This Quarterly Report on Form 10-Q should be read in conjunction with the 2020 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
The Company was formed in 2013 as a corporation in the state ofDelaware and is the holding company for SCIllinois , a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. The Company is majority-owned (as ofOctober 25, 2021 , approximately 80.2%) by SHUSA, a wholly-owned subsidiary of Santander. Refer to Note 1 - "Description of Business" to the accompanying condensed consolidated financial statements for the details regarding the definitive agreement entered into between SHUSA and the Company for SHUSA to acquire all of the outstanding shares of the Company's stock that is does not yet own. The Company is managed through a single reporting segment, Consumer Finance, which includes vehicle financial products and services, including retail installment contracts, vehicle leases, and financial products and services related to recreational and marine vehicles, and other consumer finance products. SinceMay 2013 , under the MPLFA with Stellantis, the Company has operated as Stellantis's preferred provider for consumer loans, leases and dealer loans and provides services to Stellantis customers and dealers under the CCAP brand. The Company's average penetration rate under the MPLFA for the third quarter endedSeptember 30, 2021 was 27%, a decrease from 33% for the same period in 2020. The Company has dedicated financing facilities in place for its CCAP business and has pursued a strategy of working collaboratively with Stellantis to strengthen their relationship and to create value within the CCAP program. During the nine months endedSeptember 30, 2021 , the Company originated$11.1 billion in CCAP loans which represented 53% of total retail installment contract originations (unpaid principal balance), as well as$5.8 billion in CCAP leases. Additionally, all of the leases originated by the Company during the nine months endedSeptember 30, 2021 were under the MPLFA. Economic and Business Environment
The unemployment rate is 4.80% as of that
to the
Additionally, the Company is exposed to geographic customer concentration risk, which could have an adverse effect on the Company's business, financial position, results of operations or cash flow. Refer to Note 2 - "Finance Receivables" to the accompanying condensed consolidated financial statements for the details on the Company's retail installment contracts by state concentration. Regulatory Matters TheU.S. lending industry is highly regulated under variousU.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practices, SCRA, and Unfair, Deceptive, or Abusive Acts or Practices, Credit CARD, Bank Secrecy Act, 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 theSEC , theCFPB , theFTC , and the DOJ and by regulatory agencies in each state in which the Company is licensed. In addition, the Company is directly and indirectly, through its relationship with SHUSA, subject to certain bank regulations, including oversight by the OCC, theEuropean Central Bank , and theFederal Reserve , which have the ability to limit certain of the Company's activities, such as share repurchase program, 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. 47 -------------------------------------------------------------------------------- TheMarch 5, 2021 , announcement by theU.K.'s Financial Conduct Authority (FCA) confirmed unavailability of USD LIBOR rates beyondJune 30, 2023 and cessation of one-week and two-month USD LIBOR byDecember 31, 2021 . ISDA announced these statements are an "Index Cessation Event" under the IBOR Fallbacks Supplement and the ISDA 2020 IBOR Fallbacks Protocol, which in turn triggers a "Spread Adjustment Fixing Date" under the Bloomberg IBOR Fallback Rate Adjustments Rule Book. As a result, when USD LIBOR tenors cease and the fallback rates apply, fallbacks for derivatives under ISDA's documentation shift to forms of the Secured Overnight Financing Rate (SOFR) plus the fixed spread adjustment.
The regulators also confirmed that the
The Company holds debt, derivatives, and other financial instruments that use USD LIBOR as a reference rate and that will be impacted by the demise of LIBOR. Transition away from LIBOR to new reference rates presents legal, financial, reputational, and operational risks to the Company as well as to other participants in the market. As ofSeptember 30, 2021 , the Company has approximately$3 billion of liabilities with LIBOR exposure. The Company also had approximately$16 billion in notional amounts of derivative contracts with LIBOR exposure. Additional legal and regulatory matters affecting the Company's activities are further discussed in Part I, Item 1A - Risk Factors of the 2020 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q. How the Company Assesses its Business Performance
Net income and the associated return on assets and equity are the primary metrics that society uses to assess the performance of its business. Accordingly, the company closely monitors the main drivers of net profit:
•Net financing income - The Company tracks the spread between the interest and finance charge income earned on assets and the interest expense incurred on liabilities, and continually monitors the components of its yield and cost of funds. The Company's effective interest rate on borrowing is driven by various items including, but not limited to, credit quality of the collateral assigned, used/unused portion of facilities, and reference rate for the credit spread. These drivers, as well as external rate trends, including the swap curve, spot and forward rates are monitored. •Net credit losses - The Company performs net credit loss analysis at the vintage level for retail installment contracts, loans and leases, and at the pool level for purchased portfolios-credit deteriorated, enabling it to pinpoint drivers of any unusual or unexpected trends. The Company also monitors its and industry-wide recovery rates. Additionally, because delinquencies are an early indicator of future net credit losses, the Company analyzes delinquency trends, adjusting for seasonality, to determine if the Company's loans are performing in line with original estimations. The net credit loss analysis does not include considerations of the Company's estimated ACL. •Other income - The Company's flow agreements and third-party servicing agreements have resulted in a large portfolio of assets serviced for others. These assets provide a steady stream of servicing income and may provide a gain or loss on sale. The Company monitors the size of the portfolio and average servicing fee rate and gain. •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 AffectingThe Company's Results of Operations COVID-19 Summary Beginning inMarch 2020 , the novel strain of coronavirus, or COVID-19, had materially impacted our business. Similar to many other financial institutions, we took measures to mitigate our customers' COVID-19 related economic challenges. We experienced an increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. 48 --------------------------------------------------------------------------------
Further details on COVID-19 can be found in Part II, Item 7 – Management’s Discussion and Analysis of the Financial Position and Results of Operations of the 2020 Annual Report on Form 10-K.
