Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2018
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Commission File Number: 001-36270
SANTANDER CONSUMER USA HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
 
Delaware
 
32-0414408
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
1601 Elm Street, Suite 800, Dallas, Texas
 
75201
(Address of principal executive offices)
 
(Zip Code)
Registrant’s telephone number, including area code (214) 634-1110
Not Applicable
(Former name, former address, and formal fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
 
Emerging growth company
 
¨
 
 
 
 
 
 
 
 
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
 
 
 
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  ¨ No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 




Class
 
Outstanding at July 27, 2018
Common Stock ($0.01 par value)
 
361,571,576 shares





INDEX
 

 
 
 
Item 1. 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. 
Item 3. 
Item 4. 
Item 1. 
Item 1A. 
Item 2. 
Item 3.
Item 4.
Item 5.
Item 6. 
 


2



Unless otherwise specified or the context otherwise requires, the use herein of the terms “we,” “our,” “us,” “SC,” and the “Company” refer to Santander Consumer USA Holdings Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements about the Company's expectations, beliefs, plans, predictions, forecasts, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends,” and similar words or phrases. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors, some of which are beyond the Company's control. For more information regarding these risks and uncertainties as well as certain additional risks that the Company faces, refer to the Risk Factors detailed in Item 1A of Part I of the 2017 Annual Report on Form 10-K, as well as factors more fully described in Part I, Item 2, “Management's Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this report, including the exhibits hereto, and subsequent reports and registration statements filed from time to time with the SEC. Among the factors that could cause the Company's actual results to differ materially from those suggested by the forward-looking statements are:

the Company operates in a highly regulated industry and continually changing federal, state, and local laws and regulations could materially adversely affect its business;
the Company's ability to remediate any material weaknesses in internal controls over financial reporting completely and in a timely manner;
adverse economic conditions in the United States and worldwide may negatively impact the Company's results;
the business could suffer if access to funding is reduced or if there is a change in the Company's funding costs or ability to execute securitizations;
the Company faces significant risks implementing its growth strategy, some of which are outside of its control;
the Company may not realize the anticipated benefits from, and may incur unexpected costs and delays in connection with, exiting its personal lending business;
the Company's agreement with FCA may not result in currently anticipated levels of growth and is subject to performance conditions that could result in termination of the agreement, and is subject to an option giving FCA the right to acquire an equity participation in the Chrysler Capital portion of the Company's business;
the business could suffer if the Company is unsuccessful in developing and maintaining relationships with automobile dealerships;
the Company's financial condition, liquidity, and results of operations depend on the credit performance of its loans;
loss of the Company's key management or other personnel, or an inability to attract such management and personnel, could negatively impact its business;
the Company is directly and indirectly, through its relationship with SHUSA, subject to certain banking and financial services regulations, including oversight by the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), the European Central Bank, and the Federal Reserve Bank of Boston (FRBB); such oversight and regulation may limit certain of the Company's activities, including the timing and amount of dividends and other limitations on the Company's business; and
future changes in the Company's relationship ownership by, or with SHUSA or Santander could adversely affect its operations.

If one or more of the factors affecting the Company's forward-looking information and statements renders forward-looking information and statements incorrect, the Company's actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, the Company cautions the reader not to place undue reliance on any forward-looking information or statements. The effect of these factors is difficult to predict. Factors other than these also could adversely affect the Company's results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties as new factors emerge from time to time. Management cannot assess the impact of any such factor on the Company's business or the extent to which any factor, or combination of factors may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements only speak as of the date of this document, and the Company undertakes no obligation to update any forward-looking information or

3



statements, whether written or oral, to reflect any change, except as required by law. All forward-looking statements attributable to the Company are expressly qualified by these cautionary statements.

Glossary

The following is a list of abbreviations, acronyms, and commonly used terms used in this Quarterly Report on Form 10-Q.
2017 Annual Report on Form 10-K
Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 28, 2018.
ABS
Asset-backed securities
Advance Rate
The maximum percentage of collateral that a lender is willing to lend.
Affiliates
A party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.
ALG
Automotive Lease Guide
APR
Annual Percentage Rate
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
Bluestem
Bluestem Brands, Inc., an online retailer for whose customers SC provides financing
Board
SC’s Board of Directors
CBP
Citizens Bank of Pennsylvania
CCART
Chrysler Capital Auto Receivables Trust, a securitization platform
CEO
Chief Executive Officer
CFPB
Consumer Financial Protection Bureau
CFO
Chief Financial Officer
Chrysler Agreement
Ten-year master private-label financing agreement with FCA
Clean-up Call
The early redemption of a debt instrument by the issuer, generally when the underlying portfolio has amortized to 5% or 10% of its original balance
Commission
U.S. Securities and Exchange Commission
Credit Enhancement
A method such as overcollateralization, insurance, or a third-party guarantee, whereby a borrower reduces default risk
DCF
Discounted Cash Flow Analysis
Dealer Loan
A Floorplan Loan, real estate loan, working capital loan, or other credit extended to an automobile dealer
Dodd-Frank Act
Comprehensive financial regulatory reform legislation enacted by the U.S. Congress on July 21, 2010
DOJ
U.S. Department of Justice
DRIVE
Drive Auto Receivables Trust, a securitization platform
ECOA
Equal Credit Opportunity Act
Exchange Act
Securities Exchange Act of 1934, as amended
FASB
Financial Accounting Standards Board
FCA
Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC
FICO®
A common credit score created by Fair Isaac Corporation that is used on the credit reports that lenders use to assess an applicant’s credit risk. FICO® is computed using mathematical models that take into account five factors: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit
FIRREA
Financial Institutions Reform, Recovery and Enforcement Act of 1989
Floorplan Loan
A revolving line of credit that finances dealer inventory until sold
Federal Reserve
Board of Governors of the Federal Reserve System
FRBB
Federal Reserve Bank of Boston
FTC
Federal Trade Commission
GAP
Guaranteed Auto Protection

4



IPO
SC's Initial Public Offering
ISDA
International Swaps and Derivative Association
Managed Assets
Managed assets included assets (a) owned and serviced by the Company; (b) owned by the Company and serviced by others; and (c) serviced for others
Nonaccretable Difference
The difference between the undiscounted contractual cash flows and the undiscounted expected cash flows of a portfolio acquired with deteriorated credit quality
OCC
Office of the Comptroller of the Currency
Overcollateralization
A credit enhancement method whereby more collateral is posted than is required to obtain financing
OEM
Original equipment manufacturer
Private-label
Financing branded in the name of the product manufacturer rather than in the name of the finance provider
RC
Risk Committee
Remarketing
The controlled disposal of vehicles at the end of the lease term or upon early termination or of financed vehicles obtained through repossession and their subsequent sale
Residual Value
The future value of a leased asset at the end of its lease term
RSU
Restricted stock unit
Santander
Banco Santander, S.A.
SBNA
Santander Bank, N.A., a wholly-owned subsidiary of SHUSA. Formerly Sovereign Bank, N.A.
SC
Santander Consumer USA Holdings Inc., a Delaware corporation, and its consolidated subsidiaries
SCI
Santander Consumer International Puerto Rico, LLC , a wholly-owned subsidiary of SC Illinois
SC Illinois
Santander Consumer USA Inc., an Illinois corporation and wholly-owned subsidiary of SC
SCRA
Servicemembers Civil Relief Act
SDART
Santander Drive Auto Receivables Trust, a securitization platform
SEC
U.S. Securities and Exchange Commission
SHUSA
Santander Holdings USA, Inc., a wholly-owned subsidiary of Santander and the majority stockholder of SC
SPAIN
Santander Prime Auto Issuing Note Trust, a securitization platform
SRT
Santander Retail Auto Lease Trust, a lease securitization platform
Subvention
Reimbursement of the finance provider by a manufacturer for the difference between a market loan or lease rate and the below-market rate given to a customer
TDR
Troubled Debt Restructuring
Trusts
Special purpose financing trusts utilized in SC’s financing transactions
U.S. GAAP
U.S. Generally Accepted Accounting Principles
VIE
Variable Interest Entity
Warehouse Line
A revolving line of credit generally used to fund finance receivable originations


5



PART I: FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands, except per share amounts)
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Cash and cash equivalents - $10,255 and $106,295 held at affiliates, respectively
$
319,688

 
$
527,805

Finance receivables held for sale, net
1,246,732

 
2,210,421

Finance receivables held for investment, net
24,096,770

 
22,427,769

Restricted cash - $1,786 and $2,529 held at affiliates, respectively
2,125,410

 
2,553,902

Accrued interest receivable
286,164

 
326,640

Leased vehicles, net
11,729,482

 
10,160,327

Furniture and equipment, net of accumulated depreciation of $63,155 and $55,525, respectively
64,599

 
69,609

Federal, state and other income taxes receivable
100,517

 
95,060

Related party taxes receivable
467

 
467

Goodwill
74,056

 
74,056

Intangible assets, net of amortization of $47,558 and $36,616, respectively
31,613

 
29,734

Due from affiliates
35,398

 
33,270

Other assets
1,062,240

 
913,244

Total assets
$
41,173,136

 
$
39,422,304

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Notes payable — credit facilities
$
4,502,823

 
$
4,848,316

Notes payable — secured structured financings
24,300,820

 
22,557,895

Notes payable — related party
3,125,963

 
3,754,223

Accrued interest payable
43,882

 
38,529

Accounts payable and accrued expenses
470,439

 
429,531

Deferred tax liabilities, net
1,079,557

 
897,121

Due to affiliates
154,192

 
82,382

Other liabilities
449,726

 
333,806

Total liabilities
34,127,402

 
32,941,803

Commitments and contingencies (Notes 5 and 10)

 

Equity:
 
 
 
Common stock, $0.01 par value — 1,100,000,000 shares authorized;
 
 
 
361,660,985 and 360,779,465 shares issued and 361,408,983 and 360,527,463 shares outstanding, respectively
3,614

 
3,605

Additional paid-in capital
1,693,896

 
1,681,558

Accumulated other comprehensive income, net
62,449

 
44,262

Retained earnings
5,285,775

 
4,751,076

Total stockholders’ equity
7,045,734

 
6,480,501

Total liabilities and equity
$
41,173,136

 
$
39,422,304


See notes to unaudited condensed consolidated financial statements.





6



SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands)

The assets of consolidated VIEs, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used only to settle obligations of the consolidated VIE and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to the Company's general credit were as follows:
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Restricted cash
$
1,657,399

 
$
1,995,557

Finance receivables held for sale, net
63,941

 
1,106,393

Finance receivables held for investment, net
23,109,528

 
21,715,365

Leased vehicles, net
11,729,482

 
10,160,327

Various other assets
701,267

 
733,123

Total assets
$
37,261,617

 
$
35,710,765

Liabilities
 
 
 
Notes payable
$
29,514,923

 
$
28,467,942

Various other liabilities
221,065

 
197,969

Total liabilities
$
29,735,988

 
$
28,665,911


Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying condensed consolidated balance sheets due to intercompany eliminations between the VIEs and other entities consolidated by the Company. For example, for most of its securitizations, the Company retains one or more of the lowest tranches of bonds. Rather than showing investment in bonds as an asset and the associated debt as a liability, these amounts are eliminated in consolidation as required by U.S. GAAP.

See notes to unaudited condensed consolidated financial statements.


7



SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) (Dollars in thousands, except per share amounts)
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Interest on finance receivables and loans
$
1,156,536

 
$
1,232,252

 
$
2,270,673

 
$
2,441,438

Leased vehicle income
537,897

 
429,264

 
1,042,175

 
847,497

Other finance and interest income
8,494

 
5,205

 
15,631

 
9,030

Total finance and other interest income
1,702,927

 
1,666,721

 
3,328,479

 
3,297,965

Interest expense — Including $43,640, $36,791, $85,673 and $74,515 to affiliates, respectively
273,953

 
233,371

 
514,981

 
460,460

Leased vehicle expense
360,335

 
298,224

 
719,018

 
588,395

Net finance and other interest income
1,068,639

 
1,135,126

 
2,094,480

 
2,249,110

Provision for credit losses
352,575

 
520,555

 
811,570

 
1,155,568

Net finance and other interest income after provision for credit losses
716,064

 
614,571

 
1,282,910

 
1,093,542

Profit sharing
12,853

 
8,443

 
17,230

 
16,388

Net finance and other interest income after provision for credit losses and profit sharing
703,211

 
606,128

 
1,265,680

 
1,077,154

Investment losses, net — Including $3,177, $3,461, $20,080 and $6,180 from affiliates, respectively
(82,634
)
 
(99,522
)
 
(169,154
)
 
(175,921
)
Servicing fee income — Including $11,375, $2,625, $21,447 and $5,888 from affiliates, respectively
27,538

 
31,953

 
53,720

 
63,637

Fees, commissions, and other — Including $398, $380 and $769 and $605 from affiliates, respectively
77,480

 
91,964

 
162,871

 
192,159

Total other income
22,384

 
24,395

 
47,437

 
79,875

Compensation expense
118,598

 
127,894

 
240,603

 
264,156

Repossession expense
63,660

 
67,269

 
135,741

 
138,568

Other operating costs — Including $3,111, $22,721, $4,273 and $44,365 to affiliates, respectively
94,692

 
87,252

 
188,518

 
184,769

Total operating expenses
276,950

 
282,415

 
564,862

 
587,493

Income before income taxes
448,645

 
348,108

 
748,255

 
569,536

Income tax expense
114,004

 
83,433

 
171,315

 
161,434

Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

 
 
 
 
 
 
 
 
Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gains (losses) on cash flow hedges, net of tax of $79, $(4,231), $2,981 and $96, respectively
(762
)
 
(7,644
)
 
12,038

 
(399
)
Comprehensive income
$
333,879

 
$
257,031

 
$
588,978

 
$
407,703

Net income per common share (basic)
$
0.93

 
$
0.74

 
$
1.60

 
$
1.14

Net income per common share (diluted)
$
0.92

 
$
0.74

 
$
1.59

 
$
1.13

Dividend declared per common share
$
0.05

 
$

 
$
0.10

 
$

Weighted average common shares (basic)
361,268,112

 
359,461,407

 
360,987,233

 
359,284,213

Weighted average common shares (diluted)
362,057,614

 
359,828,690

 
361,829,283

 
359,928,003


See notes to unaudited condensed consolidated financial statements.

8



SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) (In thousands)
 
 
Common Stock
 
Additional
Paid-In Capital
 
Accumulated
Other
Comprehensive Income (Loss)
 
Retained Earnings
 
Total
Stockholders’ Equity
 
Shares
 
Amount
 
 
 
 
Balance — January 1, 2017
358,908

 
$
3,589

 
$
1,657,611

 
$
28,259

 
$
3,549,160

 
$
5,238,619

Cumulative-effect adjustment upon adoption of ASU 2016-09

 

 
1,439

 

 
25,113

 
26,552

Stock issued in connection with employee incentive compensation plans
631

 
6

 
1,771

 

 

 
1,777

Stock-based compensation expense

 

 
4,084

 

 

 
4,084

 Tax sharing with affiliate

 

 
(2
)
 

 

 
(2
)
 Net income

 

 

 

 
408,102

 
408,102

Other comprehensive income (loss), net of taxes

 

 

 
(399
)
 

 
(399
)
Balance — June 30, 2017
359,539

 
$
3,595

 
$
1,664,903

 
$
27,860

 
$
3,982,375

 
$
5,678,733

 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2018
360,527

 
$
3,605

 
$
1,681,558

 
$
44,262

 
$
4,751,076

 
$
6,480,501

Cumulative-effect adjustment upon adoption of ASU 2018-02 (Note 1)

 

 

 
6,149

 
(6,149
)
 

Stock issued in connection with employee incentive compensation plans
882

 
9

 
2,813

 

 

 
2,822

 Stock-based compensation expense

 

 
5,794

 

 

 
5,794

Dividends

 

 

 

 
(36,092
)
 
(36,092
)
 Tax sharing with affiliate

 

 
3,731

 

 

 
3,731

 Net income

 

 

 

 
576,940

 
576,940

Other comprehensive income (loss), net of taxes

 

 

 
12,038

 

 
12,038

Balance — June 30, 2018
361,409

 
$
3,614

 
$
1,693,896

 
$
62,449

 
$
5,285,775

 
$
7,045,734

 
See notes to unaudited condensed consolidated financial statements.

9



SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Dollars in thousands)
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
576,940

 
$
408,102

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Derivative mark to market
(10,199
)
 
(615
)
Provision for credit losses
811,570

 
1,155,568

Depreciation and amortization
775,849

 
643,365

Accretion of discount
(91,856
)
 
(134,103
)
Originations and purchases of receivables held for sale
(1,837,463
)
 
(1,709,053
)
Proceeds from sales of and collections on receivables held for sale
2,766,700

 
1,624,515

Change in revolving personal loans, net
(72,922
)
 
(78,697
)
Investment losses, net
169,154

 
175,921

Stock-based compensation
5,794

 
4,084

Deferred tax expense
177,046

 
168,407

Changes in assets and liabilities:
 
 
 
Accrued interest receivable
16,231

 
23,723

Accounts receivable
12,100

 
(8,904
)
Federal income tax and other taxes
(5,465
)
 
(9,312
)
Other assets
(69,117
)
 
(15,809
)
Accrued interest payable
7,477

 
(2,954
)
Other liabilities
115,943

 
(48,221
)
Due to/from affiliates
65,265

 
19,787

Net cash provided by operating activities
3,413,047

 
2,215,804

Cash flows from investing activities:
 
 
 
Originations of and disbursements on finance receivables held for investment
(7,783,649
)
 
(6,189,385
)
Purchases of portfolios of finance receivables held for investment
(116,458
)
 
(152,208
)
Collections on finance receivables held for investment
5,437,414

 
5,167,574

Proceeds from sale of loans held for investment

 
412

Leased vehicles purchased
(4,764,841
)
 
(3,042,480
)
Manufacturer incentives received
445,266

 
556,860

Proceeds from sale of leased vehicles
1,959,866

 
1,282,533

Change in revolving personal loans, net
59,350

 
39,322

Purchases of furniture and equipment
(4,220
)
 
(11,623
)
Sales of furniture and equipment
74

 
230

Other investing activities
(6,578
)
 
(4,160
)
Net cash used in investing activities
(4,773,776
)
 
(2,352,925
)
Cash flows from financing activities:
 
 
 
Proceeds from notes payable related to secured structured financings — net of debt issuance costs
8,651,828

 
9,335,625

Payments on notes payable related to secured structured financings
(6,924,281
)
 
(7,206,766
)
Proceeds from unsecured notes payable

 
5,515,000

Payments on unsecured notes payable

 
(4,885,577
)
Proceeds from notes payable
14,060,698

 
11,380,056

Payments on notes payable
(15,033,991
)
 
(13,824,855
)
Proceeds from stock option exercises, gross
5,958

 
4,450

Dividends paid
(36,092
)
 

Net cash provided by financing activities
724,120

 
317,933

Net increase (decrease) in cash and cash equivalents and restricted cash
(636,609
)
 
180,812

Cash and cash equivalent and restricted cash — Beginning of period
3,081,707

 
2,917,479

Cash and cash equivalents and restricted cash — End of period
$
2,445,098

 
$
3,098,291

Supplemental cash flow information:
 
 
 
      Cash and cash equivalents
$
319,688

 
$
341,412

      Restricted cash
2,125,410

 
2,756,879

     Total cash and cash equivalents and restricted cash
$
2,445,098

 
$
3,098,291

Noncash investing and financing transactions:
 
 
 
Transfer of notes payable between secured and unsecured notes payable
$
300,000

 
$
495,991

See notes to unaudited condensed consolidated financial statements.

10



SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Unaudited)

1.     Description of Business, Basis of Presentation, and Significant Accounting Policies and Practices
Santander Consumer USA Holdings Inc., a Delaware corporation (together with its subsidiaries, SC or the Company), is the holding company for Santander Consumer USA Inc., an Illinois corporation (SC Illinois), and its subsidiaries, a specialized consumer finance company focused on vehicle finance and third-party servicing. The Company’s primary business is the indirect origination and securitization of retail installment contracts principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers.
Since May 1, 2013, under the terms of a ten-year private label financing agreement (the Chrysler Agreement) with FCA, the Company has been FCA's preferred provider for consumer loans and leases and Dealer Loans. Under the Chrysler Agreement, the Company offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as Dealer Loans for inventory, construction, real estate, working capital and revolving lines of credit. Retail installment contracts and vehicle leases entered into with FCA customers, as part of the Chrysler Agreement, represent a significant concentration of those portfolios and there is a risk that the Chrysler Agreement could be terminated prior to its expiration date. Termination of the Chrysler Agreement could result in a decrease in the amount of new retail installment contracts and vehicle leases entered into with FCA customers as well as Dealer Loans.

On June 1, 2018, the Company announced that is in exploratory discussions with FCA regarding the future of FCA’s U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. The likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined. On July 11, 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018.
The Company also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has other relationships through which it provides personal loans, private-label revolving lines of credit and other consumer finance products.
As of June 30, 2018, the Company was owned approximately 68.0% by Santander Holdings USA, Inc. (SHUSA), a subsidiary of Banco Santander, S.A. (Santander), and approximately 32.0% by other shareholders.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including certain Trusts, which are considered VIEs. The Company also consolidates other VIEs for which it was deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements as of June 30, 2018 and December 31, 2017, and for the three and six months ended June 30, 2018 and 2017, have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods

11



presented herein are not necessarily indicative of results of operations for the entire year. These financial statements should be read in conjunction with the 2017 Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, as of the date of the financial statements and the amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material. These estimates include the determination of credit loss allowance, discount accretion, impairment, fair value, expected end-of-term lease residual values, values of repossessed assets, and income taxes. These estimates, although based on actual historical trends and modeling, may potentially show significant variances over time.

Business Segment Information
The Company has one reportable segment: Consumer Finance, which includes the Company’s vehicle financial products and services, including retail installment contracts, vehicle leases, and Dealer Loans, as well as financial products and services related to recreational vehicles, and marine vehicles. It also includes the Company’s personal loan and point-of-sale financing operations.
Accounting Policies
There have been no material changes in the Company's accounting policies from those disclosed in Part II, Item 8 - Financial Statements and Supplementary Data in the 2017 Annual Report on Form 10-K.
Recently Adopted Accounting Standards
Since January 1, 2018, the Company adopted the following Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASUs):
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as amended. This ASU, requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It includes a five-step process to assist an entity in achieving the main principles of revenue recognition under ASC 606. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it did not have a material impact on the elements of the Company's Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and investment gains and losses). All other revenue streams in the scope of the new standard were not material. The Company adopted this standard as of January 1, 2018 using a modified retrospective approach. The adoption of this standard did not require any adjustments to the opening balance of retained earnings as of January 1, 2018.
ASU 2016-18, Statement of Cash Flows (Topic 230). Restricted Cash (A consensus of the FASB Emerging Issues Task Force), which requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown on the statement of cash flows and that the statement of cash flows explain changes in restricted cash during the period. The Company adopted this standard as of January 1, 2018 using retrospective approach. The impact of this adoption was disclosure only for periods presented on the Company's Statements of Cash Flows.
ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The new guidance amends the hedge accounting model to enable entities to more accurately reflect their risk management activities in the financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line in which the earnings effect of the hedged item is reported. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company elected to early adopt this standard as of January 1, 2018 using modified retrospective approach. The adoption of this standard did not require any adjustments to the opening balance of retained earnings for cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness.

12



ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company elected to early adopt this standard as of January 1, 2018 and reclassified $6,149 stranded income tax effects from accumulated other comprehensive income to retained earnings.

The adoption of the following ASUs did not have an impact on the Company's business, financial position or results of operations.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
ASU 2018-06, Codification Improvements to Topic 942, Financial Services—Depository and Lending
Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, which will, among other impacts, change the criteria under which leases are identified and accounted for as on- or off-balance sheet. The guidance will be effective for the fiscal year beginning after December 15, 2018, including interim periods within that year. Once effective, the new guidance must be applied for all periods presented. The Company is in the process of reviewing its existing property and equipment lease contracts as well as service contracts that may include embedded leases. Upon adoption, the Company will gross up its balance sheet by the present value of future minimum lease payments for these operating leases. The Company does not intend to early adopt this ASU.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, which changes the criteria under which credit losses are measured. The amendment introduces a new credit reserving model known as the Current Expected Credit Loss (CECL) model, which replaces the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to establish credit loss estimates. The guidance will be effective for the fiscal year beginning after December 15, 2019, including interim periods within that year. The Company does not intend to adopt the new standard early and is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the new CECL model will alter the assumptions used in calculating the Company's credit losses, given the change to estimated losses for the estimated life of the financial asset, and will likely result in material changes to the Company’s credit and capital reserves.

