22
These require implementing and embedding effective controls and monitoring within our business and on-going changes to systems and operations. Financial crime is continually evolving and subject to increasingly stringent regulatory oversight and focus. Even known threats can never be fully eliminated, and there will be instances in which we may be used by other parties to engage in money laundering or other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the authority to impose fines and other penalties on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or other illegal or improper purposes.
While we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree we rely on our counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our and our counterparties’ services as conduits for money laundering (including illegal cash operations) or other illegal activities without our and our counterparties’ knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering or other illegal activities, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results,business, financial condition and prospects.results of operations.
An incorrect interpretation of tax laws and regulations may adversely affect us.
The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations, and is subject to review by taxing authorities. We are subject to the income tax laws of the United States and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates, and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.
Changes in taxes and other assessments may adversely affect us.
The legislatures and tax authorities in the jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that such reforms would not have an adverse effect upon our business. Aspects of recent U.S. federal income tax reform such as the Tax Cuts and Jobs Act of 2017 limit or eliminate certain income tax deductions, including the home mortgage interest deduction, the deduction of interest on home equity loans and a limitation on the deductibility of property taxes. These limitations and eliminations could affect demand for some of our retail banking products and the valuation of assets securing certain of our loans adversely, increasing our provision for loan lossescredit loss expense and reducing profitability.
Credit Risks
If the level of our NPLs increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to cover loan and lease losses, this could have a material adverse effect on us.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to
negatively impact our results of operations. In particular, the amount of our reported NPLs may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in the United States, the impact of political events, events affecting certain industries or events affecting financial markets. There can be no assurance that we will be able to effectively control the level of the NPLs in our loan portfolio.
Our loan and lease loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the last global financial crisis demonstrated, manyMany of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including an increase in lending to individuals and small and medium enterprises, a volume increase in our credit card portfolio or the introduction of new products, or if future actual losses exceed our estimates of incurredexpected losses, we may be required to increase our loan and lease loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this also could have a material adverse effect on us.
In addition, the FASB’s ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments was adopted by the Company on January 1, 2020 and increased our ACL by approximately $2.5 billion. This standard replaces existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost. UponAs a result of the adoption of this standard, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the assets’ remaining expected lives. It is possible that our ongoing reported earnings and lending activity will be impacted negatively in periods following adoptionas a result of the application of this ASU. See “Changes in accounting standards could impact reported earnings” below.
Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.
Our fixed ratefixed-rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, and this reduces the weighted average life of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent in our commercial activity, and an increase in prepayments could have a material adverse effect on us.
The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.
The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the United States. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events such as natural disasters, particularly in locations in which a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and have an adverse impact on the economy of the affected region. We also may not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment of impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses on our loans, which may materially and adversely affect our results of operations and financial condition.
In addition, auto industry technology changes, accelerated by environmental rules, could affect our auto consumer business, particularly the residual values of leased vehicles, which could have a material adverse effect on our operating results, financial condition and prospects.
We are subject to counterparty risk in our banking business.
We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivatives contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearinghouses or other financial intermediaries.
We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. We rely on information provided by or on behalf of counterparties, such as financial statements, and we may rely on representations of our counterparties as to the accuracy and completeness of that information. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.
Liquidity and Financing Risks
Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.
Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they become due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate these risks completely. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements as well as limit growth possibilities.
Our cost of obtaining funding is directly related to prevailing market interest rates and our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.
If wholesale markets financing ceases to be available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.
We rely, and will continue to rely, primarily on deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of depositors in the economy in general, and the financial services industry in particular, as well as competition among banks for deposits. Any of these factors could significantly increase the amount of deposit withdrawals in a short period of time, thereby reducing our ability to access deposit funding in the future on appropriate terms, or at all. If these circumstances were to arise, they could have a material adverse effect on our operating results, financial condition and prospects.
We anticipate that our customers will continue to make deposits (particularly demand deposits and short-term time deposits) in the near future, and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits, or do not roll over their time deposits upon maturity, we may be materially and adversely affected.
There can be no assurance that, in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments, or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.
Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally.
Any downgrade in our or Santander's debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivatives contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivatives contracts, we may be required to maintain a minimum credit rating or terminate the contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.
We conduct a significant number of our material derivatives activities through Santander and Santander UK. We estimate that, as of December 31, 2018,2020, if all of the rating agencies were to downgrade Santander’s or Santander UK’s long-term senior debt ratings, we would be required to post additional collateral pursuant to derivatives and other financial contracts. Refer to further discussion in Note 1413 of the Notes to the Consolidated Financial Statements.
While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend on numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a company's long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example depending on certain factors, including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on the Company, the Bank, and SC.
In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace those contracts, our market risk profile could be altered.
There can be no assurance that the rating agencies will maintain their current ratings or outlooks. In general, the future evolution of our ratings will be linked, to a large extent, to the macroeconomic outlook and to the impact of the COVID-19 pandemic on our asset quality, profitability and capital. Failure to maintain favorable ratings and outlooks could increase the cost of funding and adversely affect interest margins, which could have a material adverse effect on us.
Market Risks
We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.
Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices. Changes in interest rates affect the following areas, of our business, among others:
•net interest income;
•the volume of loans originated;
•the market value of our securities holdings;
•the value of our loans and deposits;
•gains from sales of loans and securities; and
•gains and losses from derivatives.
Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions, and other factors. Variations in interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This is a result of the different effect a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure.
Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and the collateral used to secure our loans, and may reduce gains or require us to record losses on sales of our loans or securities.
In addition, we may experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.
We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.
Some of our investment management services fees are based on financial market valuations of assets certain of our subsidiaries manage or hold in custody for clients. Changes in these valuations can affect noninterest income positively or negatively, and ultimately affect our financial results. Significant changes in the volume of activity in the capital markets, and in the number of assignments we are awarded, could also affect our financial results.
We are also exposed to equity price risk in our investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to economic uncertainty and sovereign debt concerns has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income and the market value of our assets and liabilities could be materially adversely affected.
Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results,business, financial condition and prospects.results of operations.
In recent years, financial markets have been subject to volatility and the resulting widening of credit spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets, and also may translate into increased impairments. In addition, the value we ultimately realize on
disposal of the asset may be lower than its current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results,business, financial condition and prospects.results of operations.
In addition, to the extent fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain. In addition, valuation models are complex, making them inherently imperfect predictors of actual results. Any resulting impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.
We are subject to market, operational and other related risks associated with our derivatives transactions that could have a material adverse effect on us.
We enter into derivatives transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).
The execution and performance of derivatives transactions depend on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivatives transactions continues to depend, to a great extent, on our IT systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.
In addition, disputes with counterparties may arise regarding the terms or the settlement procedures of derivatives contracts, including with respect to the value of underlying collateral, which could cause us to incur unexpected costs, including transaction, operational, legal and litigation costs, or result in credit losses, all of which may impair our ability to manage our risk exposure from these products.
Risk Management
Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.
The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. Although we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.
We rely on quantitative models to measure risks and estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or our regulators based on poorly designed or implemented models could be inaccurate or misleading.
Some of our qualitative tools and metrics for managing risk are based on our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses therefore could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions based on models that are poorly developed, implemented, or used, or as a result of a modeled outcome being misunderstood or used of for purposes for which it was not designed. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere or seek to limit transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition, and prospects.
As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management is to employ an internal credit rating system to assess the particular risk profile of a customer. Since this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgment on the current and future credit risk of our customers, our employees may not always assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.
We have been refining our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur or, due to limited tools available to us, our employees may not be able to implement them effectively, which may increase our credit risk. Failure to effectively implement,
consistently follow or continuously refine our credit risk management system may result in an increase in the level of NPLs and a higher risk exposure for us, which could have a material adverse effect on us.our business, financial condition and results of operations.
Business and Industry Risks
The financial problems our customers face could adversely affect us.
Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial condition of our borrowers, which could in turn increase our NPL ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds significantly, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
We depend in part upon dividends and other funds from subsidiaries.
Most of our operations are conducted through our subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent on our subsidiaries’ earnings and business considerations, and are limited by legal and regulatory restrictions. Additionally, our right to receive any assets of our subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.
Increased competition and industry consolidation may adversely affect our results of operations.
We face substantial competition in all parts of our business from numerous banks and non-bank providers of financial services, including in originating loans and attracting deposits, providing customer service, the quality and range of products and services, technology, interest rates and overall reputation, and we expect competitive conditions to continue to intensify. Our competition comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.
There has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. Some of our competitors are substantially larger than we are, which may give those competitors advantages such as a more diversified product and customer base, the ability to reach more customers and potential customers, operational efficiencies, lower-cost funding and larger branch networks. Many competitors are also focused on cross-selling their products, which could affect our ability to maintain or grow existing customer relationships or require us to offer lower interest rates or fees on our lending products or higher interest rates on deposits. There can be no assurance that increased competition will not adversely affect our growth prospects and therefore our operations. We also face competition from non-bank competitors such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.
Non-traditional providers of banking services, such as financial technology companies, internet based e-commerce providers, mobile telephone companies and internet search engines, may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to the same regulatory or legislative requirements to which we are subject. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing.
New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to compete successfully with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to anticipate or adapt to emerging technologies or changes in customer behavior effectively, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business. Furthermore, the widespread adoption of new technologies, including cryptocurrencies and payment systems, could require substantial expenditures to modify or adapt our existing products and services as we continue to grow our internet and mobile banking capabilities. Our customers may choose to conduct business or offer products in areas that may be considered speculative or risky. Such new technologies and the rise in customer use of internet and mobile banking platforms in recent years could negatively impact our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand towards internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and workforce. These actions could lead to losses on these assets and increased expenditures to renovate, reconfigure or close a number of our remaining branches or otherwise reform our retail distribution channel. Furthermore, our failure to keep pace with innovation or to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect on our competitive position.
Increasing competition could also require that we increase the rates we offer on deposits or lower the rates we charge on loans, which could also have a material adverse effect on our business, financial condition and results of operations. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
If our customer service levels were perceived by the market to be materially below those of our competitors, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results,business, financial condition and prospects.
Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.
The success of our operations and our profitability depend, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.
The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients and the significant and ongoing investments required to bring new products and services to market in
a timely manner at competitive prices. Our failure to manage these risks and uncertainties also exposes us to the enhanced risk of operational lapses, which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine whether initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to manage these risks in the development and implementation of new products or services successfully could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.
Goodwill impairments may be required in relation to acquired businesses.
We have made business acquisitions for which it is possible that the goodwill which has been attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business’ underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill is performed annually, more frequently if impairment indicators are present, and includes a comparison of the carrying amount of the reporting unit with its fair value. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as this excess of carrying value over fair value. We recognized a $10.5 million impairment of goodwill in 2017 primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effect of Hurricane Maria. We did not recognize any impairments of goodwill in 2018 or 2019. It2019, but did record a goodwill impairment of $1.8 billion in 2020. Based on future market conditions and the Company's financial performance, it is reasonably possible we may be required to record additional impairment of $4.5goodwill up to $2.6 billion of goodwill attributable to SC and SBNA in the future. There can be no assurance that we will not have to write down the value attributed to goodwill further in the future, which would not impact risk-based capital ratios adversely, but would adversely affect our results of operations and stockholder's equity.
