans did not have FICO scores at origination. Of these amounts,$241 million and$247 million , respectively, were commercial loans. (b) Included in the total origination volume is$58 million and$51 million for the three months endedJune 30, 2020 and 2019, respectively, and$79 million and$76 million for the six months endedJune 30, 2020 , and 2019, respectively, related to newly opened accounts. (c) Unpaid principal balance excluded from the weighted average FICO score is$9 million for the six months endedJune 30, 2020 , as the borrowers on these loans did not have FICO scores at origination. Total auto originations (excluding SBNA Origination Program) decreased$0.5 billion , or 4.1%, from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 , since the Company has initiated the SBNA originations program as described below. The company's initiatives to improve our pricing as well as dealer and customer experience has increased our competitive position in the market. The Company continues to focus on optimizing the loan quality of its portfolio with an 54 -------------------------------------------------------------------------------- appropriate balance of volume and risk. CCAP volume and penetration rates are influenced by strategies implemented byFCA and the Company, including product mix and incentives. SBNA Originations Program Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail auto loans, primarily fromFCA dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA's behalf. During the three and six months endedJune 30, 2020 and 2019 the Company facilitated the purchase of$1.7 billion $2.8 billion ,$1.9 billion and$3.0 billion of retail installment contacts, respectively.
The Company's originations of retail installment contracts and leases by vehicle
type during the six months ended
Three Months Ended Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
(Dollar amounts in thousands)
Retail installment contracts
Car $ 1,180,348 23.2 % $ 1,396,979 35.4 % $ 2,409,963 26.9 % $ 2,952,093 37.0 %
Truck and utility 3,760,422 73.7 % 2,381,365 60.3 % 6,185,934 69.2 % 4,703,456 59.0 %
Van and other (a) 157,726 3.1 % 171,304 4.3 % 348,825 3.9 % 320,426 4.0 %
$ 5,098,496 100.0 % $ 3,949,648 100.0 % $ 8,944,722 100.0 % $ 7,975,975 100 %
Leased vehicles
Car $ 43,295 4.4 % $ 149,669 5.9 % $ 113,447 3.8 % $ 256,171 5.7 %
Truck and utility 924,064 93.6 % 2,285,002 90.7 % 2,823,632 93.9 % 4,087,758 91.2 %
Van and other (a) 19,258 2.0 % 85,459 3.4 % 70,259 2.3 % 139,781 3.1 %
$ 986,617 100.0 % $ 2,520,130 100.0 % $ 3,007,338 100.0 % $ 4,483,710 100.0 %
Total originations by vehicle
type
Car $ 1,223,643 20.1 % $ 1,546,648 23.9 % $ 2,523,410 21.1 % $ 3,208,264 25.7 %
Truck and utility 4,684,486 77.0 % 4,666,367 72.1 % 9,009,566 75.4 % 8,791,214 70.6 %
Van and other (a) 176,984 2.9 % 256,763 4.0 % 419,084 3.5 % 460,207 3.7 %
$ 6,085,113 100.0 % $ 6,469,778 100.0 % $ 11,952,060 100.0 % $ 12,459,685 100.0 %
(a) Other primarily consists of commercial vehicles.
The Company's portfolio of retail installment contracts held for investment and
leases by vehicle type as of
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June 30, 2020 December 31, 2019
(Dollar amounts in thousands)
Retail installment contracts
Car $ 11,686,018 38.3 % $ 12,286,182 39.9 %
Truck and utility 17,624,763 57.8 % 17,238,406 56.0 %
Van and other (a) 1,181,853 3.9 % 1,251,450 4.1 %
$ 30,492,634 100.0 % $ 30,776,038 100.0 %
Leased vehicles
Car $ 968,395 5.6 % $ 1,237,803 7.1 %
Truck and utility 15,771,263 91.7 % 15,795,594 89.8 %
Van and other (a) 467,016 2.7 % 529,385 3.1 %
$ 17,206,674 100.0 % $ 17,562,782 100.0 %
Total by vehicle type
Car $ 12,654,413 26.5 % $ 13,523,985 28.0 %
Truck and utility 33,396,026 70.0 % 33,034,000 68.3 %
Van and other (a) 1,648,869 3.5 % 1,780,835 3.7 %
$ 47,699,308 100.0 % $ 48,338,820 100.0 %
(a) Other primarily consists of commercial vehicles.
The Company's asset sales for the three and six months endedJune 30, 2020 and 2019 were as follows: Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
(Dollar amounts in thousands)
Retail installment contracts$ 512,286 $ -$ 512,286 $ - Average APR 6.4 % - % 6.4 % - % Average FICO® 691 - 691 - The unpaid principal balance, average APR, and remaining unaccreted net discount of the Company's held for investment portfolio as ofJune 30, 2020 andDecember 31, 2019 are as follows: June 30, 2020 December 31, 2019 (Dollar amounts in thousands) Retail installment contracts$ 30,492,634 $ 30,776,038 Average APR 15.4 % 16.1 % Discount 0.03 % 0.3 % Receivables from dealers$ 3,675 $ 12,668 Average APR 3.9 % 4.0 % Leased vehicles$ 17,206,674 $ 17,562,782 Finance leases$ 26,655 $ 27,584 The Company records interest income from retail installment contracts and receivables from dealers in accordance with the terms of the loans, generally discontinuing and reversing accrued income once a loan becomes more than 60 days past due, except in the case of revolving personal loans, for which the Company continues to accrue interest until charge-off, in the month in which the loan becomes 180 days past due, and receivables from dealers, for which the Company continues to accrue interest until the loan becomes more than 90 days past due. The Company generally does not acquire receivables from dealers at a discount. The Company amortizes discounts, subvention payments from manufacturers, and origination costs as adjustments to income from retail installment contracts using the effective yield method. The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit 56 -------------------------------------------------------------------------------- quality, with higher credit quality loans generally experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience, and is used as an input in the calculation of the constant effective yield. Our estimated weighted average prepayment rates ranged from 5.0% to 11.0% as ofJune 30, 2020 , and 5.3% to 11.1% as ofJune 30, 2019 . The Company amortizes the discount, if applicable, on revolving personal loans straight-line over the estimated period over which the receivables are expected to be outstanding. The Company classifies most of its vehicle leases as operating leases. The Company records the net capitalized cost of each lease as an asset, which is depreciated straight-line over the contractual term of the lease to the expected residual value. The Company records lease payments due from customers as income until and unless a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued and reversed. The Company resumes and reinstates the accrual if a delinquent account subsequently becomes 60 days or less past due. The Company amortizes subvention payments from the manufacturer, down payments from the customer, and initial direct costs incurred in connection with originating the lease straight-line over the contractual term of the lease. Historically, the Company's primary means of acquiring retail installment contracts has been through individual acquisitions immediately after origination by a dealer. The Company also periodically purchases pools of receivables and had significant volumes of these purchases during the credit crisis. While the Company continues to pursue such opportunities when available, during the six months endedJune 30, 2020 , the Company did not acquire any vehicle loan portfolios for which there have been more than insignificant deterioration in credit quality since origination. In addition, during the six months endedMarch 2019 , the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected. However, during the three months endedJune 30, 2020 and 2019 the Company did recognize certain retail installment contracts with an unpaid principal balance of$0 and$74,718 , respectively, and for the six months endedJune 30, 2020 and 2019 the Company did recognize certain retail installment contracts with an unpaid principal balance of$76,878 and$74,718 , respectively, held by non-consolidated securitization Trusts under optional clean-up calls. Following the initial recognition of these loans at fair value, the performing loans in the portfolio will be carried at amortized cost, net of ACL. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of re-recognition date), for which it was probable that not all contractually required payments would be collected. For the Company's existing purchased receivables portfolios - credit deteriorated, which were acquired at a discount partially attributable to credit deterioration since origination, the Company estimates the expected yield on each portfolio at acquisition and records monthly accretion income based on this expectation. The Company periodically re-evaluates performance expectations and may increase the accretion rate if a pool is performing better than expected. If a pool is performing worse than expected, the Company is required to continue to record accretion income at the previously established rate and to record impairment to account for the worsening performance. 57 --------------------------------------------------------------------------------
Selected Financial Data
Three Months Ended Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Income Statement Data (Dollar
amounts in thousands, except per share data)
Interest on retail installment contracts
2,325,808
Interest on purchased receivables portfolios -
credit deteriorated 727 939 1,515 2,352
Interest on receivables from dealers 11 51 65 173
Interest on personal loans 83,809 90,323 177,350 186,345
Interest on finance receivables and loans 1,236,600 1,261,098 2,510,419 2,514,678
Net leased vehicle income 126,688 231,794 321,755 437,335
Other finance and interest income 2,657 11,437 10,208 21,684
Interest expense 308,982 330,039 637,816 664,421
Net finance and other interest income 1,056,963 1,174,290 2,204,566 2,309,276
Credit loss expense 861,896 430,676 1,769,783 981,555
Profit sharing 11,530 13,345 25,825 20,313
Other income (46,393) 30,411 4,414 81,496
Operating expenses 266,679 280,649 549,352 571,606
Income before tax expense (129,535) 480,031 (135,980) 817,298
Income tax (benefit) / expense (32,857) 111,764 (35,315) 201,528
Net income $ (96,678) $ 368,267 $ (100,665) $ 615,770
Share Data
Weighted-average common shares outstanding
Basic 319,773,636 351,106,197 326,899,844 351,309,700
Diluted 319,878,145 351,556,349 327,137,104 351,825,554
Earnings per share
Basic $ (0.30) $ 1.05 $ (0.31) $ 1.75
Diluted $ (0.30) $ 1.05 $ (0.31) $ 1.75
Dividend paid per share $ 0.22 $ 0.20 $ 0.44 $ 0.40
Balance Sheet Data
Finance receivables held for investment, net
2,445,599 1,249,101 2,445,599 1,249,101
Goodwill and intangible assets 127,215 108,173 127,215 108,173
Total assets 47,268,695 46,416,093 47,268,695 46,416,093
Total borrowings 40,636,769 36,765,505 40,636,769 36,765,505
Total liabilities 42,373,230 39,078,832 42,373,230 39,078,832
Total equity 4,895,465 7,337,261 4,895,465 7,337,261
Allowance for credit losses 5,859,954 3,122,259 5,859,954 3,122,259
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Three Months Ended Six Months Ended
June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019
Other Information (Dollar amounts in thousands)
Charge-offs, net of recoveries, on retail
installment contracts $ 461,014 $
462,427
Total charge-offs, net of recoveries 461,925 464,277 1,055,524 1,079,892
End of period delinquent amortized cost over
59 days, retail installment contracts held for
investment 743,693 1,367,310 743,693 1,367,310
End of period personal loans delinquent
principal over 59 days, held for sale 127,504 167,033 127,504 167,033
End of period delinquent amortized cost over
59 days, loans held for investment 744,170 1,368,427 744,170 1,368,427
End of period assets covered by allowance for
credit losses 30,522,963 29,007,585 30,522,963 29,007,585
End of period gross retail installment
contracts held for investment 30,492,634 28,971,311 30,492,634 28,971,311
End of period gross retail installment
contracts held for sale 1,718,244 321,503 1,718,244 321,503
End of period gross personal loans held for
sale 1,283,183 1,364,956 1,283,183 1,364,956
End of period gross finance receivables and
loans held for investment 30,496,308 29,009,846 30,496,308 29,009,846
End of period gross finance receivables,
loans, and leases held for investment 47,729,637 45,557,709 47,729,637 45,557,709
Average gross retail installment contracts
held for investment 30,493,604 29,017,122 30,586,535 28,816,732
Average gross retail installment contracts
held for investment and held for sale 31,193,215 29,070,738 31,017,842 28,834,640
Average gross retail installment contracts
held for sale 1,363,876 321,503 1,363,876 321,503
Average gross purchased receivables
portfolios- credit deteriorated 18,713 26,759 19,637 28,020
Average gross receivables from dealers 8,085 13,088 10,026 13,368
Average gross personal loans held for sale 1,307,609 1,375,306 1,363,023 1,424,717
Average gross finance leases 27,356 21,889 27,581 20,994
Average gross finance receivables and loans 32,554,978 30,507,780 32,438,109 30,321,739
Average gross operating leases 17,492,255 16,043,654 17,584,849 15,752,705
Average gross finance receivables, loans, and
leases 50,047,233 46,551,434 50,022,958 46,074,444
Average managed assets 61,001,767 55,545,503 60,652,091 55,043,583
Average total assets 46,876,726 45,700,887 47,308,997 45,101,873
Average debt 40,113,885 36,152,602 39,858,355 35,715,392
Average total equity 5,033,773 7,273,470 5,573,544 7,163,738
Ratios
Yield on retail installment contracts 14.8 % 16.1 % 15.0 % 16.1 %
Yield on leased vehicles 2.9 % 5.8 % 3.7 % 5.6 %
Yield on personal loans held for sale (1) 25.6 % 26.3 % 26.0 % 26.2 %
Yield on earning assets (2) 10.9 % 12.9 % 11.4 % 12.9 %
Cost of debt (3) 3.1 % 3.7 % 3.2 % 3.7 %
Net interest margin (4) 8.4 % 10.1 % 8.8 % 10.0 %
Expense ratio (5) 1.7 % 2.0 % 1.8 % 2.1 %
Return on average assets (6) (0.8) % 3.2 % (0.4) % 2.7 %
Return on average equity (7) (7.7) % 20.3 % (3.6) % 17.2 %
Net charge-off ratio on retail installment
contracts (8) 6.0 % 6.4 % 6.9 % 7.5 %
Net charge-off ratio (8) 6.0 % 6.4 % 6.9 % 7.5 %
Delinquency ratio on retail installment
contracts held for investment, end of period
(9) 2.4 % 4.7 % 2.4 % 4.7 %
Delinquency ratio on loans held for
investment, end of period (9) 2.4 % 4.7 % 2.4 % 4.7 %
Equity to assets ratio (10) 10.4 % 15.8 % 10.4 % 15.8 %
Tangible common equity to tangible assets (10) 10.1 % 15.6 % 10.1 % 15.6 %
Common stock dividend payout ratio (11) * 19.1 % * 22.8 %
Allowance ratio (12) 19.2 % 10.8 % 19.2 % 10.8 %
Common Equity Tier 1 capital ratio (13) 13.4 % 15.7 % 13.4 % 15.7 %
(1)Includes finance and other interest income; excludes fees.
(2)"Yield on earning assets" is defined as the ratio of annualized Total finance
and other interest income, net of Leased vehicle expense, to Average gross
finance receivables, loans and leases.