In addition to those described in detail above, the Company is also in the process of evaluating the following ASUs and does not expect them to have a material impact on the Company's business, financial position, results of operations or disclosures:
ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force)

13



ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

2.
Finance Receivables
Held For Investment
Finance receivables held for investment, net is comprised of the following at June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31, 2017
Retail installment contracts acquired individually (a)
$
24,039,237

 
$
22,362,509

Purchased receivables
22,678

 
27,839

Receivables from dealers
15,042

 
15,623

Personal loans
3,038

 
4,459

Capital lease receivables (Note 3)
16,775

 
17,339

Finance receivables held for investment, net
$
24,096,770

 
$
22,427,769

(a) The Company has elected the fair value option for certain retail installment contracts reported in finance receivables held for investment, net. As at June 30, 2018 and December 31, 2017, $17,182 and $22,124 of loans were recorded at fair value (Note 13).
The Company's held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans is comprised of the following at June 30, 2018 and December 31, 2017:

June 30, 2018

Retail Installment Contracts
Acquired
Individually

Receivables from
Dealers

Personal Loans

Non-TDR

TDR


Unpaid principal balance
$
21,414,617


$
5,958,564


$
15,200


$
4,016

Credit loss allowance - specific


(1,496,580
)




Credit loss allowance - collective
(1,641,214
)



(158
)

(1,116
)
Discount
(212,484
)

(58,265
)




Capitalized origination costs and fees
69,151


5,448




138

Net carrying balance
$
19,630,070


$
4,409,167


$
15,042


$
3,038


December 31, 2017

Retail Installment Contracts
Acquired
Individually

Receivables from
Dealers

Personal Loans

Non-TDR

TDR


Unpaid principal balance
$
19,681,394


$
6,261,894


$
15,787


$
6,887

Credit loss allowance - specific


(1,731,320
)




Credit loss allowance - collective
(1,529,815
)



(164
)

(2,565
)
Discount
(309,191
)

(74,832
)



(1
)
Capitalized origination costs and fees
58,638


5,741




138

Net carrying balance
$
17,901,026


$
4,461,483


$
15,623


$
4,459



14



Retail installment contracts
Retail installment contracts are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company’s retail installment contracts held for investment are pledged against warehouse lines or securitization bonds (Note 5). Most of the borrowers on the Company’s retail installment contracts held for investment are retail consumers; however, $527,763 and $641,003 of the unpaid principal balance represented fleet contracts with commercial borrowers as of June 30, 2018 and December 31, 2017, respectively.
During the six months ended June 30, 2018 and 2017, the Company originated $4,689,784 and $3,389,700, respectively, in Chrysler Capital loans which represented 49% and 43%, respectively, of the total retail installment contract originations (unpaid principal balance). As of June 30, 2018 and December 31, 2017, the Company's carrying value of auto retail installment contract portfolio consisted of $7,987,546 and $8,234,653, respectively, of Chrysler Capital loans which represents 33% and 37%, respectively, of the Company's carrying value of auto retail installment contract portfolio.
As of June 30, 2018, borrowers on the Company’s retail installment contracts held for investment are located in Texas (16%), Florida (12%), California (9%), Georgia (6%) and other states each individually representing less than 5% of the Company’s total portfolio.
Purchased receivables

Purchased receivables portfolios, which were acquired with deteriorated credit quality, is comprised of the following at June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31, 2017
Outstanding balance
$
35,750

 
$
43,474

Outstanding recorded investment, net of impairment
22,845

 
28,069

Changes in accretable yield on the Company’s purchased receivables portfolios for the periods indicated were as follows:
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Balance — beginning of period
$
18,446

 
$
97,946

 
$
19,464

 
$
107,041

Accretion of accretable yield
(2,245
)
 
(10,303
)
 
(5,085
)
 
(21,447
)
Reclassifications from (to) nonaccretable difference (a)
2,167

 
351

 
3,989

 
2,400

Balance — end of period
$
18,368

 
$
87,994

 
$
18,368

 
$
87,994

(a) Reclassifications from (to) nonaccretable difference represents the increases (decreases) in accretable yield resulting from higher (lower) estimated undiscounted cash flows.
During the three and six months ended June 30, 2018 and 2017, the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected. However, during the three months ended June 30, 2018 and 2017, the Company recognized certain retail installment contracts with an unpaid principal balance of $72,963 and $74,405, respectively, and for the six months ended June 30, 2018 and 2017, the Company recognized certain retail installment contracts with an unpaid principal balance of $115,959 and $226,613, respectively, held by non-consolidated securitization Trusts, under optional clean-up calls (Note 6). Following the initial recognition of these loans at fair value, the performing loans in the portfolio are carried at amortized cost, net of allowance for credit losses. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of re-recognition date), for which it was probable that not all contractually required payments would be collected (Note 13).
Receivable from Dealers
The receivables from dealers held for investment are all Chrysler Agreement-related. As of June 30, 2018, borrowers on these dealer receivables are located in Virginia (63%), New York (27%) and Missouri (10%).

15



Held For Sale
The carrying value of the Company's finance receivables held for sale, net is comprised of the following at June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31, 2017
Retail installment contracts acquired individually
$
290,277

 
$
1,148,332

Personal loans
956,455

 
1,062,089

Finance receivables held for sale, net
$
1,246,732

 
$
2,210,421

Sales of retail installment contracts and proceeds from sales of charged-off assets for the three and six months ended June 30, 2018 and 2017 were as follows:
 
For the Three Months Ended 
 June 30,
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Sales of retail installment contracts to third parties
$

 
$
30,000

 
$

 
$
260,568

Sale of retail installment contracts to affiliates
1,156,060

 
536,309

 
2,631,313

 
1,236,331

Proceeds from sales of charged-off assets to third parties
16,638

 
27,449

 
34,875

 
48,792


The Company retains servicing of retail installment contracts and leases sold to third parties. Total contracts sold to unrelated third parties and/or serviced as of June 30, 2018 and December 31, 2017 were as follows:
 
June 30,
2018
 
December 31, 2017
Serviced balance of retail installment contracts and leases
$
5,089,007

 
$
5,771,085



3.
Leases
The Company originates operating and capital leases, which are separately accounted for and recorded on the Company's condensed consolidated balance sheets. Operating leases are reported as leased vehicles, net, while capital leases are included in finance receivables held for investment, net.
Operating Leases
Leased vehicles, net, which is comprised of leases originated under the Chrysler Agreement, consisted of the following as of June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31,
2017
Leased vehicles
$
15,874,839

 
$
14,285,769

Less: accumulated depreciation
(3,039,121
)
 
(3,110,167
)
Depreciated net capitalized cost
12,835,718

 
11,175,602

Manufacturer subvention payments, net of accretion
(1,152,082
)
 
(1,042,477
)
Origination fees and other costs
45,846

 
27,202

Net book value
$
11,729,482

 
$
10,160,327


The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of June 30, 2018:

16



 
 
Remainder of 2018
$
1,054,424

2019
1,658,331

2020
978,411

2021
164,984

2022
3,664

Thereafter

Total
$
3,859,814

Capital Leases
Certain leases originated by the Company are accounted for as capital leases, as the contractual residual values are nominal amounts. Capital lease receivables, net consisted of the following as of June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31,
2017
Gross investment in capital leases
$
24,273

 
$
27,234

Origination fees and other
157

 
124

Less: unearned income
(4,073
)
 
(4,377
)
   Net investment in capital leases before allowance
20,357

 
22,981

Less: allowance for lease losses
(3,582
)
 
(5,642
)
   Net investment in capital leases
$
16,775

 
$
17,339


The following summarizes the future minimum lease payments due to the Company as lessor under capital leases as of June 30, 2018:
 
 
Remainder of 2018
$
4,705

2019
6,975

2020
5,392

2021
3,773

2022
2,941

Thereafter
487

Total
$
24,273



4.
Credit Loss Allowance and Credit Quality
Credit Loss Allowance
The Company estimates the allowance for credit losses on individually acquired retail installment contracts and personal loans held for investment not classified as TDRs based on delinquency status, historical loss experience, estimated values of underlying collateral, when applicable, and various economic factors. In developing the allowance, the Company utilizes a loss emergence period assumption, a loss given default assumption applied to recorded investment, and a probability of default assumption. The loss emergence period assumption represents the average length of time between when a loss event is first estimated to have occurred and when the account is charged-off. The recorded investment represents unpaid principal balance adjusted for unaccreted net discounts, subvention from manufacturers, and origination costs. Under this approach, the resulting allowance represents the expected net losses of recorded investment inherent in the portfolio. The Company uses a transition based Markov model for estimating the allowance for credit losses on individually acquired retail installment contracts. This model utilizes the recently observed loan transition rates from various loan statuses, including delinquency and accounting statuses from performing to charge off, to forecast future losses.
For loans classified as TDRs, impairment is generally measured based on the present value of expected future cash flows discounted at the original effective interest rate. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated

17



cost to sell. The amount of the allowance is equal to the difference between the loan’s impaired value and the recorded investment.
The Company maintains a general credit loss allowance for receivables from dealers based on risk ratings and individually evaluates loans for specific impairment as necessary. As of June 30, 2018 and 2017, the credit loss allowance for receivables from dealers is comprised entirely of general allowance as none of these receivables have been determined to be individually impaired.
The activity in the credit loss allowance for individually acquired retail installment contracts and Dealer Loans for the three and six months ended June 30, 2018 and 2017 was as follows:
 
Three Months Ended June 30, 2018

Three Months Ended June 30, 2017
 
Retail Installment Contracts Acquired Individually

Receivables from Dealers

Personal Loans

Retail Installment Contracts Acquired Individually

Receivables from Dealers

Personal Loans
 
Non-TDR

TDR



Non-TDR

TDR


 

Balance — beginning of period
$
1,586,557


$
1,595,465


$
161


$
1,714


$
1,836,730


$
1,604,489


$
734


$
4,517

Provision for credit losses
242,286


112,144


(3
)

(83
)

172,990


345,380


(21
)

1,166

Charge-offs (a)
(584,296
)

(427,079
)



(695
)

(654,613
)

(457,102
)



(1,586
)
Recoveries
396,667


216,050




180


405,702


193,392




265

Balance — end of period
$
1,641,214


$
1,496,580


$
158


$
1,116


$
1,760,809


$
1,686,159


$
713


$
4,362

(a) For the three months ended June 30, 2018 and June 30, 2017, charge-offs for retail installment contracts acquired individually includes approximately $7 million and $25 million, respectively, for the partial write-down of loans to the collateral value less estimated costs to sell, for which a bankruptcy notice was received. There is no additional credit loss allowance on these loans.
 
Six Months Ended June 30, 2018

Six Months Ended June 30, 2017
 
Retail Installment Contracts Acquired Individually

Receivables from Dealers

Personal Loans

Retail Installment Contracts Acquired Individually

Receivables
from Dealers

Personal Loans
 





 
Non-TDR
 
TDR
 
 

Non-TDR
 
TDR
 
 
Balance — beginning of period
$
1,529,815


$
1,731,320


$
164


$
2,565


$
1,799,760


$
1,611,295


$
724


$

Provision for credit losses
553,007


260,102


(6
)

(185
)

515,082


632,385


(11
)

9,141

Charge-offs (a)
(1,263,735
)

(946,661
)



(1,763
)

(1,388,767
)

(947,645
)



(5,218
)
Recoveries
822,127


451,819




499


834,734


390,124




439

Balance — end of period
$
1,641,214


$
1,496,580


$
158


$
1,116


$
1,760,809


$
1,686,159


$
713


$
4,362

(a) For the six months ended June 30, 2018 and June 30, 2017, charge-offs for retail installment contracts acquired individually includes approximately $14 million and $48 million, respectively, for the partial write-down of loans to the collateral value less estimated costs to sell, for which a bankruptcy notice was received. There is no additional credit loss allowance on these loans.
The Company estimates lease losses on the capital lease receivable portfolio based on delinquency status and loss experience to date, as well as various economic factors. The activity in the lease loss allowance for capital leases for the three and six months ended June 30, 2018 and 2017 was as follows:

18



 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Balance — beginning of period
$
5,757

 
$
6,605

 
$
5,642

 
$
9,988

Provision for lease losses
(1,769
)
 
1,040

 
(1,348
)
 
(1,029
)
Charge-offs
(1,760
)
 
(3,081
)
 
(3,141
)
 
(6,760
)
Recoveries
1,354

 
1,803

 
2,429

 
4,168

Balance — end of period
$
3,582

 
$
6,367

 
$
3,582

 
$
6,367


There was no impairment activity noted for purchased receivable portfolio for the three and six months ended June 30, 2018 and June 30, 2017.

Delinquencies

Retail installment contracts and personal amortizing term loans are classified as non-performing (or nonaccrual) when they are greater than 60 days past due as to contractual principal or interest payments. See discussion of TDR under the "Troubled Debt Restructurings" section below. Dealer receivables are classified as non-performing when they are greater than 90 days past due. At the time a loan is placed in non-performing (nonaccrual) status, previously accrued and uncollected interest is reversed against interest income. If an account is returned to a performing (accrual) status, the Company returns to accruing interest on the loan.

The Company considers an account delinquent when an obligor fails to pay the required minimum portion of the scheduled payment by the due date. With respect to receivables originated by the Company through its “Chrysler Capital” channel, the required minimum payment is 90% of the scheduled payment. With respect to receivables originated by the Company or acquired by the Company from an unaffiliated third-party originator on or after January 1, 2017, the required minimum payment is 90% of the scheduled payment, whereas previous to January 1, 2017 the required minimum payment was 50% of the scheduled payment. In each case, the period of delinquency is based on the number of days payments are contractually past due.

The accrual of interest on personal loans continues until the loan is charged off. The unpaid principal balance on personal loans (including revolving personal loans) 90 days or more past due and still accruing totaled $117,815 and $130,034 as of June 30, 2018 and December 31, 2017, respectively.

A summary of delinquencies as of June 30, 2018 and December 31, 2017 is as follows:
 
June 30, 2018
 
Retail Installment Contracts Held for Investment
 
Loans
Acquired
Individually
 
Purchased
Receivables
Portfolios
 
Total
Principal, 30-59 days past due
$
2,532,058

 
$
3,108

 
$
2,535,166

Delinquent principal over 59 days (a)
1,149,429

 
1,981

 
1,151,410

Total delinquent principal
$
3,681,487

 
$
5,089

 
$
3,686,576

 
December 31, 2017
 
Retail Installment Contracts Held for Investment
 
Loans
Acquired
Individually
 
Purchased
Receivables
Portfolios
 
Total
Principal, 30-59 days past due
$
2,822,686

 
$
4,992

 
$
2,827,678

Delinquent principal over 59 days (a)
1,541,728

 
2,855

 
1,544,583

Total delinquent principal
$
4,364,414

 
$
7,847

 
$
4,372,261

(a) Interest is generally accrued until 60 days past due in accordance with the Company's accounting policy for retail installment contracts.

In addition, retail installment contracts acquired individually held for investment that were placed on nonaccrual status, as of June 30, 2018 and December 31, 2017:

19




 
June 30, 2018
 
December 31, 2017
 
Amount
 
Percent (a)
 
Amount
 
Percent (a)
Non-TDR
$
505,399


1.8
%

$
666,926


2.6
%
TDR
1,554,860


5.7
%

1,390,373


5.4
%
Total nonaccrual principal
$
2,060,259


7.5
%

$
2,057,299


7.9
%
(a) Percent of unpaid principal balance of retail installment contracts individually held for investment.

The balances in the above tables reflect total unpaid principal balance rather than net recorded investment before allowance.

As of June 30, 2018 and December 31, 2017, there were no receivables from dealers that were 30 days or more delinquent. As of June 30, 2018 and December 31, 2017, there were $482 and $1,701, respectively, of retail installment contracts held for sale that were 30 days or more delinquent.
Credit Quality Indicators
FICO® Distribution — A summary of the credit risk profile of the Company’s retail installment contracts held for investment by FICO® distribution, determined at origination, as of June 30, 2018 and December 31, 2017 was as follows:
FICO® Band
 
June 30, 2018 (b)
 
December 31, 2017 (b)
Commercial (a)
 
1.9%
 
2.5%
No-FICOs
 
11.3%
 
11.2%
<540
 
21.0%
 
21.8%
540-599
 
32.6%
 
32.0%
600-639
 
17.8%
 
17.4%
>640
 
15.4%
 
15.1%

(a)No FICO score is obtained on loans to commercial borrowers.
(b)Percentages are based on unpaid principal balance.

Commercial Lending — The Company's risk department performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described in Note 4 of the 2017 Annual Report on Form 10-K. Fleet loan credit quality indicators for retail installment contracts held for investment with commercial borrowers as of June 30, 2018 and December 31, 2017 were as follows:
 
June 30,
2018
 
December 31,
2017
Pass
$
9,974

 
$
12,276

Special Mention
4,265

 
5,324

Substandard
434

 
715

Doubtful

 

Loss

 

Total (Unpaid principal balance)
$
14,673

 
$
18,315


20



Commercial loan credit quality indicators for receivables from dealers held for investment as of June 30, 2018 and December 31, 2017 were as follows:
 
June 30,
2018
 
December 31,
2017
Pass
$
15,167

 
$
14,130

Special Mention
33

 
1,657

Substandard

 

Doubtful

 

Loss

 

Total (Unpaid principal balance)
$
15,200

 
$
15,787


Troubled Debt Restructurings
In certain circumstances, the Company modifies the terms of its finance receivables to troubled borrowers. Modifications may include a temporary reduction in monthly payment, reduction in interest rate, an extension of the maturity date, rescheduling of future cash flows, or a combination thereof. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the debtor’s financial difficulties that would not otherwise have been considered. Management considers TDRs to include all individually acquired retail installment contracts that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs. The purchased receivables portfolio, operating and capital leases, and loans held for sale, including personal loans, are excluded from the scope of the applicable guidance. The Company's TDR balance as of June 30, 2018 and December 31, 2017 primarily consisted of loans that had been deferred or modified to receive a temporary reduction in monthly payment. As of June 30, 2018 and December 31, 2017, there were no receivables from dealers classified as a TDR.
For loans not classified as TDRs, the Company generally estimates an appropriate allowance for credit losses based on delinquency status, the Company’s historical loss experience, estimated values of underlying collateral, and various economic factors. Once a loan has been classified as a TDR, it is generally assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell.
The table below presents the Company’s TDRs as of June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31, 2017
 
Retail Installment Contracts
Outstanding recorded investment (a)
$
5,932,209

 
$
6,261,432

Impairment
(1,496,580
)
 
(1,731,320
)
Outstanding recorded investment, net of impairment
$
4,435,629

 
$
4,530,112

(a) As of June 30, 2018, the outstanding recorded investment excludes $78.3 million of collateral-dependent bankruptcy TDRs that has been written down by $33.2 million to fair value less cost to sell. As of December 31, 2017, the outstanding recorded investment excludes $64.7 million of collateral-dependent bankruptcy TDRs that has been written down by $29.2 million to fair value less cost to sell.

A summary of the Company’s delinquent TDRs at June 30, 2018 and December 31, 2017, is as follows:
 
June 30,
2018
 
December 31, 2017
 
Retail Installment Contracts (a)
Principal, 30-59 days past due
$
1,202,120

 
$
1,332,239

Delinquent principal over 59 days
599,760

 
818,938

Total delinquent TDR principal
$
1,801,880

 
$
2,151,177

(a) The balances in the above table reflects total unpaid principal balance rather than net recorded investment before allowance.

A summary of the Company’s TDRs that were placed on nonaccrual status at June 30, 2018 and December 31, 2017, is as follows:

21



 
June 30,
2018
 
December 31, 2017
 
Retail Installment Contracts (a)
TDRs on cost recovery method (b)
$
1,161,487


$
790,461

TDRs on cash basis accounting
393,373


599,912

Total nonaccrual TDR principal
$
1,554,860


$
1,390,373

(a) The balances in the above table reflects total unpaid principal balance rather than net recorded investment before allowance.
(b) Out of the total TDRs on cost recovery method, $1,022,007 and $652,679 of TDRs were less than 60 days past due as of June 30, 2018 and December 31, 2017, respectively. The Company applied $142,523 and $56,740 of interest received, on these loans, towards recorded investment (as compared to interest income), in accordance with cost recovery method as of June 30, 2018 and December 31, 2017, respectively.

Average recorded investment and income recognized on TDR loans are as follows:
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
Retail Installment Contracts
Average outstanding recorded investment in TDRs
$
5,978,346

 
$
5,860,748

Interest income recognized
$
202,788

 
$
224,810

 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
Retail Installment Contracts
Average outstanding recorded investment in TDRs
$
6,084,560

 
$
5,786,429

Interest income recognized
$
443,999

 
$
485,162

The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs (including collateral-dependent bankruptcy TDRs) that occurred for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
Retail Installment Contracts
Outstanding recorded investment before TDR
$
723,925

 
$
773,629

Outstanding recorded investment after TDR
$
725,438

 
$
787,278

Number of contracts (not in thousands)
43,265

 
44,598

 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
Retail Installment Contracts
Outstanding recorded investment before TDR
$
1,308,373

 
$
1,655,328

Outstanding recorded investment after TDR
$
1,308,102

 
$
1,653,556

Number of contracts (not in thousands)
77,639

 
94,097

Loan restructurings accounted for as TDRs within the previous twelve months that subsequently defaulted during the three and six months ended June 30, 2018 and 2017 are summarized in the following table:
 
Three Months Ended
 
June 30, 2018
 
June 30, 2017
 
Retail Installment Contracts
Recorded investment in TDRs that subsequently defaulted (a)
$
144,561

 
$
190,467

Number of contracts (not in thousands)
8,707

 
10,622


22



 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
Retail Installment Contracts
Recorded investment in TDRs that subsequently defaulted (a)
$
339,826

 
$
402,164

Number of contracts (not in thousands)
20,247

 
22,516

(a) For TDR modifications and TDR modifications that subsequently defaults, the allowance methodology remains unchanged; however, the transition rates of the TDR loans are adjusted to reflect the respective risks.

5.    Debt
Revolving Credit Facilities
The following table presents information regarding credit facilities as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
Maturity Date(s)
 
Utilized Balance
 
Committed Amount
 
Effective Rate
 
Assets Pledged
 
Restricted Cash Pledged
Facilities with third parties:
 
 
 
 
 
 
 
 
 
 
 
Warehouse line
August 2019
 
$
287,484

 
$
500,000

 
3.56%
 
$
410,567

 
$
24,525

Warehouse line
Various (a)
 
518,345

 
1,250,000

 
3.36%
 
780,594

 
5,068

Warehouse line (b)
August 2019
 
1,832,943

 
3,900,000

 
3.86%
 
2,310,677

 
10,261

Warehouse line
December 2018
 
115,100

 
300,000

 
4.01%
 
181,621

 
855

Warehouse line
October 2019
 
364,777

 
1,800,000

 
4.44%
 
529,183

 
180

Repurchase facility (d)
Various (c)
 
179,934

 
179,934

 
3.78%
 
259,860

 
17,818

Repurchase facility (d)
July 2018 (e)
 
92,167

 
92,167

 
3.51%
 
129,440

 

Repurchase facility (d)
September 2018
 
68,682

 
68,682

 
3.56%
 
92,358

 

Repurchase facility (d)
December 2018
 
115,307

 
115,307

 
3.58%
 
156,202

 

Warehouse line
November 2019
 
417,499

 
1,000,000

 
3.17%
 
632,984

 
8

Warehouse line
October 2019
 
217,465

 
400,000

 
3.45%
 
328,840

 
158

Warehouse line
November 2019
 
78,620

 
500,000

 
5.06%
 
89,182

 
411

Warehouse line
October 2018
 
214,500

 
300,000

 
3.66%
 
248,608

 
333

Total facilities with third parties
 
 
4,502,823

 
10,406,090

 
 
 
6,150,116

 
59,617

Facilities with Santander and related subsidiaries:
 
 
 
 
 
 
 
 
 
 
 
Line of credit (f)
December 2018
 

 
1,000,000

 
3.09%
 

 

Promissory Note (g)
December 2022
 
250,000

 
250,000

 
3.95%
 

 

Promissory Note (g)
December 2021
 
250,000

 
250,000

 
3.70%
 

 

Promissory Note (g)
March 2019
 
300,000

 
300,000

 
3.38%
 

 

Promissory Note (g)
October 2020
 
400,000

 
400,000

 
3.10%
 

 

Promissory Note (g)
May 2020
 
500,000

 
500,000

 
3.49%
 

 

Promissory Note (g) (h)
March 2022
 
650,000

 
650,000

 
4.20%
 

 

Promissory Note (g)
August 2021
 
650,000

 
650,000

 
3.44%
 

 

Line of credit (f)
December 2018
 
122,200

 
750,000

 
4.60%
 
129,268

 
538

Line of credit (f)
March 2019
 

 
3,000,000

 
3.94%
 

 

Total facilities with Santander and related subsidiaries
 
 
3,122,200

 
7,750,000

 
 
 
129,268

 
538

Total revolving credit facilities
 
 
$
7,625,023

 
$
18,156,090

 
 
 
$
6,279,384

 
$
60,155


(a) One-half of the outstanding balance on this facility matures in March 2019 and remaining balance matures in March 2020.
(b) This line is held exclusively for financing of Chrysler Capital leases.
(c) The maturity of this repurchase facility ranges from July 2018 to September 2018. Approximately 38% of this was matured and settled in July 2018.
(d) These repurchase facilities are collateralized by securitization notes payable retained by the Company. These facilities have rolling maturities of up to one year. As the borrower, we are exposed to liquidity risk due to changes in the market value of the retained securities pledged. In some instances, we place or receive cash collateral with counterparties under collateral arrangements associated with our repurchase agreements.

23



(e) This repurchase facility was settled on maturity in July 2018.
(f)
These lines are also collateralized by securitization notes payable and residuals retained by the Company.
(g)
As of June 30, 2018 and December 31, 2017, $3,000,000 and $3,000,000, respectively, of the aggregate outstanding balances on these facilities were unsecured.
(h)
In 2017, the Company entered into an interest rate swap to hedge the interest rate risk on this fixed rate debt. This derivative was designated as fair value hedge at inception. This was later terminated and the unamortized fair value hedge adjustment as of June 30, 2018 and December 31, 2017 was $3,763 and $4,223, respectively, the amortization of which will reduce interest expense over the remaining life of the fixed rate debt.
 