Takeover by SHUSA
OnJuly 2, 2021 the Company announced that it received a non-binding proposal (the "Proposal") from SHUSA to acquire all of the outstanding shares of the Company's common stock that are not currently owned by SHUSA, subject to the conditions set forth in the Proposal. The Board formed an independent special committee (the "Special Committee"), composed ofWilliam Rainer ,William Muir , andRobert McCarthy and electedWilliam Rainer as its chairperson, to consider the Proposal. The Special Committee engaged independent financial and legal advisors to assist in its evaluation of the Proposal. InAugust 2021 , the Company entered into a definitive agreement whereby SHUSA agreed to acquire all of the outstanding shares of the common stock of the Company not already owned by SHUSA via an all-cash tender offer. Under the terms of the definitive agreement, a wholly-owned subsidiary of SHUSA commenced a tender offer to acquire all of the outstanding shares of the Company's common stock that SHUSA does not yet own at a price of$41.50 per share in cash. SHUSA agreed to acquire all remaining shares not tendered in the offer through a second- step merger at the same price as in the tender offer. Consummation of the tender offer is subject to various conditions, including regulatory approval of theBoard of Governors of theFederal Reserve System and other customary conditions. Upon completion of the transaction, the Company would become a wholly-owned subsidiary of SHUSA. 49 --------------------------------------------------------------------------------
Volume The Company's originations of retail installment contracts and leases, including revolving loans, average APR, and dealer discount (net of dealer participation) for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (Dollar amounts in thousands) Retained Originations Retail installment contracts$ 4,432,175 $ 5,344,755 $ 14,298,345 $ 13,608,298 Average APR 14.8 % 13.7 % 15.0 % 13.8 % Average FICO® (a) 606 637 603 631 Premium (2.4) % (1.3) % (2.1) % (1.0) % Personal loans (b) $ - $ 305,039 $ - $ 923,112 Average APR - % 29.4 % - % 29.4 % Leased vehicles$ 1,577,539 $ 1,856,166 $ 5,799,786 $ 4,863,504 Finance lease $ 2,816 $ 4,087 $ 8,147 $ 9,016 Total originations retained$ 6,012,530 $ 7,510,047 $ 20,106,278 $ 19,403,930 Sold Originations Retail installment contracts $ 39,325 $ 80,144 $ 523,862 $ 761,323 Average APR 4.9 % 5.2 % 5.3 % 4.8 % Average FICO® (c) 730 738 720 734 Personal Loans (d) $ - $ - $ 292,709 $ - Average APR - % - % 29.7 % $ - Total Originations Sold $ 39,325 $ 80,144 $ 816,571 $ 761,323 Total originations (excluding SBNA Originations Program)$ 6,051,855 $ 7,590,191 $ 20,922,849 $ 20,165,253 (a)Unpaid principal balance excluded from the weighted average FICO score is$386 million and$571 million for the three months endedSeptember 30, 2021 and 2020, respectively, as the borrowers on these loans did not have FICO scores at origination and of these amounts,$129 million and$145 million , respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is$1.4 billion and$1.5 billion for the nine months endedSeptember 30, 2021 and 2020, respectively, as the borrowers on these loans did not have FICO scores at origination and of these amounts,$469 million and$386 million , respectively, were commercial loans. (b) Included in the total origination volume is$72 million and$151 million , for the three and nine months endedSeptember 30, 2020 , respectively, related to newly opened accounts. (c) Unpaid principal balance excluded from the weighted average FICO score is$28 million and$80 million for the nine months endedSeptember 30, 2021 and 2020, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, zero were commercial loans for the nine months endedSeptember 30, 2021 and 2020, respectively. (d) Included in the total origination volume is$25 million for the three months endedMarch 31, 2021 related to related to newly opened accounts. Total auto originations (excluding SBNA Origination Program) increased$1.7 billion , or 8.7%, from the nine months endedSeptember 30, 2020 to nine months endedSeptember 30, 2021 . The Company's initiatives to improve our pricing, as well as, our dealer and customer experience have increased our competitive position in the market. The Company continues to focus on optimizing the loan quality of its portfolio with an appropriate balance of volume and risk. CCAP volume and penetration rates are influenced by strategies implemented by Stellantis and the Company, including product mix and incentives. Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail auto loans, primarily from Stellantis dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA's behalf. During the three and nine months endedSeptember 30, 2021 and 2020 50 --------------------------------------------------------------------------------
the company has the purchase of
and
The Company's originations of retail installment contracts and leases by vehicle type during the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (Dollar amounts in thousands) Retail installment contracts Car$ 1,537,270 34.4 %$ 1,516,163 27.9 %$ 4,998,645 33.7 %$ 3,926,126 27.3 % Truck and utility 2,788,208 62.3 % 3,686,966 68.0 % 9,341,361 63.0 % 9,872,900 68.7 % Van and other (a) 146,022 3.3 % 221,770 4.1 % 482,201 3.3 % 570,595 4.0 %$ 4,471,500 100.0 %$ 5,424,899 100.0 %$ 14,822,207 100.0 %$ 14,369,621 100.0 % Leased vehicles Car $ 36,489 2.3 % $ 53,985 2.9 % $ 109,199 1.9 % $ 167,432 3.4 % Truck and utility 1,517,749 96.2 % 1,769,518 95.3 % 5,593,418 96.4 % 4,593,150 94.5 % Van and other (a) 23,301 1.5 % 32,663 1.8 % 97,169 1.7 % 102,922 2.1 %$ 1,577,539 100.0 %$ 1,856,166 100.0 %$ 5,799,786 100.0 %$ 4,863,504 100.0 % Total originations by vehicle type Car$ 1,573,759 26.0 %$ 1,570,148 21.6 %$ 5,107,844 24.8 %$ 4,093,558 21.3 % Truck and utility 4,305,957 71.2 % 5,456,484 74.9 % 14,934,779 72.4 % 14,466,050 75.2 % Van and other (a) 169,323 2.8 % 254,433 3.5 % 579,370 2.8 % 673,517 3.5 %$ 6,049,039 100.0 %$ 7,281,065 100.0 %$ 20,621,993 100.0 %$ 19,233,125 100.0 %
(a) Other consists mainly of commercial vehicles.