(3)"Cost of debt" is defined as the ratio of annualized Interest expense to
Average debt.
(4)"Net interest margin" is defined as the ratio of annualized Net finance and
other interest income to Average gross finance receivables, loans and leases.
(5)"Expense ratio" is defined as the ratio of annualized Operating expenses to
Average managed assets.
(6)"Return on average assets" is defined as the ratio of annualized Net income
to Average total assets.
(7)"Return on average equity" is defined as the ratio of annualized Net income
to Average total equity.
(8)"Net charge-off ratio" is defined as the ratio of annualized Charge-offs on
an amortized cost basis, net of recoveries, to average unpaid principal balance
of the respective held-for-investment portfolio.
59
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(9)"Delinquency ratio" is defined as the ratio of End of period Delinquent
principal over 59 days to End of period gross balance of the respective
portfolio, excludes finance leases.
(10)"Tangible common equity to tangible assets" is defined as the ratio of Total
equity, excluding Goodwill and intangible assets, to Total assets, excluding
Goodwill and intangible assets. Management believes this non-GAAP financial
measure is useful to assess and monitor the adequacy of the Company's
capitalization. This additional information is not meant to be considered in
isolation or as a substitute for the numbers prepared in accordance with GAAP
and may not be comparable to similarly-titled measures used by other financial
institutions. A reconciliation from GAAP to this non-GAAP measure for the
periods ended June 30, 2020 and 2019 is as follows:
June 30, 2020 June 30, 2019
(Dollar amounts in thousands)
Total equity $ 4,895,465 $ 7,337,261
Deduct: Goodwill and intangibles 127,215
108,173
Tangible common equity $ 4,768,250 $ 7,229,088
Total assets $ 47,268,695 $ 46,416,093
Deduct: Goodwill and intangibles 127,215
108,173
Tangible assets $ 47,141,480 $ 46,307,920
Equity to assets ratio 10.4 % 15.8 %
Tangible common equity to tangible assets 10.1 % 15.6 %
(11)"Common stock dividend payout ratio" is defined as the ratio of Dividends
declared per share of common stock to Earnings per share attributable to the
Company's shareholders. The Common stock dividend payout ratio for the three and
six months ended June 30, 2020 has not been disclosed since the earnings per
share for the three and six months ended June 30, 2020 was a negative number.
(12)"Allowance ratio" is defined as the ratio of Allowance for credit losses,
which excludes impairment on purchased receivables portfolios-credit
deteriorated/impaired, to End of period assets covered by allowance for credit
losses.
(13)"Common Equity Tier 1 Capital ratio" is defined as the ratio of Total Common
Equity Tier 1 Capital (CET1) to Total risk-weighted assets.
June 30, 2020 June 30, 2019
Total equity $ 4,895,465 $ 7,337,261
Add: Adjustment due to CECL capital relief (c) 1,769,430 -
Deduct:
154,943 152,264
Deduct: Accumulated other comprehensive income (loss), net (63,705) (21,568)
Tier 1 common capital $ 6,573,657 $ 7,206,565
Risk weighted assets (a)(c) $ 48,997,902 $ 45,849,574
Common Equity Tier 1 capital ratio (b)(c) 13.4 % 15.7 %
(a)Under the banking agencies' risk-based capital guidelines, assets and credit
equivalent amounts of derivatives and off-balance sheet exposures are assigned
to broad risk categories. The aggregate dollar amount in each risk category is
multiplied by the associated risk weight of the category. The resulting weighted
values are added together with the measure for market risk, resulting in the
Company's total Risk weighted assets.
(b)CET1 is calculated under Basel III regulations required since January 1,
2015 . The fully phased-in capital ratios are non-GAAP financial measures.
(c)As described in our 2019 annual report on Form 10-K, on January 1, 2020 , we
adopted ASU 2016-13, Financial Instruments -Credit Losses ("CECL"), which upon
adoption resulted in a reduction to our opening retained earnings balance, net
of income tax, and increase to the allowance for credit losses of approximately
$2 billion . As also described in our 2019 10-K, the U.S. banking agencies in
December 2018 had approved a final rule to address the impact of CECL on
regulatory capital by allowing banking organizations, including the Company, the
option to phase in the day-one impact of CECL until the first quarter of 2023.
In March 2020 , the U.S. banking agencies issued an interim final rule that
provides banking organizations with an alternative option to delay for two years
an estimate of CECL's effect on regulatory capital, relative to the incurred
loss methodology's effect on regulatory capital, followed by a three-year
transition period. The Company is electing this alternative option instead of
the one described in the December 2018 rule.
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Three and Six Months Ended June 30, 2020 Compared to Three and Six Months Ended
June 30, 2019
Interest on Finance Receivables and Loans
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Income from retail installment
contracts $ 1,152,053 $ 1,169,785 $ (17,732) (2) % $ 2,331,489 $ 2,325,808 $ 5,681 - %
Income from purchased
receivables portfolios - credit
deteriorated 727 939 (212) (23) % 1,515 2,352 (837) (36) %
Income from receivables from
dealers 11 51 (40) (78) % 65 173 (108) (62) %
Income from personal loans 83,809 90,323 (6,514) (7) % 177,350 186,345 (8,995) (5) %
Total interest on finance
receivables and loans $ 1,236,600 $ 1,261,098 $ (24,498) (2) % $ 2,510,419 $ 2,514,678 $ (4,259) (0.2) %
Income from retail installment contracts remained flat from the second quarter
of 2019 to the second quarter of 2020 and from the six months ended June 30,
2019 to the six months ended June 30, 2020 .
Income from personal loans decreased $7 million , or 7%, from the second quarter
of 2019 to the second quarter of 2020, and decreased $9 million or 5%, from the
six months ended June 30, 2019 to the six months ended June 30, 2020 primarily
due to 5% and 4% decrease in average outstanding balance of company's portfolio,
respectively.
Leased Vehicle Income and Expense
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Leased vehicle income
9 % $ 1,485,528 $ 1,325,796 $ 159,732 12 %
Leased vehicle expense 610,861 444,442 166,419 37 % 1,163,773 888,461 275,312 31 %
Leased vehicle income, net $ 126,688 $ 231,794 $ (105,106) (45) % $ 321,755 $ 437,335 $ (115,580) (26) %
Leased vehicle income, net decreased in the three and six months ended June 30,
2020 , when compared to the same periods in 2019, due to depreciation on a larger
lease portfolio and a decrease in liquidated units. Through the Chrysler
Agreement, the Company receives manufacturer incentives on new leases originated
under the program in the form of lease subvention payments, which are amortized
over the term of the lease and reduce depreciation expense within leased vehicle
expense.
Interest Expense
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Interest expense on notes
payable $ 300,165 $ 336,813 $ (36,648) (11) % $ 618,879 $ 680,125 $ (61,246) (9) %
Interest expense on
derivatives 8,817 (6,774) 15,591 (230) % 18,937 (15,704) 34,641 (221) %Total interest expense$ 308,982 $ 330,039 $ (21,057) (6) %$ 637,816 $ 664,421 $ (26,605) (4) % Total Interest expense decreased$21 million , or 6%, from the second quarter of 2019 to the second quarter of 2020, and decreased$27 million or 4% from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 , primarily due to lower interest rate environment partially offset by impact of declined forward curves on cash flow hedges. 61 --------------------------------------------------------------------------------
Credit Loss Expense
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Credit loss expense $ 861,896 $ 430,676 $ 431,220 100 % $ 1,769,783 $ 981,555 $ 788,228 80 %
Credit loss expense increased $431 million or 100%, from the second quarter of
2019 to the second quarter of 2020 and increased $788 million , or 80% from the
six months ended June 30, 2019 to the six months ended June 30, 2020 . The change
is primarily driven by the adoption of the CECL standard in 2020, which replaced
the incurred loss impairment framework with one that reflects expected credit
losses over the full expected life of financial assets. In addition, the Company
added a significant amount of additional reserve to address credit risk
associated with the COVID-19 outbreak during first and second quarter of 2020.