We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.
Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.
The financial industry in the United States has experienced and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. In addition, due to our relationship with Santander, we are subject to indirect regulation by the European Central Bank, which has recently imposed compensation restrictions that may apply to certain of our executive officers and other employees under the CRD IV prudential rules. These restrictions may impact our ability to retain our experienced management team and key employees and our ability to attract appropriately qualified personnel, which could have a material adverse impact on our business, financial condition, and results of operations.
We rely on third parties for important products and services.
Third-party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting those parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third-party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure them. Any restructuring could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, financial condition and operations.
If a third party obtains access to our customer information and that third party experiences a cyberattack or breach of its systems, this could result in several negative outcomes for us, including losses from fraudulent transactions, potential legal and regulatory liability and associated damages, penalties and restitution, increased operational costs to remediate the consequences of the third party’s security breach, and harm to our reputation from the perception that our systems or third-party systems or services that we rely on may not be secure.
Damage to our reputation could cause harm to our business prospects.
Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees and conducting business transactions with our counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, dealing with sectors that are not well perceived by the public (e.g., weapons industries), dealing with customers on sanctions lists, ratings downgrades, compliance failures, unethical
behavior, and the activities of customers and counterparties, including activities that affect the environment negatively. Further, adverse publicity, regulatory actions or fines, litigation, operational failures or the failure to meet client expectations or other obligations could materially and adversely affect our reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses.
Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasingincreased regulatory supervision and enforcement have caused public perception of us and others in the financial services industry to decline. Activists increasingly target financial services firms with criticism for relationships with clients engaged in businesses whose products are perceived to be harmful to the health of customers, or whose activities are perceived to affect public safety affect the environment, climate or workers’ rights negatively. Such criticism could increase dissatisfaction among customers, investors and employees of the Company and damage the Company’s reputation. Alternatively, yielding to such activism could damage the Company’s reputation with groups whose views are not aligned with those of the activists. In either case, certain clients and customers may cease to do business with the Company, and the Company’s ability to attract new clients and customers may be diminished.
Preserving and enhancing our reputation also depends on maintaining systems, procedures and controls that address known risks and regulatory requirements, as well as our ability to timely identify, understand and mitigate additional risks that arise due to changes in our businesses and the markets in which we operate, the regulatory environment and customer expectations.
We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.
While negative public opinion once was primarily a response to adverse coverage in traditional news media, increased use of social media platforms has resulted in rapid dissemination of information and misinformation, which can magnify potential harm to the Company’s reputation. We may be the subject of misinformation and misrepresentations propagated deliberately to harm our reputation or for other deceitful purposes, including by others seeking to gain an illegal market advantage by spreading false information about us. There can be no assurance that we will be able to neutralize or contain false information that may be propagated regarding the Company, which could have an adverse effect on our operating results, financial condition and prospects effectively.
Fraudulent activity associated with our products or networks could cause us to suffer reputational damage, the use of our products to decrease and our fraud losses to be materially adversely affected. We are subject to the risk of fraudulent activity associated with merchants, customers and other third parties handling customer information. The risk of fraud continues to increase for the financial services industry in general. Credit and debit card fraud, identity theft and related crimes are prevalent, and perpetrators are growing more sophisticated. Our resources, customer authentication methods and fraud prevention tools may not be sufficient to accurately predict or prevent fraud. Additionally, our fraud risk continues to increase as third parties that handle confidential consumer information suffer security breaches and we expand our direct banking business and introduce new products and features. Our financial condition, the level of our fraud charge-offs and other results of operations could be materially adversely affected if fraudulent activity were to increase significantly. High-profile fraudulent activity could negatively impact our brand and reputation. In addition, significant increases in fraudulent activity could lead to regulatory intervention and reputational and financial damage to our brands, which could negatively impact the use of our products and services and have a material adverse effect on our business.business, financial condition and results of operations.
The Bank engages in transactions with its subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.
The Bank and its subsidiaries have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.
United States law applicable to certain financial institutions, including the Bank and other Santander entities and offices in the U.S., establish several procedures designed to ensure that the transactions entered into with or among our subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.
The Bank and its affiliates are likely to continue to engage in transactions with their respective affiliates. Future conflicts of interests among our affiliates may arise, which conflicts are not required to be and may not be resolved in SHUSA's favor.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, terrorist activities or international hostilities.
Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, and other significant public health emergencies, dislocations, fires, explosions, or other catastrophic accidents or events), terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities, preventing a subset of our employees from working for a prolonged period and otherwise preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies and defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning and our ability to anticipate the nature of any such event that may occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which we deal.
Technology and Cybersecurity Risks
Any failure to effectively maintain, secure, improve or upgrade our IT infrastructure and management information systems in a timely manner could have a material adverse effect on us.
Our ability to remain competitive depends in part on our ability to maintain, protect and upgrade our IT on a timely and cost-effective basis. We must continually make significant investments and improvements in our IT infrastructure in order to remain competitive. There can be no assurance that we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our IT infrastructure in the future. Any failure to improve or upgrade our IT infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.
Risks relating to data collection, processing, storage systems and security are inherent in our business.
Like other financial institutions with a large customer base, we have been subject to and are likely to continue to be the subject of attempted cyberattacks in light of the fact that we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and e-mail services, spreadsheets, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures proves to be inadequate or is circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, which may be a target for attempted cyberattacks. This is especially applicable in the current response to the COVID-19 pandemic and the shift we have experienced in having a significant part of our employees working from their homes for the time being, as our employees access our secure networks through their home networks. If we cannot maintain effective and secure electronic data and information, management and processing systems or if we fail to maintain complete physical and electronic records, this could result in disruptions to our operations, claims from customers, regulators, employees and other parties, violations of applicable privacy and other laws, regulatory sanctions and serious reputational and financial harm to us.
Many companies across the country and in the financial services industry have reported significant breaches in the security of their websites or other systems. Cybersecurity risks have increased significantly in recent years due to the development and proliferation of new technologies, increased use of the internet and telecommunications technology to conduct financial transactions, and increased sophistication and activities of organized crime groups, state-sponsored and individual hackers, terrorist organizations, disgruntled employees and vendors, activists and other third parties. Financial institutions, the government and retailers have in recent years reported cyber incidents that compromised data, resulted in the theft of funds or the theft or destruction of corporate information and other assets.
We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. We have policies, practices and controls designed to prevent or limit disruptions to our systems and enhance the security of our infrastructure. These include performing risk management for information systems that store, transmit or process information assets identifying and managing risks to information assets managed by third-party service providers through
on-going oversight and auditing of the service providers’ operations and controls. We develop controls regarding user access to software on the principle that access is forbidden to a system unless expressly permitted, limited to the minimum amount necessary for business purposes, and terminated promptly when access is no longer required. We seek to educate and make our employees aware of information security and privacy controls and their specific responsibilities on an ongoing basis.
Nevertheless, while we have not experienced material losses or other material consequences relating to cyberattacks or other information or security breaches, whether directed at us or third parties, our systems, software and networks, as well as those of our clients, vendors, service providers, counterparties and other third parties, may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code, cyberattacks such as denial of service, malware, ransomware, phishing, and other events that could result in security breaches or give rise to the manipulation or loss of significant amounts of personal, proprietary or confidential information of our customers, employees, suppliers, counterparties and other third parties, disrupt, sabotage or degrade service on our systems, or result in the theft or loss of significant levels of liquid assets, including cash. As cybersecurity threats continue to evolve and increase in sophistication, we cannot guarantee the effectiveness of our policies, practices and controls to protect against all such circumstances that could result in disruptions to our systems. This is because, among other reasons, the techniques used in cyberattacks change frequently, cyberattacks can originate from a wide variety of sources, and third parties may seek to gain access to our systems either directly or by using equipment or passwords belonging to employees, customers, third-party service providers or other authorized users of our systems. In the event of a cyberattack or security breach affecting a vendor or other third party entity on whom we rely, our ability to conduct business, and the security of our customer information, could be impaired in a manner to that of a cyberattack or security breach affecting us directly. We also may not receive information or notice of the breach in a timely manner, or we may have limited options to influence how and when the cyberattack or security breach is addressed.
As financial institutions are becoming increasingly interconnected with central agents, exchanges and clearinghouses, they may be increasingly susceptible to negative consequences of cyberattacks and security breaches affecting the systems of such third parties. It could take a significant amount of time for a cyberattack to be investigated, during which time we may not be in a position to fully understand and remediate the attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences associated with a particular cyberattack. The perception of a security breach affecting us or any part of the financial services industry, whether correct or not, could result in a loss of confidence in our cybersecurity measures or otherwise damage our reputation with customers and third parties with whom we do business. Should such adverse events occur, we may not have indemnification or other protection from the third party sufficient to compensate or protect us from the consequences.
As attempted cyberattacks continue to evolve in scope and sophistication, we may incur significant costs in our attempts to modify or enhance our protective measures against such attacks to investigate or remediate any vulnerability or resulting breach, or in communicating cyberattacks to our customers. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party or a cyberattack could result in our inability to recover or restore data that has been stolen, manipulated or destroyed, damage to our systems and those of our clients, customers and counterparties, violations of applicable privacy and other laws, or other significant disruption of operations, including disruptions in our ability to use our accounting, deposit, loan and other systems and our ability to communicate with and perform transactions with customers, vendors and other parties. These effects could be exacerbated if we would need to shut down portions of our technology infrastructure temporarily to address a cyberattack, if our technology infrastructure is not sufficiently redundant to meet our business needs while an aspect of our technology is compromised, or if a technological or other solution to a cyberattack is slow to be developed. Even if we timely resolve the technological issues in a cyberattack, a temporary disruption in our operations could adversely affect customer satisfaction and behavior, expose us to reputational damage, contractual claims, regulatory, supervisory or enforcement actions, or litigation.
U.S. banking agencies and other federal and state government agencies have increased their attention on cybersecurity and data privacy risks, and have proposed enhanced risk management standards that would apply to us. For example, the California Consumer Privacy Act, which took effect on January 1, 2020, requires, among other things, notification to affected individuals when there has been a security breach of their personal data, and imposes increased privacy and security obligations of entities handling certain personal information of individuals. Such legislation and regulations relating to cybersecurity and data privacy may require that we modify systems, change service providers, or alter business practices or policies regarding information security, handling of data and privacy. Changes such as these could subject us to heightened operational costs. To the extent we do not successfully meet supervisory standards pertaining to cybersecurity, we could be subject to supervisory actions, litigation and reputational damage.damage or ordered to change our business practices, policies or systems in a manner that adversely impacts our operating results.
Risks Associated with our Majority-Owned Consolidated Subsidiary
The financial results of SC could have a negative impact on the Company's operating results and financial condition.
SC historically has provided a significant source of funding to the Company through earnings. Our investment in SC involves risk, including the possibility that poor operating results of SC could negatively affect the operating results of SHUSA.
Factors that affect the financial results of SC in addition to those which have been previously addressed include, but are not limited to:
•Periods of economic slowdown may result in decreased demand for automobiles as well as declining values of automobiles and other consumer products used as collateral to secure outstanding loans. Higher gasoline prices, the general availability of consumer credit, and other factors which impact consumer confidence could increase loss frequency and decrease consumer demand for automobiles. In addition, during an economic slowdown, servicing costs may increase without a corresponding increase in finance charge income. Changes in the economy may impact the collateral value of repossessed automobiles and repossession, and foreclosure sales may not yield sufficient proceeds to repay the receivables in full and result in losses.