December 31, 2017
 
Maturity Date(s)
 
Utilized Balance
 
Committed Amount
 
Effective Rate
 
Assets Pledged
 
Restricted Cash Pledged
Facilities with third parties:
 
 
 
 
 
 
 
 
 
 
 
Warehouse line
January 2018
 
$
336,484

 
$
500,000

 
2.87%
 
$
473,208

 
$

Warehouse line
Various
 
339,145

 
1,250,000

 
2.53%
 
461,353

 
12,645

Warehouse line
August 2019
 
2,044,843

 
3,900,000

 
2.96%
 
2,929,890

 
53,639

Warehouse line
December 2018
 

 
300,000

 
1.49%
 

 

Warehouse line
October 2019
 
226,577

 
1,800,000

 
4.95%
 
311,336

 
6,772

Repurchase facility
Various
 
325,775

 
325,775

 
3.24%
 
474,188

 
13,842

Repurchase facility
April 2018
 
202,311

 
202,311

 
2.67%
 
264,120

 

Repurchase facility
March 2018
 
147,500

 
147,500

 
3.91%
 
222,108

 

Repurchase facility
March 2018
 
68,897

 
68,897

 
3.04%
 
95,762

 

Warehouse line
November 2019
 
403,999

 
1,000,000

 
2.66%
 
546,782

 
14,729

Warehouse line
October 2019
 
81,865

 
400,000

 
4.09%
 
114,021

 
3,057

Warehouse line
November 2019
 
435,220

 
500,000

 
1.92%
 
521,365

 
16,866

Warehouse line
October 2018
 
235,700

 
300,000

 
2.84%
 
289,634

 
10,474

Total facilities with third parties
 
 
4,848,316

 
10,694,483

 
 
 
6,703,767

 
132,024

Facilities with Santander and related subsidiaries:
 
 
 
 
 
 
 
 
 
 
 
Line of credit
December 2018
 

 
1,000,000

 
3.09%
 

 

Promissory Note
December 2021
 
250,000

 
250,000

 
3.70%
 

 

Promissory Note
December 2022
 
250,000

 
250,000

 
3.95%
 

 

Promissory Note
March 2019
 
300,000

 
300,000

 
2.67%
 

 

Promissory Note
October 2020
 
400,000

 
400,000

 
3.10%
 

 

Promissory Note
May 2020
 
500,000

 
500,000

 
3.49%
 

 

Promissory Note
March 2022
 
650,000

 
650,000

 
4.20%
 

 

Promissory Note
August 2021
 
650,000

 
650,000

 
3.44%
 

 

Line of credit
December 2018
 
750,000

 
750,000

 
1.33%
 

 

Line of credit
March 2019
 

 
3,000,000

 
3.94%
 

 

Total facilities with Santander and related subsidiaries
 
 
3,750,000

 
7,750,000

 
 
 

 

Total revolving credit facilities
 
 
$
8,598,316

 
$
18,444,483

 
 
 
$
6,703,767

 
$
132,024

Facilities with Third Parties
The warehouse lines and repurchase facilities are fully collateralized by a designated portion of the Company’s retail installment contracts (Note 2), leased vehicles (Note 3), securitization notes payables and residuals retained by the Company.
Facilities with Santander and Related Subsidiaries
Lines of Credit
Through SHUSA, Santander provides the Company with $3,000,000 of committed revolving credit that can be drawn on an unsecured basis. Through its New York branch, Santander provides the Company with $1,750,000 of long-term committed revolving credit facilities. The $1,750,000 of longer-term committed revolving credit facilities is composed of a $1,000,000 facility that permits unsecured borrowing but is generally collateralized by retained

24



residuals and $750,000 facility that is securitized by Prime retail installment loans. The $1,000,000 line of credit was terminated in July 2018 and replaced with a $500,000 line of credit with SHUSA.
Promissory Notes
Through SHUSA, Santander provides the Company with $3,000,000 of promissory notes.

Secured Structured Financings
 
The following table presents information regarding secured structured financings as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
Estimated Maturity Date(s)
 
Balance
 
Initial Note Amounts Issued
 
Initial Weighted Average Interest Rate
 
Collateral (b)
 
Restricted Cash
2014 Securitizations
February 2020 - April 2022
 
$
830,449

 
$
6,391,020

 
 1.16% - 1.72%
 
$
995,784

 
$
204,967

2015 Securitizations
April 2021 - January 2023
 
2,075,021

 
9,054,732

 
 1.33% - 2.29%
 
2,634,724

 
343,060

2016 Securitizations
April 2022 - March 2024
 
2,694,694

 
7,462,790

 
 1.63% - 2.80%
 
3,723,193

 
321,888

2017 Securitizations
April 2023 - September 2024
 
5,646,607

 
9,296,570

 
 1.35% - 2.52%
 
7,666,331

 
419,569

2018 Securitizations
December 2022 - October 2025
 
7,349,419

 
7,677,570

 
 2.41% - 3.53%
 
8,811,769

 
299,108

Public Securitizations (a)
 
 
18,596,190

 
39,882,682

 

 
23,831,801

 
1,588,592

2011 Private issuance
September 2028
 
153,881

 
1,700,000

 
1.46%
 
277,894

 
102

2013 Private issuances
August 2021-September 2024
 
1,391,968

 
2,044,054

 
1.28% - 1.38%
 
2,558,503

 
5,383

2014 Private issuance
November 2021
 
52,955

 
1,239,271

 
1.10% - 1.40%
 
136,946

 
6,649

2015 Private issuances
July 2019 - September 2021
 
1,413,139

 
2,305,062

 
0.88% - 2.80%
 
460,556

 
2,986

2016 Private issuances
May 2020 - September 2024
 
892,712

 
3,050,000

 
1.55% - 2.86%
 
1,410,208

 
3,113

2017 Private issuances
April 2021 - September 2021
 
991,766

 
1,600,000

 
1.85% - 2.44%
 
1,215,294

 
5,992

2018 Private issuance
June 2022 - January 2023
 
808,209

 
1,000,002

 
2.42% - 2.89%
 
938,604

 
2,450

Privately issued amortizing notes
 
 
5,704,630

 
12,938,389

 
 
 
6,998,005

 
26,675

Total secured structured financings
 
 
$
24,300,820

 
$
52,821,071

 
 
 
$
30,829,806

 
$
1,615,267

(a)Securitizations executed under Rule 144A of the Securities Act are included within this balance.
(b)Secured structured financings may be collateralized by the Company's collateral overages of other issuances.


25



 
December 31, 2017
 
Estimated Maturity Date(s)
 
Balance
 
Initial Note Amounts Issued
 
Initial Weighted Average Interest Rate
 
Collateral
 
Restricted Cash
2013 Securitizations
January 2019 - March 2021
 
$
418,806

 
$
4,239,700

 
0.89% - 1.59%
 
$
544,948

 
$
125,696

2014 Securitizations
February 2020 - April 2022
 
1,150,422

 
6,391,020

 
 1.16% - 1.72%
 
1,362,814

 
210,937

2015 Securitizations
September 2019 - January 2023
 
2,484,051

 
9,171,332

 
 1.33% - 2.29%
 
3,465,671

 
366,062

2016 Securitizations
April 2022 - March 2024
 
3,596,822

 
7,462,790

 
 1.63% - 2.80%
 
4,798,807

 
344,899

2017 Securitizations
April 2023 - September 2024
 
7,343,157

 
9,535,800

 
 2.01% - 2.52%
 
9,701,381

 
422,865

Public Securitizations
 
 
14,993,258

 
36,800,642

 
 
 
19,873,621

 
1,470,459

2011 Private issuance
September 2028
 
281,946

 
1,700,000

 
1.46%
 
398,051

 
20,356

2013 Private issuances
August 2021 - September 2024
 
2,292,279

 
2,044,054

 
1.28% - 1.38%
 
3,719,148

 
155,066

2014 Private issuances
March 2018 - November 2021
 
117,730

 
1,538,087

 
1.05% - 1.40%
 
231,997

 
9,552

2015 Private issuances
November 2018 - September 2021
 
2,009,627

 
2,305,062

 
0.88% - 4.09%
 
988,247

 
55,451

2016 Private issuances
May 2020 - September 2024
 
1,489,464

 
3,050,000

 
1.55% - 2.86%
 
2,147,988

 
89,460

2017 Private issuances
April 2021 - September 2021
 
1,373,591

 
1,641,079

 
1.85% - 2.27%
 
1,747,227

 
47,415

Privately issued amortizing notes
 
 
7,564,637

 
12,278,282

 
 
 
9,232,658

 
377,300

Total secured structured financings
 
 
$
22,557,895

 
$
49,078,924

 
 
 
$
29,106,279

 
$
1,847,759


Most of the Company’s secured structured financings are in the form of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company’s securitizations and private issuances are collateralized by vehicle retail installment contracts and loans or leases. As of June 30, 2018 and December 31, 2017, the Company had private issuances of notes backed by vehicle leases totaling $6,016,507 and $3,710,377, respectively.
Unamortized debt issuance costs are amortized as interest expense over the terms of the related notes payable using the effective interest method and are classified as a discount to the related recorded debt balance. Amortized debt issuance costs were $8,580 and $8,377 for the three months ended June 30, 2018 and 2017, respectively, and $16,500 and $17,106 for the six months ended June 30, 2018 and 2017, respectively. For securitizations, the term takes into consideration the expected execution of the contractual call option, if applicable. Amortization of premium or accretion of discount on notes payable is also included in interest expense using the effective interest method over the estimated remaining life of the notes. Total interest expense on secured structured financings for the three months ended June 30, 2018 and 2017 was $172,916 and $132,953, respectively. Total interest expense on secured structured financings for the six months ended June 30, 2018 and 2017 was $323,591 and $257,018, respectively.

6.
Variable Interest Entities
The Company transfers retail installment contracts and vehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under U.S. GAAP and the Company may or may not consolidate these VIEs on the condensed consolidated balance sheets.
For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Note 7 of the 2017 Annual Report on Form 10-K.

26




On-balance sheet variable interest entities
The Company retains servicing rights for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in fees, commissions and other income. As of June 30, 2018 and December 31, 2017, the Company was servicing $26,330,533 and $26,250,482, respectively, of gross retail installment contracts that have been transferred to consolidated Trusts. The remainder of the Company’s retail installment contracts remain unpledged.
A summary of the cash flows received from consolidated securitization trusts during the three and six months ended June 30, 2018 and 2017, is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Assets securitized
$
6,511,953

 
$
4,750,103

 
$
13,752,897

 
$
12,396,728

 
 
 
 
 
 
 
 
Net proceeds from new securitizations (a)
$
4,581,874

 
$
3,485,091

 
$
8,058,196

 
$
9,061,892

Net proceeds from sale of retained bonds
382,022

 
157,763

 
593,632

 
273,733

Cash received for servicing fees (b)
213,900

 
215,994

 
429,690

 
424,917

Net distributions from Trusts (b)
780,834

 
729,557

 
1,325,986

 
1,407,786

Total cash received from Trusts
$
5,958,630

 
$
4,588,405

 
$
10,407,504

 
$
11,168,328

(a)
Includes additional advances on existing securitizations.
(b)
These amounts are not reflected in the accompanying condensed consolidated statements of cash flows because these cash flows are intra-company and eliminated in consolidation.
Off-balance sheet variable interest entities
During the three and six months ended June 30, 2018 the Company sold $1,156,060 and $2,631,313, respectively, of gross retail installment contracts to VIEs in off-balance sheet securitizations for a loss (excluding lower of cost or market adjustments, if any) of $3,177 and $20,080, respectively. During the three and six months ended June 30, 2017 the Company sold $536,309 and $1,236,331 respectively, of gross retail installment contracts to VIEs in off-balance securitizations for a loss of $3,461 and $6,180, respectively. The losses are recorded in investment losses, net in the accompanying condensed consolidated statements of income. These transactions were executed under securitization platforms with Santander. Santander, as a majority owned affiliate, holds eligible vertical interest in Notes and Certificates of not less than 5% to comply with the Dodd-Frank Act risk retention rules.
As of June 30, 2018 and December 31, 2017, the Company was servicing $4,927,722 and $3,428,248, respectively, of gross retail installment contracts that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:
 
June 30, 2018
 
December 31, 2017
SPAIN
$
3,967,665

 
$
2,024,016

Total serviced for related parties
3,967,665

 
2,024,016

Chrysler Capital securitizations
960,057

 
1,404,232

Total serviced for third parties
960,057

 
1,404,232

Total serviced for others portfolio
$
4,927,722

 
$
3,428,248

Other than repurchases of sold assets due to standard representations and warranties, the Company has no exposure to loss as a result of its involvement with these VIEs.

A summary of the cash flows received from off-balance sheet securitization trusts during the three and six months ended June 30, 2018 and 2017 is as follows:

27



 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Receivables securitized (a)
$
1,156,060

 
$
536,309

 
$
2,631,313

 
$
1,236,331

 
 
 
 
 
 
 
 
Net proceeds from new securitizations
$
1,160,119

 
$
538,478

 
$
2,634,939

 
$
1,240,797

Cash received for servicing fees
12,616

 
11,970

 
20,694

 
13,368

Total cash received from securitization trusts
$
1,172,735

 
$
550,448

 
$
2,655,633

 
$
1,254,165

(a) Represents the unpaid principal balance at the time of original securitization.

7.
Derivative Financial Instruments
The Company uses derivatives financial instruments such as a) interest rate swaps; b) interest rate caps; and c) the corresponding options written in order to offset the interest rate caps to manage the Company's exposure to changing interest rates. The Company uses both derivatives that qualify for hedge accounting treatment and economic hedges.

In addition, the Company is the holder of a warrant that gives it the right, if certain vesting conditions are satisfied, to purchase additional shares in a company in which it has a cost method investment. This warrant was issued in 2012 and is carried at its estimated fair value of zero at June 30, 2018 and December 31, 2017.
The underlying notional amounts and aggregate fair values of these derivatives financial instruments at June 30, 2018 and December 31, 2017, are as follows:
 
June 30, 2018
 
Notional
 
Fair Value
 
Asset
 
Liability
Interest rate swap agreements designated as cash flow hedges
$
4,197,700

 
$
74,110

 
$
74,110

 
$

Interest rate swap agreements not designated as hedges
2,613,800

 
19,596

 
19,596

 

Interest rate cap agreements
9,207,853

 
198,933

 
198,933

 

Options for interest rate cap agreements
9,207,853

 
(199,131
)
 

 
(199,131
)
 
December 31, 2017
 
Notional
 
Fair Value
 
Asset
 
Liability
Interest rate swap agreements designated as cash flow hedges
$
4,926,900

 
$
45,986

 
$
45,986

 
$

Interest rate swap agreements not designated as hedges
1,736,400

 
9,596

 
9,596

 

Interest rate cap agreements
10,906,081

 
103,721

 
135,830

 
(32,109
)
Options for interest rate cap agreements
10,906,081

 
(103,659
)
 
32,165

 
(135,824
)

See Note 13 for disclosure of fair value and balance sheet location of the Company's derivative financial instruments.
The Company enters into legally enforceable master netting agreements that reduce risk by permitting netting of transactions, such as derivatives and collateral posting, with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in ISDA master agreements. The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting (ISDA) agreement. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offset in the Condensed Consolidated Balance Sheet” section of the tables below. Information on the offsetting of derivative assets and derivative liabilities due to the right of offset was as follows, as of June 30, 2018 and December 31, 2017:

28



 
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet
 
Assets Presented
in the
Condensed Consolidated
Balance Sheet
 
Cash
Collateral
Received (a)
 
Net
Amount
June 30, 2018
 
 
 
 
 
Interest rate swaps - third party (b)
$
93,706

 
$
(61,355
)
 
$
32,351

Interest rate caps - Santander and affiliates
14,111

 
(12,240
)
 
1,871

Interest rate caps - third party
184,822

 
(81,597
)
 
103,225

Total derivatives subject to a master netting arrangement or similar arrangement
292,639

 
(155,192
)
 
137,447

Total derivatives not subject to a master netting arrangement or similar arrangement

 

 

Total derivative assets
$
292,639

 
$
(155,192
)
 
$
137,447

Total financial assets
$
292,639

 
$
(155,192
)
 
$
137,447

 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Interest rate swaps - Santander and affiliates
$
8,621

 
$
(3,461
)
 
$
5,160

Interest rate swaps - third party
46,961

 
(448
)
 
46,513

Interest rate caps - Santander and affiliates
18,201

 
(12,240
)
 
5,961

Interest rate caps - third party
149,794

 
(55,835
)
 
93,959

Total derivatives subject to a master netting arrangement or similar arrangement
223,577

 
(71,984
)
 
151,593

Total derivatives not subject to a master netting arrangement or similar arrangement

 

 

Total derivative assets
$
223,577

 
$
(71,984
)
 
$
151,593

Total financial assets
$
223,577

 
$
(71,984
)
 
$
151,593

(a) Cash collateral received is reported in Other liabilities or Due to affiliate, as applicable, in the consolidated balance sheet.
(b) Includes derivative instruments originally transacted with Santander and affiliates and subsequently amended to reflect clearing with central clearing counterparties.
 
Gross Amounts Not Offset in the
Condensed Consolidated Balance Sheet
 
Liabilities Presented
in the Condensed
Consolidated
Balance Sheet
 
Cash
Collateral
Pledged (a)
 
Net
Amount
June 30, 2018
 
 
 
 
 
Back to back - Santander & affiliates
$
14,111

 
$
(14,111
)
 
$

Back to back - third party
185,020

 
(185,020
)
 

Total derivatives subject to a master netting arrangement or similar arrangement
199,131

 
(199,131
)
 

Total derivatives not subject to a master netting arrangement or similar arrangement

 

 

Total derivative liabilities
$
199,131

 
$
(199,131
)
 
$

Total financial liabilities
$
199,131

 
$
(199,131
)
 
$

 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
Back to back - Santander & affiliates
18,201

 
(18,201
)
 

Back to back - third party
149,732

 
(133,540
)
 
16,192

Total derivatives subject to a master netting arrangement or similar arrangement
167,933

 
(151,741
)
 
16,192

Total derivatives not subject to a master netting arrangement or similar arrangement

 

 

Total derivative liabilities
$
167,933

 
$
(151,741
)
 
$
16,192

Total financial liabilities
$
167,933

 
$
(151,741
)
 
$
16,192

(a) Cash collateral pledged is reported in Other assets or Due from affiliate, as applicable, in the consolidated balance sheet. In certain instances, the Company is over-collateralized since the actual amount of cash pledged as collateral exceeds the associated financial liability. As a result, the actual amount of cash collateral pledged that is reported in Other assets or Due from affiliates may be greater than the amount shown in the table above.

The gross gains (losses) reclassified from accumulated other comprehensive income (loss) to net income, are included as components of interest expense. The impacts on the condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2018 and 2017 were as follows:

29



 
Three Months Ended June 30, 2018
 
Recognized in Earnings
 
Gross Gains Recognized in Accumulated Other Comprehensive Income (Loss)
 
Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges
$

 
$
8,412

 
$
9,095

Total
$

 
$
8,412

 
$
9,095

Derivative instruments not designated as hedges
 
 
 
 
 
Losses (Gains) recognized in interest expenses
(22
)
 
 
 
 
 
Three Months Ended June 30, 2017
 
Recognized in Earnings
 
Gross Gains (Losses) Recognized in Accumulated Other Comprehensive Income (Loss)
 
Gross Gains (Losses) Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges
$
(9,895
)
 
$
(2,217
)
 
$
(8,859
)
Interest rate swap agreements designated as fair value hedges
$
1,232

 
$

 
$

Total
$
(8,663
)
 
$
(2,217
)
 
$
(8,859
)
 
 
 
 
 
 
Derivative instruments not designated as hedges
 
 
 
 
 
Losses (Gains) recognized in operating expenses
$
(272
)
 
 
 
 
 
Six Months Ended June 30, 2018
 
Recognized in Earnings
 
Gross Gains Recognized in Accumulated Other Comprehensive Income (Loss)
 
Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges
$

 
$
34,841

 
$
13,672

Total
$

 
$
34,841

 
$
13,672

 
 
 
 
 
 
Derivative instruments not designated as hedges:
 
 
 
 
 
Losses (Gains) recognized in interest expenses
$
(9,739
)
 
 
 
 

 
Six Months Ended June 30, 2017
 
Recognized in Earnings
 
Gross Gains Recognized in Accumulated Other Comprehensive Income (Loss)
 
Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges
$
(9,512
)
 
$
5,115

 
$
(4,619
)
Interest rate swap agreements designated as fair value hedges
$
1,232

 

 

Total
$
(8,280
)
 
$
5,115

 
$
(4,619
)
 
 
 
 
 
 
Derivative instruments not designated as hedges:
 
 
 
 
 
Losses (Gains) recognized in operating expenses
$
426

 
 
 
 

The Company estimates that approximately $41,548 of unrealized gains included in accumulated other comprehensive income (loss) will be reclassified to interest expense within the next twelve months.

8.
Other Assets
Other assets were comprised as follows:

30



 
June 30,
2018
 
December 31,
2017
Vehicles (a)
$
254,086

 
$
293,546

Manufacturer subvention payments receivable (b)
163,775

 
83,910

Upfront fee (b)
72,500

 
80,000

Derivative assets at fair value (c)
278,528

 
196,755

Derivative - third party collateral
190,609

 
149,805

Prepaids
30,459

 
40,830

Accounts receivable
26,459

 
38,583

Other
45,824

 
29,815

Other assets
$
1,062,240

 
$
913,244

 
(a)
Includes vehicles recovered through repossession as well as vehicles recovered due to lease terminations.
(b)
These amounts relate to the Chrysler Agreement. The Company paid a $150,000 upfront fee upon the May 2013 inception of the Chrysler Agreement. The fee is being amortized into finance and other interest income over a ten-year term. As the preferred financing provider for FCA, the Company is entitled to subvention payments on loans and leases with below-market customer payments. Exercise of the equity option by FCA would be considered a triggering event requiring re-evaluation of whether or not the remaining unamortized balance of the upfront fee should be impaired. FCA has not yet delivered to the Company a notice of intent to exercise its option.
(c)
Derivative assets at fair value represent the gross amount of derivatives presented in the condensed consolidated financial statements. Refer to Note 7 to these Condensed Consolidated Financial Statements for the detail of these amounts.

9.
Income Taxes
The Company recorded income tax expense of $114,004 (25.4% effective tax rate) and $83,433 (24.0% effective tax rate) during the three months ended June 30, 2018 and 2017, respectively. The Company recorded income tax expense of $171,315 (22.9% effective tax rate) and $161,434 (28.3% effective tax rate) during the six months ended June 30, 2018 and 2017, respectively.
The Company is a party to a tax sharing agreement requiring that the unitary state tax liability among affiliates included in unitary state tax returns be allocated using the hypothetical separate company tax calculation method. The Company had a net receivable from affiliates under the tax sharing agreement of $467 and $467 at June 30, 2018 and December 31, 2017, respectively, which was included in related party taxes receivable in the condensed consolidated balance sheet.

The Company provides U.S. income taxes on earnings of foreign subsidiaries unless the subsidiaries' earnings are considered indefinitely reinvested outside of the United States. As of December 31, 2017 and June 30, 2018, the Company has no earnings that are considered indefinitely reinvested.

During the six months ended June 30, 2018, the Company adopted ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This standard requires entities to reclassify from accumulated other comprehensive income to retained earnings stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The Company reclassified $6,149 related to stranded tax effects.

The Company applies an aggregate portfolio approach whereby income tax effects from accumulated other comprehensive income are released only when an entire portfolio (i.e. all related units of account) of a particular type is liquidated, sold or extinguished. 
Significant judgment is required in evaluating and reserving for uncertain tax positions. Although management believes adequate reserves have been established for all uncertain tax positions, the final outcomes of these matters may differ. Management does not believe the outcome of any uncertain tax position, individually or combined, will have a material effect on the Company's business, financial position or results of operations. The reserve for uncertain tax positions, as well as associated penalties and interest, is a component of the income tax provision.

10.
Commitments and Contingencies


31



The following table summarizes liabilities recorded for commitments and contingencies as of June 30, 2018 and December 31, 2017, all of which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets:
Agreement or Legal Matter
 
Commitment or Contingency
 
June 30, 2018
 
December 31, 2017
Chrysler Agreement
 
Revenue-sharing and gain-sharing payments
 
$
11,053

 
$
6,580

Agreement with Bank of America
 
Servicer performance fee
 
6,996

 
8,072

Agreement with CBP
 
Loss-sharing payments
 
4,977

 
5,625

Other Contingencies
 
Consumer arrangements
 
14,339

 
6,326

Legal and regulatory proceedings
 
Aggregate legal and regulatory liabilities
 
112,500

 
108,800


Following is a description of the agreements and legal matters pursuant to which the liabilities in the preceding table were recorded.

Chrysler Agreement
Under terms of the Chrysler Agreement, the Company must make revenue sharing payments to FCA and also must make gain-sharing payments to FCA when residual gains on leased vehicles exceed a specified threshold. The Company had accrued $11,053 and $6,580 at June 30, 2018 and December 31, 2017, respectively, related to these obligations.
The Chrysler Agreement requires, among other things, that the Company bear the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that the Company maintain at least $5.0 billion in funding available for Floorplan Loans and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to the Company. The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations under the Chrysler Agreement. These obligations include the Company's meeting specified escalating penetration rates for the first five years of the agreement. The Company did not meet these penetration rates. Also, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. If FCA exercises its purchase option, the Chrysler Agreement were to terminate, or the Company otherwise is unable to realize the expected benefits of its relationship with FCA, there could be a materially adverse impact to the Company’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of its portfolio, liquidity, funding and growth, and the Company's ability to implement its business strategy could be materially adversely affected.

Agreement with Bank of America
Until January 2017, the Company had a flow agreement with Bank of America whereby the Company was committed to selling up to $300,000 of eligible loans to the bank each month. The Company retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale. The Company had accrued $6,996 and $8,072 at June 30, 2018 and December 31, 2017, respectively, related to this obligation.
Agreement with CBP
Until May 1, 2017, the Company sold loans to CBP under terms of a flow agreement and predecessor sale agreements. The Company retained servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. The Company had accrued $4,977 and $5,625 at June 30, 2018 and December 31, 2017, respectively, related to the loss-sharing obligation.
Other Contingencies

32



The Company is or may be subject to potential liability under various other contingent exposures. The Company had accrued $14,339 and $6,326 at June 30, 2018 and December 31, 2017, respectively, for other miscellaneous contingencies.
Legal and regulatory proceedings

Periodically, the Company is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, regulatory matter and legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. Further, it is reasonably possible that actual outcomes or losses may differ materially from the Company's current assessments and estimates and any adverse resolution of any of these matters against it could materially and adversely affect the Company's business, financial condition and results of operation.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, regulatory matter or other legal proceeding develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency. The Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.

As of June 30, 2018, the Company has accrued aggregate legal and regulatory liabilities of $112,500. Further, the Company believes that the estimate of the aggregate range of reasonably possible losses, in excess of reserves established, for legal and regulatory proceedings is up to $207,000 as of June 30, 2018. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject.

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: The Company is a defendant in a purported securities class action lawsuit (the Deka Lawsuit) in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 26, 2014, was brought against the Company, certain of its current and former directors and executive officers and certain institutions that served as underwriters in the Company’s IPO on behalf of a class consisting of those who purchased or otherwise acquired our securities between January 23, 2014 and June 12, 2014. The complaint alleges, among other things, that our IPO registration statement and prospectus and certain subsequent public disclosures violated federal securities laws by containing misleading statements concerning the Company’s ability to pay dividends and the adequacy of the Company’s compliance systems and oversight. On December 18, 2015, the Company and the individual defendants moved to dismiss the lawsuit, which was denied. On December 2, 2016, the plaintiffs moved to certify the proposed classes. On July 11, 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017).

Feldman Lawsuit: On October 15, 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the Feldman Lawsuit). The Feldman Lawsuit names as defendants current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing the Company’s nonprime vehicle lending practices, resulting in harm to the Company. The complaint seeks unspecified damages and equitable relief. On December 29, 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.