Profit Sharing
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Profit sharing $ 11,530 $ 13,345 $ (1,815) (14) % $ 25,825 $ 20,313 $ 5,512 27 %
Profit sharing expense consists of revenue sharing related to the Chrysler
Agreement and profit sharing on personal loans originated pursuant to the
agreements with Bluestem. Profit sharing expense decreased from the second
quarter of 2019 to the second quarter of 2020, and a net increase from the six
months ended June 30, 2019 to the six months ended June 30, 2020 primarily due
to increase in the lease portfolio during the first quarter of 2020, offset by
the decline in lease portfolio related to COVID 19 in the second quarter.
Other Income
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Investment losses, net $ (147,582) $ (84,787) $ (62,795) 74 % $ (211,008) $ (151,884) $ (59,124) 39 %
Servicing fee income 19,120 25,002 (5,882) (24) % 38,223 48,808 (10,585) (22) %
Fees, commissions, and other 82,069 90,196 (8,127) (9) % 177,199 184,572 (7,373) (4) %
Total other income $ (46,393) $ 30,411 $ (76,804) (253) % $ 4,414 $ 81,496 $ (77,082) (95) %
Average serviced for others
portfolio $ 10,947,550 $ 8,996,182 $ 1,951,368 22 % $ 10,624,365 $ 8,970,346 $ 1,654,019 18 %
Investment losses, net, decreased $59 million from the six months ended June 30,
2019 to the six months ended June 30, 2020 , primarily due to the reduction in
carrying value of the held for sale personal lending portfolio and the loss on
asset sales, offset by lower personal lending balances and losses in 2020.
Servicing fee income decreased $6 million from the second quarter of 2019 to the
second quarter of 2020, and decreased $11 million from the six months ended June
30, 2019 to the six months ended June 30, 2020 due to the lower average balances
for serviced portfolio that had higher servicing fee rates. The Company records
servicing fee income on loans that it services but does not own and does not
report on its balance sheet. The serviced for others portfolio as of June 30,
2020 and 2019 was as follows:
62
--------------------------------------------------------------------------------June 30, 2020 2019 (Dollar amounts in thousands)
SBNA and Santander retail installment contracts
131 163
Total serviced for related parties 9,488,966 6,854,009 CCAP securitizations 127,108 369,113 SCART securitizations 484,413 - Other third parties 1,110,728 2,059,186 Total serviced for third parties 1,722,249
2,428,299
Total serviced for others portfolio$ 11,211,215 $
9,282,308
Fees, commissions, and other, primarily includes late fees, miscellaneous, and other income. This income remained flat from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 . Total Operating Expenses Three Months Ended Six Months EndedJune 30 , Increase (Decrease)June 30 , Increase (Decrease) 2020 2019 Amount Percent 2020 2019 Amount Percent (Dollar amounts in thousands)
Compensation expense$ 127,643 $ 122,678 $ 4,965 4 %$ 260,969 $ 250,572 $ 10,397 4 % Repossession expense 22,289 69,699 (47,410) (68) % 79,951 140,559 (60,608) (43) % Other operating costs 116,747 88,272 28,475 32 % 208,432 180,475 27,957 15 % Total operating expenses$ 266,679 $ 280,649 $ (13,970) (5) %$ 549,352 $ 571,606 $ (22,254) (4) % Compensation expenses slightly increased three and six months endedJune 30, 2020 compared to the same period in 2019 due to salary adjustments. Repossession expense decreased three and six months endedJune 30, 2020 compared to the same period in 2019, primarily due to the lower volume of involuntary repossessions nationwide as a result of the COVID-19 outbreak. Other operating costs increased three and six months endedJune 30, 2020 compared to the same periods of 2019, primarily due to ancillary product expenses and computer hardware and software expenses. Income Tax Expense Three Months Ended Six Months EndedJune 30 , Increase (Decrease)June 30 , Increase (Decrease) 2020 2019 Amount Percent 2020 2019 Amount Percent (Dollar amounts in thousands)
Income tax expense
(129) % $ (35,315) $ 201,528 $ (236,843) (118) %
Income before income taxes (129,535) 480,031 (609,566) (127) % (135,980) 817,298 (953,278) (117) %
Effective tax rate 25.4 % 23.3 % 26.0 % 24.7 %
The effective tax rate increased from 24.7% for the six months ended June 30,
2019 to 26.0% for the six months ended June 30, 2020 , primarily due to the
impact of electric vehicle tax credits reducing tax expense recorded on earnings
in the prior year versus increasing tax benefit recorded on a loss in the
current year.
Other Comprehensive Income (Loss)
Three Months Ended Six Months Ended
June 30 , Increase (Decrease) June 30 , Increase (Decrease)
2020 2019 Amount Percent 2020 2019 Amount Percent
(Dollar amounts in thousands)
Change in unrealized gains (losses)
on cash flow hedges and
available-for-sale securities, net
of tax $ (50) $ (33,506) $ 33,456 (100) % $ (37,012) $ (54,083) $ 17,071 (32) %
63-------------------------------------------------------------------------------- The change in unrealized gains (losses) for the three and six months endedJune 30, 2020 as compared to three and six months endedJune 30, 2019 , was primarily driven by, as shown in Note 9 "Derivative Financial Instruments", increase in cash flow hedge portfolio related to mark to mark valuation. Credit Quality Loans and Other Finance Receivables Allowance for Credit losses Non-prime loans comprise 79% of the Company's portfolio as ofJune 30, 2020 . The Company records an allowance for credit loss at a level considered adequate to cover lifetime expected credit losses in the Company's retail installment contracts and other loans and receivables held for investment, based upon a holistic assessment including both quantitative and qualitative considerations. Refer to Note 2 - "Finance Receivables" and Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the Company's held for investment portfolio of retail installment contracts and receivables from dealers, as ofJune 30, 2020 andDecember 31, 2019 . Credit risk profile A summary of the credit risk profile of the Company's retail installment contracts held for investment, by FICO® score, number of trade lines, and length of credit history, each as determined at origination, as ofJune 30, 2020 andDecember 31, 2019 was as follows (dollar amounts in billions, totals may not foot due to rounding): June 30, 2020Trade Lines 1 2 3 4+ Total FICO Months History $ % $ % $ % $ % $ % No-FICO (a) <36$2.9 97 %$0.1 3 %$0.0 - %$0.0 - %$3.0 10 % 36+ 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 3 % <540 <36 0.1 25 % 0.1 25 % 0.1 25 % 0.1 25 % 0.4 1 % 36+ 0.1 2 % 0.2 4 % 0.2 4 % 4.3 90 % 4.8 16 % 540-599 <36 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 3 % 36+ 0.1 1 % 0.2 2 % 0.3 3 % 8.5 93 % 9.1 29 % 600-639 <36 0.4 44 % 0.2 22 % 0.1 11 % 0.2 22 % 0.9 3 % 36+ 0.1 2 % 0.1 2 % 0.1 2 % 4.7 94 % 5.0 16 % >640 <36 1.1 69 % 0.2 13 % 0.1 6 % 0.2 13 % 1.6 5 % 36+ 0.1 2 % 0.1 2 % 0.1 2 % 3.9 93 % 4.2 14 % Total (c)$5.5 18 %$1.6 5 %$1.2 4 %$22.3 73 %$30.6 100 % December 31, 2019 (b) Trade Lines 1 2 3 4+ Total FICO Months History $ % $ % $ % $ % $ % No-FICO (a) <36$ 2.8 97 %$ 0.1 3 %$ 0.0 $ 0.0 $ 0.0 $ 0.0 $ 2.9 9 % 36+ 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 3 % <540 <36 0.1 25 % 0.1 25 % 0.1 25 % 0.1 25 % 0.4 1 % 36+ 0.1 2 % 0.2 4 % 0.2 4 % 4.4 90 % 4.9 16 % 540-599 <36 0.3 43 % 0.2 29 % 0.1 14 % 0.1 14 % 0.7 2 % 36+ 0.2 2 % 0.3 3 % 0.3 3 % 8.3 91 % 9.1 30 % 600-639 <36 0.3 43 % 0.2 29 % 0.1 14 % 0.1 14 % 0.7 2 % 36+ 0.1 2 % 0.1 2 % 0.2 4 % 4.7 92 % 5.1 17 % >640 <36 0.5 45 % 0.1 9 % 0.1 9 % 0.4 36 % 1.1 4 % 36+ 0.1 2 % 0.1 2 % 0.1 2 % 4.7 94 % 5.0 16 % Total$ 4.8 16 %$ 1.6 5 %$ 1.3 4 %$ 23.0 75 %$ 30.8 100 %
(a) Includes commercial loans
(b) The information as of
64
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(c)The amount of accrued interest excluded from the disclosed amortized cost as
of June 30, 2020 is $447 million .