•SC’s growth strategy is subject to significant risks, some of which are outside its control, including general economic conditions, the ability to obtain adequate financing for growth, laws and regulatory environments in the states in which the business seeks to operate, competition in new markets, the ability to attract new customers, the ability to recruit qualified personnel, and the ability to obtain and maintain all required approvals, permits, and licenses on a timely basis.
•Our relationship with FCA is a significant source of our loan and lease originations. Loss of our relationship with FCA, including as a result of termination of our agreement with FCA, could materially and adversely affect our business, financial condition and results of operations.
•SC’s business may be negatively impacted if it is unsuccessful in developing and maintaining relationships with automobile dealerships that correlate to SC’s ability to acquire loans and automotive leases. In addition, economic downturns may result in the closure of dealerships and corresponding decreases in sales and loan volumes.
•SC's business could be negatively impacted if it is unsuccessful in developing and maintaining its serviced for others portfolio. As this is a significant and growing portion of SC's business strategy, if an institution for which SC currently services assets chooses to terminate SC's rights as a servicer or if SC fails to add additional institutions or portfolios to its servicing platform, SC may not achieve the desired revenue or income from this platform.
•SC has repurchase obligations in its capacity as a servicer in securitizations and whole loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, results of operations, and liquidity.
•The obligations associated with being a public company require significant resources and management attention, which increases the costs of SC's operations and may divert focus from business operations. As a result of its IPO, SC is now required to remain in compliance with the reporting requirements of the SEC and the NYSE, maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy.
•The market price of SC Common Stock may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel.
•SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. When SC decides to sell assets or a business, it may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the achievement of our strategic objectives. SC may also experience greater costs and synergies than expected, and the impact of the divestiture on revenue may be larger than projected. Additionally, SC may ultimately dispose of assets or a business at a price or on terms that are less favorable than those it had originally anticipated. After reaching a definitive agreement with a buyer, SC typically must satisfy pre-closing conditions and the completion of the transaction may be subject to regulatory and governmental approvals. Failure of these conditions and approvals to be satisfied or obtained may prevent SC from completing the transaction. Divestitures involve a number of risks, including the diversion of management and employee attention, significant costs and expenses, and a decrease in revenues and earnings associated with the divested business. Divestitures may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside of our control could materially and adversely affect our business, financial condition and results of operations. SC continues to classify loans from its Bluestem portfolio as held-for-sale with a carrying value of approximately $0.9 billion as of December 31, 2020. SC remains a party to agreements with Bluestem that obligate it to, among other things, purchase new advances originated by Bluestem, along with existing balances on accounts with new advances through April 2022. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial reporting condition of either party. Although SC is seeking a third party willing and able to take on this obligation, it may not be successful in finding such a party, and Bluestem may not agree to the substitution. SC has recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as the portfolio is held, particularly due to the new volume it is committed to purchase. Until SC finds a third party to assume this obligation, there is a risk that material changes to its relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations.
•SC's business could be negatively impacted if access to funding is reduced. Adverse changes in SC's ABS program or in the ABS market generally could materially adversely affect its ability to securitize loans on a timely basis or upon terms acceptable to SC. This could increase its cost of funding, reduce its margins, or cause it to hold assets until investor demand improves.
•As with SHUSA, adverse outcomes to current and future litigation against SC may negatively impact its business, financial condition, and results of operations, and liquidity. SC is party to various litigation claims and legal proceedings. In particular, as a consumer finance company, it is subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against it could take the form of class action complaints by consumers. As the assignee of loans originated by automotive dealers, it also may be named as a co-defendant in lawsuits filed by consumers principally against automotive dealers.
The Chrysler Agreement 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 SC fails to meet certain of these performance conditions, FCA may seek 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 through which SC launched the Chrysler Capital brand in May 2013. Through the Chrysler Capital brand, SC originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services SC provides under the Chrysler Agreement include providing (1) credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products FCA sells or distributes, (2) automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, (3) financing for commercial and fleet customers, and (4) 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. On June 28, 2019, the Company entered into an amendment of the Chrysler Agreement which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.
In May 2013, in accordance with the terms of the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable payment, to be amortized over ten years. In addition, in June 2019, in connection with the execution of the amendment to the Chrysler Agreement, SC paid a $60 million upfront fee to FCA. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement were 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. Among other covenants, 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 SC’s participation in such gains and losses.
The Chrysler Agreement is subject to early termination in certain circumstances, including SC's failure to meet certain key performance metrics, provided FCA treats SC in a manner consistent with other comparable OEMs. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or SC's other stockholders owns 20% or more of SC Common Stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired. 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. 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 it believes to be the fair market value for such interest, and the loss of its 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 re-deploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC’s profitability.
SC’s ability to realize the full strategic and financial benefits of its relationship with FCA depends in part on the successful development of its Chrysler Capital business, which requires a significant amount of management's time and effort as well as the success of FCA's business. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, or if SC otherwise is unable to realize the expected benefits of its relationship with FCA, including as a result of FCA's bankruptcy or loss of business, there could be a materially adverse impact to SHUSA's and SC’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of SHUSA's and SC’s portfolio, liquidity, reputation, funding costs and growth, and SHUSA's and SC's ability to obtain or find other OEM relationships or to otherwise implement our business strategy could be materially adversely affected.
General Risk Factors
Macro-Economic and Political Risks
Developments stemming from the U.K. withdrawal from the EU could have a material adverse effect on us.
The U.K.’s withdrawal from the EU may have negative effects on global economic conditions and global financial markets. The EU and the U.K. recently signed the EU-UK Trade and Cooperation Agreement, which provides a basic framework for free trade in goods and cooperation in certain policy areas; however, there are many aspects pertaining to trade and cooperation between the EU and the U.K. that remain subject to negotiation and there is still uncertainty about the long-term relationship between the EU and the U.K. and whether the U.K. will replicate or replace certain EU laws. The U.K.’s withdrawal from the EU has contributed to political and economic uncertainty in the U.K. and may contribute to such environments in EU member states. Such political and economic uncertainty could have a material adverse effect on economic conditions and the stability of financial markets in the U.K., and could significantly reduce market liquidity and restrict the ability of key market participants to operate in certain financial markets. While the Company does not maintain a presence in the U.K., political and economic uncertainty in countries with significant economies and relationships to the global financial industry have in the past led to declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence on an international level, each of which could adversely affect our business, financial condition and results of operations.
Business and Industry Risks
We depend in part upon dividends and other funds from subsidiaries.
Most of our operations are conducted through our subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent on our subsidiaries’ earnings and business considerations, and are limited by legal and regulatory restrictions. Additionally, our right to receive any assets of our subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.
Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.
The success of our operations and our profitability depend, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.
The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients and the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices. Our failure to manage these risks and uncertainties also exposes us to the enhanced risk of operational lapses, which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine whether initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to manage these risks in the development and implementation of new products or services successfully could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition. In addition, the cost of developing products that are not launched is likely to affect our business, financial condition and results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on our business, financial condition and results of operations.
We rely on third parties for important products and services.
Third-party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting those parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third-party vendors could also entail significant delays and expense. Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure them. Any restructuring could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, financial condition and results of operations.
If a third party obtains access to our customer information and that third party experiences a cyberattack or breach of its systems, this could result in several negative outcomes for us, including losses from fraudulent transactions, potential legal and regulatory liability and associated damages, penalties and restitution, increased operational costs to remediate the consequences of the third party’s security breach, and harm to our reputation from the perception that our systems or third-party systems or services that we rely on may not be secure.
Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, terrorist activities or international hostilities.
Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, and other significant public health emergencies, dislocations, fires, explosions, or other catastrophic accidents or events), terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities, preventing a subset of our employees from working for a prolonged period and otherwise preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies and defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.
Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning and our ability to anticipate the nature of any such event that may occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which we deal.
Financial Reporting and Control Risks
Changes in accounting standards could impact reported earnings.
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our Consolidated Financial Statements. These changes can materially impact how we record and report our financial condition and results of operations, as well as affect the calculation of our capital ratios. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
For example, as noted in Note 21 to the Consolidated Financial Statements in this Form 10-K, in June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on forecasts of expected future economic conditions and is primarily driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permitpermitted us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and will permit us to phase in an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.
The preparation of consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect our Consolidated Financial Statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provisions for liabilities.
The ACL is a significant critical estimate. Due to the inherent nature of this estimate, we cannot provide assurance that the Company will not significantly increase the ACL or sustain credit losses that are significantly higher than the provided allowance.
The valuation of financial instruments measured at fair value can be subjective, in particular when models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove inaccurate.
If the judgments, estimates and assumptions we use in preparing our Consolidated Financial Statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.
Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud, and lapses in these controls could materially and adversely affect our operations, liquidity and/or reputation.
Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We also maintain a system of internal controls over financial reporting. However, these controls may not achieve their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgement and breakdowns resulting from human failures. Controls can be circumvented by collusion or improper management override. Because of these limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis.
Further, there can be no assurance that we will not suffer from material weaknesses in disclosure controls and processes over financial reporting in the future. If we fail to remediate any future material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements and limit our ability to raise capital. Additionally, failure to remediate the material weaknesses or otherwise failing to maintain effective internal controls over financial reporting may negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.
Failure to satisfy obligations associated with public securities filings may have adverse regulatory, economic, and reputational consequences.
We filed our Annual Report on Form 10-K for 2015 and certain Quarterly Reports on Form 10-Q in 2016 after the time periods prescribed by the SEC’s regulations. Those failures to file our periodic reports within the time periods prescribed by the SEC, among other consequences, resulted in the suspension of our eligibility to use Form S-3 registration statements until we timely filed our SEC periodic reports for a period of 12 months. We timely filed our SEC periodic reports for 12 consecutive months as of November 13, 2017. If in the future we are not able to file our periodic reports within the time periods prescribed by the SEC, among other consequences, we would be unable to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 consecutive months. Our inability to use Form S-3 registration statements would increase the time and resources we need to spend if we choose to access the public capital markets.
38
Risks Associated with our Majority-Owned Consolidated Subsidiary
The financial results of SC could have a negative impact on the Company's operating results and financial condition.
SC historically has provided a significant source of funding to the Company through earnings. Our investment in SC involves risk, including the possibility that poor operating results of SC could negatively affect the operating results of SHUSA.
Factors that affect the financial results of SC in addition to those which have been previously addressed include, but are not limited to:
Periods of economic slowdown may result in decreased demand for automobiles as well as declining values of automobiles and other consumer products used as collateral to secure outstanding loans. Higher gasoline prices, the general availability of consumer credit, and other factors which impact consumer confidence could increase loss frequency and decrease consumer demand for automobiles. In addition, during an economic slowdown, servicing costs may increase without a corresponding increase in finance charge income. Changes in the economy may impact the collateral value of repossessed automobiles and repossession, and foreclosure sales may not yield sufficient proceeds to repay the receivables in full and result in losses.