Parmelee Lawsuit: The Company is a defendant in two purported securities class actions lawsuits that were filed in March and April 2016 in the United States District Court, Northern District of Texas. The lawsuits were consolidated and are now captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783. The lawsuits were

33



filed against the Company and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired our securities between February 3, 2015 and March 15, 2016. The complaint alleges that the Company violated federal securities laws by making false or misleading statements, as well as failing to disclose material adverse facts, in its periodic reports filed under the Exchange Act and certain other public disclosures, in connection with, among other things, the Company’s change in its methodology for estimating its allowance for credit losses and correction of such allowance for prior periods. On March 14, 2017, the Company filed a motion to dismiss the lawsuit. On January 3, 2018, the court granted the Company’s motion as to defendant Ismail Dawood (the Company’s former Chief Financial Officer) and denied the motion as to all other defendants. In July 2018, the lead plaintiff filed an unopposed motion for preliminary approval of a class action settlement of the lawsuit for a cash payment of $9,500.

Jackie888 Lawsuit: On September 27, 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the Jackie888 Lawsuit). The Jackie888 Lawsuit names as defendants current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with the Company’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. On April 13, 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.

Consumer Lending Cases
The Company is also party to various lawsuits pending in federal and state courts alleging violations of state and federal consumer lending laws, including, without limitation, the Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.

Regulatory Investigations and Proceedings
The Company is party to, or is periodically otherwise involved in, reviews, investigations, examinations and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the FRBB, the CFPB, the DOJ, the SEC, the FTC and various state regulatory and enforcement agencies.

Currently, such matters include, but are not limited to, the following:

The Company received a civil subpoena from the DOJ, under FIRREA, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans, and also from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. The Company has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ and SEC with respect to these matters.

In October 2014, May 2015, July 2015 and February 2017, the Company received subpoenas and/or Civil Investigative Demands (CIDs) from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. The Company has been informed that these states serve as an executive committee on behalf of a group of 32 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contain broad requests for information and the production of documents related to the Company’s underwriting, securitization, servicing and collection of nonprime vehicle loans. The Company has responded to these requests within the deadlines specified in the CIDs and has otherwise cooperated with the Attorneys General with respect to this matter.

In February 2016, the CFPB issued a supervisory letter relating to its investigation of the Company’s compliance systems, Board and senior management oversight, consumer complaint handling, marketing of GAP coverage and loan deferral disclosure practices. The Company subsequently received a series of CIDs from the CFPB requesting information and testimony regarding the Company’s marketing of GAP coverage and loan deferral disclosure practices. The Company has responded to these requests within the deadlines specified in the CIDs and has otherwise cooperated with the CFPB with respect to this matter.


34



In August 2017, the Company received a CID from the CFPB. The stated purpose of the CID is to determine whether the Company has complied with the Fair Credit Reporting Act and related regulations. The Company has responded to these requests within the deadlines specified in the CIDs and has otherwise cooperated with the CFPB with respect to this matter.

These matters are ongoing and could in the future result in the imposition of damages, fines or other penalties. No assurance can be given that the ultimate outcome of these matters or any resulting proceedings would not materially and adversely affect the Company’s business, financial condition and results of operations.

2017 Written Agreement with the Federal Reserve

On March 21, 2017, the Company and SHUSA entered into a written agreement with the FRBB. Under the terms of the agreement, the Company is required to enhance its compliance risk management program, Board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of the Company's management and operations.

Mississippi Attorney General Lawsuit

On January 10, 2017, the Attorney General of Mississippi filed a lawsuit against the Company in the Chancery Court of the First Judicial District of Hinds County, Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that the Company engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the MCPA) and seeks unspecified civil penalties, equitable relief and other relief. On March 31, 2017, the Company filed motions to dismiss the lawsuit and subsequently filed a motion to stay the lawsuit pending the resolution of an interlocutory appeal relating to the MCPA before the Mississippi Supreme Court in Purdue Pharma, L.P., et al. v. State, No. 2017-IA- 00300-SCT. On September 25, 2017, the court granted the motion to stay and ordered a stay of all proceedings, excluding discovery and final briefing on motions to dismiss.
 
SCRA Consent Order

In February 2015, the Company entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, that resolves the DOJ’s claims against the Company that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers Civil Relief Act (SCRA). The consent order requires the Company to pay a civil fine in the amount of $55, as well as at least $9,360 to affected servicemembers consisting of $10 per servicemember plus compensation for any lost equity (with interest) for each repossession by the Company, and $5 per servicemember for each instance where the Company sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder. The consent order also provides for monitoring by the DOJ for the Company’s SCRA compliance for a period of five years and requires the Company to undertake certain additional remedial measures.
Agreements

Bluestem

The Company is party to agreements with Bluestem whereby the Company is committed to purchase certain new advances on personal revolving financings receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewable through April 2022 at Bluestem's option. As of June 30, 2018 and December 31, 2017, the total unused credit available to customers was $3.8 billion, and $3.9 billion, respectively. In 2017, the Company purchased $1.2 billion of receivables, out of the $4.0 billion unused credit available to customers as of December 31, 2016. In addition, the Company purchased $263,831 of receivables related to newly opened customer accounts in 2017. During the six months ended June 30, 2018, the Company purchased $0.5 billion of receivables, out of the $3.9 billion unused credit available to customers as of December 31, 2017. In addition, the Company purchased $83,842 of receivables related to newly opened customer accounts during the six months ended June 30, 2018.
 

35



Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of June 30, 2018 and December 31, 2017, the Company was obligated to purchase $15,667 and $11,539, respectively, in receivables that had been originated by Bluestem but not yet purchased by the Company. The Company also is required to make a profit-sharing payment to Bluestem each month if performance exceeds a specified return threshold. During the year ended December 31, 2015, the Company and Bluestem executed an amendment that, among other provisions, increases the profit-sharing percentage retained by the Company, gives Bluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and, provided that repurchase right is exercised, gives Bluestem the right to retain up to 20% of new accounts subsequently originated.

SBNA

The Company also has agreements with SBNA to service recreational and marine vehicle portfolios. These agreements call for a periodic retroactive adjustment, based on cumulative return performance, of the servicing fee rate to inception of the contract. There were zero adjustments for the three and six months ended June 30, 2018 and June 30, 2017.

The Company provided SBNA with the first right to review and approve consumer vehicle lease applications, subject to volume constraints, under terms of a flow agreement that was terminated in May 2015. The Company has indemnified SBNA for potential credit and residual losses on $48,226 of leases that had been originated by SBNA under this program but were subsequently determined not to meet SBNA’s underwriting requirements. This indemnification agreement is supported by an equal amount of cash collateral posted by the Company in an SBNA bank account. The collateral account balance is included in restricted cash in the Company's consolidated balance sheets. As of June 30, 2018, the balance in the collateral account is zero. In January 2015, the Company additionally agreed to indemnify SBNA for residual losses, up to a cap, on certain leases originated under the flow agreement for which SBNA and the Company had differing residual value expectations at lease inception. As of June 30, 2018 and December 31, 2017, the Company had a recorded liability of $1,481 and $2,206, respectively, related to the residual losses covered under the agreement.

Others

Under terms of an application transfer agreement with Nissan, the Company has the first opportunity to review for its own portfolio any credit applications turned down by the Nissan's captive finance company. The agreement does not require the Company to originate any loans, but for each loan originated the Company will pay Nissan a referral fee.
  
In connection with the sale of retail installment contracts through securitizations and other sales, the Company has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of June 30, 2018, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for the Company's asset-backed securities or other sales. In the opinion of management, the potential exposure of other recourse obligations related to the Company’s retail installment contract sales agreements is not expected to have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.
  
Santander has provided guarantees on the covenants, agreements, and obligations of the Company under the governing documents of its warehouse lines and privately issued amortizing notes. These guarantees are limited to the obligations of the Company as servicer.
  
In November 2015, the Company executed a forward flow asset sale agreement with a third party under terms of which the Company committed to sell $350,000 in charged off loan receivables in bankruptcy status on a quarterly basis . However, any sale more than $275,000 is subject to a market price check. As of June 30, 2018 and December 31, 2017, the remaining aggregate commitment was $78,466 and $98,858, respectively.
Leases

36




The Company has entered into various operating leases, primarily for office space and computer equipment. Lease expense incurred totaled $2,531 and $5,090 for the three and six months ended June 30, 2018, respectively and $2,728 and $5,467 for the three and six months ended June 30, 2017 respectively. The remaining obligations under lease commitments at June 30, 2018 are as follows:
Years ended December 31,
 
2018
$
6,260

2019
12,817

2020
13,080

2021
12,940

2022
12,282

Thereafter
44,663

Total
$
102,042


    
11.
Related-Party Transactions
Related-party transactions not otherwise disclosed in these footnotes to the condensed consolidated financial statements include the following:
Credit Facilities
Interest expense, including unused fees, for affiliate lines/letters of credit for the three and six months ended June 30, 2018 and 2017, was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Line of credit agreement with Santander - New York Branch (Note 5)
$
5,741

 
$
15,490

 
$
10,108

 
$
38,466

Debt facilities with SHUSA (Note 5)
36,561

 
20,261

 
72,407

 
32,894

Accrued interest for affiliate lines/letters of credit at June 30, 2018 and December 31, 2017, was as follows:
 
June 30,
2018
 
December 31, 2017
Line of credit agreement with Santander - New York Branch (Note 5)
$
1,787

 
$
1,435

Debt facilities with SHUSA (Note 5)
18,225

 
18,670

In August 2015, under an agreement with Santander, the Company agreed to begin incurring a fee of 12.5 basis points (per annum) on certain warehouse lines, as they renew, for which Santander provides a guarantee of the Company's servicing obligations. The Company recognized guarantee fee expense of $1,569 and $3,617 for the three and six months ended June 30, 2018, respectively, and $1,370 and $2,948 for the three and six months ended June 30, 2017, respectively. As of June 30, 2018 and December 31, 2017, the Company had $11,216 and $7,598 of related fees payable to Santander, respectively.
Derivatives
The Company has derivative financial instruments with Santander and affiliates with outstanding notional amounts of $1,311,693 and $3,734,400 at June 30, 2018 and December 31, 2017, respectively (Note 7). The Company had a collateral overage on derivative liabilities with Santander and affiliates of $3,060 and $1,622 at June 30, 2018 and December 31, 2017, respectively. Interest and mark-to-market adjustments on these agreements totaled $231 and $245 for the three months ended June 30, 2018 and 2017, respectively, and $460 and $216 for the six months ended June 30, 2018 and 2017, respectively.
Lease origination and servicing agreement
In June 2014, the Company executed a bulk sale of Chrysler Capital automobile leases to SBNA. As part of

37



the sale, the Company retained servicing rights on all of the leases sold to SBNA.
In addition, during 2014 and until May 2015, the Company was party to a flow agreement with SBNA whereby SBNA had the first right to review and approve Chrysler Capital consumer vehicle lease applications. The Company received an origination fee on all leases originated under this agreement and continues to service these vehicles leases. Pursuant to the Chrysler Agreement, the Company pays FCA on behalf of SBNA for residual gains and losses on the flowed leases.
Servicing fee income recognized on leases serviced for SBNA totaled $567 and $1,656 for the three months ended June 30, 2018 and 2017, respectively, and $1,348 and $3,049 for the six months ended June 30, 2018 and 2017, respectively.
Other information on the consumer vehicle lease portfolio serviced for SBNA as of June 30, 2018 and December 31, 2017 is as follows:
 
June 30,
2018
 
December 31,
2017
Total serviced portfolio
$
7,042

 
$
321,629

Origination and servicing fees receivable
113

 
2,067

Revenue share reimbursement receivable
1,042

 
1,548


In June 2014, the Company entered into an indemnification agreement with SBNA whereby the Company indemnifies SBNA for any credit or residual losses on a pool of $48,226 in leases originated under the flow agreement. The covered leases are non-conforming units because they did not meet SBNA’s credit criteria at origination. At the time of the agreement, the Company established a $48,226 collateral account with SBNA in restricted cash that will be released over time to SBNA, in the case of losses, and the Company, in the case of payments and sale proceeds. As of June 30, 2018 and December 31, 2017, the balance in the collateral account is zero and $18, respectively. The Company recognized zero indemnification expense for the three months ended June 30, 2018 and 2017 and $722 and zero for the six months ended June 30, 2018 and 2017, respectively.

Also, in January 2015, the Company agreed to indemnify SBNA for residual losses, up to a cap, on certain leases originated under the flow agreement between September 24, 2014 and May 9, 2015 for which SBNA and the Company had differing residual value expectations at lease inception. At the time of the agreement, the Company established a collateral account held by SBNA to cover the expected losses, as of June 30, 2018 and December 31, 2017, the balance in the collateral account was $1,483 and $2,210, respectively. As of June 30, 2018 and December 31, 2017, the Company had a recorded liability of $1,481 and $2,206 respectively, related to the residual losses covered under the agreement.
Retail Installment Contracts and RV Marine
The Company also has agreements with SBNA to service auto retail installment contracts and recreational and marine vehicle portfolios. In addition, during the three months ended September 30, 2017, the Company sold certain receivables previously acquired with deteriorated credit quality to SBNA. The Company will continue to perform the servicing of these assets.
Servicing fee income recognized under these agreements totaled $756 and $845 for the three months ended June 30, 2018 and 2017, respectively, and $1,795 and $1,770 for the six months ended June 30, 2018 and 2017, respectively. Other information on the serviced auto loan and retail installment contract portfolios for SBNA as of June 30, 2018 and December 31, 2017 is as follows:
 
June 30,
2018
 
December 31,
2017
Total serviced portfolio
$
447,228

 
$
522,219

Cash collections due to owner
13,478

 
12,306

Servicing fees receivable
845

 
943

Dealer Lending
The Company is required to permit SBNA a first right to review and assess Chrysler Capital dealer lending opportunities, and SBNA is required to pay the Company origination fee and annual renewal fee for each loan. The

38



agreement also transferred the servicing of all Chrysler Capital receivables from dealers, including receivables held by SBNA and by the Company, from the Company to SBNA. The Company may provide advance funding for dealer loans originated by SBNA, which is reimbursed to the Company by SBNA. The Company had no outstanding receivable from SBNA as of June 30, 2018 and December 31, 2017 for such advances.
Other information related to the above transactions with SBNA as of June 30, 2018 and December 31, 2017 is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Origination and renewal fee income from SBNA (a)
$
1,232

 
$
640

 
$
2,072

 
$
1,546

Servicing fees expenses charged by SBNA (b)
20

 
26

 
39

 
56

(a) As of June 30, 2018 and December 31, 2017, the Company had origination and renewal fees receivable from SBNA of $608 and $369, respectively.
(b) As of June 30, 2018 and December 31, 2017, the Company had $9 and $9, respectively, of servicing fees payable to SBNA, respectively.
Under the agreement with SBNA, the Company may originate retail consumer loans in connection with sales of vehicles that are collaterally held against floorplan loans by SBNA. Upon origination, the Company remits payment to SBNA, who settles the transaction with the dealer. The Company owed SBNA $6,866 and $4,481 related to such originations as of June 30, 2018 and December 31, 2017, respectively.
The Company received a $9,000 referral fee in connection with sourcing and servicing arrangement and is amortizing the fee into income over the ten-year term of the agreement through July 1, 2022, the termination date of the agreement. As of June 30, 2018 and December 31, 2017, the unamortized fee balance was $4,500 and $4,950, respectively. The Company recognized $225 and $450 of income related to the referral fee for the three and six months ended June 30, 2018 and 2017, respectively.
Origination Support Services

Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail loans, primarily from Chrysler dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA’s behalf. During the three and six months ended June 30, 2018, the Company facilitated the purchase of $29 million and $53 million of retail installment contacts, respectively. The Company recognized referral fee and servicing fee income of $216 and $388, respectively, for the three and six months ended June 30, 2018 of which $46 is receivable as of June 30, 2018.

In addition, beginning in 2016, the Company agreed to pay SBNA a market rate-based fee expense for payments made at SBNA retail branch locations for accounts originated/serviced by the Company and the costs associated with modifying the Advanced Teller platform to the payments. The Company incurred $154 and $76 for these services during the three months ended June 30, 2018 and 2017, respectively, and $341 and $116 for the six months ended June 30, 2018 and 2017, respectively.
Securitizations
On March 29, 2017, the Company entered into a Master Securities Purchase Agreement (MSPA) with Santander, whereby the Company has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term ending in December 2018. The Company provides servicing on all loans originated under this arrangement. For the six months ended June 30, 2017, the Company sold $1,236,331 of loans under this MSPA arrangement. The MSPA was amended in early 2018 and under this amended agreement, the Company sold $2,631,313 of prime loans at fair value to Santander for the six months ended June 30, 2018.
Other information on the relating to SPAIN securitization platform for the three and six months ended June 30, 2018 and June 30, 2017 is as follows:

39



 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Servicing fee income
$
8,622

 
$
890

 
$
15,822

 
$
890

Loss(Gain) on sale, excluding lower of cost or market adjustments (if any)
3,177

 
3,461

 
20,080

 
6,180

Servicing fee receivable as of June 30, 2018 and December 31, 2017 was $3,421 and $1,848, respectively. The Company had $70,546 and $12,961 of collections due to Santander as of June 30, 2018 and December 31, 2017 respectively.

Santander Investment Securities Inc. (SIS), an affiliated entity, serves as co-manager on certain of the Company’s securitizations. Amounts paid to SIS as co-manager for the three months ended June 30, 2018 and 2017, totaled $148 and $1,009, respectively, and totaled $858 and $1,159 for the six months ended June 30, 2018 and 2017, respectively, and are included in debt issuance costs in the accompanying condensed consolidated financial statements.
CEO and other employee compensation
On August 28, 2017, the Board of the Company announced that Scott Powell would succeed Jason Kulas as President and CEO, effective immediately. During the six months ended June 30, 2018, the Company accrued $1,713 as its share of compensation expense based on time allocation between his services to the Company and SHUSA.
In addition, for the six months ended June 30, 2018, the Company owed approximately $193 to SHUSA as Chief Compliance Officer's share of compensation expense based on time allocation between his services to the Company and SHUSA.

Further, certain other employees of the Company provide services to SHUSA and certain other employees of SHUSA provide services to the Company. For the six months ended June 30, 2018, the Company owed SHUSA approximately $360 and SHUSA owed the Company approximately $340 for such services.

Other related-party transactions

As of June 30, 2018, Jason Kulas had an equity investment in a property in which the Company leases 373,000 square feet as its corporate headquarters. For the three months ended June 30, 2018 and 2017, the Company recorded $1,208 and $1,285, respectively, in lease expenses on this property. For the six months ended June 30, 2018 and 2017, the Company recorded $2,402 and $2,560, respectively, in lease expenses on this property. The Company subleases approximately 13,000 square feet of its corporate office space to SBNA. For the three months ended June 30, 2018 and 2017, the Company recorded $41 and $41 respectively, in sublease revenue on this property. For the six months ended June 30, 2018 and 2017, the Company recorded $82 and $82 respectively, in sublease revenue on this property. Future minimum lease payments over the remainder of the 9-year term of the lease, which extends through 2026, total $58,983.

The Company's wholly-owned subsidiary, Santander Consumer International Puerto Rico, LLC (SCI), opened deposit accounts with Banco Santander Puerto Rico, an affiliated entity. As of June 30, 2018 and December 31, 2017, SCI had cash of $10,557 and $106,596, respectively, on deposit with Banco Santander Puerto Rico.

Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with the Company to provide professional services, telecommunications, and internal and/or external applications. Expenses incurred, which are included as a component of other operating costs in the accompanying consolidated statements of income, totaled zero and $21 for the three months ended June 30, 2018 and 2017, respectively, and zero and $42 for the six months ended June 30, 2018 and 2017, respectively.

Beginning in 2017, the Company and SBNA entered into a Credit Card Agreement (Card Agreement) whereby SBNA will provide credit card services for travel and related business expenses and for vendor payments. This service is at zero cost but generate rebates based on purchases made. As of June 30, 2018, the activities associated with the program were insignificant.


40



Effective April 1, 2017, the Company contracted Aquanima, a Santander affiliate, to provide procurement services. Expenses incurred and paid for totaled $379 and $212 for the three months ended June 30, 2018 and 2017, respectively and $758 and $212 for the six months ended June 30, 2018 and 2017, respectively.

The Company partners with SHUSA to place Cyber Liability Insurance in which participating national entities share $150 million aggregate limits. The Company repays SHUSA for the Company’s equitably allocated portion of insurance premiums and fees. Expenses incurred totaled $93 and $78 for the three months ended June 30, 2018 and 2017, respectively and $185 and $156 for the six months ended June 30, 2018 and 2017, respectively. In addition the Company partners with SHUSA for various other insurance products. Expenses incurred totaled $163 and $141 for the three months ended June 30, 2018 and 2017, respectively, and $325 and $281 for the six months ended June 30, 2018 and 2017, respectively.

12.
Computation of Basic and Diluted Earnings per Common Share

Earnings per common share (EPS) is computed using the two-class method required for participating securities. Restricted stock awards are considered to be participating securities because holders of such shares have non-forfeitable dividend rights in the event of a declaration of a dividend on the Company's common shares.

The calculation of diluted EPS excludes 221,572 and 952,111 employee stock options for the three and six months ended June 30, 2018 and 2017, respectively, as the effect of exercise or settlement of those securities would be anti-dilutive. RSUs of zero for the three and six months ended June 30, 2018 and 479 and 555 for the three and six months ended June 30, 2017, respectively, were excluded from the calculation of diluted EPS as the effect of exercise or settlement of those securities would be anti-dilutive.

The following table represents EPS numbers for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
Earnings per common share
 
 
 
 
 
 
 
Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

Weighted average number of common shares outstanding before restricted participating shares (in thousands)
361,268

 
359,311

 
360,987

 
359,134

Weighted average number of participating restricted common shares outstanding (in thousands)

 
150

 

 
150

Weighted average number of common shares outstanding (in thousands)
361,268

 
359,461

 
360,987

 
359,284

Earnings per common share
$
0.93

 
$
0.74

 
$
1.60

 
$
1.14

Earnings per common share - assuming dilution
 
 
 
 
 
 
 
Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

Weighted average number of common shares outstanding (in thousands)
361,268

 
359,461

 
360,987

 
359,284

Effect of employee stock-based awards (in thousands)
790

 
368

 
842

 
644

Weighted average number of common shares outstanding - assuming dilution (in thousands)
362,058

 
359,829

 
361,829

 
359,928

Earnings per common share - assuming dilution
$
0.92

 
$
0.74

 
$
1.59

 
$
1.13



13.
Fair Value of Financial Instruments
Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

41



Level 3 inputs are those that are unobservable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.
Financial Instruments Disclosed, But Not Carried, At Fair Value
The following tables present the carrying value and estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at June 30, 2018 and December 31, 2017, and the level within the fair value hierarchy:
 
June 30, 2018
 
Carrying
Value
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (a)
$
319,688

 
$
319,688

 
$
319,688

 
$

 
$

Finance receivables held for investment, net (b)
23,917,404

 
25,331,074

 

 

 
25,331,074

Restricted cash (a)
2,125,410

 
2,125,410

 
2,125,410

 

 

Total
$
26,362,502

 
$
27,776,172

 
$
2,445,098

 
$

 
$
25,331,074

Liabilities:
 
 
 
 
 
 
 
 
 
Notes payable — credit facilities (c)
$
4,502,823

 
$
4,502,823

 
$

 
$

 
$
4,502,823

Notes payable — secured structured financings (d)
24,300,820

 
24,352,684

 

 
16,462,852

 
7,889,832

Notes payable — related party (e)
3,125,963

 
3,068,515

 

 

 
3,068,515

Total
$
31,929,606

 
$
31,924,022

 
$

 
$
16,462,852

 
$
15,461,170

 
December 31, 2017
 
Carrying
Value
 
Estimated
Fair Value
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (a)
$
527,805

 
$
527,805

 
$
527,805

 
$

 
$

Finance receivables held for investment, net (b)
22,284,068

 
24,340,739

 

 

 
24,340,739

Restricted cash (a)
2,553,902

 
2,553,902

 
2,553,902

 

 

Total
$
25,365,775

 
$
27,422,446

 
$
3,081,707

 
$

 
$
24,340,739

Liabilities:
 
 
 
 
 
 
 
 
 
Notes payable — credit facilities (c)
$
4,848,316

 
$
4,848,316

 
$

 
$

 
$
4,848,316

Notes payable — secured structured financings (d)
22,557,895

 
22,688,381

 

 
12,275,408

 
10,412,973

Notes payable — related party (e)
3,754,223

 
3,754,223

 

 

 
3,754,223

Total
$
31,160,434

 
$
31,290,920

 
$

 
$
12,275,408

 
$
19,015,512


(a)
Cash and cash equivalents and restricted cash — The carrying amount of cash and cash equivalents, including restricted cash, is at an approximated fair value as the instruments mature within 90 days or less and bear interest at market rates.
(b)
Finance receivables held for investment, net — Finance receivables held for investment, net are carried at amortized cost, net of an allowance. These receivables exclude retail installment contracts that are measured at fair value on a recurring and nonrecurring basis. The estimated fair value for the underlying financial instruments are determined as follows:
Retail installment contracts held for investment and purchased receivables — The estimated fair value is calculated based on a DCF in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates, expected recovery rates, discount rates reflective of the cost of funding, and credit loss expectations.
Capital lease receivables — Capital lease receivables are carried at gross investments, net of unearned income and allowance for lease losses. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
Receivables from dealers and personal loans held for investment — Receivables from dealers and personal loans held for investment are carried at amortized cost, net of credit loss allowance. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.