The Company's portfolio of retail installment contracts held for investment and leases by vehicle type as ofSeptember 30, 2021 andDecember 31, 2020 are as follows: September 30, 2021 December 31, 2020 (Dollar amounts in thousands) Retail installment contracts Car$ 11,613,325 35.5 %$ 11,727,343 35.6 % Truck and utility 19,741,505 60.3 % 19,939,215 60.5 % Van and other (a) 1,387,714 4.2 % 1,270,478 3.9 %$ 32,742,544 100.0 %$ 32,937,036 100.0 % Leased vehicles Car $ 450,467 2.8 % $ 766,451 4.4 % Truck and utility 15,339,907 95.2 % 16,052,162 93.0 % Van and other (a) 322,042 2.0 % 440,855 2.6 %$ 16,112,416 100.0 %$ 17,259,468 100.0 % Total by vehicle type Car$ 12,063,792 24.7 %$ 12,493,794 24.9 % Truck and utility 35,081,412 71.8 % 35,991,377 71.7 % Van and other (a) 1,709,756 3.5 % 1,711,333 3.4 %$ 48,854,960 100.0 %$ 50,196,504 100.0 %
(a) Other consists mainly of commercial vehicles.
51 -------------------------------------------------------------------------------- The Company's asset sales for the three and nine months endedSeptember 30, 2021 and 2020 were as follows: Three Months Ended Nine Months Ended September 30, 2021 September 30, 2020 2021 2020
(Dollar amounts in thousands)
Retail installment contracts $ 277,898 $ 636,301 $ 2,968,467 $ 1,148,587 Average APR 3.4 % 4.9 % 4.2 % 5.6 % Average FICO® 737 735 737 715 Personal Loans $ - $ - $ 1,253,476 - Average APR - % - 29.7 % - Total Asset Sales $ 277,898 636,301 $ 4,221,943 1,148,587
The unpaid principal, average APR, and remaining unrecognized net haircut on the Company’s investment portfolio at the time
September 30, 2021 December 31, 2020
(Dollar amounts in thousands)
Retail installment contracts $ 32,742,544 $ 32,937,036
Average APR 15.2 % 15.2 %
Premium (0.96) % (0.15) %
Leased vehicles $ 16,112,416 $ 17,259,468
Finance leases $ 24,508 $ 26,150
The Company records interest income from retail installment contracts and
receivables from dealers in accordance with the terms of the loans, generally
discontinuing and reversing accrued income once a loan becomes more than 60 days
past due, except in the case of revolving personal loans, for which the Company
continues to accrue interest until charge-off, in the month in which the loan
becomes 180 days past due, and receivables from dealers, for which the Company
continues to accrue interest until the loan becomes more than 90 days past due.
The Company generally does not acquire receivables from dealers at a discount.
The Company amortizes discounts, subvention payments from manufacturers, and
origination costs as adjustments to income from retail installment contracts
using the effective yield method. The Company estimates future principal
prepayments specific to pools of homogeneous loans based on the vintage, credit
quality at origination and term of the loan. Prepayments in our portfolio are
sensitive to credit quality, with higher credit quality loans generally
experiencing higher voluntary prepayment rates than lower credit quality loans.
The impact of defaults is not considered in the prepayment rate, and the
prepayment rate only considers voluntary prepayments. The resulting prepayment
rate specific to each pool is based on historical experience, and is used as an
input in the calculation of the constant effective yield. Our estimated weighted
average prepayment rates ranged from 11.2% to 15.9% as of September 30, 2021 ,
and 5.1% to 10.7% as of September 30, 2020 .
During the three and nine months ended September 30, 2021 and 2020 the Company
recognized certain retail installment contracts with an unpaid principal balance
of $42,264 , $42,264 , zero and $76,878 , 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.
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 on a straight-line basis 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
52
--------------------------------------------------------------------------------
accrual of revenue if a delinquent account subsequently becomes 60 days or less
past due. The Company amortizes subvention payments from the manufacturer, down
payments from the customer, and initial direct costs incurred in connection with
originating the lease on a straight-line basis over the contractual term of the
lease.