Delinquencies
The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.
In each case, the period of delinquency is based on the number of days payments are contractually past due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, the Company's delinquencies have been highest in the period from November through January due to consumers' holiday spending. In the current quarter, delinquency rates have been positively impacted (lower) due to the historic volume of deferrals granted to borrowers impacted by COVID-19. Refer to Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the retail installment contracts held for investment that were placed on nonaccrual status, as ofJune 30, 2020 andDecember 31, 2019 . Credit Loss Experience The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the six months endedJune 30, 2020 and 2019. Six Months Ended June 30, 2020 2019 (Dollar amounts in thousands) Principal outstanding at period end$ 30,492,634 $ 28,971,311 Average principal outstanding during the period$ 30,493,604 $ 28,816,732 Number of receivables outstanding at period end 1,916,589 1,824,968 Average number of receivables outstanding during the period 1,867,332 1,810,734 Number of repossessions (a) 82,364 144,957
Number of repossessions as a percent of average number of receivables outstanding
8.8 % 16.0 %
Net losses $ 1,054,060 $ 1,077,631
Net losses as a percent of average principal amount outstanding 6.9 % 7.5 %
(a) Repossessions are net of redemptions. The number of repossessions includes
repossessions from the outstanding portfolio and from accounts already charged
off. The Company has recently temporarily suspended involuntary repossession
activities nationwide as a result of the COVID-19 outbreak.
There were no charge-offs on the Company's receivables from dealers for the
three and six months ended June 30, 2020 and 2019. Net charge-offs on the
finance lease receivables portfolio, totaled $1,517 and $347 for the six months
ended June 30, 2020 and 2019, respectively.
Deferrals and Troubled Debt Restructurings
In accordance with the Company's policies and guidelines, the Company may offer
extensions (deferrals) to consumers on its retail installment contracts, whereby
the consumer is allowed to move a maximum of three payments per event to the end
of the loan. The Company's policies and guidelines limit the frequency of each
new deferral that may be granted to one deferral every six months, regardless of
the length of any prior deferral. The maximum number of lifetime months extended
for all automobile retail installment contracts was eight, while some marine and
recreational vehicle contracts had a maximum of twelve months extended to
reflect their longer term. Additionally, the Company generally limits the
granting of deferrals on new accounts until a requisite number of months have
passed since origination. During the deferral period, the Company continues to
accrue and collect interest on the loan in accordance with the terms of the
deferral agreement.
However, in March 2020 , the Company began actively working with its borrowers
impacted by COVID-19 and provided loan modification programs to mitigate the
adverse effects of COVID-19. These programs revised the practices noted above by
1) increasing the maximum number of extensions from eight to twelve, 2) allowing
more than one deferral every six months and 3) removing the requirement that a
requisite number of months have passed since origination.
The predominant program offering is a two-month deferral of payments to the end
of the loan term and waiver of late charges. We experienced a sharp increase in
requests for extensions related to COVID-19 nationwide and over 730,000 loan
extensions have been granted since the implementation of the program in March
2020 . As of June 30, 2020 , approximately one third (or approximately $11 billion
in balances) of our customers have received a COVID-19 deferral.
65
--------------------------------------------------------------------------------The following is a summary of deferrals (amortized cost) on the Company's retail installment contracts held for investment as of the dates indicated:
June 30, 2020 December 31, 2019 (a)
(Dollar amounts in thousands)
Never deferred $ 17,429,649 57.1 % $ 23,830,368 77.3 %
Deferred once 6,895,969 22.5 % 3,499,477 11.4 %
Deferred twice 3,308,443 10.8 % 1,463,503 4.8 %
Deferred 3 - 4 times 2,234,482 7.3 % 1,867,546 6.1 %
Deferred greater than 4 times 715,928 2.3 % 115,144 0.4 %
Total (b) $ 30,584,471 $ 30,776,038
(a) The information as of December 31, 2019 is based on UPB. Difference between
amortized cost and UPB was not material.
(b) The amount of accrued interest excluded from the disclosed amortized cost as
of June 30, 2020 is $447 million .
The historic volume of deferrals granted in response to COVID-19 impacts has
caused the percentage of balances that have never been deferred to decrease
significantly year over year, and the percentage of balances deferred greater
than four times to increase dramatically.
At the time a deferral is granted, all delinquent amounts may be deferred or
paid. This may result in the classification of the loan as current and therefore
not considered a delinquent account. However, there are other instances when a
deferral is granted but the loan is not brought completely current, such as when
the account days past due is greater than the deferment period granted. Such
accounts are aged based on the timely payment of future installments in the same
manner as any other account. Historically, the majority of deferrals are
approved for borrowers who are either 31-60 or 61-90 days delinquent and these
borrowers are typically reported as current after deferral. If a customer
receives two or more deferrals over the life of the loan, the loan would
generally advance to a TDR designation.
However, in March 2020 , the federal bank regulatory agencies issued an
"Interagency Statement on Loan Modifications and Reporting for Financial
Institutions Working with Customers Affected by the Coronavirus." This guidance
encourages financial institutions to work prudently with borrowers that may be
unable to meet their contractual obligations because of the effects of COVID-19
and concludes that short-term modifications (e.g. six months) made on a good
faith basis to borrowers who were impacted by COVID-19 and who were less than 30
days past due as of the implementation date of a relief program are not TDRs.