42



(c)
Notes payable — credit facilities — The carrying amount of notes payable related to revolving credit facilities is estimated to approximate fair value. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
(d)
Notes payable — secured structured financings — The estimated fair value of notes payable related to secured structured financings is calculated based on market observable prices and spreads for the Company's publicly traded debt and market observed prices of similar notes issued by the Company, or recent market transactions involving similar debt with similar credit risks, which are considered level 2 inputs. The estimated fair value of notes payable related to privately issued amortizing notes is calculated based on a combination of credit enhancement review, discounted cash flow analysis and review of market observable spreads for similar liabilities. In conducting this analysis, the Company uses significant unobservable inputs on key assumptions, including historical default rates, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations, which are considered level 3 inputs.
(e)
Notes payable — related party — The carrying amount of floating rate notes payable to a related party is estimated to approximate fair value as the facilities are subject to short-term floating interest rates that approximate rates available to the Company. The fair value premium/discount of the fixed rate promissory notes are derived from changes in the Company's unsecured cost of funds since the time of issuance and weighted average life of these notes.
Financial Instruments Measured At Fair Value On A Recurring Basis
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017, and the level within the fair value hierarchy:
 
Fair Value Measurements at June 30, 2018
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other assets — trading interest rate caps (a)
$
184,822

 
$

 
$
184,822

 
$

Due from affiliates — trading interest rate caps (a)
14,111

 

 
14,111

 

Other assets — cash flow hedging interest rate swaps (a)
74,110

 

 
74,110

 

Other assets — trading interest rate swaps (a)
19,596

 

 
19,596

 

Other liabilities — trading options for interest rate caps (a)
185,020

 

 
185,020

 

Due to affiliates — trading options for interest rate caps (a)
14,111

 

 
14,111

 

Retail installment contracts acquired individually (b)
17,182

 

 

 
17,182


43



 
Fair Value Measurements at December 31, 2017
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Other assets — trading interest rate caps (a)
$
129,718

 
$

 
$
129,718

 
$

Due from affiliates — trading interest rate caps (a)
6,112

 

 
6,112

 

Other assets — cash flow hedging interest rate swaps (a)
39,036

 

 
39,036

 

Due from affiliates — cash flow hedging interest rate swaps (a)
6,950

 

 
6,950

 

Other assets — trading interest rate swaps (a)
7,925

 

 
7,925

 

Due from affiliates — trading interest rate swaps (a)
1,671

 

 
1,671

 

Other assets — trading options for interest rate caps (a)
20,075

 

 
20,075

 

Due from affiliates — trading options for interest rate caps (a)
12,090

 

 
12,090

 

Other liabilities — trading options for interest rate caps (a)
129,712

 

 
129,712

 

Due to affiliates — trading options for interest rate caps (a)
6,112

 

 
6,112

 

Other liabilities — trading interest rate caps (a)
20,019

 

 
20,019

 

Due to affiliates — trading interest rate caps (a)
12,090

 

 
12,090

 

Retail installment contracts acquired individually (b)
22,124

 

 

 
22,124

(a)
The valuation is determined using widely accepted valuation techniques including a DCF on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees. The Company utilizes the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for instruments (Note 7).
(b)
For certain retail installment contracts reported in finance receivables held for investment, net, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using a DCF model. When estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding of debt issuance and recent historical equity yields, and recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3. Changes in the fair value are recorded in investment gains (losses), net in the condensed consolidated statement of income.
The following table presents the changes in retail installment contracts held for investment balances classified as Level 3 balances for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Balance — beginning of period
$
18,850

 
$
30,652

 
$
22,124

 
$
24,495

Additions / issuances
1,927

 
6,396

 
3,276

 
19,727

Net collection activities
(3,936
)
 
(6,998
)
 
(9,530
)
 
(17,123
)
Gains recognized in earnings
341

 
439

 
1,312

 
3,390

Balance — end of period
$
17,182

 
$
30,489

 
$
17,182

 
$
30,489


All total return settlement payments were made as of September 30, 2017, and the derivative instrument has been settled. The following table presents the changes in the total return settlement balance, which was classified as Level 3, for the three and six months ended June 30, 2017:
 
Three Months Ended
 
Six Months Ended
Balance — beginning of period
$
31,123

 
$
30,618

(Gains)/losses recognized in earnings

 
505

Balance — end of period
$
31,123

 
$
31,123


44



The Company did not have any transfers between Levels 1 and 2 during the three and six months ended June 30, 2018 and 2017. There were no amounts transferred into or out of Level 3 during the three and six months ended June 30, 2018 and 2017.
Financial Instruments Measured At Fair Value On A Nonrecurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a nonrecurring basis at June 30, 2018 and December 31, 2017, and are categorized using the fair value hierarchy:
 
Fair Value Measurements at June 30, 2018
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Lower of cost or fair value expense for the six months ended June 30, 2018
Other assets — vehicles (a)
$
254,086

 
$

 
$
254,086

 
$

 
$

Personal loans held for sale (b)
956,455

 

 

 
956,455

 
134,688

Retail installment contracts held for sale (c)
290,277

 

 

 
290,277

 
15,026

Auto loans impaired due to bankruptcy (d)
162,184

 

 
162,184

 


 
88,812

 
Fair Value Measurements at December 31, 2017
 
Total
 
Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Lower of cost or fair value expense for the year ended December 31, 2017
Other assets — vehicles (a)
$
293,546

 
$

 
$
293,546

 
$

 
$

Personal loans held for sale (b)
1,062,089

 

 

 
1,062,089

 
374,374

Retail installment contracts held for sale (c)
1,148,332

 

 

 
1,148,332

 
11,686

Auto loans impaired due to bankruptcy (d)
121,578

 

 
121,578

 

 
75,194

(a) The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market levels of used car prices.
(b) The estimated fair value for personal loans held for sale is calculated based on the lower of market participant view and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations. The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.
(c) Represents retail installment contract held for sale reserved for future SPAIN transactions. At June 30, 2018, as the SPAIN ABS platform matures with several market executions over the last few quarters, the fair value of these installment contracts are estimated based on contractual pricing methodology used for previous SPAIN transactions. This pricing methodology includes consideration of significant unobservable inputs including investor return expectations (i.e., Yield), expected lifetime cumulative net loss and weighted average life of the retail installment contracts. At December 31, 2017, the estimated fair value was calculated based on a DCF analysis in which the Company used significant unobservable inputs on key assumptions, including expected default rates, prepayment rates, recovery rates, and discount rates reflective of the cost of funds and appropriate rate of returns. The change in methodology did not have a material impact on the fair value mark of the retail installments contacts held for sale.
(d) For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.
Quantitative Information about Level 3 Fair Value Measurements

45



The following table presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at June 30, 2018 and December 31, 2017:
 
Financial Instruments
 
Fair Value at June 30, 2018
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
Financial Assets:
 
Retail installment contracts held for investment
 
$
17,182

 
Discounted Cash Flow
 
Discount Rate
 
8%-10%
 
Default Rate
15%-20%
 
Prepayment Rate
6%-8%
 
Loss Severity Rate
50%-60%
 
Personal loans held for sale
 
$
956,455

 
Lower of Market or Income Approach
 
Market Approach
 
 
 
Market Participant View
70%-80%
 
Income Approach
 
 
Discount Rate
15%-25%
 
 
Default Rate
30%-40%
 
Net Principal Payment Rate
50%-70%
 
Loss Severity Rate
90%-95%
 
Retail installment contracts held for sale
 
$
290,277

 
Income Approach
 
Expected Yield
 
1%-2%
 
Expected Lifetime Cumulative Net Loss
 
4%-6%
 
Weighted Average Life
 
2 - 3 years
                                         
 
Financial Instruments
 
Fair Value at December 31, 2017
 
Valuation Technique
 
Unobservable Inputs
 
Range
 
Financial Assets:
 
Retail installment contracts held for investment
 
$
22,124

 
Discounted Cash Flow
 
Discount Rate
 
8%-10%
 
Default Rate
15%-20%
 
Prepayment Rate
6%-8%
 
Loss Severity Rate
50%-60%
 
Personal loans held for sale
 
$
1,062,089

 
Lower of Market or Income Approach
 
Market Approach
 
 
 
Market Participant View
70%-80%
 
Income Approach
 
 
Discount Rate
15%-20%
 
 
Default Rate
30%-40%
 
Net Principal Payment Rate
50%-70%
 
Loss Severity Rate
90%-95%
 
Retail installment contracts held for sale
 
$
1,148,332

 
Discounted Cash Flow
 
Discount Rate
 
3%-6%
 
Default Rate
3%-4%
 
Prepayment Rate
15%-20%
 
Loss Severity Rate
50%-60%

14.    Employee Benefit Plans
The Company has granted stock options to certain executives, other employees, and independent directors under the Company's 2011 Management Equity Plan (the MEP), which enabled the Company to make stock awards up to a total

46



of approximately 29 million common shares (net of shares canceled and forfeited). The MEP expired in January 2015 and the Company will not grant any further awards under the MEP. The Company has granted stock options, restricted stock awards and restricted stock units (RSUs) under the Omnibus Incentive Plan (the Plan), which was established in 2013 and enables the Company to grant awards of cash and of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, RSUs, and other awards that may be settled in or based upon the value of the Company's common stock up to a total of 5,192,641 common shares. The Plan was amended and restated as of June 16, 2016.
Stock options granted under the MEP and the Plan have an exercise price based on the estimated fair market value of the Company’s common stock on the grant date. The stock options expire ten years after grant date and include both time vesting options and performance vesting options. The fair value of the stock options is amortized into expense over the vesting period as time and performance vesting conditions are met.
Compensation expense related to the 583,890 shares of restricted stock that the Company has issued to certain executives is recognized over a five-year vesting period, with zero and $181 recorded for the three months ended June 30, 2018 and 2017, and zero and $359 for the six months ended June 30, 2018 and 2017, respectively. The Company recognized $5,794 and $4,084 related to stock options and restricted stock units within compensation expense for the six months ended June 30, 2018 and 2017, respectively. In addition, the Company recognizes forfeitures of awards as they occur.
A summary of the Company’s stock options and related activity as of and for the six months ended June 30, 2018 is as follows:
 
Shares
 
Weighted
Average
Exercise
Price
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Options outstanding at January 1, 2018
1,695,008

 
$
12.39

 
4.7

 
$
12,058

Granted

 

 

 

Exercised
(518,893
)
 
9.46

 

 
4,431

Expired
(67,579
)
 
23.63

 

 

Forfeited
(65,398
)
 
23.57

 

 

Options outstanding at June 30, 2018
1,043,138

 
12.41

 
3.7

 
7,689

Options exercisable at June 30, 2018
911,072

 
$
11.25

 
3.4

 
$
7,536


In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the Capital Requirements Directive IV prudential rules, which require a portion of such officers' and employees' variable compensation to be paid in the form of equity, the Company periodically grants RSUs. Under the Plan, a portion of these RSUs vest immediately upon grant, and a portion vest annually over the following three or five years and subject to the achievement of certain performance conditions as applicable. After the shares subject to the RSUs vest and are settled, they are subject to transfer and sale restrictions for one year. In addition, the Company grants RSUs to certain officers and employees as part of variable compensation and these RSUs vest over three years. The Company also has granted certain directors RSUs that vest either upon the earlier of the first anniversary of grant date or the first stockholder meeting following the grant date. RSUs are valued based upon the fair market value on the date of the grant.

47



A summary of the Company’s Restricted Stock Units and performance stock units and related activity as of and for the six months ended June 30, 2018 is as follows:
 
Shares
 
Weighted
Average
Grant Date Fair Value
 
Weighted
Average
Remaining
Contractual
Term (Years)
 
Aggregate
Intrinsic
Value
Outstanding as of January 1, 2018
$
650,252

 
$
12.68

 
1.0

 
$
12,108

Granted
591,215

 
16.35

 

 

Vested
(491,374
)
 
14.20

 

 
8,038

Forfeited/canceled
(22,719
)
 
12.74

 

 

Unvested as of June 30, 2018
727,374

 
14.58

 
1.5

 
13,886


15.
Shareholders' Equity
Treasury Stock
The Company had 252,002 shares of treasury stock outstanding, with a cost of $5,370 as of June 30, 2018, and as of December 31, 2017. Prior to the IPO, the Company repurchased 3,154 shares as a result of an employee leaving the Company. Additionally, 248,848 shares were withheld to cover income taxes related to stock issued in connection with employee incentive compensation plans. The value of the treasury stock is immaterial and included within additional paid-in-capital.
Accumulated Other Comprehensive Income (Loss)
A summary of changes in accumulated other comprehensive income (loss), net of tax, for the three and six months ended June 30, 2018 and 2017 is as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Beginning balance, unrealized gains (losses) on cash flow hedges
$
63,211

 
$
35,504

 
$
44,262

 
$
28,259

Other comprehensive income (loss) before reclassifications (gross) (a)
7,015

 
(14,022
)
 
29,934

 
(4,123
)
Amounts (gross) reclassified out of accumulated other comprehensive income (loss)
(7,777
)
 
6,378

 
(11,747
)
 
3,724

Ending balance, unrealized gains (losses) on cash flow hedges
$
62,449

 
$
27,860

 
$
62,449

 
$
27,860

(a) Includes impact of accumulated other comprehensive income reclassified to Retained earnings, primarily comprised of $6,149 as a result of the adoption of ASU 2018-02. Refer to Note 1 for further discussion.
Amounts (gross) reclassified out of accumulated other comprehensive income (loss) during the three and six months ended June 30, 2018 and 2017 consist of the following:
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
Reclassification
Amount reclassified
 
Income statement line item
 
Amount reclassified
 
Income statement line item

 
 
 
 
 
 
 
Cash flow hedges
$
(9,095
)
 
Interest expense
 
$
8,859

 
Interest expense
Tax expense (benefit)
1,318

 
 
 
(2,481
)
 
 
Net of tax
$
(7,777
)
 
 
 
$
6,378

 
 

 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
Reclassification
Amount reclassified
 
Income statement line item
 
Amount reclassified
 
Income statement line item
 
 
 
 
 
 
 
 
Cash flow hedges
$
(13,672
)
 
Interest expense
 
$
4,619

 
Interest expense
Tax expense (benefit)
1,925

 
 
 
(895
)
 
 
Net of tax
$
(11,747
)
 
 
 
$
3,724

 
 


48



Dividends
The Company paid a cash dividend of $0.05 per share in May 2018 and has declared a cash dividend of $0.20 per share, to be paid on August 8, 2018, to shareholders of record as of the close of business on August 6, 2018.

16.
Investment Losses, Net
When the Company sells retail installment contracts acquired individually, personal loans or leases to unrelated third parties or to VIEs and determines that such sale meets the applicable criteria for sale accounting, the Company recognizes a gain or loss for the difference between the cash proceeds and carrying value of the assets sold. The gain or loss is recorded in investment gains (losses), net. Lower of cost or market adjustments on the recorded investment of finance receivables held for sale are also recorded in investment gains (losses), net.
Investment gains (losses), net was comprised of the following for the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Gain (loss) on sale of loans and leases
$
(2,096
)
 
$
(2,179
)
 
$
(18,792
)
 
$
(13,061
)
Lower of cost or market adjustments
(79,215
)
 
(95,683
)
 
(149,714
)
 
(161,804
)
Other gains, (losses and impairments), net
(1,323
)
 
(1,660
)
 
(648
)
 
(1,056
)
 
$
(82,634
)
 
$
(99,522
)
 
$
(169,154
)
 
$
(175,921
)

The lower of cost or market adjustments for the three and six months ended June 30, 2018 and 2017 included $89,513, $195,287, $107,717, and $224,358 in customer default activity, respectively, and net favorable adjustments of $10,298, $45,573, $12,034, and $62,554 respectively, primarily related to net changes in the unpaid principal balance on the personal lending portfolio, most of which has been classified as held for sale.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This Quarterly Report on Form 10-Q should be read in conjunction with the 2017 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 the SEC, 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 the SEC and other information may also be accessed at the SEC’s website at www.sec.gov.
Overview

Santander Consumer USA Holdings Inc. is the holding company for Santander Consumer USA Inc., a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. The Company is majority-owned (as of June 30, 2018, approximately 68.0%) 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 RVs, and marine vehicles. The Consumer Finance segment also includes personal loan and point-of-sale financing operations.
Since May 1, 2013, under terms of the Chrysler Agreement, a ten-year master private-label financing agreement with FCA, the Company has been FCA's preferred provider for consumer loans and leases and Dealer Loans. Business generated under terms of the Chrysler Agreement is branded as Chrysler Capital. Pursuant to with the Chrysler Agreement, the Company offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as Dealer Loans for inventory, construction, real estate, working capital and revolving lines of credit.

Under the terms of the Chrysler Agreement, certain standards were agreed to, including the Company meeting specified escalating penetration rates for the first five years, subject to FCA treating the Company in a manner consistent with

49



comparable OEMs' treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its respective obligations under the agreement, including the Company’s failure to meet target penetration rates, could result in the agreement being terminated. The Company did not meet these penetration rates. Chrysler Capital continues to be a focal point of the Company's strategy and the Company continues to work with FCA to improve penetration rates. The Company's penetration rate for three months ended June 30, 2018 was 32%.

On June 1, 2018, the Company announced that it was in exploratory discussions with FCA regarding the future of FCA’s U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit in the future and indicated that acquiring Chrysler Capital is one option it will consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. In addition, on July 11, 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018.
FCA has not delivered a notice to exercise its purchase option, and the Company remains committed to the success of the Chrysler Capital business. Although the likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined, termination of the Chrysler Agreement or, a significant change in the business relationship between SC and FCA could materially adversely affect SC's operations, including the origination of receivables through the Chrysler Capital portion of SC’s business and the servicing of Chrysler Capital receivables. Moreover, there can be no assurance that SC could successfully or timely implement any such transaction without significant disruption of its operations or restructuring, or without incurring additional liabilities, which could involve significant expense to SC and have a material adverse effect on its business, financial condition and results of operations.

The Company has dedicated financing facilities in place for its Chrysler Capital business. During the six months ended June 30, 2018, the Company originated $4.7 billion in Chrysler Capital loans which represented 49% of total retail installment contract originations (unpaid principal balance), with an approximately even share between prime and non-prime, as well as more than $4.7 billion in Chrysler Capital leases. Since its May 1, 2013, launch, Chrysler Capital has originated more than $49.9 billion in retail loans and $28.3 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for an affiliate. As of June 30, 2018, the Company's carrying value of auto retail installment contract portfolio consisted of $8.0 billion of Chrysler Capital loans which represents 33% of the Company's carrying value of auto retail installment contract portfolio.
The Company also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has several relationships through which it has provided personal loans, private-label credit cards and other consumer finance products. In October 2015, the Company announced a planned exit from the personal lending business.
The Company periodically sells consumer retail installment contracts through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer retail installment contracts. The Company typically retains servicing of loans and leases sold or securitized, and may also retain some residual risk in sales of leases. The Company has also entered into an agreement with a third party whereby the Company will periodically sell charged-off loans.

Economic and Business Environment

The U.S. economy continues to stabilize. Unemployment rates continues to be at pre-recession levels of 4% as reported by the Bureau of Labor Statistics for June 30, 2018. The Federal Reserve raised its federal funds rate by 25 basis points in June 2018.

Despite this stability, consumer debt levels continued to rise, specifically auto debt. As consumers assume higher debt levels, the Company may experience an increase in delinquencies and credit losses. Additionally, the Company is exposed to geographic customer concentration risk, which could have an adverse effect on the Company's financial position, results of operations or cash flow.

The following table shows the percentage of unpaid principal balance on the Company's retail installment contracts by state concentration. Total unpaid principal balance of retail installment contracts held for investment was $27,408,764 and $25,986,532 at June 30, 2018 and December 31, 2017, respectively.

50



 
June 30,
2018
 
December 31, 2017
 
Retail Installment Contracts Held for Investment
Texas
16%
 
16%
Florida
12%
 
12%
California
9%
 
9%
Georgia
6%
 
6%
Illinois
4%
 
4%
North Carolina
4%
 
4%
New York
4%
 
4%
Pennsylvania
3%
 
3%
Ohio
3%
 
3%
Louisiana
2%
 
3%
South Carolina
2%
 
3%
Other States
35%
 
33%
 
100%
 
100%


51



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, 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 2017 Annual Report on Form 10-K.

How the Company Assesses its Business Performance

Net income, and the associated return on assets and equity, are the primary metrics by which the Company judges the performance of its business. Accordingly, the Company closely monitors the primary drivers of net income:

Net financing income — The Company tracks the spread between the interest and finance charge income earned on assets and the interest expense incurred on liabilities, and continually monitors the components of its yield and cost of funds. The Company's effective interest rate on borrowing is driven by various items including, but not limited to, credit quality of the collateral assigned, used/unused portion of facilities, and reference rate for the credit spread. These drivers, as well as external rate trends, including the swap curve, spot and forward rates are monitored.
Net credit losses — The Company performs net credit loss analysis at the vintage level for individually acquired retail installment contracts, loans and leases, and at the pool level for purchased portfolios, 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).


52



Second Quarter 2018 Summary of Results
Key highlights of the Company's performance in the second quarter of 2018 included:
Total auto originations of $7.9 billion, up 45.0% from $5.5 billion originated in the same quarter in 2017;
Net finance and other interest income of $1.1 billion, down 6% compared to the same quarter in 2017;
Return on average assets of 3.3%, up from 2.7% compared to the same quarter in 2017;
Common equity tier 1 (CET1) ratio of 16.7%, up 240 bps compared to the same quarter in 2017; and
Net leased vehicle income of $177.6 million, up 36% compared to the same quarter in 2017.
Recent Developments and Other Factors Affecting The Company's Results of Operations
Changes to Board of Directors
On April 19, 2018, Brian Gunn submitted his resignation as a member of the Board of Directors of SC Holdings and of the Board of Directors of SC Illinois, effective on April 19, 2018.

Planned Capital Actions

On June 28, 2018, the Company and SHUSA announced that the Board of Governors of the Federal Reserve System did not object to the planned capital actions described in SHUSA’s 2018 Capital Plan under the recently finalized results of the 2018 Comprehensive Capital Analysis and Review.

The Company's portion of the SHUSA capital plan includes:

An increase in the quarterly common stock dividend from $0.05 per share to $0.20 per share, beginning in the third quarter of 2018; and
Authorization to repurchase $200 million of outstanding common stock through June 30, 2019.
  
The timing and amount of any capital actions will depend on various factors, including the business plans and financial performance of both the Company and SHUSA, as well as market conditions, and any capital action by the Company is subject to approval of the Company’s and SHUSA’s respective boards of directors.








53



Volume
The Company's originations of individually acquired loans and leases, including revolving loans, average APR, and discount during the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(Dollar amounts in thousands)
Retained Originations
 
 
 
 
 
 
 
Retail installment contracts
$
4,630,704

 
$
3,750,752

 
$
8,014,110

 
$
6,669,307

Average APR
16.8
%
 
15.6
%
 
17.0
%
 
16.7
%
Average FICO® (a)
602

 
612

 
599

 
598

Discount
0.004
%
 
0.3
%
 
0.2
%
 
0.4
%
 
 
 
 
 
 
 
 
Personal loans (b)
$
340,088

 
$
351,068

 
$
613,416

 
$
638,764

Average APR
27.1
%
 
25.7
%
 
28.3
%
 
25.7
%
 
 
 
 
 
 
 
 
Leased vehicles
$
2,632,052

 
$
1,426,957

 
$
4,725,657

 
$
3,027,616

 
 
 
 
 
 
 
 
Capital lease
$
2,058

 
$
1,001

 
$
4,456

 
$
2,178

Total originations retained
$
7,604,902

 
$
5,529,778

 
$
13,357,639

 
$
10,337,865

 
 
 
 
 
 
 
 
Sold Originations
 
 
 
 
 
 
 
Retail installment contracts
$
683,935

 
$
304,748

 
$
1,553,979

 
$
1,172,771

Average APR
7.6
%
 
6.6
%
 
7.3
%
 
6.2
%
Average FICO® (c)
726

 
725

 
726

 
727

 
 
 
 
 
 
 
 
Total originations
$
8,288,837

 
$
5,834,526

 
$
14,911,618

 
$
11,510,636

(a)
Unpaid principal balance excluded from the weighted average FICO score is $594 million and $503 million for the three months ended June 30, 2018 and 2017, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, $44 million and $49 million, respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is $1 billion and $1 billion for the six months ended June 30, 2018 and 2017, respectively, as the borrowers on the loans did not have FICO scores origination. Of these amounts, $77 million and $77 million, respectively, were commercial loans.
(b)
Effective as of three months ended December 31, 2017, the Company revised its approach to define origination volumes for Personal Loans to include new originations, gross of paydowns and charge-offs, related to customers who took additional advances on existing accounts (including capitalized late fees, interest and other charges), and newly opened accounts. In the prior periods, the Company reported net balance increases on personal loans as origination volume which have been revised for comparative purposes. Included in the total origination volume is $58 million and $48 million for the three months ended June 30, 2018 and 2017, respectively, and $84 million and $71 million six months ended June 30, 2018 and 2017 respectively, related to newly opened accounts.
(c)
Unpaid principal balance excluded from the weighted average FICO score is $54 million and $39 million for the three months ended June 30, 2018 and 2017, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, $26 million and $14 million, respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO sore is $121 million and $156 million for the six months ended June 30, 2018 and 2017, respectively, as the borrowers on the loans did not have FICO scores origination. Of these amounts, $67 million and $58 million, respectively, were commercial loans

Total originations increased $3.4 billion, or 30%, from the six months ended June 30, 2017 to the six months ended June 30, 2018. The increase was primarily attributable to our new initiatives, starting in the second half of 2017, to improve our pricing as well as dealer and customer experience, which we believe 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. Chrysler Capital volume and penetration rates are influenced by strategies implemented by FCA, 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 loans, primarily from Chrysler dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA’s behalf. During the three and six months ended June 30, 2018, the Company facilitated the purchase of $29 million and $53 million of retail installment contacts, respectively.