Three and Nine Months Ended September 30, 2021 Compared to Three and Nine Months
Ended September 30, 2020
Interest on Finance Receivables and Loans
Three Months Ended Nine Months Ended
September 30, Increase (Decrease) September 30, Increase (Decrease)
2021 2020 Amount Percent 2021 2020 Amount Percent
(Dollar amounts in thousands)
Income from retail installment contracts
- %$ 3,659,757 $ 3,552,193 $ 107,564 3 % Income from purchased receivables portfolios - credit deteriorated 338 649 (311) (48) % 1,247 2,164 (917) (42) % Income from receivables from dealers - (17) 17 (100) % - 48 (48) (100) % Income from personal loans - 79,359 (79,359) (100) % 88,260 256,708 (168,448) (66) % Total interest on finance receivables and loans$ 1,215,121 $ 1,300,694 $ (85,573) (7) %$ 3,749,264 $ 3,811,113 $ (61,849) (1.6) % Income from retail installment contracts remained relatively flat from the third quarter of 2020 to the third quarter of 2021, and increased$108 million or 3% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily due to an increase in average outstanding balance of the Company's portfolio, offset by sale of gross retail installment contracts to third party investors in off-balance sheet securitizations. Income from personal loans OnMarch 31, 2021 , the Company completed the sale of the$1.3 billion Bluestem personal lending portfolioBB Allium LLC . Refer to Note 1 - "Description of Business, Basis of Presentation, and Accounting Principles" to the condensed consolidated financial statements, for additional information regarding the sale. Leased Vehicle Income and Expense Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) 2021 2020 Amount Percent 2021 2020 Amount Percent (Dollar amounts in thousands)
Income from leasing vehicles
(8) %$ 2,115,134 $ 2,210,684 $ (95,550) (4) % Leased vehicle expense 325,259 467,172 (141,913) (30) % 1,043,774 1,630,945 (587,171) (36) % Leased vehicle income, net$ 345,075 $ 257,984 $ 87,091 34 %$ 1,071,360 $ 579,739 $ 491,621 85 % Leased vehicle income, net increased$87 million or 34% from the third quarter of 2020 to the third quarter of 2021 and increased$492 million or 85% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily driven by an increase in residual value of liquidated units. Through the MPLFA, the Company receives manufacturer incentives on new leases originated under the program in the form of lease subvention payments, which are amortized over the term of the lease and reduce depreciation expense within leased vehicle expense. Interest Expense Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease)
2021 2020 Amount Percent 2021 2020 Amount Percent
(Dollar amounts in thousands)
Interest expense on notes payable$ 210,072 $ 283,202 $ (73,130) (26) %$ 686,923 $ 902,081 $ (215,158) (24) % Interest expense on derivatives 8,675 8,916 (241) (3) % 22,556 27,853 (5,297) (19) %
Total interest expense
(25) %$ 709,479 $ 929,934 $ (220,455) (24) % 53
-------------------------------------------------------------------------------- Total interest expense decreased$73.4 million or 25% from the third quarter of 2020 to the third quarter of 2021 and decreased$220 million or 24% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily due to a lower interest rate environment and lower debt balances. Credit Loss Expense (benefit) Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) 2021 2020 Amount Percent 2021 2020 Amount Percent (Dollar amounts in thousands) Credit loss expense$ 42,058 $ 340,548 $ (298,490) (88) %$ (85,484) $ 2,110,331 $ (2,195,815) (104) % Credit loss expense (benefit) decreased$0.3 billion or 88% from the third quarter of 2020 to the third quarter of 2021 and decreased$2.2 billion or 104% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily driven by the additional reserve to address credit risk associated with the COVID-19 outbreak and associated economic recession during 2020. Profit Sharing Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) 2021 2020 Amount Percent 2021 2020 Amount Percent (Dollar amounts in thousands) Profit sharing$ 41,009 $ 30,414 $ 10,595 35 %$ 158,888 $ 56,239 $ 102,649 183 % Profit sharing expense consists of revenue sharing related to the MPLFA and profit sharing on personal loans originated pursuant to the agreements with Bluestem during the first quarter of 2021. Profit sharing expense increased from the third quarter of 2020 to the third quarter of 2021 and increased from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily due to an increase in lease portfolio income resulting from an increase in revenue share with Stellantis, and Bluestem credit improvements, during the first quarter of 2021, prior to sale of the personal lending portfolio onMarch 31, 2021 . Refer to Note 1 - "Description of Business, Basis of Presentation, and Accounting Principles" to the accompanying condensed consolidated financial statements, for additional information regarding the sale. Other Income Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) 2021 2020 Amount Percent 2021 2020 Amount Percent (Dollar amounts in thousands) Investment gains (losses), net$ 5,241 $ (68,989) $ 74,230 (108) %$ (7,057) $ (279,997) $ 272,940 (97) % Servicing fee income 19,975 18,574 1,401 8 % 61,481 56,797 4,684 8 % Fees, commissions, and other 48,867 78,924 (30,057) (38) % 200,242 256,123 (55,881) (22) % Total other income$ 74,083 $ 28,509 $ 45,574 160 %$ 254,666 $ 32,923 $ 221,743 674 % Average serviced for others portfolio$ 14,956,054 $ 11,365,610 $ 3,590,444 32 %$ 14,029,336 $ 10,862,178 $ 3,167,158 29 % Investment gains (losses), net increased$74 million from the third quarter of 2020 to the third quarter of 2021 and increased$273 million from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily due to the sale of the personal lending portfolio. Servicing fee income remained relatively flat in the third quarter of 2021 as compared to the third quarter of 2020 and from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . 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 54 --------------------------------------------------------------------------------
from
September 30,
2021 2020
(Dollar amounts in thousands)
SBNA and Santander retail installment contracts $ 11,742,348 $ 9,528,349
SBNA leases 243,531 65
Total serviced for related parties $ 11,985,879 $ 9,528,414
CCAP securitizations - 103,579
SCART securitizations 2,067,156 1,032,639
Other third parties 1,097,933 846,178
Total serviced for third parties $ 3,165,089 $ 1,982,396
Total serviced for others portfolio $ 15,150,968 $ 11,510,810
Fees, commissions, and other primarily includes late fees, miscellaneous, and
other income and decreased primarily due to the sale of Bluestem personal
lending portfolio BB Allium LLC . Refer to Note 1 - "Description of Business,
Basis of Presentation, and Accounting Principles" to the condensed consolidated
financial statements, for additional information regarding the sale.