The Company applied this guidance to deferrals executed in response to COVID-19
and did not designate borrowers who were less than 30 days past due at the time
of the COVID-19 extension as TDR's, even if they would have otherwise qualified.
This guidance (or exception) prevented approximately $3 billion in retail
installment contract balances from being TDR designated.
The Company evaluates the results of deferral strategies based upon the amount
of cash installments that are collected on accounts after they have been
deferred versus the extent to which the collateral underlying the deferred
accounts has depreciated over the same period of time. Based on this evaluation,
the Company believes that payment deferrals granted according to its policies
and guidelines are an effective portfolio management technique and result in
higher ultimate cash collections from the portfolio.
Changes in deferral levels do not have a direct impact on the ultimate amount of
consumer finance receivables charged off. However, the timing of a charge-off
may be affected if the previously deferred account ultimately results in a
charge-off. To the extent that deferrals impact the ultimate timing of when an
account is charged off, historical charge-off ratios, expected life of the loan
and cash flow forecasts for loans classified as TDRs used in the determination
of the adequacy of the Company's ACL are also impacted.
The Company also may agree, or be required by operation of law or by a
bankruptcy court, to grant a modification involving one or a combination of the
following: a reduction in interest rate, a reduction in loan principal balance,
a temporary reduction of monthly payment, or an extension of the maturity date.
The servicer of the Company's revolving personal loans also may grant
modifications in the form of principal or interest rate reductions or payment
plans. Similar to deferrals, the Company believes modifications are an effective
portfolio management technique. Not all modifications are classified as TDRs as
the loan may not meet the scope of the applicable guidance or the modification
may have been granted for a reason other than the borrower's financial
difficulties.
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A loan that has been classified as a TDR remains so until the loan is liquidated
through payoff or charge-off. TDRs are generally placed on nonaccrual status
when the account becomes past due more than 60 days. For loans on nonaccrual
status, interest income is recognized on a cash basis and the accrual of
interest is resumed and reinstated if a delinquent account subsequently becomes
60 days or less past due.
The following is a summary of the amortized cost (including accrued interest)
balance as of June 30, 2020 and December 31, 2019 of loans that have received
these modifications and concessions;
June 30, 2020 December 31, 2019 (a)
Retail Installment Contracts
(Dollar amounts in thousands)
Temporary reduction of monthly payment (b)
1,168,358 Bankruptcy-related accounts 30,403 41,756 Extension of maturity date 36,689 35,238 Interest rate reduction 71,895 61,870 Max buy rate and fair lending (c) 6,724,559 6,069,509 Other (d) 313,623 240,553 Total modified loans$ 8,016,923 $ 7,617,284 (a) The table includes balances based on UPB. Difference between amortized cost and UPB was not material. (b) Reduces a customer's payment for a temporary time period (no more than six months) (c) Max buy rate modifications comprises of loans modified by the Company to adjust the interest rate quoted in a dealer-arranged financing. The Company reassesses the contracted APR when changes in the deal structure are made (e.g., higher down payment and lower vehicle price). If any of the changes result in a lower APR, the contracted rate is reduced. Substantially all deal structure changes occur within seven days of the date the contract is signed. These deal structure changes are made primarily to give the consumer the benefit of a lower rate due to an improved contracted deal structure compared to the deal structure that was approved during the underwriting process.Fair Lending modifications comprises of loans modified by the Company related to possible "disparate impact" credit discrimination in indirect vehicle finance. These modifications are not considered a TDR event because they do not relate to a concession provided to a customer experiencing financial difficulty. (d) Includes various other types of modifications and concessions, such as hardship modifications that are considered a TDR event. Refer to Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the Company's amortized cost (including accrued interest) in TDRs and a summary of delinquent TDRs, as ofJune 30, 2020 andDecember 31, 2019 . The following table shows the components of the changes in the amortized cost (including accrued interest) in retail installment contract TDRs (excluding collateral-dependent bankruptcy TDRs) for the three and six months endedJune 30, 2020 and 2019: Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Balance - beginning of period$ 3,436,753 $ 4,891,375 $ 3,828,892 $ 5,365,477 New TDRs 896,477 293,079 1,082,244 624,871 Charge-offs (127,617) (368,758) (417,184) (833,516) Paydowns (a) (224,817) (309,202) (538,827) (650,808) Others 822 (14,570) 26,493 (14,100) Balance - end of period$ 3,981,618 $
4,491,924
(a) Includes net discount accreted in interest income for the period.
The historic volume of deferrals granted in response to COVID-19 impacts has driven an increase in TDR balances year over year, the first period over period increase in the Company's TDR balances since the peak in 2017. Liquidity Management, Funding and Capital Resources Source of Funding The Company requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. The Company funds its operations through its lending relationships with 13 third-party banks, SHUSA and through securitizations in the ABS market and flow agreements. The Company seeks to issue debt that appropriately matches the cash flows of the assets that it originates. The Company has more than$4.8 billion of stockholders' equity that supports its access to the securitization markets, credit facilities, and flow agreements. 67 -------------------------------------------------------------------------------- During the second quarter endedJune 30, 2020 , the Company completed on-balance sheet funding transactions totaling approximately$2.9 billion , including: •securitizations on the Company's DRIVE, deeper subprime platform, for approximately$0.9 billion ; •private amortizing lease facilities for approximately$1.0 billion ; and •securitizations on the Company's SDART platform for approximately$1.0 billion
The Company also completed approximately
Refer to Note 7 - "Debt" to the accompanying condensed consolidated financial statements for the details on the Company's total debt. Credit Facilities Third-party Revolving Credit Facilities Warehouse Lines The Company has one credit facility with eight banks providing an aggregate commitment of$3.5 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Finance lease financing. As ofJune 30, 2020 there was an outstanding balance of approximately$0.8 billion on this facility in aggregate. The facility requires reduced Advance Rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds. The Company has eight credit facilities with eleven banks providing an aggregate commitment of$8.0 billion for the exclusive use of providing short-term liquidity needs to support Core and CCAP Loan financing. As ofJune 30, 2020 there was an outstanding balance of approximately$2.8 billion on these facilities in aggregate. These facilities reduced Advance Rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds. Repurchase Agreements The Company obtains financing through investment management or repurchase agreements whereby the Company pledges retained subordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to one year. As ofJune 30, 2020 there was an outstanding balance of$298 million under these repurchase agreements.