54



The Company's originations of individually acquired retail installment contracts and leases by vehicle type during the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended
 
Six months ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(Dollar amounts in thousands)
Retail installment contracts
 
 
 
 
 
 
 
 
 
 
 
Car
$
1,892,910

35.6
%
 
$
1,733,010

42.7
%
 
$
3,473,841

36.2
%
 
$
3,391,628

43.2
%
Truck and utility
3,101,908

58.4
%
 
1,985,619

49.0
%
 
5,482,673

57.4
%
 
3,854,854

49.2
%
Van and other (a)
319,821

6.0
%
 
336,871

8.3
%
 
611,575

6.4
%
 
595,596

7.6
%
 
$
5,314,639

100.0
%
 
$
4,055,500

100.0
%
 
$
9,568,089

100.0
%
 
$
7,842,078

100.0
%
Leased vehicles
 
 
 
 
 
 
 
 
 
 
 
Car
$
274,589

10.4
%
 
$
335,338

23.5
%
 
$
433,513

9.2
%
 
$
636,234

21.0
%
Truck and utility
2,260,804

85.9
%
 
1,006,587

70.5
%
 
4,101,105

86.8
%
 
2,183,666

72.1
%
Van and other (a)
96,659

3.7
%
 
85,032

6.0
%
 
191,039

4.0
%
 
207,716

6.9
%
 
$
2,632,052

100.0
%
 
$
1,426,957

100.0
%
 
$
4,725,657

100.0
%
 
$
3,027,616

100.0
%
Total originations by vehicle type
 
 
 
 
 
 
 
 
 
 
 
Car
$
2,167,499

27.3
%
 
$
2,068,348

37.7
%
 
$
3,907,354

27.4
%
 
$
4,027,862

37.0
%
Truck and utility
5,362,712

67.5
%
 
2,992,206

54.6
%
 
9,583,778

67.0
%
 
6,038,520

55.6
%
Van and other (a)
416,480

5.2
%
 
421,903

7.7
%
 
802,614

5.6
%
 
803,312

7.4
%
 
$
7,946,691

100.0
%
 
$
5,482,457

100.0
%
 
$
14,293,746

100.0
%
 
$
10,869,694

100.0
%
(a) Other primarily consists of commercial vehicles.
The Company's asset sales for the three and six months ended June 30, 2018 and 2017 were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
 
(Dollar amounts in thousands)
Retail installment contracts
$
1,156,060

 
$
566,309

 
$
2,631,313

 
$
1,496,899

Average APR
7.5
%
 
6.6
%
 
7.0
%
 
6.2
%
Average FICO®
724

 
725

 
726

 
726

 
 
 
 
 
 
 
 
Total asset sales
$
1,156,060

 
$
566,309

 
$
2,631,313

 
$
1,496,899


Total assets sales increased $1,134 million, or 76% from the six months ended June 30, 2017 to the six months ended June 30, 2018. The increase resulted due to two SPAIN securitization executed in the six months ended June 30, 2018, whereby eligible prime loans are sold to Santander. This was partially offset by terminations of the forward flow agreements with CBP and Bank of America during fiscal 2017.


55



The Company's portfolio of retail installment contracts held for investment and leases by vehicle type as of June 30, 2018 and December 31, 2017 are as follows:
 
June 30,
2018
 
December 31,
2017
 
(Dollar amounts in thousands)
Retail installment contracts
 
 
 
 
 
Car
$
13,398,684

48.9
%
 
$
13,509,708

52.0
%
Truck and utility
12,372,129

45.1
%
 
11,144,712

42.9
%
Van and other (a)
1,637,951

6.0
%
 
1,332,112

5.1
%
 
$
27,408,764

100.0
%
 
$
25,986,532

100.0
%
 
 
 
 
 
 
Leased vehicles


 
 
 
 
Car
$
1,574,790

12.3
%
 
$
1,571,170

14.1
%
Truck and utility
9,753,755

76.0
%
 
8,704,623

77.9
%
Van and other (a)
1,507,173

11.7
%
 
899,809

8.0
%
 
$
12,835,718

100.0
%
 
$
11,175,602

100.0
%
 
 
 
 
 
 
Total by vehicle type
 
 
 
 
 
Car
$
14,973,474

37.2
%
 
$
15,080,878

40.6
%
Truck and utility
22,125,884

55.0
%
 
19,849,335

53.4
%
Van and other (a)
3,145,124

7.8
%
 
2,231,921

6.0
%
 
$
40,244,482

100.0
%
 
$
37,162,134

100.0
%
(a) Other primarily consists of commercial vehicles.
The unpaid principal balance, average APR, and remaining unaccreted dealer discount of the Company's held for investment portfolio as of June 30, 2018 and December 31, 2017 are as follows:
 
June 30,
2018
 
December 31, 2017
 
(Dollar amounts in thousands)
Retail installment contracts (a)
$
27,408,764

 
$
25,986,532

Average APR
16.7
%
 
16.5
%
Discount
1.0
%
 
1.5
%
 

 
 
Personal loans
$
4,016

 
$
6,887

Average APR
31.8
%
 
31.8
%
 

 
 
Receivables from dealers
$
15,200

 
$
15,787

Average APR
4.2
%
 
4.2
%
 

 
 
Leased vehicles
$
12,835,718

 
$
11,175,602

 

 
 
Capital leases
$
20,200

 
$
22,857

(a) Of this balance as of June 30, 2018, $7.2 billion, $7.0 billion, $5.4 billion, and $4.3 billion was originated during the six months ended June 30, 2018, and the years ended 2017, 2016, and 2015, respectively.

The Company records interest income from individually acquired retail installment contracts, personal loans, and receivables from dealers in accordance with the terms of the loans, generally discontinuing and reversing accrued income once a loan becomes more than 60 days past due, except in the case of revolving personal loans, for which 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 and term personal loans at a discount. The Company amortizes discounts, subvention payments from manufacturers, and origination costs as adjustments to income from individually acquired retail

56



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 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 5.9% to 10.6% as of June 30, 2018, and 6.0% to 10.5% as of June 30, 2017.
 
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. For individually acquired retail installment contracts, personal loans, capital leases, and receivables from dealers, the Company also establishes a credit loss allowance for the estimated losses inherent in the portfolio. The Company estimates probable losses based on contractual delinquency status, historical loss experience, expected recovery rates from sale of repossessed collateral, bankruptcy trends, and general economic conditions such as unemployment rates. For loans within these portfolios that are classified as TDRs, impairment is measured based on the present value of expected future cash flows discounted at the original effective interest rate. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell.

The 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, it did not purchase any pools during the six months ended June 30, 2018 and 2017. However, during the three months ended June 30, 2018 and 2017, the Company recognized certain retail installment contracts with an unpaid principal balance of $72,963 and $74,405, respectively, and for the six months ended June 30, 2018 and 2017, the Company recognized certain retail installment contracts with an unpaid principal balance of $115,959 and $226,613, respectively, held by non-consolidated securitization Trusts under optional clean-up calls. Following the initial recognition of these loans at fair value, the performing loans in the portfolio will be carried at amortized cost, net of allowance for credit losses. 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. All of the retail installment contracts acquired during these periods were acquired individually. For the Company's existing purchased receivables portfolios, 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 record 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, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Income Statement Data
(Dollar amounts in thousands, except per share data)
Interest on individually acquired retail installment contracts
$
1,069,390

 
$
1,132,113

 
$
2,091,306

 
$
2,236,785

Interest on purchased receivables portfolios
2,244

 
10,303

 
5,085

 
21,447

Interest on receivables from dealers
130

 
967

 
250

 
1,888

Interest on personal loans
84,772

 
88,869

 
174,032

 
181,318

Interest on finance receivables and loans
1,156,536

 
1,232,252

 
2,270,673

 
2,441,438

Net leased vehicle income
177,562

 
131,040

 
323,157

 
259,102

Other finance and interest income
8,494

 
5,205

 
15,631

 
9,030

Interest expense
273,953

 
233,371

 
514,981

 
460,460

Net finance and other interest income
1,068,639

 
1,135,126

 
2,094,480

 
2,249,110

Provision for credit losses on individually acquired retail installment contracts
354,430

 
518,370

 
813,109

 
1,147,467

Provision for credit losses on receivables from dealers
(3
)
 
(21
)
 
(6
)
 
(11
)
Provision for credit losses on personal loans
(83
)
 
1,166

 
(185
)
 
9,141

Provision for credit losses on capital leases
(1,769
)
 
1,040

 
(1,348
)
 
(1,029
)
Provision for credit losses
352,575

 
520,555

 
811,570

 
1,155,568

Profit sharing
12,853

 
8,443

 
17,230

 
16,388

Other income
22,384

 
24,395

 
47,437

 
79,875

Operating expenses
276,950

 
282,415

 
564,862

 
587,493

Income before tax expense
448,645

 
348,108

 
748,255

 
569,536

Income tax expense
114,004

 
83,433

 
171,315

 
161,434

Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

Share Data
 
 
 
 
 
 
 
Weighted-average common shares outstanding
 
 
 
 
 
 
 
Basic
361,268,112

 
359,461,407

 
360,987,233

 
359,284,213

Diluted
362,057,614

 
359,828,690

 
361,829,283

 
359,928,003

Earnings per share
 
 
 
 
 
 
 
Basic
$
0.93

 
$
0.74

 
$
1.60

 
$
1.14

Diluted
$
0.92

 
$
0.74

 
$
1.59

 
$
1.13

Dividend paid per common share
$
0.05

 
$

 
$
0.10

 
$

Balance Sheet Data
 
 
 
 
 
 
 
Finance receivables held for investment, net
$
24,096,770

 
$
23,634,914

 
$
24,096,770

 
$
23,634,914

Finance receivables held for sale, net
1,246,732

 
2,123,103

 
1,246,732

 
2,123,103

Goodwill and intangible assets
105,669

 
106,298

 
105,669

 
106,298

Total assets
41,173,136

 
39,507,482

 
41,173,136

 
39,507,482

Total borrowings
31,929,606

 
31,648,526

 
31,929,606

 
31,648,526

Total liabilities
34,127,402

 
33,828,749

 
34,127,402

 
33,828,749

Total equity
7,045,734

 
5,678,733

 
7,045,734

 
5,678,733

Allowance for credit losses
3,142,650

 
3,458,410

 
3,142,650

 
3,458,410








58



 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Other Information
(Dollar amounts in thousands)
Charge-offs, net of recoveries, on individually acquired retail installment contracts
$
398,658

 
$
512,621

 
$
936,450

 
$
1,111,554

Charge-offs, net of recoveries, on purchased receivables portfolios
(565
)
 
419

 
(993
)
 
772

Charge-offs, net of recoveries, on personal loans
515

 
1,321

 
1,264

 
4,779

Charge-offs, net of recoveries, on capital leases
406

 
1,278

 
712

 
2,592

Total charge-offs, net of recoveries
399,014

 
515,639

 
937,433

 
1,119,697

End of period delinquent principal over 59 days, individually acquired retail installment contracts held for investment
1,149,429

 
1,412,377

 
1,149,429

 
1,412,377

End of period personal loans delinquent principal over 59 days
164,458

 
177,615

 
164,458

 
177,615

End of period delinquent principal over 59 days, loans held for investment
1,151,410

 
1,417,461

 
1,151,410

 
1,417,461

End of period assets covered by allowance for credit losses
27,412,597

 
27,342,511

 
27,412,597

 
27,342,511

End of period gross individually acquired retail installment contracts held for investment
27,373,181

 
27,240,542

 
27,373,181

 
27,240,542

End of period gross personal loans
1,370,888

 
1,400,369

 
1,370,888

 
1,400,369

End of period gross finance receivables and loans held for investment
27,427,980

 
27,512,362

 
27,427,980

 
27,512,362

End of period gross finance receivables, loans, and leases held for investment
40,283,898

 
37,916,523

 
40,283,898

 
37,916,523

Average gross individually acquired retail installment contracts held for investment
26,633,832

 
27,168,965

 
26,280,006

 
27,136,965

Average gross personal loans held for investment
4,562

 
13,566

 
5,304

 
15,587

Average gross individually acquired retail installment contracts held for investment and held for sale
27,534,479

 
28,202,716

 
27,221,983

 
28,235,651

Average gross purchased receivables portfolios
37,284

 
202,097

 
39,257

 
211,494

Average gross receivables from dealers
15,361

 
68,810

 
15,507

 
69,361

Average gross personal loans
1,375,877

 
1,402,416

 
1,421,861

 
1,450,002

Average gross capital leases
20,937

 
25,752

 
21,699

 
28,235

Average gross finance receivables and loans
28,983,938

 
29,901,791

 
28,720,307

 
29,994,743

Average gross operating leases
12,219,612

 
10,191,380

 
11,856,109

 
10,016,322

Average gross finance receivables, loans, and leases
41,203,550

 
40,093,171

 
40,576,416

 
40,011,065

Average managed assets
50,306,666

 
50,435,958

 
49,494,154

 
50,844,426

Average total assets
40,901,810

 
39,216,971

 
40,334,031

 
39,063,816

Average debt
31,898,900

 
31,519,486

 
31,589,063

 
31,545,144

Average total equity
6,891,934

 
5,540,371

 
6,737,055

 
5,434,973

Ratios
 
 
 
 
 
 
 
Yield on individually acquired retail installment contracts
15.5
 %
 
16.1
%
 
15.4
 %
 
15.8
%
Yield on purchased receivables portfolios
24.1
 %
 
20.4
%
 
25.9
 %
 
20.3
%
Yield on receivables from dealers
3.4
 %
 
5.6
%
 
3.2
 %
 
5.4
%
Yield on personal loans (1)
24.6
 %
 
25.3
%
 
24.5
 %
 
25.0
%
Yield on earning assets (2)
13.0
 %
 
13.7
%
 
12.9
 %
 
13.5
%
Cost of debt (3)
3.4
 %
 
3.0
%
 
3.3
 %
 
2.9
%
Net interest margin (4)
10.4
 %
 
11.3
%
 
10.3
 %
 
11.2
%
Expense ratio (5)
2.2
 %
 
2.2
%
 
2.3
 %
 
2.3
%
Return on average assets (6)
3.3
 %
 
2.7
%
 
2.9
 %
 
2.1
%
Return on average equity (7)
19.4
 %
 
19.1
%
 
17.1
 %
 
15.0
%
Net charge-off ratio on individually acquired retail installment contracts (8)
6.0
 %
 
7.5
%
 
7.1
 %
 
8.2
%
Net charge-off ratio on purchased receivables portfolios (8)
(6.1
)%
 
0.8
%
 
(5.1
)%
 
0.7
%
Net charge-off ratio on personal loans (8)
45.2
 %
 
39.0
%
 
47.7
 %
 
61.3
%
Net charge-off ratio (8)
6.0
 %
 
7.5
%
 
7.1
 %
 
8.2
%
Delinquency ratio on individually acquired retail installment contracts held for investment, end of period (9)
4.2
 %
 
5.2
%
 
4.2
 %
 
5.2
%
Delinquency ratio on personal loans, end of period (9)
12.0
 %
 
12.7
%
 
12.0
 %
 
12.7
%
Delinquency ratio on loans held for investment, end of period (9)
4.2
 %
 
5.2
%
 
4.2
 %
 
5.2
%
Equity to assets ratio (10)
17.1
 %
 
14.4
%
 
17.1
 %
 
14.4
%
Tangible common equity to tangible assets (10)
16.9
 %
 
14.1
%
 
16.9
 %
 
14.1
%
Common stock dividend payout ratio (11)
5.4
 %
 

 
6.3
 %
 

Allowance ratio (12)
11.5
 %
 
12.6
%
 
11.5
 %
 
12.6
%
Common Equity Tier 1 capital ratio (13)
16.7
 %
 
14.3
%
 
16.7
 %
 
14.3
%

(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.

59



(3)
"Cost of debt" is defined as the ratio of annualized Interest expense to Average debt.
(4)
"Net interest margin" is defined as the ratio of annualized Net finance and other interest income to Average gross finance receivables, loans and leases.
(5)
"Expense ratio" is defined as the ratio of annualized Operating expenses to Average managed assets.
(6)
"Return on average assets" is defined as the ratio of annualized Net income to Average total assets.
(7)
"Return on average equity" is defined as the ratio of annualized Net income to Average total equity.
(8)
"Net charge-off ratio" is defined as the ratio of annualized Charge-offs on a recorded investment basis, net of recoveries, to average unpaid principal balance of the respective held-for-investment portfolio.
(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 capital leases.
(10)
"Tangible common equity to tangible assets" is defined as the ratio of Total equity, excluding Goodwill and intangible assets, to Total assets, excluding Goodwill and intangible assets. 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 U.S. GAAP and may not be comparable to similarly-titled measures used by other financial institutions. A reconciliation from GAAP to this non-GAAP measure for the periods ended June 30, 2018 and 2017 is as follows:
 
June 30, 2018
 
June 30, 2017
 
(Dollar amounts in thousands)
Total equity
$
7,045,734

 
$
5,678,733

  Deduct: Goodwill and intangibles
105,669

 
106,298

Tangible common equity
$
6,940,065

 
$
5,572,435

 
 
 
 
Total assets
$
41,173,136

 
$
39,507,482

  Deduct: Goodwill and intangibles
105,669

 
106,298

Tangible assets
$
41,067,467

 
$
39,401,184

 
 
 
 
Equity to assets ratio
17.1
%
 
14.4
%
Tangible common equity to tangible assets
16.9
%
 
14.1
%

(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.
(12)
"Allowance ratio" is defined as the ratio of Allowance for credit losses, which excludes impairment on purchased receivables portfolios, to End of period assets covered by allowance for credit losses.
(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, 2018
 
June 30, 2017
Total equity
$
7,045,734

 
$
5,678,733

  Deduct: Goodwill, intangibles, and other assets, net of deferred tax liabilities
166,241

 
177,619

  Deduct: Accumulated other comprehensive income (loss), net
62,449

 
27,860

Tier 1 common capital
$
6,817,044

 
$
5,473,254

Risk weighted assets (a)
$
40,744,526

 
$
38,368,928

Common Equity Tier 1 capital ratio (b)
16.7
%
 
14.3
%
(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.


60



The following tables present an analysis of net yield on interest earning assets:
 
Three Months Ended June 30,
 
2018
 
2017
 
(Dollar amounts in thousands)
 
Average Balances
 
Interest Income/Interest Expense
 
Yield/Rate
 
Average Balances
 
Interest Income/Interest Expense
 
Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Retail installment contracts acquired individually
$
27,534,479

 
$
1,069,390

 
15.5
%
 
$
28,202,716

 
$
1,132,113

 
16.1
%
Purchased receivables
37,284

 
2,244

 
24.1
%
 
202,097

 
10,303

 
20.4
%
Receivables from dealers
15,361

 
130

 
3.4
%
 
68,810

 
967

 
5.6
%
Personal loans
1,375,877

 
84,772

 
24.6
%
 
1,402,416

 
88,869

 
25.3
%
Capital lease receivables
20,937

 
934

 
17.8
%
 
25,752

 
1,059

 
16.4
%
Finance receivables held for investment, net
28,983,938

 
1,157,470

 
16.1
%
 
29,901,791

 
1,233,311

 
16.5
%
Leased vehicles, net
12,219,612

 
177,562

 
5.8
%
 
10,191,380

 
131,040

 
5.1
%
Other assets
2,840,914

 
7,560

 
1.1
%
 
2,688,439

 
4,146

 
0.6
%
Allowance for credit losses
(3,142,654
)
 

 

 
(3,564,639
)
 

 

Total assets
$
40,901,810

 
$
1,342,592

 
 
 
$
39,216,971

 
$
1,368,497

 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Notes payable
$
31,898,900

 
$
273,953

 
3.4
%
 
$
31,519,486

 
$
233,371

 
3.0
%
Other liabilities
2,110,976

 

 

 
2,157,114

 

 

Total liabilities
34,009,876

 
273,953

 
 
 
33,676,600

 
233,371

 
 

 
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity
6,891,934

 

 

 
5,540,371

 

 
 
Total liabilities and equity
$
40,901,810

 
$
273,953

 
 
 
$
39,216,971

 
$
233,371

 
 


 
Six Months Ended June 30,
 
2018
 
2017
 
(Dollar amounts in thousands)
 
Average Balances
 
Interest Income/Interest Expense
 
Yield/Rate
 
Average Balances
 
Interest Income/Interest Expense
 
Yield/Rate
Assets
 
 
 
 
 
 
 
 
 
 
 
Retail installment contracts acquired individually
$
27,221,983

 
$
2,091,306

 
15.4
%
 
$
28,235,651

 
$
2,236,785

 
15.8
%
Purchased receivables
39,257

 
5,085

 
25.9
%
 
211,494

 
21,447

 
20.3
%
Receivables from dealers
15,507

 
250

 
3.2
%
 
69,361

 
1,888

 
5.4
%
Personal loans
1,421,861

 
174,032

 
24.5
%
 
1,450,002

 
181,318

 
25.0
%
Capital lease receivables
21,699

 
934

 
17.2
%
 
28,235

 
2,527

 
17.9
%
Finance receivables held for investment, net
28,720,307

 
2,271,607

 
15.9
%
 
29,994,743

 
2,443,965

 
16.3
%
Leased vehicles, net
11,856,109

 
323,157

 
5.5
%
 
10,016,322

 
259,102

 
5.2
%
Other assets
3,468,048

 
14,697

 
1.7
%
 
2,600,369

 
6,503

 
0.5
%
Allowance for credit losses
(3,142,654
)
 

 

 
(3,547,618
)
 

 

Total assets
$
40,901,810

 
$
2,609,461

 
 
 
$
39,063,816

 
$
2,709,570

 
 
Liabilities and equity
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Notes payable
$
31,589,063

 
$
514,981

 
3.3
%
 
$
31,545,144

 
$
460,460

 
2.9
%
Other liabilities
2,575,692

 

 

 
2,083,699

 

 

Total liabilities
34,164,755

 
514,981

 
 
 
33,628,843

 
460,460

 
 

 
 
 
 
 
 
 
 
 
 
 
Total stockholders' equity
6,737,055

 

 
 
 
5,434,973

 

 
 
Total liabilities and equity
$
40,901,810

 
$
514,981

 
 
 
$
39,063,816

 
$
460,460

 
 




61



Results of Operations
The following table presents the Company's results of operations for the three and six months ended June 30, 2018 and 2017:
 
For the Three Months Ended June 30,
 
For the Six Months Ended 
 June 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollar amounts in thousands)
Interest on finance receivables and loans
$
1,156,536

 
$
1,232,252

 
$
2,270,673

 
$
2,441,438

Leased vehicle income
537,897

 
429,264

 
1,042,175

 
847,497

Other finance and interest income
8,494

 
5,205

 
15,631

 
9,030

Total finance and other interest income
1,702,927

 
1,666,721

 
3,328,479

 
3,297,965

Interest expense
273,953

 
233,371

 
514,981

 
460,460

Leased vehicle expense
360,335

 
298,224

 
719,018

 
588,395

Net finance and other interest income
1,068,639

 
1,135,126

 
2,094,480

 
2,249,110

Provision for credit losses
352,575

 
520,555

 
811,570

 
1,155,568

Net finance and other interest income after provision for credit losses
716,064

 
614,571

 
1,282,910

 
1,093,542

Profit sharing
12,853

 
8,443

 
17,230

 
16,388

Net finance and other interest income after provision for credit losses and profit sharing
703,211

 
606,128

 
1,265,680

 
1,077,154

Total other income
22,384

 
24,395

 
47,437

 
79,875

Total operating expenses
276,950

 
282,415

 
564,862

 
587,493

Income before income taxes
448,645

 
348,108

 
748,255

 
569,536

Income tax expense
114,004

 
83,433

 
171,315

 
161,434

Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

 
 
 
 
 
 
 
 
Net income
$
334,641

 
$
264,675

 
$
576,940

 
$
408,102

Change in unrealized gains (losses) on cash flow hedges, net of tax
(762
)
 
(7,644
)
 
12,038

 
(399
)
Comprehensive income
$
333,879

 
$
257,031

 
$
588,978

 
$
407,703



62



Three and Six Months Ended June 30, 2018 Compared to Three and Six Months Ended June 30, 2017
Interest on Finance Receivables and Loans
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Income from individually acquired retail installment contracts
$
1,069,390

 
$
1,132,113

 
$
(62,723
)
 
(6
)%
 
$
2,091,306

 
$
2,236,785

 
$
(145,479
)
 
(7
)%
Income from purchased receivables portfolios
2,244

 
10,303

 
(8,059
)
 
(78
)%
 
5,085

 
21,447

 
(16,362
)
 
(76
)%
Income from receivables from dealers
130

 
967

 
(837
)
 
(87
)%
 
250

 
1,888

 
(1,638
)
 
(87
)%
Income from personal loans
84,772

 
88,869

 
(4,097
)
 
(5
)%
 
174,032

 
181,318

 
(7,286
)
 
(4
)%
Total interest on finance receivables and loans
$
1,156,536

 
$
1,232,252

 
$
(75,716
)
 
(6
)%
 
$
2,270,673

 
$
2,441,438

 
$
(170,765
)
 
(7
)%

Income from individually acquired retail installment contracts decreased $63 million, or 6%, from the second quarter of 2017 to the second quarter of 2018, and decreased $145 million, or 7%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to, a) 2.4% and 3.6% decline respectively, in the average outstanding balance of the portfolio; b) lower interest accruals for certain TDRs; and c) partially offset by higher loan APRs.

Income from purchased receivables portfolios decreased $8 million, or 78%, from the second quarter of 2017 to the second quarter of 2018, and decreased $16 million, or 76%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, due to the sale of a majority of the purchased receivables to SHUSA during the third quarter of 2017 and the continued runoff of the portfolios, as the Company has made no portfolio acquisitions accounted for under ASC 310-30 since 2012.
Income from personal loans decreased $4 million, or 5%, from the second quarter of 2017 to the second quarter of 2018, and decreased $181 million, or 4% from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to 1.9% decline in the average outstanding balance of the portfolio.
Leased Vehicle Income and Expense
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Leased vehicle income
$
537,897

 
$
429,264

 
$
108,633

 
25
%
 
$
1,042,175

 
$
847,497

 
$
194,678

 
23
%
Leased vehicle expense
360,335

 
298,224

 
62,111

 
21
%
 
719,018

 
588,395

 
130,623

 
22
%
Leased vehicle income, net
$
177,562

 
$
131,040

 
$
46,522

 
36
%
 
$
323,157

 
$
259,102

 
$
64,055

 
25
%
Leased vehicle income and expense increased in the three and six months ended June 30, 2018 when compared to the same periods in 2017, due to the continual growth in the portfolio since the Company launched Chrysler Capital in 2013, as the average outstanding balance of the portfolio increased 19.9% and 18.4%, respectively. 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)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Interest expense on notes payable
$
287,369

 
$
233,254

 
$
54,115

 
23
 %
 
$
540,741

 
$
455,523

 
$
85,218

 
19
 %
Interest expense on derivatives
(13,416
)
 
117

 
(13,533
)
 
(11,567
)%
 
(25,760
)
 
4,937

 
(30,697
)
 
(622
)%
Total interest expense
$
273,953

 
$
233,371

 
$
40,582

 
17
 %
 
$
514,981

 
$
460,460

 
$
54,521

 
12
 %
Interest expense on notes payable increased $54 million, or 23%, from the second quarter of 2017 to the second quarter of 2018, and increased $85 million, or 19%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to the increased cost of funds resulting from higher market rates.