Total Operating Expenses
Three Months Ended Nine Months Ended
September 30, Increase (Decrease) September 30, Increase (Decrease)
2021 2020 Amount Percent 2021 2020 Amount Percent
(Dollar amounts in thousands)
Compensation expense $ 149,669 $ 127,991 $ 21,678 17 % $ 460,014 $ 388,960 $ 71,054 18 %
Repossession expense 33,349 35,910 (2,561) (7) % 117,540 115,861 1,679 1 %
Other operating costs 179,147 99,761 79,386 80 % 382,313 308,193 74,120 24 %
Business expense
37 %$ 959,867 $ 813,014 $ 146,853 18 % Compensation expenses increased$22 million or 17% from the third quarter of 2020 to the third quarter of 2021 and increased$71 million or 18% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily due to an increase in employee headcount resulting in a higher bonus accrual and an increase in medical claims reserve, offset by a prior year pandemic adjustment. Repossession expense remained relatively flat from the third quarter of 2020 to the third quarter of 2021 and from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 . Other operating costs increased$79 million or 80% from the third quarter of 2020 to the third quarter of 2021 and increased$74 million or 24% from the nine months endedSeptember 30, 2020 to the nine months endedSeptember 30, 2021 , primarily due to$50 million donation to theSC Foundation , and$11.5 million impairment of Roadloans trade name which has been replaced with aPlatform Development and License Agreement ("PDLA") withAutofi Inc. for the design and operation of a digital software platform for the sale and financing of automobiles. Income Tax Expense Three Months Ended Nine Months Ended September 30, Increase (Decrease) September 30, Increase (Decrease) 2021 2020 Amount Percent 2021 2020 Amount Percent (Dollar amounts in thousands) Income tax expense$ 208,607 $ 172,476 $ 36,131 21%$ 775,484 $ 137,161 $ 638,323 465 % Income before income taxes 971,931 662,591 309,340 47% 3,338,665 526,611 2,812,054 534 % Effective tax rate 21.5 % 26.0 % 23.2 % 26.0 % The effective tax rate decreased from 26.0% for the third quarter of 2020 to 21.5% for third quarter of 2021 and decreased from 26.0% for the nine months endedSeptember 30, 2020 to 23.2% for the nine months endedSeptember 30, 2021 , primarily due to pre-tax income during 2021 compared to discrete tax adjustments that increased the tax benefit recorded on the pre-tax loss in the first half of 2020. 55 --------------------------------------------------------------------------------
Other total income (loss)
Three Months Ended Nine Months Ended
September 30, Increase (Decrease) September 30, Increase (Decrease)
2021 2020 Amount Percent 2021 2020 Amount Percent
(Dollar amounts in thousands)
Change in unrealized gains
(losses) on cash flow
hedges and
available-for-sale
securities, net of tax $ 5,661 $ 6,823 $ (1,162) (17) % $ 19,372 $ (30,189) $ 49,561 (164) %
The change in unrealized gains (losses) for the three and nine months ended
September 30, 2021 as compared to three and nine months ended September 30,
2020 , was primarily driven by decrease of notional and forward curve rates for
the cash flow hedge portfolio related to mark-to-market valuation, as shown in
Note 9 "Derivative Financial Instruments" to the accompanying condensed
consolidated financial statements.
Credit Quality
Loans and Other Finance Receivables
Allowance for Credit losses
Non-prime loans comprise 80% of the Company's portfolio as of September 30,
2021 . The Company records an ACL at a level considered adequate to cover current
expected credit losses in the Company's retail installment contracts and other
loans and receivables held for investment, based upon a holistic assessment
including both quantitative and qualitative considerations. Refer to Note 2 -
"Finance Receivables" and Note 3 - "Credit Loss Allowance and Credit Quality" to
the accompanying condensed consolidated financial statements for the details on
the Company's held for investment portfolio of retail installment contracts as
of September 30, 2021 and December 31, 2020 .
Credit risk profile
A summary of the credit risk profile of the Company's retail installment
contracts held for investment, by FICO® score, number of trade lines (represents
number of approved credit accounts reported to credit reporting agencies), and
length of credit history, each as determined at origination, as of September 30,
2021 and December 31, 2020 was as follows (dollar amounts in billions, totals
may not sum due to rounding):
September 30, 2021
Trade Lines 1 2 3 4+ Total
FICO Months History $ % $ % $ % $ % $ %
No-FICO (a) <36 $3.2 97 % $0.1 3 % $0.0 - % $0.0 - % $3.3 9 %
36+ 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 2 %
<540 <36 0.1 50 % 0.0 - % 0.0 - % 0.1 50 % 0.2 1 %
36+ 0.1 2 % 0.2 4 % 0.2 4 % 4.2 89 % 4.7 14 %
540-599 <36 0.3 33 % 0.2 22 % 0.1 11 % 0.3 33 % 0.9 3 %
36+ 0.1 1 % 0.3 3 % 0.3 3 % 9.8 93 % 10.5 32 %
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 % 0.2 3 % 5.6 93 % 6.0 18 %
>=640 (b) <36 0.8 53 % 0.3 20 % 0.2 13 % 0.2 13 % 1.5 5 %
36+ 0.1 2 % 0.1 2 % 0.1 2 % 4.1 93 % 4.4 13 %
Total (c) $5.5 17 % $1.7 5 % $1.3 4 % $24.7 74 % $33.2 100 %
56
--------------------------------------------------------------------------------
December 31, 2020
Trade Lines 1 2 3 4+ Total
FICO Months History $ % $ % $ % $ % $ %
No-FICO (a) <36 $3.0 97 % $ 0.1 3 % $ 0.0 - % $ 0.0 - % $ 3.1 9 %
36+ 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 2 %
<540 <36 0.0 - % - - % 0.1 50 % 0.1 50 % 0.2 1 %
36+ 0.1 2 % 0.2 4 % 0.2 4 % 4.3 90 % 4.8 15 %
540-599 <36 0.3 38 % 0.2 25 % 0.1 13 % 0.2 25 % 0.8 3 %
36+ 0.2 2 % 0.2 2 % 0.3 3 % 9.0 93 % 9.7 28 %
600-639 <36 0.4 44 % 0.2 22 % 0.1 11 % 0.2 22 % 0.9 3 %
36+ 0.1 2 % 0.1 2 % 0.1 2 % 5.0 94 % 5.3 16 %
>640 (b) <36 1.0 59 % 0.3 18 % 0.2 12 % 0.2 12 % 1.7 5 %
36+ 0.1 2 % 0.1 2 % 0.1 2 % 5.5 95 % 5.8 18 %
Total (c) $ 5.5 17 % $ 1.6 5 % $ 1.3 4 % $ 24.7 75 % $ 33.1 100 %
(a) Includes commercial loans
(b) Beginning in 2021, loans with FICO score of 640 are disclosed in the >=640
category. As of December 31, 2020 , loans with FICO score of 640 were included in
the 600-639 category.