SC’s growth strategy is subject to significant risks, some of which are outside its control, including general economic conditions, the ability to obtain adequate financing for growth, laws and regulatory environments in the states in which the business seeks to operate, competition in new markets, the ability to attract new customers, the ability to recruit qualified personnel, and the ability to obtain and maintain all required approvals, permits, and licenses on a timely basis
SC’s business may be negatively impacted if it is unsuccessful in developing and maintaining relationships with automobile dealerships that correlate to SC’s ability to acquire loans and automotive leases. In addition, economic downturns may result in the closure of dealerships and corresponding decreases in sales and loan volumes.
SC's business could be negatively impacted if it is unsuccessful in developing and maintaining its serviced for others portfolio. As this is a significant and growing portion of SC's business strategy, if an institution for which SC currently services assets chooses to terminate SC's rights as a servicer or if SC fails to add additional institutions or portfolios to its servicing platform, SC may not achieve the desired revenue or income from this platform.
SC has repurchase obligations in its capacity as a servicer in securitizations and whole loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, results of operations, and liquidity.
The obligations associated with being a public company require significant resources and management attention, which increases the costs of SC's operations and may divert focus from business operations. As a result of its IPO, SC is now required to remain in compliance with the reporting requirements of the SEC and the NYSE, maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy.
The market price of SC Common Stock may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel.
SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. For example, in October 2015, SC disclosed a decision to exit the personal lending business and to explore strategic alternatives for its existing personal lending assets. Of its two primary lending relationships, SC completed the sale of substantially all of its loans associated with the LendingClub relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as held-for-sale. SC remains a party to agreements with Bluestem that obligate it to purchase new advances originated by Bluestem, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and which is renewable through April 2022 at Bluestem's option. Both parties have the right to terminate this agreement upon written notice if certain events were to occur, including if there is a material adverse change in the financial reporting condition of either party. Although SC is seeking a third party willing and able to take on this obligation, it may not be successful in finding such a party, and Bluestem may not agree to the substitution. SC has recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as the portfolio is held, particularly due to the new volume it is committed to purchase. Until SC finds a third party to assume this obligation, there is a risk that material changes to its relationship with Bluestem, or the loss or discontinuance of Bluestem’s business, would materially and adversely affect SC’s business, financial condition and results of operations. On March 9, 2020, Bluestem Brands, Inc., together with certain of its affiliates, filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the District of Delaware.
SC's business could be negatively impacted if access to funding is reduced. Adverse changes in SC's ABS program or in the ABS market generally could materially adversely affect its ability to securitize loans on a timely basis or upon terms acceptable to SC. This could increase its cost of funding, reduce its margins, or cause it to hold assets until investor demand improves.
As with SHUSA, adverse outcomes to current and future litigation against SC may negatively impact its financial position, results of operations, and liquidity. SC is party to various litigation claims and legal proceedings. In particular, as a consumer finance company, it is subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against it could take the form of class action complaints by consumers. As the assignee of loans originated by automotive dealers, it also may be named as a co-defendant in lawsuits filed by consumers principally against automotive dealers.
The Chrysler Agreement 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 SC fails to meet certain of these performance conditions, FCA may seek 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 through which SC launched the Chrysler Capital brand on May 1, 2013. Through the Chrysler Capital brand, SC originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services SC provides under the Chrysler Agreement include providing (1) credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products FCA sells or distributes, (2) automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, (3) financing for commercial and fleet customers, and (4) 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. On June 28, 2019, the Company entered into an amendment of the Chrysler Agreement which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. This amendment also terminated a previously disclosed tolling agreement, dated July 11, 2018, between SC and FCA.
In May 2013, in accordance with the terms of the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable payment, to be amortized over ten years. In addition, in June 2019, in connection with the execution of the amendment to the Chrysler Agreement, SC paid a $60 million upfront fee to FCA. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement were terminated in accordance with its term.
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. Among other covenants, 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 SC’s participation in such gains and losses.
The Chrysler Agreement is subject to early termination in certain circumstances, including SC's failure to meet certain key performance metrics, provided FCA treats SC in a manner consistent with other comparable OEMs. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or SC's other stockholders owns 20% or more of SC’s common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired. 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. 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 it believes to be the fair market value for such interest, and the loss of its 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 re-deploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC’s profitability.
SC’s ability to realize the full strategic and financial benefits of its relationship with FCA depends in part on the successful development of its Chrysler Capital business, which requires a significant amount of management's time and effort as well as the success of FCA's business. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, or if SC otherwise is unable to realize the expected benefits of its relationship with FCA, including as a result of FCA's bankruptcy or loss of business, there could be a materially adverse impact to SHUSA's and SC’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of SHUSA's and SC’s portfolio, liquidity, reputation, funding costs and growth, and SHUSA's and SC's ability to obtain or find other OEM relationships or to otherwise implement our business strategy could be materially adversely affected.
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
As of December 31, 2019,2020, the Company utilized 760667 buildings that occupy a total of 6.76.9 million square feet, including 184149 owned properties with 1.4 million square feet, 453 leased properties with 3.81.2 million square feet, and 123 sale-and-leaseback518 leased properties with 1.55.8 million square feet. The executive and primary administrative offices for SHUSA and the Bank are located at 75 State Street, Boston, Massachusetts. The Company leases this location. SC's corporate headquarters are located at 1601 Elm Street, Dallas, Texas. SC leases this location.
ElevenEight major buildings serve as the headquarters or house significant operational and administrative functions, and are : Operations Center - 2 Morrissey Boulevard, Dorchester, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-Santander Way; 95 Amaral Street, Riverside, Rhode Island-Leased; SHUSA/SBNA Administrative Offices-75 State Street, Boston, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-450 Penn Street, Reading; Pennsylvania-Leased; Loan Processing Center-601 Penn Street; Reading, Pennsylvania-Owned; Operations and Administrative Offices-1130 Berkshire Boulevard, Wyomissing, Pennsylvania-Owned;Operations and Administrative Offices-1401 Brickell Avenue, Miami, Florida-Owned; Operations and Administrative Offices - San Juan, Puerto Rico-Leased; Computer Data Center - Hato Rey, Puerto Rico-Leased; SAM Administrative Offices-Guaynabo Puerto Rico-leased; and SC Administrative Offices-1601 Elm Street, Dallas, Texas-Leased.
The majority of these eleveneight Company properties identified above are utilized for general corporate purposes. The remaining 749659 properties consist primarily of bank branches and lending offices. Of the total number of buildings, the Bank has 588 retail branches, and BSPR has 27580 retail branches.
For additional information regarding the Company's properties refer to Note 65 - "Premises and Equipment" and Note 97 - "Other Assets" in the Notes to Consolidated Financial Statements in Item 8 of this Report.
ITEM 3 - LEGAL PROCEEDINGS
Refer to Note 1516 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the IRS and Note 2019 to the Consolidated Financial Statements for SHUSA’s litigation disclosures, which are incorporated herein by reference.
ITEM 4 - MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company has one class of common stock. The Company’s common stock was traded on the NYSE under the symbol “SOV” through January 29, 2009. On January 30, 2009, all shares of the Company's common stock were acquired by Santander and de-listed from the NYSE. Following this de-listing, there has not been, nor is there currently, an established public trading market in shares of the Company’s common stock. As of the date of this filing, Santander was the sole holder of the Company’s common stock.
At February 28, 2019,2021, 530,391,043 shares of common stock were outstanding. There were no issuances of common stock during 2020, 2019, 2018, or 2017.2018.
During the years ended December 31, 2020, 2019, 2018, and 20172018 the Company declared and paid cash dividends of $125.0 million, $400.0 million, $410.0 million, and $10.0$410.0 million respectively, to its shareholder.
Refer to the "Liquidity and Capital Resources" section in Item 7 of the MD&A for the two most recent fiscal years' activity on the Company's common stock.
ITEM 6 - SELECTED FINANCIAL DATA
Not applicable.
|
| | | | | | | | | | | | | | | | | | | | |
| | SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31, |
(Dollars in thousands) | | 2019 (1) | | 2018 (1) | | 2017 (1) | | 2016 (1) | | 2015 |
Balance Sheet Data | | | | | | | | | | |
Total assets | | $ | 149,499,477 |
| | $ | 135,634,285 |
| | $ | 128,274,525 |
| | $ | 138,360,290 |
| | $ | 141,106,832 |
|
Loans HFI, net of allowance | | 89,059,251 |
| | 83,148,738 |
| | 76,795,794 |
| | 82,005,321 |
| | 83,779,641 |
|
Loans held-for-sale | | 1,420,223 |
| | 1,283,278 |
| | 2,522,486 |
| | 2,586,308 |
| | 3,190,067 |
|
Total investments (2) | | 19,274,235 |
| | 15,189,024 |
| | 16,871,855 |
| | 19,415,330 |
| | 22,768,783 |
|
Total deposits and other customer accounts | | 67,326,706 |
| | 61,511,380 |
| | 60,831,103 |
| | 67,240,690 |
| | 65,583,428 |
|
Borrowings and other debt obligations (2)(3) | | 50,654,406 |
| | 44,953,784 |
| | 39,003,313 |
| | 43,524,445 |
| | 49,828,582 |
|
Total liabilities | | 125,100,647 |
| | 111,787,053 |
| | 104,583,693 |
| | 115,981,532 |
| | 119,259,732 |
|
Total stockholder's equity | | 24,398,830 |
| | 23,847,232 |
| | 23,690,832 |
| | 22,378,758 |
| | 21,847,100 |
|
Summary Statement of Operations | | | | | | | | | |
Total interest income | | $ | 8,650,195 |
| | $ | 8,069,053 |
| | $ | 7,876,079 |
| | $ | 7,989,751 |
| | $ | 8,137,616 |
|
Total interest expense | | 2,207,427 |
| | 1,724,203 |
| | 1,452,129 |
| | 1,425,059 |
| | 1,236,210 |
|
Net interest income | | 6,442,768 |
| | 6,344,850 |
| | 6,423,950 |
| | 6,564,692 |
| | 6,901,406 |
|
Provision for credit losses (4) | | 2,292,017 |
| | 2,339,898 |
| | 2,759,944 |
| | 2,979,725 |
| | 4,079,743 |
|
Net interest income after provision for credit losses | | 4,150,751 |
| | 4,004,952 |
| | 3,664,006 |
| | 3,584,967 |
| | 2,821,663 |
|
Total non-interest income (5) | | 3,729,117 |
| | 3,244,308 |
| | 2,901,253 |
| | 2,755,705 |
| | 2,905,035 |
|
Total general, administrative and other expenses (6) | | 6,365,852 |
| | 5,832,325 |
| | 5,764,324 |
| | 5,386,194 |
| | 9,381,892 |
|
Income/(loss) before income taxes | | 1,514,016 |
| | 1,416,935 |
| | 800,935 |
| | 954,478 |
| | (3,655,194 | ) |
Income tax provision/(benefit) (7) | | 472,199 |
| | 425,900 |
| | (157,040 | ) | | 313,715 |
| | (599,758 | ) |
Net income / (loss) (9) | | $ | 1,041,817 |
| | $ | 991,035 |
| | $ | 957,975 |
| | $ | 640,763 |
| | $ | (3,055,436 | ) |
Selected Financial Ratios (8) | | | | | | | | | | |