63




Interest expense on derivatives decreased $14 million, or 11,567%, from the second quarter of 2017, to the second quarter of 2018 and decreased $31 million or 622%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to a favorable mark-to-market impact based on interest rate changes.
Provision for Credit Losses
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Provision for credit losses on individually acquired retail installment contracts
$
354,430

 
$
518,370

 
$
(163,940
)
 
(32
)%
 
$
813,109

 
$
1,147,467

 
$
(334,358
)
 
(29
)%
Provision for credit losses on receivables from dealers
(3
)
 
(21
)
 
18

 
(86
)%
 
(6
)
 
(11
)
 
5

 
(45
)%
Provision for credit losses on personal loans
(83
)
 
1,166

 
(1,249
)
 
(107
)%
 
(185
)
 
9,141

 
(9,326
)
 
(102
)%
Provision for credit losses on capital leases
(1,769
)
 
1,040

 
(2,809
)
 
(270
)%
 
(1,348
)
 
(1,029
)
 
(319
)
 
31
 %
Provision for credit losses
$
352,575

 
$
520,555

 
$
(167,980
)
 
(32
)%
 
$
811,570

 
$
1,155,568

 
$
(343,998
)
 
(30
)%
Provision for credit losses on the Company's individually acquired retail installment contracts decreased $164 million, or 32%, from the second quarter of 2017 to the second quarter of 2018, and decreased $334 million, or 29%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to lower net charge offs for six months ended June 30, 2018. The portfolio increased 0.5% from 27.2 billion at June 30, 2017 to 27.4 billion at June 30, 2018. In addition, provision for credit losses is impacted by nonaccrual of interest income for certain TDR loans, which is offset in the impairment as it reduces the carrying value of TDR loans.
Profit Sharing
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Profit sharing
$
12,853

 
$
8,443

 
$
4,410

 
52
%
 
$
17,230

 
$
16,388

 
$
842

 
5
%

Profit sharing consists of revenue sharing related to the Chrysler Agreement and profit sharing on personal loans originated pursuant to the agreements with Bluestem. Profit sharing increased in the three and six months ended June 30, 2018 compared to the same periods in 2017, primarily because of decrease in Chrysler profit sharing expense based on increase in lease depreciation expense.
Other Income
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Investment losses, net
$
(82,634
)
 
$
(99,522
)
 
$
16,888

 
17
 %
 
$
(169,154
)
 
$
(175,921
)
 
$
6,767

 
4
 %
Servicing fee income
27,538

 
31,953

 
(4,415
)
 
(14
)%
 
53,720

 
63,637

 
(9,917
)
 
(16
)%
Fees, commissions, and other
77,480

 
91,964

 
(14,484
)
 
(16
)%
 
162,871

 
192,159

 
(29,288
)
 
(15
)%
Total other income
$
22,384

 
$
24,395

 
$
(2,011
)
 
(8
)%
 
$
47,437

 
$
79,875

 
$
(32,438
)
 
(41
)%
Average serviced for others portfolio
$
9,103,107

 
$
10,342,125

 
$
(1,239,018
)
 
(12
)%
 
$
8,928,448

 
$
10,832,620

 
$
(1,904,172
)
 
(18
)%

64



Investment losses, net for the three and six months ended June 30, 2018 and 2017, were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Gain (loss) on sale of loans and leases
$
(2,096
)
 
$
(2,179
)
 
$
(18,792
)
 
$
(13,061
)
Lower of cost or market adjustments
(79,215
)
 
(95,683
)
 
(149,714
)
 
(161,804
)
Other gains, (losses and impairments), net
(1,323
)
 
(1,660
)
 
(648
)
 
(1,056
)
Total investment losses, net
$
(82,634
)
 
$
(99,522
)
 
$
(169,154
)
 
$
(175,921
)
Gain (loss) on sale of loans and leases changed from a $2.2 million loss during second quarter of 2017, to a loss of $2.1 million for the second quarter of 2018, and changed from $13.1 million loss during the six months ended June 30, 2017, to a loss of $18.8 million as of June 30, 2018. The change was driven primarily by the significantly higher assets sales during the six months ended June 30, 2018 as compared to the six months ended June 30, 2017.
The change in lower of cost or market adjustments primarily relates to customer default activity and net changes in the unpaid principal balance on the personal lending portfolio, most of which has been classified as held for sale. Refer to Note 16 - "Investment Gains (Losses), Net" in the accompanying condensed consolidated financial statements.
The Company records servicing fee income on loans that it services but does not own and does not report on its balance sheet. Servicing fee income decreased $4 million, or 14%, from the second quarter of 2017 to the second quarter of 2018, and decreased 10 million, or 16%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, due to the decline in the Company's serviced portfolio. The serviced for others portfolio as of June 30, 2018 and 2017 was as follows:
 
June 30,
 
2018
 
2017
 
(Dollar amounts in thousands)
SBNA and Santander retail installment contracts
$
4,458,912

 
$
1,541,451

SBNA leases
7,042

 
641,074

Total serviced for related parties
4,465,954

 
2,182,525

Chrysler Capital securitizations
960,057

 
1,931,324

Other third parties
4,128,950

 
5,767,621

Total serviced for third parties
5,089,007

 
7,698,945

Total serviced for others portfolio
$
9,554,961

 
$
9,881,470

The Company's serviced for others balances has decreased versus the prior year is primarily due to the timing of prime asset sales.

The Company's fees, commissions, and other primarily includes late fees, miscellaneous, and other income. This income decreased 16% from the second quarter of 2017 to the second quarter of 2018, and decreased 15%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, due to the discontinuance of certain revenue streams in late 2017.
Total Operating Expenses
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Compensation expense
$
118,598

 
$
127,894

 
$
(9,296
)
 
(7
)%
 
$
240,603

 
$
264,156

 
$
(23,553
)
 
(9
)%
Repossession expense
63,660

 
67,269

 
(3,609
)
 
(5
)%
 
135,741

 
138,568

 
(2,827
)
 
(2
)%
Other operating costs
94,692

 
87,252

 
7,440

 
9
 %
 
188,518

 
184,769

 
3,749

 
2
 %
Total operating expenses
$
276,950

 
$
282,415

 
$
(5,465
)
 
(2
)%
 
$
564,862

 
$
587,493

 
$
(22,631
)
 
(4
)%

65



Compensation expense decreased $9 million, or 7%, from the second quarter of 2017 to the second quarter of 2018, and decreased $24 million, or 9%, from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to a decrease in severance expenses incurred in 2017 related to management changes and efficiency efforts.
Income Tax Expense
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Income tax expense
$
114,004

 
$
83,433

 
$
30,571

 
37
%
 
$
171,315

 
$
161,434

 
$
9,881

 
6
%
Income before income taxes
448,645

 
348,108

 
100,537

 
29
%
 
748,255

 
569,536

 
178,719

 
31
%
Effective tax rate
25.4
%
 
24.0
%
 
 
 
 
 
22.9
%
 
28.3
%
 
 
 
 

The effective tax rate decreased from 28.3% for the six months ended June 30, 2017 to 22.9% for the six months ended June 30, 2018, primarily due to the Tax Cuts and Jobs Act enacted on December 22, 2017 and effective January 1, 2018 offset by the tax benefit recognized in the second quarter of 2017 upon the assertion that undistributed net earnings of the Company’s subsidiary SCI, would be indefinitely reinvested outside the US. The Company changed its assertion to reflect a change in management’s strategic objective to no longer permanently reinvest the earnings during the fourth quarter of 2017.

Other Comprehensive Income (Loss)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
Increase (Decrease)
 
June 30,
 
Increase (Decrease)
 
2018
 
2017
 
Amount
 
Percent
 
2018
 
2017
 
Amount
 
Percent
 
(Dollar amounts in thousands)
Change in unrealized gains (losses) on cash flow hedges, net of tax
$
(762
)
 
$
(7,644
)
 
$
6,882

 
(90
)%
 
$
12,038

 
$
(399
)
 
$
12,437

 
3,117
%

The change in unrealized gains (losses) on cash flow hedges for the three and six months ended June 30, 2018 as compared to the three and six months ended June 30, 2017 was primarily driven by more favorable interest rate movements in 2018 than in 2017.

66



Credit Quality
Loans and Other Finance Receivables
Nonprime loans comprise 83% of the Company's portfolio as of June 30, 2018. The Company records an allowance for credit losses to cover the estimate of inherent losses on individually acquired retail installment contracts and other loans and receivables held for investment. The Company's held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans was comprised of the following at June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
Retail Installment Contracts
Acquired
Individually (a)
 
Receivables from
Dealers
 
Personal Loans
 
Non-TDR
 
TDR
 
 
Unpaid principal balance
$
21,414,617


$
5,958,564

 
$
15,200

 
$
4,016

Credit loss allowance - specific


(1,496,580
)
 
 
 
 
Credit loss allowance - collective
(1,641,214
)


 
(158
)
 
(1,116
)
Discount
(212,484
)

(58,265
)
 

 

Capitalized origination costs and fees
69,151


5,448

 

 
138

Net carrying balance
$
19,630,070

 
$
4,409,167

 
$
15,042

 
$
3,038

Allowance as a percentage of unpaid principal balance
7.7
%
 
25.1
%
 
1.0
%
 
27.8
%
Allowance and discount as a percentage of unpaid principal balance
8.7
%
 
26.1
%
 
1.0
%
 
27.8
%
(a) As of June 30, 2018, used car financing represented 59% of our outstanding retail installment contracts acquired individually. 86% of this used car financing consisted of nonprime auto loans.
 
December 31, 2017
 
Retail Installment Contracts
Acquired
Individually (a)
 
Receivables from
Dealers
 
Personal Loans
 
Non-TDR
 
TDR
 
 
Unpaid principal balance
$
19,681,394

 
$
6,261,894

 
$
15,787

 
$
6,887

Credit loss allowance - specific

 
(1,731,320
)
 

 

Credit loss allowance - collective
(1,529,815
)
 

 
(164
)
 
(2,565
)
Discount
(309,191
)
 
(74,832
)
 

 
(1
)
Capitalized origination costs and fees
58,638

 
5,741

 

 
138

Net carrying balance
$
17,901,026

 
$
4,461,483

 
$
15,623

 
$
4,459

Allowance as a percentage of unpaid principal balance
7.8
%
 
27.6
%
 
1.0
%
 
37.2

Allowance and discount as a percentage of unpaid principal balance
9.3
%
 
28.8
%
 
1.0
%
 
37.3
%
(a) As of December 31, 2017, used car financing represented 61% of our outstanding retail installment contracts acquired individually. 87% of this used car financing consisted of nonprime auto loans.

The Company acquired certain retail installment contracts in pools at a discount due to credit deterioration subsequent to their origination, the Company anticipates the expected credit losses at purchase and records income thereafter based on the expected effective yield, recording impairment if performance is worse than expected at purchase. Any deterioration in the performance of the purchased portfolios results in an incremental impairment. The balances of these purchased receivables portfolios were as follows at June 30, 2018 and December 31, 2017:
 
June 30,
2018
 
December 31, 2017
 
(Dollar amounts in thousands)
Outstanding balance
$
35,750

 
$
43,474

Outstanding recorded investment, net of impairment
$
22,845

 
$
28,069

A summary of the credit risk profile of the Company's consumer loans by FICO® score, number of trade lines, and length of credit history, each as determined at origination, as of June 30, 2018 and December 31, 2017 was as follows (dollar amounts in billions, totals may not foot due to rounding):

67



June 30, 2018
Trade Lines
 
1
 
2
 
3
 
4+
 
Total
FICO
Months History
 
$
%
 
$
%
 
$
%
 
$
%
 
$
%
No-FICO
<36
 
$
2.3

96
%
 
$
0.1

4
%
 
$


 
$


 
$
2.4

9
%
36+
 
0.4

40
%
 
0.2

20
%
 
0.1

10
%
 
0.3

30
%
 
1.0

4
%
<540
<36
 
0.1

25
%
 
0.1

25
%
 
0.1

25
%
 
0.1

25
%
 
0.4

1
%
36+
 
0.2

4
%
 
0.3

6
%
 
0.3

6
%
 
4.5

84
%
 
5.3

19
%
540-599
<36
 
0.3

37
%
 
0.2

25
%
 
0.1

13
%
 
0.2

25
%
 
0.8

3
%
36+
 
0.2

2
%
 
0.3

4
%
 
0.3

4
%
 
7.5

90
%
 
8.3

30
%
600-639
<36
 
0.2

33
%
 
0.1

17
%
 
0.1

17
%
 
0.2

33
%
 
0.6

2
%
36+
 
0.1

2
%
 
0.1

2
%
 
0.1

2
%
 
3.9

94
%
 
4.2

15
%
>640
<36
 
0.3

43
%
 
0.1

14
%
 
0.1

14
%
 
0.2

29
%
 
0.7

3
%
36+
 
0.1

3
%
 
0.1

3
%
 
0.1

3
%
 
3.4

91
%
 
3.7

14
%
Total
 
$
4.2

15
%
 
$
1.6

6
%
 
$
1.3

5
%
 
$
20.3

74
%
 
$
27.4

100
%
December 31, 2017
Trade Lines
 
1
 
2
 
3
 
4+
 
Total
FICO
Months History
 
$
%
 
$
%
 
$
%
 
$
%
 
$
%
No-FICO
<36
 
$
2.3

97
%
 
$
0.1

3
%
 
$


 
$


 
$
2.4

9
%
36+
 
0.4

38
%
 
0.2

20
%
 
0.1

11
%
 
0.3

31
%
 
1.0

4
%
<540
<36
 
0.2

40
%
 
0.1

23
%
 
0.1

14
%
 
0.1

23
%
 
0.5

2
%
36+
 
0.2

3
%
 
0.3

5
%
 
0.3

5
%
 
4.5

87
%
 
5.3

21
%
540-599
<36
 
0.3

35
%
 
0.2

23
%
 
0.1

15
%
 
0.2

27
%
 
0.8

3
%
36+
 
0.2

2
%
 
0.2

3
%
 
0.3

4
%
 
6.8

91
%
 
7.5

29
%
600-639
<36
 
0.2

36
%
 
0.1

22
%
 
0.1

15
%
 
0.1

27
%
 
0.5

2
%
36+
 
0.1

1
%
 
0.1

2
%
 
0.1

2
%
 
3.6

95
%
 
3.9

15
%
>640
<36
 
0.3

42
%
 
0.1

21
%
 
0.1

13
%
 
0.1

24
%
 
0.6

2
%
36+
 


 
0.1

2
%
 
0.1

3
%
 
3.3

95
%
 
3.5

13
%
Total
 
$
4.2

16
%
 
$
1.5

6
%
 
$
1.3

5
%
 
$
19.0

73
%
 
$
26.0

100
%
Delinquencies

The Company considers an account delinquent when an obligor fails to pay the required minimum portion of the scheduled payment by the due date. The Company noted some deterioration in the performance of recent originations, particularly those loans originated in 2015, and addressed those trends with the introduction of more disciplined underwriting standards in late 2016. Based on this more disciplined underwriting (among other things), the servicing practices for retail installment contracts originated after January 1, 2017 changed, such that there is an increase in the minimum payment requirements. Although these changes impact the measurement of customer delinquencies, the Company does not believe they have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. With respect to receivables originated by the Company through its “Chrysler Capital” channel, the required minimum payment is 90% of the scheduled payment. With respect to receivables originated by the Company or acquired by the Company from an unaffiliated third-party originator on or after January 1, 2017, the required minimum payment is 90% of the scheduled payment, whereas previous to January 1, 2017 the required minimum payment was 50% of the scheduled payment. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time.

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.
The following is a summary of delinquencies on retail installment contracts held for investment as of June 30, 2018 and December 31, 2017:

68



 
June 30, 2018
 
December 31, 2017
 
Dollars (in thousands)
 
Percent (a)
 
Dollars (in thousands)
 
Percent (a)
Principal 30-59 days past due
$
2,535,166

 
9.2
%
 
$
2,827,678

 
10.9
%
Delinquent principal over 59 days (b)
1,151,410

 
4.2
%
 
1,544,583

 
5.9
%
Total delinquent principal
$
3,686,576

 
13.4
%
 
$
4,372,261

 
16.8
%
(a) Percent of unpaid principal balance of total retail installment contracts acquired individually held for investment.
(b) Interest is generally accrued until 60 days past due in accordance with the Company's accounting policy for retail installment contracts.

In addition, retail installment contracts acquired individually held for investment that were placed on nonaccrual status, as of June 30, 2018 and December 31, 2017:
 
June 30, 2018
 
December 31, 2017
 
Amount
 
Percent (a)
 
Amount
 
Percent (a)
Non-TDR
$
505,399


1.8
%

$
666,926


2.6
%
TDR
1,554,860


5.7
%

1,390,373


5.4
%
Total nonaccrual principal
$
2,060,259


7.5
%

$
2,057,299


7.9
%
(a) Percent of unpaid principal balance of total retail installment contracts acquired individually held for investment.
All of the Company's receivables from dealers were current as of June 30, 2018 and December 31, 2017.
Credit Loss Experience
The following is a summary of net losses and repossession activity on finance receivables held for investment for the six months ended June 30, 2018 and 2017.
 
Six Months Ended June 30,
 
2018
 
2017
 
Retail Installment
Contracts
 
Retail Installment
Contracts
 
(Dollar amounts in thousands)
Principal outstanding at period end
$
27,408,764

 
$
27,434,063

Average principal outstanding during the period
$
26,319,263

 
$
27,348,459

Number of receivables outstanding at period end
1,714,744

 
1,756,934

Average number of receivables outstanding during the period
1,729,592

 
1,732,382

Number of repossessions (a)
142,625

 
151,194

Number of repossessions as a percent of average number of receivables outstanding
16.5
%
 
17.5
%
Net losses
$
935,457

 
$
1,112,326

Net losses as a percent of average principal amount outstanding
7.1
%
 
8.1
%
(a) Repossessions are net of redemptions. The number of repossessions includes repossessions from the outstanding portfolio and from accounts already charged off.
There were no charge-offs on the Company's receivables from dealers for the three and six months ended June 30, 2018 and 2018.
Deferrals and Troubled Debt Restructurings
In accordance with the Company's policies and guidelines, the Company from time to time, 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. More than 90% of deferrals granted are for two months. 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 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 payments has been received. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.

69



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. A customer is limited to one deferral each six months, and if a customer receives two or more deferrals over the life of the loan, the loan will advance to a TDR designation.
The following is a summary of deferrals on the Company's retail installment contracts held for investment as of the dates indicated:
 
June 30, 2018
 
December 31, 2017
 
(Dollar amounts in thousands)
Never deferred
$
18,454,764

 
67.3
%
 
$
16,407,960

 
63.1
%
Deferred once
4,130,591

 
15.1
%
 
4,724,987

 
18.2
%
Deferred twice
2,149,008

 
7.8
%
 
2,168,424

 
8.3
%
Deferred 3 - 4 times
2,592,975

 
9.5
%
 
2,614,421

 
10.1
%
Deferred greater than 4 times
81,426

 
0.3
%
 
70,740

 
0.3
%
Total
$
27,408,764

 
 
 
$
25,986,532

 
 
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, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the Company's allowance for credit losses are also impacted. The change to the Company’s servicing practices (i.e., aging reflective partial
payments) did not have a significant impact to delinquencies, deferral strategies period over period, amount or timing of the
recognition of credit losses or allowance for loan losses.

Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the allowance for credit losses and related provision for credit losses. Changes in the charge-off ratios and loss confirmation periods are considered in determining the appropriate level of allowance for credit losses and related provision for credit losses, including the allowance and provision for loans that are not classified as TDRs. For loans that are classified as TDRs, the Company generally compares the present value of expected cash flows to the outstanding recorded investment of TDRs to determine the amount of TDR impairment and related provision for credit losses that should be recorded. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell.
The Company also may agree, or be required by operation of law or by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in loan principal balance, a temporary reduction of monthly payment, or an extension of the maturity date. The servicer of the Company's revolving personal loans also may grant modifications in the form of principal or interest rate reductions or payment plans. Similar to deferrals, the Company believes modifications are an effective portfolio management technique. Not all modifications are classified as TDRs as the loan may not meet the scope of the applicable guidance or the modification may have been granted for a reason other than the borrower's financial difficulties.
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis; however, the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of those loans should also be placed on a cost recovery basis. For TDR loans on nonaccrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on cost recovery basis, the Company returns to accrual when a sustained period of repayment performance has been

70



achieved (typically defined as six months). The impact to interest income of TDR loans that were on cost recovery which moved back to accrual, was insignificant as of June 30, 2018 and December 31, 2017.

While the Company's nonaccrual designation remains consistent at more than 60 days past due, the Company continuously assesses TDR collection performance. The recognition of interest income on impaired loans (such as TDR loans) is based on an expectation of whether the contractually due interest income is reasonably assured of collection. Prior to January 1, 2017, the collection performance of TDR loans supported classifying TDRs as nonaccrual only when past due more than 60 days, regardless of delinquency status at the time of the TDR event. However, the Company noted emerging trends related to recent TDR vintage performance that caused the Company to review whether collection of interest income was reasonably assured for certain TDRs. Accordingly, beginning January 1, 2017, based on observed TDR performance, the Company places certain additional TDRs on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured; and at the latest, when the account becomes past due more than 60 days. The Company believes repayment under the revised terms is not reasonably assured for a retail installment contract that is already on nonaccrual (i.e., more than 60 days past due) and has received a modification or deferment that qualifies for a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on nonaccrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis. If the portfolio of TDRs with these characteristics continues to grow, this change would affect the magnitude of interest income to be recognized in the future.

TDR loans are generally measured based on the present value of expected cash flows. The recognition of interest income on TDR loans reflects management’s best estimate of the amount that is reasonably assured of collection and is consistent with the estimate of future cash flows used in the impairment measurement. Any accrued but unpaid interest is fully reserved for through the recognition of additional impairment on the recorded investment, if not expected to be collected. Accordingly, the placement of TDR loans on nonaccrual reduces the interest income recorded but that reduction is completely offset by a reduction in the impairment required for that loan; therefore the result is a net zero impact to the income statement.
The following is a summary of the principal balance as of June 30, 2018 and December 31, 2017 of loans that have received these modifications and concessions:
 
June 30, 2018
 
December 31, 2017
 
Retail Installment Contracts
 
Retail Installment Contracts
 
(Dollar amounts in thousands)
Temporary reduction of monthly payment (a)
$
2,597,881

 
$
2,864,363

Bankruptcy-related accounts
62,008

 
77,992

Extension of maturity date
24,699

 
25,332

Interest rate reduction
56,638

 
56,764

Max buy rate and fair lending (b)
4,035,804

 
3,067,624

Other
145,641

 
176,838

Total modified loans
$
6,922,671

 
$
6,268,913

(a) Reduces a customer's payment for a temporary time period (no more than six months)
(b) 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.
A summary of the Company's recorded investment in TDRs as of the dates indicated is as follows:
 
June 30, 2018
 
December 31, 2017
 
Retail Installment Contracts
 
(Dollar amounts in thousands)
Outstanding recorded investment (a)
$
5,932,209

 
$
6,261,432

Impairment
(1,496,580
)
 
(1,731,320
)
Outstanding recorded investment, net of impairment
$
4,435,629

 
$
4,530,112


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(a) As of June 30, 2018, the outstanding recorded investment excludes $78.3 million of collateral-dependent bankruptcy TDRs that has been written down by $33.2 million to fair value less cost to sell. As of December 31, 2017, the outstanding recorded investment excludes $64.7 million of collateral-dependent bankruptcy TDRs that has been written down by $29.2 million to fair value less cost to sell.
A summary of the Company's delinquent TDRs as of the dates indicated is as follows:
 
June 30, 2018
 
December 31, 2017
 
Retail Installment Contracts (a)
 
(Dollar amounts in thousands)
Principal 30-59 days past due
$
1,202,120

 
$
1,332,239

Delinquent principal over 59 days
599,760

 
818,938

Total delinquent TDRs
$
1,801,880

 
$
2,151,177

(a) The balances in the above table reflects total unpaid principal balance rather than net recorded investment before allowance.

A summary of the Company’s TDRs that were placed on nonaccrual status at June 30, 2018 and December 31, 2017, is as follows:
 
June 30, 2018
 
December 31, 2017
 
Retail Installment Contracts (a)
 
(Dollar amounts in thousands)
TDRs on cost recovery method (b)
$
1,161,487


$
790,461

TDRs on cash basis accounting
393,373


599,912

Total nonaccrual TDR principal
$
1,554,860


$
1,390,373

(a) The balances in the above table reflects total unpaid principal balance rather than net recorded investment before allowance.
(b) Out of the total TDRs on cost recovery basis, $1,022,007 and $652,679 of TDRs were less than 60 days past due as of June 30, 2018 and December 31, 2017, respectively. The Company applied $142,523 and $56,740 of interest received, on these loans, towards recorded investment (as compared to interest income), in accordance with cost recovery method as of June 30, 2018 and December 31, 2017, respectively.

As of June 30, 2018, and December 31, 2017, the Company did not have any Dealer Loans classified as TDRs and had not granted deferrals or modifications on any of these loans.

The following table shows the components of the changes in the recorded investment in retail installment contract TDRs (excluding collateral-dependent bankruptcy TDRs) during the three and six months ended June 30, 2018 and 2017:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2018
 
June 30, 2017
 
June 30, 2018
 
June 30, 2017
Balance — beginning of period
$
5,978,182

 
$
5,792,102

 
$
6,261,431

 
$
5,637,792

New TDRs
715,331

 
787,278

 
1,294,591

 
1,653,556

Charge-offs
(425,172
)
 
(448,502
)
 
(942,706
)
 
(931,427
)
Paydowns (a)
(337,062
)
 
(202,162
)
 
(682,922
)
 
(433,891
)
Other transfers
930

 
676

 
1,815

 
3,362

Balance — end of period
$
5,932,209

 
$
5,929,392

 
$
5,932,209

 
$
5,929,392

(a) Includes discount accreted in interest income for the period.
For loans not classified as TDRs, the Company generally estimates an appropriate allowance for credit losses based on delinquency status, the Company’s historical loss experience, estimated values of underlying collateral, and various economic factors. Once a loan has been classified as a TDR, it is generally assessed for impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate considering all available evidence. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. Due to this key distinction in allowance calculations, the coverage ratio is higher for TDRs in comparison to non-TDRs.
The table below presents the Company’s allowance ratio for TDR and non-TDR individually acquired retail installment contracts as of June 30, 2018 and December 31, 2017:

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June 30, 2018
 
December 31, 2017
 
(Dollar amounts in thousands)
TDR - Unpaid principal balance
$
5,958,564

 
$
6,261,894

TDR - Impairment
1,496,580

 
1,731,320

TDR - Allowance ratio
25.1
%
 
27.6
%
 
 
 
 
Non-TDR - Unpaid principal balance
$
21,414,617

 
$
19,681,394

Non-TDR - Allowance
1,641,214

 
1,529,815

Non-TDR Allowance ratio
7.7
%
 
7.8
%
 
 
 
 
Total - Unpaid principal balance
$
27,373,181

 
$
25,943,288

Total - Allowance
3,137,794

 
3,261,135

Total - Allowance ratio
11.5
%
 
12.6
%

The allowance ratio for TDR retail installment contracts decreased from December 31, 2017 to June 30, 2018. The decrease in the TDR allowance ratio is primarily driven by the non-accrual of interest income for certain TDR loans which is offset in the impairment as it reduces the carrying value of TDR loans.