(c) The amount of accrued interest excluded from the disclosed amortized cost as
of September 30, 2021 and December 31, 2020 is $323 million and $416 million ,
respectively.
Delinquencies
The company considers an account in default if a debtor fails to make substantial (defined as 90%) scheduled payment by the due date.
In each case, the period of delinquency is based on the number of days payments are contractually past due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, the Company's delinquencies have been highest in the period from November through January due to consumers' holiday spending. Refer to Note 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 ofSeptember 30, 2021 andDecember 31, 2020 . Credit Loss Experience The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the nine months endedSeptember 30, 2021 and 2020. Nine Months Ended September 30, 2021 September 30, 2020 (Dollar amounts in thousands) Principal outstanding at period end $ 32,742,544 $ 33,485,342 Average principal outstanding during the period $ 32,576,199 $ 31,462,524 Number of receivables outstanding at period end 1,865,446 1,971,917 Average number of receivables outstanding during the period 1,900,412 1,888,260 Number of repossessions (a) 122,769 131,522
Number of withdrawals as a percentage of the average number of outstanding receivables
8.6 % 9.3 % Net losses $ 326,795 $ 1,100,138
Net losses as a percentage of the average principal outstanding (b)
1.3 % 4.7 %
(a) Repossessions are net of redemptions. The number of repossessions includes
repossessions from the outstanding portfolio and from accounts already charged
off. The Company temporarily suspended involuntary repossession activities
nationwide during the onset of COVID-19 and restarted these activities during
the third quarter of 2020.
(b) Decrease is due to a reduction in the number of repossessions (refer to note
(a) above), and an increase in the number of deferrals (explained in detail
under "Deferrals and Troubled Debt Restructurings" below) as it relates to
COVID-19.
57
--------------------------------------------------------------------------------
There were no write-offs on the Company’s accounts receivable from dealers for the three and nine months ended
In accordance with the Company's policies and guidelines, the Company may offer extensions (deferrals) to customers on its retail installment contracts, whereby the customer is allowed to defer a maximum of three payments per event to the end of the loan. The Company's policies and guidelines limit the frequency of each new deferral to one deferral every six months, regardless of the length of any prior deferral. Further, the maximum number of lifetime months extended for all automobile retail installment contracts is eight, while some marine and recreational vehicle contracts have 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. InMarch 2020 , the Company began actively working with its borrowers impacted by COVID-19 and provided loan modification programs in accordance with the "Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus" issued by federal banking agencies and the CARES Act to mitigate the adverse effects of COVID-19 on modifications. These programs temporarily revised the practices noted above during 2020 and increased the volume of modifications provided to our customers. The Company's predominant program offering is a two-month deferral of payments to the end of the loan term and waiver of late charges. EffectiveJanuary 1, 2021 , the Company has generally returned to pre-pandemic servicing practices, with the exception of an increased limit on total months of extensions allowed. As ofSeptember 30, 2021 , the overall modification volumes were consistent with volumes experienced before COVID-19 pandemic, and the number and dollar amount of active COVID-19 modifications are immaterial. The following is a summary of all deferrals (amortized cost) on the Company's retail installment contracts held for investment as of the dates indicated: September 30, 2021 December 31, 2020 (Dollar amounts in thousands) Never deferred$ 24,353,207 73.4 %$ 20,824,336 63.0 % Deferred once 3,543,563 10.7 % 5,245,471 15.8 % Deferred twice 2,022,010 6.1 % 3,083,542 9.3 % Deferred 3 - 4 times 2,174,422 6.6 % 2,842,870 8.6 % Deferred greater than 4 times 1,074,914 3.2 % 1,104,369 3.3 % Total (a)$ 33,168,116 $ 33,100,588 (a) The amount of accrued interest excluded from the disclosed amortized cost as ofSeptember 30, 2021 andDecember 31, 2020 is$323 million and$416 million , respectively. 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. 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 58 --------------------------------------------------------------------------------
the credit and cash flow projections for loans classified as TDRs used in determining the adequacy of the company’s ACL are also affected.