Lines of Credit with Santander and Related Subsidiaries Santander and certain of its subsidiaries, such as SHUSA, historically have provided, and continue to provide, the Company with significant funding support in the form of committed credit facilities. The Company's debt with these affiliated entities consisted of the following:
68
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As of
Average Maximum
Outstanding Outstanding
Counterparty Utilized Balance Committed Amount Balance Balance
Promissory Note SHUSA $ 250,000 $ 250,000 $ 250,000 $ 250,000
Promissory Note SHUSA 250,000 250,000 250,000 250,000
Promissory Note SHUSA 250,000 250,000 250,000 250,000
Promissory Note SHUSA 250,000 250,000 250,000 250,000
Promissory Note SHUSA 250,000 250,000 250,000 250,000
Promissory Note SHUSA 300,000 300,000 300,000 300,000
Promissory Note SHUSA 350,000 350,000 350,000 350,000
Promissory Note SHUSA 400,000 400,000 400,000 400,000
Promissory Note SHUSA 400,000 400,000 400,000 400,000
Promissory Note SHUSA 450,000 450,000 450,000 450,000
Promissory Note SHUSA 500,000 500,000 500,000 500,000
Promissory Note SHUSA 500,000 500,000 500,000 500,000
Promissory Note SHUSA 650,000 650,000 650,000 650,000
Promissory Note SHUSA 650,000 650,000 650,000 650,000
Promissory Note SHUSA 750,000 750,000 750,000 750,000
Promissory Note SHUSA 1,000,000 1,000,000 1,000,000 1,000,000
Promissory Note Santander 2,000,000 2,000,000 2,000,000 2,000,000
Line of Credit SHUSA - 500,000 150,549 485,000
Line of Credit SHUSA - 2,500,000 - -
$ 9,200,000 $ 12,200,000
SHUSA provides the Company with $3.0 billion of committed revolving credit that
can be drawn on an unsecured basis. SHUSA also provides the Company with $7.2
billion of term promissory notes with maturities ranging from October 2020 to
June 2025 . Santander provides the Company with $2 billion of unsecured
promissory notes maturing June 2022 .
Secured Structured Financings
The Company's secured structured financings primarily consist of public,
SEC -registered securitizations. The Company also executes private
securitizations under Rule 144A of the Securities Act and privately issues
amortizing notes. The Company has on-balance sheet securitizations outstanding
in the market with a cumulative ABS balance of approximately $27 billion .
Flow Agreements
In addition to the Company's credit facilities and secured structured
financings, the Company has a flow agreement in place with a third party for
charged off assets. Loans and leases sold under these flow agreements are not on
the Company's balance sheet but provide a stable stream of servicing fee income
and may also provide a gain or loss on sale. The Company continues to actively
seek additional flow agreements.
Off-Balance Sheet Financing
Beginning in 2017, the Company had the option to sell a contractually determined amount of eligible prime loans to Santander, through securitization platforms. As all of the notes and residual interests in the securitizations were issued to Santander, the Company recorded these transactions as true sales of the retail installment contracts securitized, and removed the sold assets from the Company's consolidated balance sheets. Beginning in 2018, this program has been replaced with a new program with SBNA, whereby the Company has agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchasing of retail loans, primarily fromFCA dealers, all of which are serviced by the Company. The Company also continues to periodically execute securitizations under Rule 144A of the Securities Act. After retaining the required credit risk retention via a 5% vertical interest, the Company transfers all remaining notes and residual interests in these securitizations to third parties. The Company subsequently records these transactions as true sales of the retail installment contracts securitized, and removes the sold assets from the Company's condensed consolidated balance sheet. 69 -------------------------------------------------------------------------------- Cash Flow Comparison The Company has historically produced positive net cash from operating activities. The Company's investing activities primarily consist of originations, acquisitions, and collections from retail installment contracts. SC's financing activities primarily consist of borrowing, repayments of debt, share repurchases, and payment of dividends. Six Months EndedJune 30, 2020 2019 (Dollar amounts in thousands)
Net cash provided by operating activities
(1,852,397) (4,363,359)
Net cash provided by financing activities 732,456
1,622,883
Net Cash Provided by Operating Activities Net cash provided by operating activities decreased by$1.7 billion from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 , primarily due to$1.6 billion increase to receivables held for sale.Net Cash Used in Investing Activities Net cash used in investing activities decreased by$2.5 billion from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 , primarily due to a decrease of$1.5 billion in leased vehicles purchased and a decrease of$761 million in originations of finance receivables held for investment. Net Cash Provided by Financing Activities Net cash provided by financing activities decreased by$890 million from the six months endedJune 30, 2019 to the six months endedJune 30, 2020 , primarily related to tender offer program which expired onFebruary 27, 2020 and a decrease of$437 million in notes payable. 70 --------------------------------------------------------------------------------
Contingencies and Off-Balance Sheet Arrangements For information regarding the Company's contingencies and off-balance sheet arrangements, refer to Note 6 - "Variable Interest Entities" and Note 14 - "Commitments and Contingencies" in the accompanying condensed consolidated financial statements.
Contractual Obligations The Company leases its headquarters inDallas, Texas , its servicing centers inTexas ,Colorado ,Arizona , andPuerto Rico , and an operations facilities inCalifornia ,Texas andColorado under non-cancelable operating leases that expire at various dates through 2027. The Company also has various debt obligations entered into in the normal course of business as a source of funds. The following table summarizes the Company's contractual obligations as ofJune 30, 2020 : 1-3 3-5 More than Less than 1 year years years 5 years Total (In thousands) Operating lease obligations $ 8,479$ 25,969
1,620,056 9,022,430 2,500,000 - 13,142,486
Notes payable - secured structured
financings (a) 328,787 8,772,383 11,487,763 6,971,054 27,559,987
Contractual interest on debt 981,650 1,039,409 292,740 75,364 2,389,163
Total $ 2,938,972 $ 18,860,191 $ 14,305,959 $ 7,066,109 $ 43,171,231
(a)Adjusted for unamortized costs of $68 million .
Risk Management Framework
The Company's risk management framework is overseen by its Board, the RC, its
management committees, its executive management team, an independent risk
management function, an internal audit function and all of its associates. The
RC, along with the Company's full Board, is responsible for establishing the
governance over the risk management process, providing oversight in managing the
aggregate risk position and reporting on the comprehensive portfolio of risk
categories and the potential impact these risks can have on the Company's risk
profile. The Company's primary risks include, but are not limited to, credit
risk, market risk, liquidity risk, operational risk and model risk. For more
information regarding the Company's risk management framework, please refer to
the Risk Management Framework section of the Company's 2019 Annual Report on
Form 10-K.
Credit Risk
Company applies qualitative framework to exercise judgment about matters that
are inherently uncertain and that are not considered by the quantitative
framework. These adjustments are documented and reviewed through the Company's
risk management processes. Furthermore, management reviews, updates, and
validates its process and loss assumptions on a periodic basis. This process
involves an analysis of data integrity, review of loss and credit trends, a
retrospective evaluation of actual loss information to loss forecasts, and other
analyses.
ACL levels are collectively reviewed for adequacy and approved quarterly. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Credit Losses Committee. The ACL levels are approved by the board level committees quarterly.
Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ACL and reserve for unfunded lending commitments in the Consolidated Balance Sheets.
Market Risk
Interest Rate Risk
71
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The Company measures and monitors interest rate risk on at least a monthly
basis. The Company borrows money from a
variety of market participants to provide loans and leases to the Company's
customers. The Company's gross interest rate
spread, which is the difference between the income earned through the interest
and finance charges on the Company's finance
receivables and lease contracts and the interest paid on the Company's funding,
will be negatively affected if the expense
incurred on the Company's borrowings increases at a faster pace than the income
generated by the Company's assets.
The Company has policies in place designed to measure, monitor and manage the
potential volatility in earnings stemming from changes in interest rates. The
Company generates finance receivables which are predominantly fixed rate and
borrow with a mix of fixed and variable rate funding. To the extent that the
Company's asset and liability re-pricing characteristics are not effectively
matched, the Company may utilize interest rate derivatives, such as interest
rate swap agreements, to mitigate against interest rate risk. As of June 30,
2020 , the notional value of the Company's interest rate swap agreements was $3.0
billion . The Company also enters into Interest Rate Cap agreements as required
under certain lending agreements. In order to mitigate any interest rate risk
assumed in the Cap agreement required under the lending agreement, the Company
may enter into a second interest rate cap (Back-to-Back). As of June 30, 2020
the notional value of the Company's interest rate cap agreements was $21.8
billion , under which, all notional was executed Back-to-Back.