Return on average assets | | 0.73 | % | | 0.76 | % | | 0.71 | % | | 0.45 | % | | (2.18 | )% |
Return on average equity | | 4.23 | % | | 4.11 | % | | 4.10 | % | | 2.88 | % | | (11.98 | )% |
Average equity to average assets | | 17.31 | % | | 18.37 | % | | 17.39 | % | | 15.67 | % | | 18.15 | % |
Efficiency ratio | | 62.58 | % | | 60.82 | % | | 61.81 | % | | 57.79 | % | | 95.67 | % |
| |
(1) | On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with Accounting Standards Codification ("ASC") 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. On July 2, 2018, an additional Santander subsidiary, SAM, an investment adviser located in Puerto Rico, was transferred to the Company. SFS and SAM are entities under common control of Santander; however, their results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company on both an individual and aggregate basis. As a result, the Company has reported the results of SFS on a prospective basis beginning July 1, 2017 and the results of SAM on a prospective basis beginning July 1, 2018. |
| |
(2) | The increase in total investments from 2018 to 2019 was due to the purchase of additional AFS treasury securities. The decreases in Total investments and corresponding decreases in Borrowings and other debt obligations from 2016 to 2017 and 2015 to 2016 were primarily driven by the use of proceeds from the sales of investment securities to repurchase and pay off its outstanding borrowings. |
| |
(3) | The increase in Borrowings and other debt obligations from 2018 to 2019 was primarily a result of the Company funding the growth of the loan portfolio and operating lease portfolio. |
| |
(4) | The decrease in the Provision for credit losses from 2017 to 2018 was primarily due to lower net charge-offs on the RIC portfolio, accompanied by a recovery on the purchased RIC portfolio and lower provision on the originated RIC portfolio and the commercial loan portfolio. The decrease from 2015 to 2016 was primarily due to significantly lower provision on the purchased RIC portfolio, accompanied by slightly lower net charge-offs across the total loan portfolio. |
| |
(5) | The increase in Non-interest income from 2018 to 2019 and 2017 to 2018 is primarily attributable to an increase in lease income corresponding to the growth of the operating lease portfolio. |
| |
(6) | General, administrative, and other expenses increased annually between 2016 and 2019, primarily due to growth in compensation and benefits and lease expense, driven by corresponding growth of the operating lease portfolio. In 2015, this line included a $4.5 billion goodwill impairment charge on SC. |
| |
(7) | Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on the Company's income taxes. The income tax benefit in 2017 was due to the impact of the TCJA, resulting in a tax benefit to the Company. The income tax benefit in 2015 was primarily the result of the release of the deferred tax liability in conjunction with the goodwill impairment charge. |
| |
(8) | For the calculation components of these ratios, see the Non-GAAP Financial Measures section of the MD&A. |
| |
(9) | Includes net income/(loss) attributable to NCI of $288.6 million, $283.6 million, $405.6 million, $277.9 million, and $(1.7) billion for the years ended December 31, 2019, 2018, 2017, 2016 and 2015, respectively. |
ITEM 7 - MD&A
EXECUTIVE SUMMARY
SHUSA is the parent holding company of SBNA, a national banking association, and owns approximately 72.4% (as of December 31, 2019) ofassociation; SC, a specialized consumer finance company. SHUSA iscompany headquartered in Dallas, Texas; SSLLC, a broker-dealer headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Santander. SHUSA is also the parent company of Santander BanCorp , a holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR; SSLLC, a registered broker-dealer headquartered in Boston;Massachusetts; BSI, a financial services company headquartered in Miami, Florida that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; SIS, a registered broker-dealer headquartered in New York providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed-income securities; SFS, a consumer credit institution headquartered in Puerto Rico; and several other subsidiaries. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SSLLC, SIS and another SHUSA subsidiary, Santander Asset Management, LLC,SAM, are registered investment advisers with the SEC. SHUSA's two largest subsidiaries by asset size and revenue are the Bank and SC. SHUSA is a wholly-owned subsidiary of Santander.
As of December 31, 2020, SC was owned approximately 80.2% by SHUSA and 19.8% by other shareholders. SC Common Stock is listed on the NYSE under the trading symbol "SC."
The Bank's principal markets are inprimary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily loans, residential mortgage loans, home equity lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States.States, principally located in Massachusetts, New Hampshire, Connecticut, Rhode Island, New York, New Jersey, Pennsylvania, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and BOLI. The Bank's principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The financial results of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.
SC is a specialized consumer finance company focused on vehicle finance and third-party servicing.servicing and delivering service to dealers and customers across the full credit spectrum. . SC's primary business is the indirect origination and securitizationservicing of RICs and leases, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers. Additionally, SC sells consumer RICs through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer RICs. SAF is SC’s primary vehicle financing brand, and is available as a finance option for automotive dealers across the United States Further information about SC’s business is provided below in the “Chrysler Capital” section.
SC is managed through a single reporting segment which included vehicle financial products and services, including RICs, vehicle leases, and dealer loans, as well as financial products and services related to recreational and marine vehicles and other consumer finance products.
SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has other relationships through which it holds other consumer finance products. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as HFS at December 31, 2019..
Chrysler Capital
Since May 2013, under the ten-year private label financing agreement with FCA that became effective May 1, 2013 (the "Chrysler Agreement"),Chrysler Agreement, SC has operated as FCA’s preferred provider for consumer loans, leases and dealer loans and provides services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.
Chrysler Capital continues to be a focal point of the Company'sSC's strategy. On June 28, 2019, SC entered into an amendment to the Chrysler Agreement with FCA which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions under the Chrysler Agreement.agreement. The amendment also established an operating framework that is mutually beneficial for both parties for the remainder of the contract. The Company's average penetration rate under the Chrysler Agreement for the third quarter of 2019year ended December 31, 2020 was 34%, an increaseflat from 30%34% for the same period in 2018.year ended December 31, 2019.
SC has dedicated financing facilities in place for its Chrysler Capital business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. During the year ended December 31, 2019,2020, SC originated $12.8$14.2 billion in Chrysler Capital loans, which represented 56%60% of the UPB of its total RIC originations, with an approximately even share between prime and non-prime, as well as $8.5$6.8 billion in Chrysler Capital leases. Additionally, substantially all of the leases originated by SC during the year ended December 31, 20192020 were under the Chrysler Agreement. Since its May 2013 launch, Chrysler Capital has originated more than $65.9 billion in retail loans (excluding the SBNA RIC origination program) and purchased $41.9 billion in leases.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ECONOMIC AND BUSINESS ENVIRONMENT
Overview
During the fourth quarter of 2019,2020, unemployment remained lowdecreased and year-to-date market results were positive, recovering from a volatile fourth quartermixed, reflecting the effects of 2018.COVID-19.
The unemployment rate at December 31, 20192020 was 3.5%6.7%, compared to 3.5%7.9% at September 30, 2019,2020 and was lower compared to 3.9%3.5% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose sharply in the leisure and hospitality sector. In addition, notable increases were seen in retail trade, social assistance and healthcare, while mining employment decreased.health services, and professional and business services.
The BEA advance estimate indicates that real gross domestic product grew at an annualized rate of 2.1% for the fourth quarter of 2019, consistent with the advance estimated growth of 2.1% for the third quarter of 2019. Growth continued to be driven by increases in personal consumption expenditures, federal government spending, and state and local government spending. In addition, imports, which are a subtraction to in the calculation of the gross domestic product, decreased. These positive contributions were offset by decreases to private inventory investment and non-residential fixed investments.
Market year-to-date returns for the following indices based on closing prices at December 31, 20192020 were:
| | | | | | | | | | |
| | December 31, 2020 | | |
| | December 31, 2019 |
Dow Jones Industrial Average | | 22.0%7.5% | | |
S&P 500 | | 28.5%16.6% | | |
NASDAQ Composite | | 34.8%44.1% | | |
AtIn light of the effects COVID-19 will have on economic activity, at its December 20192020 meeting, the Federal Open Market Committee decided to maintain the federal funds rate target at 1.50%,range to continue0.00% to 0.25%. The Committee expects to maintain this target rate until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability. This action will help support economic expansion, current strength inactivity, strong labor market conditions and inflation near its targeted objective. Overall inflation remains belowto remain at the targeted rate of 2.0%.
The ten-year Treasury bond rate at December 31, 20192020 was 1.90%0.92%, down from 2.69%1.90% at December 31, 2018.2019. Within the industry, changes in this metric are often considered to correspond to changes in 15-year and 30-year mortgage rates.
Current mortgage origination and refinancing information is not yet available. Based on the most current information released based on September 2019 statistics, mortgage originations increased 29.74% year-over-year, which included an increased 6.21% in mortgage originations for home purchases and an increased 103.1% in mortgage originations from refinancing activity from the same period in 2018. These rates are representative of U.S. national average mortgage origination activity.
The ratio of NPLs to total gross loans for U.S. banks declined for six consecutive years, to just under 1.5% in 2015. NPL trends have remained relatively low since that time. NPLs for U.S. commercial banks were approximately 0.87% of loans using the latest available data, which was as of the third quarter of 2019, compared to 0.95% for the prior year.
Changing market conditions are considered a significant risk factor to the Company. The interest rate environment can present challenges in the growth of net interest income for the banking industry, which continues to rely on non-interest activities to support revenue growth. Changing market conditions and political uncertainty could have an overall impact on the Company's results of operations and financial condition. Such conditions could also impact the Company's credit risk and the associated provision for credit lossesloss expense and legal expense.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Credit Rating Actions
The following table presents Moody’s, S&P and Fitch credit ratings for the Bank, BSPR, SHUSA, and Santander and the Kingdom of Spain, as of December 31, 2019:
senior debt / long-term issuer rating: |
| | | | | | | | | | | | | | | | | | | | | | |
| | BANK | | BSPRSANTANDER (1)(2)
| | SHUSA | | SBNA (2) | Overall Outlook |
Fitch | | Moody'sA | S&P | FitchBBB+ | | Moody'sBBB+ | S&P | Fitch | | Moody's | S&P | FitchNegative |
Long-TermMoody's | | Baa1A2 | A- | BBB+Baa3 | | Baa1 | N/A | BBB+ | | Baa3 | BBB+ | BBB+Stable |
Short-Term | | P-1 | A-2 | F-2 | | P-1/P-2 | N/A | F-2 | | n/a | A-2 | F-2 |
Outlook | | Stable | Stable | Stable | | Stable | N/A | Stable | | Stable | Stable | Stable |
|
S&P | | A | | BBB+ | | A- | | | |
| | | SANTANDER | | SPAIN |
| | | Moody's | S&P | Fitch | | Moody's | S&P | Fitch |
Long-Term | | | A2 | A | A- | | Baa1 | A | A- |
Short-Term | | | P-1 | A-1 | F-2 | | P-2 | A-1 | F-1 |
Outlook | | | Stable | Stable | Stable | | Stable | Stable | StableNegative |
(1) P-1 Short Term Deposit Rating; P-2 Short Term Debt Rating.Senior preferred rating
(2) Outlook currently is Stable and under review with the possibility of a downgrade.Moody's rating represents SBNA long-term issuer rating
Moody's announced completion of its periodic reviews and affirmed its ratings over SHUSA, SBNA and BSPR in March 2019. Spain in August 2019 and Santander in June 2019. Fitch affirmed its ratings and outlook for Spain in December 2019 and BSPR in October 2019.
SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely relatedrelated to the business or outlook of other entities owned by Santander. Future changes in the credit ratings of its parent, Santander, or the Kingdom of Spain, however, could impact SHUSA's or its subsidiaries' credit ratings, and any other change in the condition of Santander could affect SHUSA.
At this time, SC is not rated by the major credit rating agencies.
Impacts of COVID- 19 on our current and future financial and operating status and planning
The current outbreak of COVID-19 has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.
Due to the unpredictable and rapidly changing nature of this outbreak and the resulting economic distress, it is not possible to determine with certainty the ultimate impact on our results of operations or whether other currently unanticipated consequences of the pandemic are reasonably likely to materially affect our results of operations; however, certain adverse effects have already occurred or are probable. The following summarizes our current discussion of the impacts of COVID-19 on the Company's current financial and operating status, as well as on its future operational and financial planning as of the date hereof:
•Impact on services: The COVID-19 outbreak as well as state stay-at-home orders resulted in the closure of certain branches in highly affected areas within the Bank's footprint. To comply with social distancing guidelines and help minimize the spread of the coronavirus, the Bank instituted temporary changes to how it operates, including closure of certain branches and limitations on services provided to others. Certain limited service locations were only performing teller transactions- such as depositing and cashing checks and handling requests for cash withdrawals, money orders and cashier's checks - in the lobby or at the drive-through. In addition, some branches were only providing account opening and servicing with a banker by appointment only. Full and limited-service branches are limiting the number of people allowed in our locations at one time. Branch hours have been changed temporarily, with certain branches providing special hours for high-risk customers. As the quarter wore on and states changed their guidance, the Bank has resumed normal branch operations for over 90% of its current branches while maintainingapplicable social distancing guidelines. Retail customers are encouraged to take advantage of mobile and online banking enabling customers to bank anytime, anywhere, for services including: checking account balances, remote check deposit, transfers, bill pay, and more. Retail customers can also utilize automated services via phone to make balance and transaction inquiries, payments on loans, transfers between accounts, stop payments, and more. Our call center remains staffed and open seven days a week to better serve our customers. Business customers can continue to utilize the business mobile banking application and business online banking to minimize the need to go to branches or exchange cash. We have developed the "Business First Coronavirus Resource Page" for our business customers during this time.
•Impact on customers and loan and lease performance: The COVID-19 outbreak and associated economic crisis have led to negative effects on our customers. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak is impacting customers nationwide and is expected to have a materially more significant impact on the performance of our loan and lease portfolios than even the most severe historical natural disaster.
Closures and disruptions to businesses in the United States have led to negative effects on our customers. Similar to many other financial institutions, we have taken and will continue to take measures to mitigate our customers’ COVID-19-related economic challenges. The Company is actively working with its borrowers who have been impacted by COVID-19. This unique and evolving situation has created temporary personal and financial challenges for our retail and commercial borrowers. The Company is working prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19 and has developed loan modification and deferral programs to mitigate the financial effects of COVID-19 on our loan customers. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. The Bank also permitted fee reversals for those customers impacted by COVID-19, even if the amount exceed the allowable courtesy fee reversal. The Bank also joined other U.S. banks in providing overdrawn customers full access to their EIP by providing a temporary credit in the amount of their overdrawn balance as of the end of the day prior to receipt of the EIP, up to a limit of 5,000. To date, the Bank has provided over $3 million in temporary credits, helping nearly 10,000 customers. Beginning July 15, 2020, the Bank began removing these temporary credits from customers’ accounts.
These customer support programs, by their nature, are expected to negatively impact our financial performance and other results of operations in the near term. Our business, financial condition and results of operations may be materially and adversely affected in the longer term if the COVID-19 outbreak leads us to continue to conduct such programs for a significant period of time, if the number of customers experiencing hardship related directly or indirectly to the pandemic increases, or if our customer support programs are not effective in mitigating the effects of the pandemic and the recession on our customers' financial situations. Given the unpredictable nature of this situation, the nature and extent of such effects cannot be predicted at this time, but such effects could be materially adverse to our business, financial condition and results of operations.
In addition to the measures discussed above, the Bank is providing assistance for its retail customers, including helping those experiencing difficulties with loan payments, waiving fees for early CD withdrawals, refunding late payment and overdraft fees, offering credit card limit increases, and increasing cash availability limits at ATMs. The policy of a more relaxed approach to providing fee refunds in the wake of hardship caused by the COVID-19 pandemic remains, but beginning in August the Bank began to see fewer refund requests. As a result, fee reversals are approaching pre-pandemic levels.For business banking customers, the Bank works with customers to provide loan accommodations and deferrals and extensions for customers experiencing hardships.
The PPP, a key part of the CARES Act, authorizes loans to small businesses to help meet payroll costs and pay other eligible expenses during the COVID-19 outbreak. The program is administered by the SBA, and the loans and accrued interest are forgivable as long as the borrower uses at least 60% of the proceeds of the loan for eligible purposes, such as payroll, benefits, rent and utilities, and maintains employee and payroll levels. The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020. Original loans were originated with a two-year maturity, unless extended by mutual agreement between the lender and borrower. Loans made on or after June 5, 2020 have a five-year maturity. In July 2020, the PPP was extended through August 8, 2020. The Bank originated loans in the first, second and third rounds of the PPP. In rounds one and two, SBNA assisted more than 12,070 business customers in receiving PPP loans for more than $1.2 billion in funding.SBNA launched a pilot of the PPP loan forgiveness application on August 14, 2020. On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits and Venues Act was enacted, which re-authorized lending under the PPP through March 31, 2021, modified provisions relating to originating PPP loans and forgiveness of PPP loans, and authorized second draw PPP loans.
•Impact on originations, including the relationship with FCA: Since the COVID-19 outbreak, SC has partnered with FCA to launch new incentive programs including implementing 90 day first payment deferrals and a 0% annual percentage rate for 84 months on select 2019/2020 FCA models. Most dealers are open today and operating at full capacity; however, some dealers are operating in a modified capacity based on state requirements and/or COVID-19-related employee concerns. Third party sources are reporting a new car seasonally adjusted annual rate that is approximately 95% of pre-COVID expectations. While an economic downturn associated with the pandemic will impact sales, most dealers have developed business models that will allow them to continue operation in some capacity.
While banking is considered an essential business in all of the Bank’s footprint states, executive orders have limited the scope of work of vendors supporting mortgage and home equity lines of credit such as appraisers, notaries, law firms, title companies and settlement agents or stopped these vendors from working altogether at certain times throughout the year. As a result of these restrictions, the number of mortgages, home equity lines of credit and refinancings declined, for a period in certain states. While many of these restrictions have been lifted, it remains difficult to estimate the overall negative impact these limitations will have on mortgages, home equity lines of credits and refinancing as restrictions may be reinstated with rising COVID-19 numbers in the upcoming months.
•Impact on debt and liquidity: As international trade and business activity has slowed and supply chains have been disrupted, global credit and financial markets have recently experienced, and may continue to experience significant disruption and volatility. During 2020, financial markets experienced significant declines and volatility, and such market conditions may continue in the U.S. economy. Under these circumstances, we may experience some or all of the risks related to market volatility and recessionary conditions described under the caption "We are vulnerable to disruptions and volatility in the global financial markets" in the Risk Factors section above.
Governmental and regulatory authorities have recently implemented fiscal and monetary policies and initiatives to mitigate the effects of the pandemic on the economy and individual businesses and households, such as the reduction of the Federal Reserve's benchmark interest rate to near zero in March 2020. Further, the Federal Reserve established TALF to support the flow of credit to consumers and businesses, including the investment in certain eligible ABS bonds. Given the current state of the capital markets and the recent tightening in ABS credit spreads, the Company did not utilize TALF during 2020, but the Company may utilize TALF in the future. These governmental and regulatory actions may not be successful in mitigating the adverse economic effects of COVID-19 and could affect our liquidity, access to funding, net interest income and reduce our profitability. Sustained adverse economic effects from the outbreak may also result in downgrades in our credit ratings or adversely affect the interest rate environment. If our access to funding is reduced or if our costs to obtain such funding significantly increases, our business, financial condition and results of operations could be materially and adversely affected.
The capital markets have shown some signs of recovery during the second half of 2020; however, due to the rapidly evolving nature of the pandemic, it is not possible to predict whether unanticipated consequences of the outbreak are reasonably likely to affect liquidity, access to funding and capital resources in the future.
•Impact on impairment of goodwill, indefinite-lived and long-lived assets: The Company has analyzed the impact of COVID-19 on its financial statements, including the potential for impairment. As a result of this analysis, the Company has recorded a goodwill impairment charge of $1.8 billion during the second quarter of 2020. The analysis did not indicate any impairment for the Company's loan and lease portfolios, leased vehicles, ROU assets, or other non-financial assets such as upfront fees or other intangibles.
•Impact on communities: The Company is committed to supporting our communities impacted by the COVID-19 pandemic and the Company's non-profit foundation has begun responding to the COVID-19 crisis with donations to a select group of organizations addressing community issues. In addition, SHUSA's ongoing support for non-profit partners providing essential services in our communities includes $15.0 million in charitable giving this year. Further SHUSA will provide $25.0 million in financing to community development financial institutions to fund small business loans and will expedite grant funding and payments where possible to help sustain nonprofit operations during this time.
Impact from Texas Winter Storm
In February 2021, our footprint was impacted by a significant winter storm, which struck the State of Texas and surrounding region. The Company is in the process of assessing the potential losses related to our exposure in this region. The Company will continue to monitor and assess the impact of this event on our subsidiaries’ businesses and may establish reserves for losses in future periods. There is no impact on the December 31, 2020 Balance Sheet or results of operations.
REGULATORY MATTERS
The activities of the Company and its subsidiaries, including the Bank and SC, are subject to regulation under various U.S. federal laws and regulatory agencies which impose regulations, supervise and conduct examinations, and may affect the operations and management of the Company and its ability to take certain actions, including making distributions to our parent.parent, Santander. The Company is regulated on a consolidated basis by the Federal Reserve, including the FRB of Boston, and the CFPB. The Company's banking and bank holding company subsidiaries are further supervised by the FDICOCC, the FRB of Atlanta, and the OCC.NYDFS. As a subsidiary of the Company, SC is also subject to regulatory oversight by the Federal Reserve as well as the CFPB. Santander BanCorp and BSPR also are supervised by the Puerto Rico Office of the Commissioner of Financial Institutions.
Payment of DividendsDividends
SHUSA is the parent holding company of SBNA and other consolidated subsidiaries, and is a legal entity separate and distinct from its subsidiaries. SHUSA and SBNA are subject to various regulatory restrictions relating to the payment of dividends, including regulatory capital minimums and the requirement to remain "well-capitalized" under prompt corrective action regulations. As a consolidated subsidiary of the Company, SC is included in various regulatory restrictions relating to the payment of dividends as described inunder the caption “Stress Tests and Capital Adequacy” discussionPlanning” in this section. Refer to the Liquidity"Liquidity and Capital ResourcesResources" section of this MD&A for detail of the capital actions of the Company and its subsidiaries during the period.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FBOs
In February 2014,June 2020, the Federal Reserve announced that, due to the economic uncertainty resulting from COVID-19, it will require all large banks, including SHUSA, to update and resubmit their capital plans under new scenarios by November 2, 2020. In addition, the Federal Reserve issued the final rule implementing certain EPS mandatedInterim Policy, which includes:
•A cap on common stock dividends that cannot exceed the average of the trailing four quarters’ net income; and
•A prohibition on share repurchases.