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. 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. The following is a summary of the amortized cost (including accrued interest) balance as ofSeptember 30, 2021 andDecember 31, 2020 of loans that have received these modifications and concessions; September 30, 2021 December 31, 2020 Retail Installment Contracts (Dollar amounts in thousands) Temporary reduction of monthly payment (a) $ 267,880 $ 579,187 Bankruptcy-related accounts 16,805 23,865 Extension of maturity date 91,555 69,613 Interest rate reduction 73,456 76,786 Max buy rate and fair lending (b) 8,533,585 7,459,761 Other (c) 518,022 391,424 Total modified loans $ 9,501,303$ 8,600,636 (a) Reduces a customer's payment for a temporary time period (no more than six months) (b) Max buy rate modifications comprise 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 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. (c) Includes various other types of modifications and concessions, such as hardship modifications that are considered a TDR event. 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 table shows the components of the changes in the amortized cost (including accrued interest) in retail installment contract TDRs for the three and nine months endedSeptember 30, 2021 and 2020: Three Months Ended Nine Months Ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020
Balance – start of the period
$ 4,011,780 $ 3,828,892 New TDRs 391,370 336,249 1,824,843 1,418,493 Charge-offs (206,111) (200,352) (599,083) (617,536) Paydowns (a) (424,607) (278,242) (1,192,995) (817,069) Others 10,057 4,197 (63,625) 30,690 Balance - end of period (b)$ 3,980,920 $ 3,843,470 $ 3,980,920 $ 3,843,470
(a) Includes the net discount accrued in interest income for the period. (b) excluding collateral insolvency TDRs
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 ofSeptember 30, 2021 andDecember 31, 2020 . 59 -------------------------------------------------------------------------------- Liquidity Management, Funding and Capital Resources Source of Funding The Company requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. The Company funds its operations through its lending relationships with 13 third-party banks, Santander and SHUSA, and through securitizations in the ABS market and flow agreements. The Company seeks to issue debt that appropriately matches the cash flows of the assets that it originates. The Company has more than$7.9 billion of stockholders' equity that supports its access to the securitization markets, credit facilities, and flow agreements. During the quarter endedSeptember 30, 2021 , the Company completed on-balance sheet funding transactions totaling approximately$6.2 billion , including: •securitization on the Company's SDART platform for approximately$2.5 billion ; •securitizations on the Company's DRIVE, deeper subprime platform, for approximately$1.8 billion ; and •lease securitization on our SRT platform for approximately$1.9 billion
The company also has approx.
For details of the company’s total debt, see Note 7 – “Debt” of the accompanying condensed consolidated financial statements.
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. The facility requires reduced Advance Rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds. The Company has eight credit facilities with eleven banks providing an aggregate commitment of$8.3 billion for the exclusive use of providing short-term liquidity needs to support Core and CCAP Loan financing. As ofSeptember 30, 2021 there was an outstanding balance of approximately zero 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 ofSeptember 30, 2021 , there is no outstanding balance under any repurchase agreements. 60 --------------------------------------------------------------------------------
Lines of Credit with Santander and Affiliates Santander and some of its subsidiaries, such as SHUSA, have historically and continue to provide substantial funding assistance to the company in the form of committed credit facilities. The company’s debts to these affiliated companies are made up as follows:
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 350,000 350,000 350,000 350,000
Promissory Note SHUSA 400,000 400,000 400,000 400,000
Promissory Note SHUSA 450,000 450,000 450,000 450,000
Promissory Note SHUSA 500,000 500,000 500,000 500,000
Promissory Note SHUSA 500,000 500,000 500,000 500,000
Promissory Note SHUSA 650,000 650,000 650,000 650,000
Promissory Note SHUSA 750,000 750,000 750,000 750,000
Promissory Note SHUSA 1,000,000 1,000,000 1,000,000 1,000,000
Promissory Note Santander 2,000,000 2,000,000 2,000,000 2,000,000
Promissory Note Santander 2,000,000 2,000,000 2,000,000 2,000,000
Line of Credit SHUSA - 500,000 82,271 480,000
Line of Credit SHUSA - 2,500,000 - -
$ 9,600,000 $ 12,600,000
SHUSA provides the Company with $0.5 billion of committed revolving credit and
$2.5 billion of contingent liquidity that can be drawn on an unsecured basis.
SHUSA also provides the Company with $5.6 billion of term promissory notes with
maturities ranging from December 2021 to May 2025 . Santander provides the
Company with $4 billion of unsecured promissory notes with maturities ranging
from June 2022 and September 2022 .
Secured Structured Financings
The Company's secured structured financings primarily consist of public,
SEC -registered securitizations. The Company also executes private
securitizations under Rule 144A of the Securities Act and privately issues
amortizing notes. The Company has on-balance sheet securitizations outstanding
in the market with a cumulative ABS balance of approximately $29 billion .
Deficiency and Debt Forward Flow Agreement
In addition to the Company's credit facilities and secured structured
financings, the Company has a flow agreement in place with a third party for
charged off assets. Loans and leases sold under these flow agreements are not on
the Company's balance sheet but provide a stable stream of servicing fee income
and may also provide a gain or loss on sale.
Off-balance sheet financing
Beginning in 2017, the Company had the option to sell a contractually determined
amount of eligible prime loans to Santander, through securitization platforms.
As all of the notes and residual interests in the securitizations were issued to
Santander, the Company recorded these transactions as true sales of the retail
installment contracts securitized, and removed the sold assets from the
Company's consolidated balance sheets. Beginning in 2018, this program has been
replaced with a new program with SBNA, whereby the Company has agreed to provide
SBNA with origination support services in connection with the processing,
underwriting and purchasing of retail loans, primarily from Stellantis dealers,
all of which are serviced by the Company.
The Company also continues to periodically execute securitizations under Rule
144A of the Securities Act. After retaining the required credit risk retention
via a 5% vertical interest, the Company transfers all remaining notes and
residual interests in these securitizations to third parties. The Company
subsequently records these transactions as true sales of the retail installment
contracts securitized, and removes the sold assets from the Company's
consolidated balance sheet.
61
--------------------------------------------------------------------------------
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.