The Company monitors its interest rate exposure by conducting interest rate
sensitivity analysis. For purposes of reflecting a
possible impact to earnings, the twelve-month net interest income impact of an
instantaneous 100 basis point parallel shift in
prevailing interest rates is measured. As of June 30, 2020 , the twelve-month
impact of a 100 basis point parallel increase
in the interest rate curve would decrease the Company's net interest income by
$42 million . In addition to the sensitivity
analysis on net interest income, the Company also measures Market Value of
Equity (MVE) to view the interest rate risk
position. MVE measures the change in value of Balance Sheet instruments in
response to an instantaneous 100 basis point
parallel increase, including and beyond the net interest income twelve-month
horizon. As of June 30, 2020 , the impact of
a 100 basis point parallel increase in the interest rate curve would decrease
the Company's MVE by $71 million .
Collateral Risk
The Company's lease portfolio presents an inherent risk that residual values recognized upon lease termination will be lower than those used to price the contracts at inception. Although the Company has elected not to purchase residual value insurance at the present time, the Company's residual risk is somewhat mitigated by the residual risk-sharing agreement withFCA . Under the agreement, the Company is responsible for incurring the first portion of any residual value gains or losses up to the first 8%. The Company andFCA then equally share the next 4% of any residual value gains or losses (i.e., those gains or losses that exceed 8% but are less than 12%). Finally,FCA is responsible for residual value gains or losses over 12%, capped at a certain limit, after which the Company incurs any remaining gains or losses. From the inception of the agreement withFCA through the second quarter of 2020, approximately 88% of full term leases have not exceeded the first and second portions of any residual losses under the agreement. The Company also utilizes industry data, including the ALG benchmark for residual values, and employ a team of individuals experienced in forecasting residual values.
Similarly, lower used vehicle prices also reduce the amount that can be recovered when remarketing repossessed vehicles that serve as collateral underlying loans. The Company manages this risk through loan-to-value limits on originations, monitoring of new and used vehicle values using standard industry guides, and active, targeted management of the repossession process.
Liquidity Risk
The Company views liquidity as integral to other key elements such as capital adequacy, asset quality and profitability. The Company's primary liquidity risk relates to the ability to finance new originations through the Bank and ABS securitization markets. The Company cannot predict how the COVID-19 outbreak and the legal and regulatory responses to the COVID-19 outbreak and related economic disruptions will affect businesses, including liquidity or the ability to access the capital markets. If access to funding is reduced or if the costs to obtain such funding significantly increases, there may be a material impact to business and financial condition.The Company has a robust liquidity policy that is intended to manage this risk. The liquidity risk policy establishes the following guidelines: •that the Company maintain at least eight external credit providers (as ofJune 30, 2020 , it had thirteen); •that the Company relies on Santander and affiliates for no more than 30% of its funding (as ofJune 30, 2020 , Santander and affiliates provided 23% of its funding); •that no single lender's commitment should comprise more than 33% of the overall committed external lines (as ofJune 30, 2020 , the highest single lender's commitment was 21% (not including repo)); and 72 -------------------------------------------------------------------------------- •that no more than 35% and 65% of the Company's warehouse facilities mature in the next six months and twelve months respectively (as ofJune 30, 2020 , three of the Company's warehouse facilities are scheduled to mature in the next six or twelve months). The Company's liquidity risk policy also requires that the Company's Asset Liability Committee monitor many indicators, both market-wide and company-specific, to determine if action may be necessary to maintain the Company's liquidity position. The Company's liquidity management tools include daily, monthly and twelve-month rolling cash requirements forecasts, long term strategic planning forecasts, monthly funding usage and availability reports, daily sources and uses reporting, structural liquidity risk exercises, key risk indicators, and the establishment of liquidity contingency plans. The Company also performs monthly stress tests in which it forecasts the impact of various negative scenarios (alone and in combination), including reduced credit availability, higher funding costs, lower Advance Rates, lending covenant breaches, lower dealer discount rates, and higher credit losses. The Company generally seeks funding from the most efficient and cost effective source of liquidity from the ABS markets, third-party facilities, and Santander. Additionally, the Company can reduce originations to significantly lower levels, if necessary, during times of limited liquidity. The Company had established a qualified like-kind exchange program to defer tax liability on gains on sale of vehicle assets at lease termination. If the Company does not meet the safe harbor requirements ofIRS Revenue Procedure 2003-39, the Company may be subject to large, unexpected tax liabilities, thereby generating immediate liquidity needs. The Company believes that its compliance monitoring policies and procedures are adequate to enable the Company to remain in compliance with the program requirements. The Tax Cuts and Jobs Act permanently eliminated the ability to exchange personal property afterJanuary 1, 2018 , which resulted in the like-kind exchange program being discontinued in 2018. Operational Risk The Company is exposed to operational risk loss arising from failures in the execution of our business activities. These relate to failures arising from inadequate or failed processes, failures in its people or systems, or from external events. The Company's operational risk management program Third Party Risk Management, Business Continuity Management,Information Risk Management , Fraud Risk Management, and Operational Risk Management, with key program elements covering Loss Event, Issue Management, Risk Reporting and Monitoring, and Risk Control Self-Assessment (RCSA). To mitigate operational risk, the Company maintains an extensive compliance, internal control, and monitoring framework, which includes the gathering of corporate control performance threshold indicators, Sarbanes-Oxley testing, monthly quality control tests, ongoing compliance monitoring with applicable regulations, internal control documentation and review of processes, and internal audits. The Company also utilizes internal and external legal counsel for expertise when needed. Upon hire and annually, all associates receive comprehensive mandatory regulatory compliance training. In addition, the Board receives annual regulatory and compliance training. The Company uses industry-leading call mining that assist the Company in analyzing potential breaches of regulatory requirements and customer service. Model Risk The Company mitigates model risk through a robust model validation process, which includes committee governance and a series of tests and controls. The Company utilizes SHUSA's Model Risk Management group for all model validation to verify models are performing as expected and in line with their design objectives and business uses. Critical Accounting Estimates Accounting policies are integral to understanding the Company's Management's Discussion and Analysis of Financial Condition and Results of Operations. The preparation of financial statements in accordance withU.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company reviews its accounting policies, assumptions, estimates and judgments to ensure that its financial statements are presented fairly and in accordance withU.S. GAAP. There have been no material changes (except as disclosed below) in the Company's critical accounting estimates from those disclosed in Item 7 of the 2019 Annual Report on Form 10-K. The change is as a result of the Company's adoption of CECL standard, onJanuary 1, 2020 . Refer to footnote 1 "Description of Business, Basis of Presentation, and 73 -------------------------------------------------------------------------------- Significant Accounting Policies and Practices", and footnote 3 " Credit Loss Allowance and Credit Quality" in the accompanying condensed consolidated financial statements and Part II, Item 2 - "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Credit Quality" for a detailed discussion around accounting policy, estimation process and assumptions used in ACL.
Recent Accounting Pronouncements
Information concerning the Company's implementation and impact of new accounting standards issued by the FinancialAccounting Standards Board (FASB) is discussed in Note 1- Recently Issued Accounting Pronouncements, in the accompanying condensed consolidated financial statements.
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