The Interim Policy applied to the third quarter of 2020, and was extended into the fourth quarter by the DFA. UnderFederal Reserve. Based on the Final Rule, FBOs with over $50 billionInterim Policy and the Company’s expected average trailing four quarters of U.S. non-branch assets, including Santander, were requirednet income, the Company and SC are prohibited from paying dividends in the first quarter of 2021. SC is consolidated into SHUSA’s capital plan and therefore is subject to consolidate U.S. subsidiary activities underthe Interim Policy that utilizes SHUSA’s average trailing income to determine the cap on common stock dividends. SHUSA requested an IHC. In addition,exception to the Final Rule required U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assetsInterim Policy for SC to be subjectable to EPSpay dividends of up to $0.22 per share in the third quarter of 2020. The Federal Reserve granted this request, and heightened capital, liquidity, risk management, and stress testing requirements. Dueon July 31, 2020 SC’s Board of Directors declared a quarterly cash dividend of $0.22 per share of SC Common Stock payable to both its global and U.S. non-branch total consolidated asset size, Santandershareholders of record as of August 13, 2020. This dividend was subject to bothpaid on August 24, 2020. SC did not declare or pay a dividend in the fourth quarter of the above provisions of the Final Rule. As a result of this rule, Santander has transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016.
Economic Growth Act
In May 2018, the Economic Growth Act was signed into law. The Economic Growth Act scales back certain requirements of the DFA. In October 2019,2020. It is uncertain whether the Federal Reserve finalized a rulemaking implementingwill extend the changes required byInterim Policy in its present form beyond the Economic Growth Act. The rulemaking provides a tailored approach tofirst quarter of 2021. If it does so, the EPS mandated by Section 165foregoing restrictions on dividends and share repurchases would continue.
Regulatory Capital Requirements
U.S. Basel III regulatory capital rules are applicable to both SHUSA and the Bank and establish a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets.
These rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios and prompt corrective action thresholds that when fully phased in, require banking organizations, including the Company and the Bank, to maintain a minimum CET1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter, of 4.0%. A further capital conservation buffer of 2.5% above these minimum ratios was phased in effective January 1, 2019. This buffer is required for banking institutions and BHCs to avoid restrictions on their ability to make capital distributions, including paying dividends.
These U.S. Basel III regulatory capital rules include deductions from and adjustments to CET1. These include, for example, the requirement that MSRs and deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities are deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15%25% of CET1. Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and was initially planned over three years, with a fully phased-in requirement of January 1, 2018. However, during 2017, the regulatory agencies finalized changes to the capital rules that became effective on January 1, 2018. These changes extended the current treatment and deferred the final transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspended the risk-weightrisk weight to 100 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent. During 2019, the regulatory agencies approved a final rule which includes simplifications for non-advanced approaches to the generally applicable capital rules, specifically with regard to the treatment of minority interest, as well as modifying the risk-weight to 250 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital. This final rule will becomebecame effective on April 1, 2020.
As described in Note 1, on January 1, 2020, we adopted the CECL standard, which upon adoption resulted in a reduction to our opening retained earnings balance, net of income tax, and an increase to the allowance for loan losses of approximately $2.5 billion. As also described Note 1, the U.S. banking agencies in December 2018 approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations, including the Company, the option to phase in the day-one impact of CECL until the first quarter of 2023. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The Company has elected this alternative option instead of the one described in the December 2018 rule.
See the Bank"Bank Regulatory CapitalCapital" section of this MD&A for the Company's capital ratios under Basel III standards. The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect the Company's regulatory capital position relative to that of its competitors, including those that may not be subject to the same regulatory requirements as the Company.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and, in critically undercapitalized situations, appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the Federal Deposit Insurance Corporation Improvements ActFDIA and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-outcash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution. At December 31, 2019,2020, the Bank met the criteria to be classified as “well-capitalized.”
On April 10, 2018,March 4, 2020, the Federal Reserve issuedadopted a NPR seeking comment on a proposalfinal rule to simplify capital rules for large banks. If finalized as proposed,Under the NPR would replacefinal rule, firms' supervisory stress test results are now used to establish the capital conservation buffer. Thesize of the SCB requirement, replacing the 2.5% of risk-weighted assets component under the prior capital conservation buffer would be replaced with a new SCB.requirement. The SCB is calculated as the maximum decline in CET1 in the severely adverse scenario (subject to a 2.5% floor) plus four quarters of dividends. The proposal would resultrule results in new regulatory capital minimums which are equal to 4.5% of CET1 plus the SCB, any GSIB surcharge, and any countercyclical capital buffer. The GSIB buffer is applicable only to the largest and most complex firms and does not apply to SHUSA. TheseIn the event a firm falls below its new minimums, would be firm-specific and would triggerthe rule imposes restrictions on capital distributions and discretionary bonuses in the event a firm falls below their new minimums.bonuses. Firms would stillcontinue to submit a capital plan annually. Supervisory expectations for capital planning processes woulddo not change under the proposal. The Company does not expect this NPR, if finalized as proposed,rule to have a material impact on its current or future planned capital actions. This rule was finalized on March 4, 2020, and its impact is being evaluated.
Stress Testing and Capital Planning
The DFA also requires certain banks and BHCs, including the Company, to perform a stress test and submit a capital plan to the Federal Reserve and receive a notice of non-objection before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. In June 2018, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan through June 30, 2019. In February 2019, the Federal Reserve announced that SHUSA, as well as other less complex firms, would receive a one-year extension of the requirement to submit its capital plan until April 5, 2020. The Federal Reserve also announced that, for the period beginning July 1, 2019 through June 30, 2020, the Company would be allowed to make capital distributions up to the amount that would have allowed it to remain above all minimum capital requirements in CCAR 2018, adjusted for any changes in the Company’s regulatory capital ratios since the Federal Reserve acted on the 2018 capital plan.
In October 2019, the Federal Reserve finalizedissued rules that tailor the stress testing and capital actions a company is required to perform based on the company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure.exposure. In March 2020, the Federal Reserve amended and simplified its capital planning rules and introduced the SCB to more closely align individual firm capital requirements to the firm’s risk profile. The SCB uses the results from the Federal Reserve's supervisory stress tests, which are one component of the CCAR, to help determine each firm's capital requirements for the coming year. On August 10, 2020 the Federal Reserve announced the individual large bank capital requirements. SHUSA’s CET1 SCB is 2.5% resulting in a 7% CET1 capital requirement under the revised rules. The simplified SCB rule was effective on October 1, 2020 but has been superseded, temporarily in the third and fourth quarter of 2020, by the Interim Policy which limits distributions as described above under “Payment of Dividends”.
On October 7, 2020 the Federal Reserve proposed amendments to capital planning and stress testing requirements for large BHCs. Under the proposal, as a Category IV firm under the supervisory tailoring rules, the Company isrule, SHUSA would be required to submit a capital plan to the Federal Reserve on an annual basis. The Company is also subjectbasis but would generally no longer be required to supervisory stress testing on a two-year cycle.utilize the scenarios provided by the Federal Reserve. The Company continues to evaluate planned capital actions in its annual capital plan and on an ongoing basis.
Liquidity Rules
The Federal Reserve, the FDIC, and the OCC have established a rule to implement the Basel III LCR for certain internationally active banks and nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The LCR is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to its expected net cash outflow for a 30-day time horizon. Smaller covered companies (more than $50 billion in assets) such as the Company were required to calculate the LCR monthly beginning January 2016.
In October 2019, the Federal Reserve finalized rules that tailor the liquidity requirements based on a company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. In light of the fact that the Company is under $250 billion in assets and has less than $50 billion in short-term wholesale funding, the Company is no longer required to disclose the US LCR.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In October 2020, the joint agencies published the final rule for the NSFR. The NSFR is designed to promoteencourage more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizonhorizon. The NSFRmetric requires bankslarge banking organizations to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thereby reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity in a way that could increase the risk of its failure and potentially lead to broader systemic stress. In May 2016,Similar to the Federal Reserve issued a proposedaforementioned criteria used to determine US LCR reporting requirements, the final NSFR rule for NSFRwould not be applicable to U.S. financial institutions. The proposed rule has not been finalized, and the Company is currently evaluating the impact the proposed rule would have onbased upon its financial position, results of operationssize and disclosures.risk profile.
Resolution Planning
The DFA requires all BHCs and FBOs with assets of $50 billion or morethe Company to prepare and regularly update resolution plans. The 165(d) Resolution Planresolution plan must assume that the covered company is resolved under the U.S. Bankruptcy Code and that no “extraordinary support” is received from the U.S. or any other government. The most recent 165(d) Resolution Planresolution plan was submitted to the Federal Reserve and FDIC in December 2018. In addition, under amended Federal Deposit Insurance Corporation Improvements ActFDIA rules, the IDI resolution plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution that supports depositors’ rapid access to their insured deposits, maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by creditors in resolution. The most recent IDI resolution plan was submitted to the FDIC in June 2018. SHUSA and SBNA are currently awaiting feedback.
TLAC
The TLAC Rule requires certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured LTD. The TLAC Rule applies to U.S. GSIBs and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important FBO. The Company is such an IHC.
Under the TLAC Rule, companies are required to maintain a minimum amount of TLAC, which consists of a minimum amount of LTD and Tier 1 capital. As a result, SHUSA must hold the higher of 18% of its RWAs or 9% of its total consolidated assets in the form of TLAC, of which 6% of its RWAs or 3.5% of total consolidated assets must consist of LTD. In addition, SHUSA must maintain a TLAC buffer composed solely of CET1 capital and will be subject to restrictions on capital distributions and discretionary bonus payments based on the size of the TLAC buffer it maintains. The TLAC Rule became effective on January 1, 2019.
Volcker Rule
The DFA added new Section 13 toof the Bank Holding Company Act, which isBHCA, commonly referred to as the “Volcker Rule.Rule,” The Volcker Rule prohibits a “banking entity” from engaging in “proprietary trading” or engaging in any of the following activities with respect to a Covered Fund: (i) acquiring or retaining any equity, partnership or other ownership interest in the Covered Fund; (ii) controlling the Covered Fund; or (iii) engaging in certain transactions with the fund if the banking entity or any affiliate is an investment adviser or sponsor to the Covered Fund. These prohibitions are subject to certain exemptions for permitted activities.
Because the term “banking entity” includes an IDI, a depository institution holding company and any of their affiliates, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, and certain of the Company’s subsidiaries (including the Bank and SC), as well as other Santander subsidiaries in the United States and abroad.
The Company implemented certain policies and procedures, training programs, recordkeeping, internal controls and other compliance requirements that were necessary to comply with the Volcker Rule. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on its size and its level of trading and Covered Fund activities. SHUSA's compliance program includes, among other things, processes for prior approval of new activities and investments permitted under the Volcker Rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the rule.