Nine Months Ended September 30,
2021 2020
(Dollar amounts in thousands)
Net cash provided by operating activities $ 5,131,575 $ 3,251,942
Net cash provided by (used in) investing activities (89,496) (4,205,861)
Net cash provided by (used in) financing activities (3,017,154) 1,165,602
Net Cash Provided by Operating Activities
Net cash provided by operating activities increased by $1.9 billion from the
nine months ended September 30, 2020 to the nine months ended September 30,
2021 , primarily due to the sale of the personal loan portfolio and an increase
in proceeds on receivables held for sale.
Net Cash Provided by Investing Activities
Net cash provided by investing activities increased by $4.1 billion from the
nine months ended September 30, 2020 to the nine months ended September 30,
2021 , primarily due to an increase in collections and proceeds on sale of held
for investment.
Net Cash Used in Financing Activities
Net cash used in financing activities decreased by $4.2 billion from the nine
months ended September 30, 2020 to the nine months ended September 30, 2021 ,
primarily due to a decrease in proceeds from notes payable.
Contingent liabilities and off-balance sheet agreements Information on the Company’s contingent liabilities and off-balance sheet agreements can be found in Note 6 – “Variable Interest Entities” and Note 14 – “Obligations and Contingent Liabilities” 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 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 ofSeptember 30, 2021 : 1-3 3-5 More than Less than 1 year years years 5 years Total (In thousands) Operating lease obligations $ 4,078$ 31,752
Promissory Note Loans – Credit Facilities and Related Parties
5,400,000 3,200,000 1,000,000 - 9,600,000 Notes payable - secured structured financings (a) 978,330 11,918,520 11,008,316 5,014,104 28,919,270 Contractual interest on debt 589,396 545,982 140,437 45,506 1,321,321 Total$ 6,971,804 $ 15,696,254 $ 12,177,463 $ 5,077,639 $ 39,923,160
(a) Adjusted for unamortized costs of
62 --------------------------------------------------------------------------------
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 2020 Annual Report on Form 10-K.
Credit risk
The Company applies a 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.
The ACL levels are jointly reviewed for appropriateness and approved quarterly. Necessary actions resulting from the company’s analysis will, if necessary, be regulated by its Credit Loss Committee. The ACL levels are approved quarterly by the board-level committees.
Part II, Item 8 - Financial Statements and Supplementary Data (Note 1) in the 2020 Annual Report on Form 10-K described the methodology used to determine the ACL and reserve for unfunded lending commitments in the Consolidated Balance Sheets. Market Risk Interest Rate Risk The Company measures and monitors interest rate risk on at least a monthly basis. The Company borrows money from a variety of market participants to provide loans and leases to the Company's customers. The Company's gross interest rate spread, which is the difference between the income earned through the interest and finance charges on the Company's finance receivables and lease contracts and the interest paid on the Company's funding, will be negatively affected if the expense incurred on the Company's borrowings increases at a faster pace than the income generated by the Company's assets. The Company has policies in place designed to measure, monitor and manage the potential volatility in earnings stemming from changes in interest rates. The Company generates finance receivables which are predominantly fixed rate and borrow with a mix of fixed and variable rate funding. To the extent that the Company's asset and liability re-pricing characteristics are not effectively matched, the Company may utilize interest rate derivatives, such as interest rate swap agreements, to mitigate against interest rate risk. As ofSeptember 30, 2021 , the notional value of the Company's interest rate swap agreements was$0.3 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 ofSeptember 30, 2021 the notional value of the Company's interest rate cap agreements was$15.3 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 ofSeptember 30, 2021 , the twelve-month impact of a 100 basis point parallel increase in the interest rate curve would increase the Company's net interest income by$14 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 ofSeptember 30, 2021 , the impact of a 100 basis point parallel increase in the interest rate curve would decrease the Company's MVE by$12 million . 63 --------------------------------------------------------------------------------
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 with Stellantis. Under the agreement, the Company is responsible for incurring the first portion of any residual value gains or losses up to the first 8%. The Company and Stellantis 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, Stellantis is responsible for residual value gains or losses over 12%, capped at a certain limit, after which the Company incurs any remaining gains or losses. From the inception of the agreement with Stellantis through the third quarter of 2021, approximately 92% 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 employs 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 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 ofSeptember 30, 2021 , it had thirteen); •that the Company relies on Santander and affiliates for no more than 30% of its funding (as ofSeptember 30, 2021 , Santander and affiliates provided 25% of its funding); •that no single lender's commitment should comprise more than 33% of the overall committed external lines (as ofSeptember 30, 2021 , the highest single lender's commitment was 16%); and •that no more than 35% and 65% of the Company's warehouse facilities mature in the next six months and twelve months respectively (as ofSeptember 30, 2021 , one of the Company's warehouse facilities is scheduled to mature in the next six or twelve months). The Company's liquidity risk policy also requires that the Company's Asset Liability Committee monitor many indicators, both market-wide and company-specific, to determine if action may be necessary to maintain the Company's liquidity position. The Company's liquidity management tools include daily, monthly and twelve-month rolling cash requirements forecasts, long term strategic planning forecasts, monthly funding usage and availability reports, daily sources and uses reporting, structural liquidity risk exercises, key risk indicators, and the establishment of liquidity contingency plans. The Company also performs monthly stress tests in which it forecasts the impact of various negative scenarios (alone and in combination), including reduced credit availability, higher funding costs, lower Advance Rates, lending covenant breaches, lower dealer discount rates, and higher credit losses. The Company generally seeks funding from the most efficient and cost-effective source of liquidity from the ABS markets, third-party facilities, and Santander and SHUSA. 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 the risk of operational loss resulting from errors in the conduct of our business. These relate to failures that can be traced back to inappropriate or failed processes, failures of its employees or systems or to external events. The company’s operational risk management program includes third party risk management, business continuity management, and information
64
————————————————– ——————————————
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 assists 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.
© Edgar Online, source