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 Santander, as well as through securitizations in the ABS market and large 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 $7.0 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.
During the six months ended June 30, 2018, the Company completed on-balance sheet funding transactions totaling approximately $9.2 billion, including:
three securitizations on the Company's SDART platform for approximately $3.3 billion;
two securitizations on the Company's DRIVE, deeper subprime platform, for approximately $2.1 billion;
one private lease securitization for approximately $1.2 billion;
one lease securitization on our SRT Platform for approximately 1.0 billion;
one private amortizing lease facility for approximately 1.0 billion;
issuance of retained bonds on the Company's SDART platform for approximately $304 million; and
issuance of retained bonds on the Company's DRIVE platform for approximately $191 million.
The Company also completed approximately $2.6 billion in asset sales to Santander.








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As of June 30, 2018 and December 31, 2017, the Company's debt consisted of the following:
 
June 30,
2018
 
December 31,
2017
Third - party revolving credit facilities
$
4,502,823

 
$
4,848,316

Related - party revolving credit facilities
3,125,963

 
3,754,223

     Total revolving credit facilities
7,628,786

 
8,602,539

 
 
 
 
Public securitizations
18,596,190

 
14,993,258

Privately issued amortizing notes
5,704,630

 
7,564,637

     Total secured structured financings
24,300,820

 
22,557,895

Total debt
$
31,929,606

 
$
31,160,434

Credit Facilities
Third-party Revolving Credit Facilities
Warehouse Lines
The Company has two credit facilities with seven banks providing an aggregate commitment of $4.2 billion for the exclusive use of providing short-term liquidity needs to support Chrysler Capital retail financing. As of June 30, 2018 and December 31, 2017, there was an outstanding balance of $1.9 billion and $2.0 billion, respectively, on these facilities in aggregate. These facilities require reduced Advance Rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.
Repurchase Facilities
The Company obtains financing through four investment management 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 of June 30, 2018 and December 31, 2017, there was an outstanding balance of $456 million and $744 million, respectively, under these repurchase facilities.

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:
 
As of June 30, 2018 (amounts in thousands)
 
Counterparty
 
Utilized Balance
 
Committed Amount
 
Average Outstanding Balance
 
Maximum Outstanding Balance
Line of credit
Santander-NY
 
$

 
$
1,000,000

 
$
107,253

 
$
595,000

Line of credit
Santander-NY
 
122,200

 
750,000

 
575,135

 
687,900

Line of credit
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
 
400,000

 
400,000

 
400,000

 
400,000

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

Line of Credit
SHUSA
 

 
3,000,000

 

 

 
 
 
$
3,122,200

 
$
7,750,000

 

 
 

74



 
As of June 30, 2017 (amounts in thousands)
 
Counterparty
 
Utilized Balance
 
Committed Amount
 
Average Outstanding Balance
 
Maximum Outstanding Balance
Line of Credit
Santander-NY
 
$

 
$
500,000

 
$
171,236

 
$
500,000

Line of credit
Santander-NY
 
825,000

 
1,000,000

 
997,940

 
1,000,000

Line of Credit
Santander-NY
 

 
1,000,000

 
796,214

 
1,000,000

Line of Credit
Santander-NY
 

 
750,000

 

 

Promissory Note
SHUSA
 
300,000

 
300,000

 
192,857

 
300,000

Promissory Note
SHUSA
 
650,000

 
650,000

 
328,571

 
650,000

Promissory Note
SHUSA
 
500,000

 
500,000

 
179,577

 
500,000

Line of Credit
SHUSA
 

 
3,000,000

 
139,973

 
750,000

 
 
 
$
2,275,000

 
$
7,700,000

 
 
 
 
Through SHUSA, Santander provides the Company with $3.0 billion of committed revolving credit that can be drawn on an unsecured basis. Santander, through its New York branch, provides the Company with $1.75 billion of long-term committed revolving credit facilities. The $1.75 billion of long-term committed revolving credit facilities is composed of a $1 billion facility that permits unsecured borrowing but is generally collateralized by retained residuals and $750 million facility that is securitized by prime retail installment loans. Both facilities have current maturity dates of December 31, 2018.

SHUSA provides the Company with $3.0 billion of term promissory notes with maturities ranging from March 2019 to December 2022.
Under an agreement with Santander, the Company pays a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of the Company's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee is paid against each month's ending balance. The guarantee fee only applies to additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by a duly executed counter-guaranty agreement. The Company recognized guarantee fee expense of $3.6 million and $2.9 million for the six months ended June 30, 2018 and 2017, respectively.
The Company also has derivative financial instruments with Santander and affiliates (all of which were subsequently amended to reflect clearing with central clearing counterparties) with outstanding notional amounts of $1.3 billion and $3.7 billion at June 30, 2018 and December 31, 2017, respectively. The Company had a collateral overage on derivative liabilities with Santander and affiliates of $3 million and $2 million at June 30, 2018 and December 31, 2017, respectively. Interest on these agreements includes amounts totaling $460 thousand and $216 thousand for the six months ended June 30, 2018 and 2017, respectively.
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 issue amortizing notes. The Company has completed six securitizations year-to-date in 2018 and currently has 44 securitizations outstanding in the market with a cumulative ABS balance of approximately $13 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 such flow agreements.

Off-Balance Sheet Financing
Beginning in March 2017, the Company has 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 are issued to

75



Santander, the Company recorded these transactions as true sales of the retail installment contracts securitized, and removed the sold assets from the Company's condensed consolidated balance sheets.
The Company also continues to periodically execute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Upon transferring all of the notes and residual interests in these securitizations to third parties, the Company 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.

Cash Flow Comparison
The Company has produced positive net cash from operating activities every year since 2003. The Company's investing activities primarily consist of originations and acquisitions of retail installment contracts. SC's financing activities primarily consist of borrowing, repayments of debt, and payment of dividends.
 
Six Months Ended June 30,
 
2018
 
2017
 
(Dollar amounts in thousands)
Net cash provided by operating activities
$
3,413,047

 
$
2,215,804

Net cash used in investing activities
(4,773,776
)
 
(2,352,925
)
Net cash provided by financing activities
724,120

 
317,933

Net Cash Provided by Operating Activities
Net cash provided by operating activities increased by $1.2 billion from the six months ended June 30, 2017 to the six months ended June 30, 2018, mainly due to the lower provision for credit losses of $344 million and higher proceeds of $1.1 billion from assets held for sale.
Net Cash Used in Investing Activities
Net cash used in investing activities increased by $2.4 billion from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to the increase of $1.7 billion lease vehicle purchases and $1.6 billion of disbursements on finance receivables held for investment, offset by increase of $0.7 billion in proceeds from sale of leased vehicles.
Net Cash Provided by Financing Activities
Net cash provided by financing activities increased by $406 million from the six months ended June 30, 2017 to the six months ended June 30, 2018, primarily due to the increase of proceeds from notes payable, offset by dividend payment of $36 million.

Contingencies and Off-Balance Sheet Arrangements
For information regarding the Company's contingencies and off-balance sheet arrangements, refer to Note 10 - Commitments and Contingencies in the accompanying condensed consolidated financial statements.

Contractual Obligations
The Company leases its headquarters in Dallas, Texas, its servicing centers in Texas, Colorado, Arizona, and Puerto Rico, and an operations facilities in California, Texas and Colorado 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 of June 30, 2018:

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Less than 1 year
 
1-3
years
 
3-5
years
 
More than
5 years
 
Total
 
(In thousands)
Operating lease obligations
$
12,701

 
$
26,079

 
$
24,863

 
$
38,399

 
$
102,042

Notes payable - revolving facilities
1,467,063

 
4,357,960

 
1,800,000

 

 
7,625,023

Notes payable - secured structured financings
1,524,792

 
7,986,566

 
10,263,313

 
4,587,170

 
24,361,841

Contractual interest on debt
903,477

 
880,000

 
226,537

 
1,513,152

 
3,523,166

 
$
3,908,033


$
13,250,605


$
12,314,713


$
6,138,721


$
35,612,072



Risk Management Framework

The Company's risk management framework is overseen by its Board, the Board's Risk Committee (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 2017 Annual Report on Form 10-K.

Credit Risk

The risk inherent in the Company's loan and lease portfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide factors such as changes in employment. The Company manages this risk through its underwriting, pricing and credit approval guidelines and servicing policies and practices, as well as geographic and other concentration limits.

The Company's automated originations process is intended to reflect a disciplined approach to credit risk management. The Company's robust historical data on both organically originated and acquired loans is used by Company to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary loss forecasting score using information such as FICO®, debt-to-income ratio, loan-to-value ratio, and more than 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The Company continuously maintains and adjusts the pricing in each tier to reflect market and risk trends. In addition to the automated process, the Company maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers. The Company generally tightens its underwriting requirements in times of greater economic uncertainty to compete in the market at loss and approval rates acceptable for meeting the Company's required returns. The Company's underwriting policy has also been adjusted to meet the requirements of the Company's contracts such as the Chrysler Agreement. In both cases, the Company has accomplished this by adjusting risk-based pricing, the material components of which include interest rate, down payment, and loan-to-value.

The Company monitors early payment defaults and other potential indicators of dealer or customer fraud and uses the monitoring results to identify dealers who will be subject to more extensive requirements when presenting customer applications, as well as dealers with whom the Company will not do business at all.
Market Risk
Interest Rate Risk
The Company measures and monitors interest rate risk on at least a monthly basis. The Company borrows money from a variety of market participants to provide loans and leases to the Company's customers. The Company's gross interest rate spread, which is the difference between the income earned through the interest and finance charges on the Company's finance receivables and lease contracts and the interest paid on the Company's funding, will be negatively affected if the expense incurred on the Company's borrowings increases at a faster pace than the income generated by the Company's assets.
The Company's Interest Rate Risk policy is 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

77



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 manage its desired outcome. As of June 30, 2018, the notional value of the Company's interest rate swap agreements was $6.8 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, 2018 the notional value of the Company’s interest rate cap agreements was $18.4 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, 2018, 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 $3 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, 2018, the impact of a 100 basis point parallel increase in the interest rate curve would decrease the Company's MVE by $58 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 with FCA. 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 FCA 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 with FCA through the second quarter of 2018, approximately 87% of full term leases have not exceeded the first and second portions of any residual losses under the agreement. The Company also utilizes industry data, including the ALG benchmark for residual values, and employ a team of individuals experienced in forecasting residual values.
Similarly, lower used vehicle prices also reduce the amount that can be recovered when remarketing repossessed vehicles that serve as collateral underlying loans. The Company manages this risk through loan-to-value limits on originations, monitoring of new and used vehicle values using standard industry guides, and active, targeted management of the repossession process.
The Company does not currently have material exposure to currency fluctuations or inflation.
Liquidity Risk
The Company views liquidity as integral to other key elements such as capital adequacy, asset quality and profitability. The Company’s primary liquidity risk relates to the ability to finance new originations through the Bank and ABS securitization markets. The Company has a robust liquidity policy that is intended to manage this risk. The liquidity policy establishes the following guidelines:
that the Company maintain at least eight external credit providers (as of June 30, 2018, it had thirteen);
that the Company relies on Santander and affiliates for no more than 30% of its funding (as of June 30, 2018, Santander and affiliates provided 10% of its funding);
that no single lender's commitment should comprise more than 33% of the overall committed external lines (as of June 30, 2018, the highest single lender's commitment was 20%);
that no more than 35% of the Company's debt mature in the next six months and no more than 65% of the Company's debt mature in the next twelve months (as of June 30, 2018, 6% and 12% of the Company's debt is scheduled to mature in the next six and twelve months, respectively); and
that the Company maintain unused capacity of at least $6.0 billion, including flow agreements, in excess of the Company's expected peak usage over the following twelve months (as of June 30, 2018, the Company had twelve-month rolling unused capacity of $12.2 billion).
The Company's liquidity 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

78



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 first from structured secured financings, second from third-party credit facilities, and last from Santander. The Company believes this strategy helps reduce its reliance on borrowings under funding commitments from Santander and SHUSA. Additionally, the Company can reduce originations to significantly lower levels if necessary during times of limited liquidity.
The Company has 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 of IRS 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 after January 1, 2018, which will result 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, 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. The Company's call mining software analyzes all customer service calls, converting speech to text, and mining for specific words and phrases that may indicate inappropriate comments by a representative. The software also detects escalated voice volume, enabling a supervisor to intervene if necessary. This tool is intended to enable the Company to effectively manage and identify training opportunities for associates, as well as track and resolve customer complaints through a robust quality assurance program.
Model Risk
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 with U.S. Generally Accepted Accounting Principles (U.S. GAAP) requires management to make estimates and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company reviews its accounting policies, assumptions, estimates and judgments to ensure that its financial statements are presented fairly and in accordance with U.S. GAAP. There have been no material changes in the Company's critical accounting estimates from those disclosed in Item 7 of the 2017 Annual Report on Form 10-K.
Recent Accounting Pronouncements
Information concerning the Company's implementation and impact of new accounting standards issued by the Financial Accounting Standards Board (FASB) is discussed in Note 1- Recently Issued Accounting Pronouncements, in the accompanying condensed consolidated financial statements.

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Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Incorporated by reference from Part I, Item 2 - “Management’s Discussion and Analysis of Financial Conditions and Results of Operations — Risk Management Framework” above.

Item 4.
Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2018, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control over financial reporting described below. In light of these material weaknesses, management completed additional procedures and analyses to validate the accuracy and completeness of the financial results impacted by the control deficiencies including the validation of data underlying key financial models and the addition of substantive logic inspection, fluctuation analysis and testing procedures. In addition, management engaged the Audit Committee directly, in detail, to discuss the procedures and analysis performed to ensure the reliability of the Company’s financial reporting. As a result, management concluded the condensed consolidated financial statements included in this report fairly present, in all material respects, our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with U.S. GAAP.

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis.

Based on the assessment, management determined that the Company did not maintain effective internal control over financial reporting as of June 30, 2018, as a result of material weaknesses in the following areas:

1. Control Environment, Risk Assessment, Control Activities and Monitoring

We did not maintain effective internal control over financial reporting related to the following areas: control environment, risk assessment, control activities and monitoring:

Management did not effectively execute a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting.
The tone at the top was insufficient to ensure there were adequate mechanisms and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities and to ensure corrective actions were appropriately prioritized and implemented in a timely manner.
There was not adequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and U.S. GAAP.
There was not an adequate assessment of changes in risks by management that could significantly impact internal control over financial reporting or an adequate determination and prioritization of how those risks should be managed.
There was not adequate management oversight and identification of models, spreadsheets and completeness and accuracy of data material to financial reporting.
There were insufficiently documented Company accounting policies and insufficiently detailed Company procedures to put policies into effective action.
There was a lack of appropriate tone at the top in establishing an effective control owner risk and controls self-assessment process which contributed to a lack of clarity about ownership of risks assessments and control design and effectiveness. There was insufficient governance, oversight and monitoring of the credit loss allowance and accretion processes and a lack of defined roles and responsibilities in monitoring functions.

This material weakness in control environment contributes to each of the following identified material weaknesses:

2. Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance

Various deficiencies were identified in the credit loss allowance process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:

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Review controls over completeness and accuracy of data, inputs and assumptions in models and spreadsheets used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions.
Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective.
Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: the credit loss allowance, provision for credit losses, and the related disclosures within Note 2 - Finance Receivables and Note 4 - Credit Loss Allowance and Credit Quality, in the accompanying condensed consolidated financial statements.

3. Identification, Governance, and Monitoring of Models Used to Estimate Accretion

Various deficiencies were identified in the accretion process related to review, monitoring and governance processes over models that aggregated to a material weakness. The following controls did not operate effectively:

Review controls over completeness and accuracy of data, inputs, calculation and assumptions in models and spreadsheets used for estimating accretion were not effective, and management did not adequately challenge significant assumptions.
Review and approval controls over the development of new models to estimate accretion and related model changes were ineffective.
Adequate and comprehensive performance monitoring over related model output results was not performed, and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: finance receivables held for investment, net, finance receivables held for sale, net, interest on finance receivables and loans, provision for credit losses, investment gains and losses, net, and the related disclosures within Note 2 - Finance Receivables, Note 4 - Credit Loss Allowance and Credit Quality and Note 16 - Investment Gains (Losses), Net, in the accompanying condensed consolidated financial statements.

Remediation Status of Reported Material Weaknesses

The Company is currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. The Company is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with U.S. GAAP.

To address the material weakness in the Control Environment, Risk Assessment, Control Activities and Monitoring (Material Weakness 1, noted above), the Company has taken the following measures:

Appointed an additional independent director to the Audit Committee of the Board with extensive experience as a financial expert in our industry to provide further experience on the committee.
Established regular working group meetings, with appropriate oversight by management of both the Company and its parent to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.
Hired a Chief Accounting Officer and other key personnel with significant public-company financial reporting experience and the requisite skillsets in areas important to financial reporting.
Developed and implemented a plan to enhance its risk assessment processes, control procedures and documentation.
Reallocated additional Company resources to improve the oversight for certain financial models.
Increased accounting resources with qualified permanent resources to ensure sufficient staffing to conduct enhanced financial reporting procedures and to continue the remediation efforts. Improved management documentation, review controls and oversight of accounting and financial reporting activities to ensure accounting practices conform to the Company’s policies and U.S. GAAP.
Increased accounting participation in critical governance activities to ensure an adequate assessment of risk activities which may impact financial reporting or the related internal controls.
Completed a comprehensive review and update of all accounting policies, process descriptions and control activities.
Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.

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To address the material weaknesses related to the Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance (Material Weakness 2, noted above), the Company has taken the following measures:

Completed a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.
Implemented a more comprehensive monitoring plan for credit loss allowance with a specific focus on model inputs, changes in model assumptions and model outputs to ensure an effective execution of the Company’s risk strategy.
Implemented improved controls over the development of new models or changes to models used to estimate credit loss allowance.
Implemented enhanced on-going performance monitoring procedures.
Developed comprehensive model documentation.
Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.
Increased resources dedicated to the analysis, review and documentation to ensure compliance with U.S. GAAP and the Company’s policy.

To address the material weaknesses related to the Identification, Governance and Monitoring of Models Used to Estimate Accretion (Material Weakness 3, noted above), the Company has taken the following measures:

Developed a comprehensive accretion model documentation manual and implemented on-going performance monitoring to ensure compliance with required standards.
Automated the process for the application of the effective interest rate method for accreting discounts, subvention payments from manufacturers and other origination costs on individually acquired retail installment contracts.
Implemented a comprehensive plan to review controls over data, inputs and assumptions used in the models.
Strengthened review controls and change management procedures over the models used to estimate accretion.
Increased accounting resources with qualified, permanent resources to ensure an adequate level of review and execution of control activities.

While progress has been made to remediate all of these areas, as of June 30, 2018, we are still in the process of developing and implementing the enhanced processes and procedures and testing the operating effectiveness of these improved controls. We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts. In addition, the material weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated as of June 30, 2018.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) or 15d-15(d) of the Exchange Act during the quarter ended June 30, 2018 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Limitations on Effectiveness of Controls and Procedures

Management does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all error and fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within our company have been detected.


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PART II: OTHER INFORMATION
Item 1.
Legal Proceedings
    
Reference should be made to Note 10 to the accompanying condensed consolidated financial statements, which is incorporated herein by reference, for information regarding legal proceedings in which the Company is involved, which supplements the discussion of legal proceedings set forth in Note 11 to the accompanying consolidated financial statements of the 2017 Annual Report on Form 10-K.
Item 1A.
Risk Factors
Our 2017 Annual Report on Form 10-K includes a detailed discussion of our risk factors in Part I, Item IA "Risk Factors." The information presented below updates and should be read in conjunction with the risk factors and information disclosed in that Form 10-K.
Investing in our securities involves risk. Set forth below and elsewhere in this report are risk factors that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this report. We may amend or supplement these risk factors from time to time by other reports we file with the SEC.
SC's agreement with FCA may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement. If we fail to meet certain of these performance conditions, FCA may elect to terminate the agreement. In addition, FCA has the option to acquire an equity participation in the Chrysler Capital portion of SC's business.
In February 2013, SC entered into the Chrysler Agreement with FCA under which SC launched the Chrysler Capital brand, which originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services that SC provides under the Chrysler Agreement, which launched May 1, 2013, include credit lines to finance FCA­franchised dealers’ acquisitions of vehicles and other products that FCA sells or distributes, automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, financing for commercial and fleet customers, and ancillary services. In addition, SC may facilitate, for an affiliate, offerings to dealers for dealer loan financing, construction loans, real estate loans, working capital loans, and revolving lines of credit. In accordance with the terms of the Chrysler Agreement, in May 2013, SC paid FCA a $150 million upfront, nonrefundable payment, which will be amortized over ten years. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement is terminated in accordance with its terms.
As part of the Chrysler Agreement, SC received limited exclusivity rights to participate in specified minimum percentages of certain of FCA's financing incentive programs, which include loan rate subvention and automotive lease residual support subvention. SC has committed to certain revenue sharing arrangements. SC bears the risk of loss on loans originated pursuant to the Chrysler Agreement, while FCA shares in any residual gains and losses in respect of automotive leases, subject to specific provisions in the Chrysler Agreement, including limitations on our participation in gains and losses.
In addition, under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider. There is no maximum limit on the size of FCA's potential equity participation. Although the Chrysler Agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that SC ultimately receives less than what SC believes to be the fair market value for such interest, and the loss of SC's associated revenue and profits may not be offset fully by the immediate proceeds for such interest. There can be no assurance that SC would be able to redeploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC's profitability. Moreover, the likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined, but termination of the Chrysler Agreement or a significant change in the business relationship between SC and FCA could materially adversely affect SC's operations, including the origination of receivables through the Chrysler Capital portion of SC's business and the servicing of Chrysler Capital receivables, and there can be no assurance that SC could successfully or timely implement any such transaction without significant disruption of its operations or restructuring, or without incurring additional liabilities, which could involve significant expense to SC and have a material adverse effect on its business, financial condition and results of operations.
The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations under the Chrysler Agreement. SC's obligations include the Company's meeting specified escalating penetration rates for the first five years of the agreement. SC did not meet these penetration rates.

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FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or our other stockholders owns 20% or more of our common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC becomes, control, or become controlled by, an OEM that competes with FCA or (iii) certain of our credit facilities become impaired.
Our ability to realize the full strategic and financial benefits of our relationship with FCA depends in part on the successful development of our Chrysler Capital business, which will require a significant amount of management's time and effort. If FCA exercises its purchase option, or if the Chrysler Agreement were to terminate, or the Company otherwise is unable to realize the expected benefits of its relationship with FCA, there could be a materially adverse impact to our business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of our portfolio, liquidity, funding and growth, and the Company's ability to implement its business strategy could be materially adversely affected. On July 11, 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and SC entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
There were no unregistered sales of the Company’s common stock during the period covered by this Quarterly Report on Form 10-Q.
Item 3.
Defaults upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information

Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
(Amounts presented as actuals)

Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the Exchange Act), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

The following activities are disclosed in response to Section 13(r) with respect to Santander UK and certain other affiliates of Santander (collectively, the Group). During the period covered by this report:
Santander UK holds two savings accounts and one current account for two customers resident in the U.K. who are currently designated by the U.S. under the Specially Designated Global Terrorist (SDGT) sanctions program. Revenues and profits generated by Santander U.K. on these accounts in the first half of 2018 were negligible relative to the overall profits of Santander.
Santander UK holds two frozen current accounts for two U.K. nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and have remained frozen through the first half of 2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK Collections & Recoveries department. No revenues or profits were generated by Santander UK on these accounts in the first half of 2018.

The Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (stand-by letters of credit to guarantee the obligations - either under tender documents or under contracting agreements - of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.

In the aggregate, all of the transactions described above resulted in gross revenues and net profits for the period ended June 30, 2018, which were negligible relative to the overall revenues and profits of Santander. The Group has undertaken significant steps

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to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, the Group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

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Item 6.
Exhibits
The following exhibits are included herein:
 
Exhibit
Number
 
Description
10.1
 
10.2*
 
10.3*
 
10.4*
 
31.1*
 
31.2*
 
32.1*
 
32.2*
 
101.INS*
 
 
XBRL Instance Document
101.SCH*
 
 
XBRL Taxonomy Extension Schema
101.CAL*
 
 
XBRL Taxonomy Extension Calculation Linkbase
101.DEF*
 
 
XBRL Taxonomy Extension Definition Linkbase
101.LAB*
 
 
XBRL Taxonomy Extension Label Linkbase
101.PRE*
 
 
XBRL Taxonomy Extension Presentation Linkbase
*
Filed herewith.
#
Indicates management contract or compensatory plan or arrangement

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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 
 
Santander Consumer USA Holdings Inc.
(Registrant)
 
 
 
By:
 
/s/ Scott Powell
 
 
Name:  Scott Powell
 
 
Title:  President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
 
Signature
 
Title
 
Date
 
/s/ Scott Powell
 
President and Chief Executive Officer
 
July 31, 2018
Scott Powell
 
(Principal Executive Officer)
 
 
 
 /s/ Juan Carlos Alvarez de Soto
 
 
Chief Financial Officer
 
July 31, 2018
Juan Carlos Alvarez de Soto
 
(Principal Financial and Accounting Officer)
 
 

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