In October 2019, the joint agencies responsible for administering the Volcker Rule finalized revisions to Volcker Rule. The final rule tailors the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of a trading account, clarify certain key provisions in the Volcker Rule, and simplify the information companies are required to provide the banking agencies.
In July 2020, the joint agencies finalized a rule that revised the Volcker Rule further.The 2020 revisions provide an exemption for activities of qualifying foreign excluded funds, revise the exclusions from the definition of a “covered fund”, create new exclusions from the definition of a covered fund, and modify the definition of an ownership interest.The new rule became effective on October 1, 2020, and the Company is still evaluatingin the impactprocess of transitioning to the requirements of this finalrevised rule.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Risk Retention Rule
In December 2014, theThe Federal Reserve issued itsReserve's final credit risk retention rule which generally requires sponsors of ABS to retain at least five percent of the credit risk of the assets collateralizing ABS. SHUSA, primarily through SC, is an active participant in the structured finance markets and began to complycomplies with thethese retention requirements effective in December 2016.requirements.
Market Risk Rule
The market risk rule requires certain national banks to measure and hold risk-based regulatory capital for the market risk of their covered positions. The bank must measure and hold capital for its market risk using its internal-risk based models. The market risk rule outlines quantitative requirements for the bank's internal risk based models, as well as qualitative requirements for the bank's management of market risk. Banks subject to the market risk rule must also measure and hold market risk regulatory capital for the specific risk associated with certain debt and equity positions.
A bank is subject to the market risk capital rules if its consolidated trading activity, defined as the sum of trading assets and liabilities as reported in its FFIEC 031 and FR Y-9C for the previous quarter, equals the lesser of: (1) 10 percent or more of the bank's total assets as reported in its Call Report and FR Y-9C for the previous quarter, or (2) $1 billion or more. At September 30, 2019, SBNA reported aggregate trading exposure in excess of the market risk threshold and, as a result, both the Company and SBNA began holding the market risk component within RWARWAs of the risk-based capital ratios, and submitted the FFIEC 102 - Market Risk Regulatory Report beginning for the period ended December 31, 2019. The incorporation of market risk within regulatory capital has resulted in a decrease in the risk-based capital ratios.
Capital Simplification Rule
The federal banking agencies are adoptingadopted a final rule that simplifies for non-advanced approaches banking organizations the generally applicable capital rules and makes a number of technical corrections. Specifically, it reverses the previous transition provision freeze on MSRs and deferred tax assets by modifying the risk-weight from 100% to 250%. The rule will also replacereplaces the existing methodology for calculating includible minority interest with a flat 10% limit at each capital level. The increased risk weighting presents an unfavorable decline to the Company's risk-based ratios, but it is estimated that the Tier 1 and total capital ratios will improvehas improved overall due to the additional minority interest includible under the simplified rule. TheAdoption of the capital simplification rule becomes effective April 1, 2020; however, regulators have grantedwas required by the option for institutions to adopt early on January 1, 2020. The Company plans to adopt this new ruleregulatory agencies on April 1, 2020.
Heightened Standards
OCC guidelines to strengthen the governance and risk management practices of large financial institutions are commonly referred to as “heightened standards.” The heightened standards apply to insured national banks with $50 billion or more in consolidated assets. The heightened standards require covered institutions to establish and adhere to a written risk governance framework to manage and control their risk-taking activities. The heightened standards also provide minimum standards for the institutions’ boards of directors to oversee the risk governance framework.
Transactions with Affiliates
Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve's Regulation W, which governs transactions of the Company and itsCompany's banking subsidiaries with affiliated companies and individuals. Section 23A imposes limits on certain specified “covered transactions,” which include loans, lines, and letters of credit to affiliated companies or individuals, and investments in affiliated companies, as well as certain other transactions with affiliated companies and individuals. The aggregate of all covered transactions is limited to 10% of a bank’s capital and surplus for any one affiliate and 20% for all affiliates. Certain covered transactions also must meet collateral requirements that range from 100% to 130% depending on the type of transaction.
Section 23B of the Federal Reserve Act prohibits a depository institution from engaging in certain transactions with affiliates unless the transactions are considered arms'-length. To meet the definition of arm's-length, the terms of the transaction must be the same, or at least as favorable, as those for similar transactions with non-affiliated companies. As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Company faces elevated compliance risk in this area.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Regulation AB II
Regulation AB II, among other things, expanded disclosure requirements and modified the offering and shelf registration process for ABS. SC must comply with these rules, which impact all offerings of publicly registered ABS and all reports under the Exchange Act, for outstanding publicly-registered ABS, and affect SC's public securitization platform.
CRA
SBNA and BSPR areis subject to the requirements of the CRA, which requires the appropriate federal financial supervisory agency to assess an institution's record of helping to meet the credit needs of the local communities in which it is located. BSPR’s current CRA rating is “Outstanding” and SBNA’s current CRA rating is "Satisfactory." The OCC takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and relocating branches, and the Federal Reserve does the same with respect to certain regulatory applications the Company makes. Subsequent to December 31, 2020, the OCC upgraded SBNA's CRA rating to "Outstanding."
On December 12, 2019, the OCC and the FDIC jointly issued the CRA NPR to modernize the regulatory framework implementing the CRA. On May 20, 2020, the OCC issued the CRA Final Rule implementing many of the provisions of the CRA NPR. The CRA NPR generally focuses on clarifying and expanding the activities that qualify for CRA consideration, providing benchmarksallowing the OCC to determine what levelsevaluate a bank’s CRA performance through quantitative measures intended to assess the volume and value of activity, are necessary to obtain a particular CRA rating, establishing additionalupdating how assessment areas based on the locationare determined to account for institutions such as internet-based banks that receive a substantial portion of a bank’stheir deposits outside physical branch locations, and increasing claritytransparency and consistencytimeliness in reporting. TheIn connection with promulgating the CRA NPR contemplates that regulators will provideFinal Rule, the OCC issued a publicly available, non-exhaustive list of activities that would automatically receive CRA consideration. and a process for confirming that particular activities meet the qualifying activities criteria. In addition, the CRA NPRFinal Rule allows banks to receive consideration for certain qualifying activities conducted outside their assessment areas. It currently is unclear when andWhile the CRA Final Rule took effect on October 1, 2020, SBNA will have until January 1, 2023 to bring its operations into compliance with the rule. Although SBNA will be required to comply with the CRA Final Rule in what manner2023, the OCC has deferred to a future rulemaking process how to calibrate the key thresholds and FDIC will finalizebenchmarks used in the CRA NPR.rule to determine the level of performance necessary to achieve a performance rating.
Other Regulatory Matters
On February 25, 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, which resolved the DOJ’s claims against SC that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the SCRA. The consent order required SC to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected service members, consisting of $10,000 per service member plus compensation for any lost equity (with interest) for each repossession by SC and $5,000 per service member for each instance where SC sought to collect repossession-related fees on accounts for which a repossession was conducted by a prior account-holder. The consent order required SC to undertake additional remedial measures. The consent order also subjected SC to monitoring by the DOJ for compliance with the SCRA for a period of five years. The consent order terminated as of February 26, 2019.
On March 21, 2017, SC and the Company entered into a written agreement with the FRB of Boston. Under the terms of that agreement, SC iswas required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and the Company iswas required to enhance its oversight of SC's management and operations. On February 2, 2021, the FRB of Boston closed this matter.
As of December 31, 2019, SSLLC had received 751 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico CEFs that SSLLC previously recommended and/or sold to clients. Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 439 arbitration cases pending as of December 31, 2019. The Company has experienced a decrease in the volume of claims since September 30, 2019; however, it is reasonably possible that it could experience an increase in claims in future periods.
On August 8, 2019, bond insurers National Public Finance Guarantee Corporation and MBIA Insurance Corporation filed suit in Puerto Rico state court against eight Puerto Rico municipal bond underwriters, including SSLLC, alleging that the underwriters made misrepresentations in connection with the issuance of the debt and that the bond insurers relied on such misrepresentations in agreeing to insure certain of the bonds. The complaint alleges damages of not less than $720 million. The defendants removed the case to federal court, and plaintiffs have sought to return the case to state court.
In addition, SSLLC, Santander BanCorp, BSPR, the Company and Santander are defendants in a putative class action alleging federal securities and common law claims relating to the solicitation and purchase of more than $180 million of Puerto Rico bonds and $101 million of CEFs during the period from December 2012 to October 2013. The case is pending in the United States District Court for the District of Puerto Rico and is captioned Jorge Ponsa-Rabell, et. al. v. SSLLC, Civ. No. 3:17-cv-02243. The amended complaint alleges that defendants acted in concert to defraud purchasers in connection with the underwriting and sale of Puerto Rico municipal bonds, CEFs and open-end funds. In May 2019, the defendants filed a motion to dismiss the amended complaint.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to 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 affiliates of SHUSA within the Santander Group. During the period covered by this annual report:
Santander UK holds accounts for two customers, with the first customer holding one savings account and one current account and the second customer holding one savings account. Both of the customers, who are resident in the UK, are currently designated by the U.S. under the SDGT sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2019 were negligible relative to the overall profits of Santander.
During the period covered by this annual report, Santander UK held one savings account with a balance of £1.24, and one current account with a balance of £1,884.53, for another customer resident in the UK who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designations of the customer under these sanctions. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. Santander UK determined to put a block on these accounts, and the accounts were subsequently closed on 14 January 2019. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2019 were negligible relative to the overall profits of Santander.
Santander UK holds two frozen current accounts for two UK 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 remained frozen through the year ended December 31, 2019. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK's Collections and Recoveries Department. No revenues or profits were generated by Santander UK on these accounts in the year ended December 31, 2019.
The Santander 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.
During the period covered by this annual report, Santander Brasil held one current account with a balance of R$100.00 for a customer resident in Brazil who is currently designated by the U.S. under the SDGT sanctions program. The customer relationship pre-dates the designation of the customer under these sanctions. Santander Brasil determined to terminate the account even prior to the customer being formally designated under the SDGT sanctions program on September 10, 2019, and the account was subsequently closed on October 9, 2019. Revenues and profits generated by Santander Brasil on this account in the year ended December 31, 2019 were negligible relative to the overall profits of Santander.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, 2019 which were negligible relative to the overall revenues and profits of Santander. Santander has undertaken significant steps 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. Santander 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, Santander intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRITICAL ACCOUNTING ESTIMATES
This MD&A is based on the Consolidated Financial Statements and accompanying notes that have been prepared in accordance with GAAP. The significant accounting policies of the Company are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, accordingly, have a greater possibility of producing results that could be materially different than originally reported. However, the Company is not currently aware of any likely events or circumstances that would result in materially different results. Management identified accounting for ALLL and the reserve for unfunded lending commitments, estimates of expected residual values of leased vehicles subject to operating leases, accretion of discounts and subvention on RICs, goodwill, fair value measurements and income taxes as the Company's most critical accounting estimates, in that they are important to the portrayal of the Company's financial condition and results and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.
ALLL for Loan Losses and Reserve for Unfunded Lending Commitments
The ALLL and reserveCompany maintains an ACL for unfunded lending commitments represent management's bestthe Company’s held-for-investment portfolio, excluding those loans measured at fair value
in accordance with applicable accounting standards.
The allowance for expected credit losses is measured based on a current expected loss model, which means that it is not necessary for a loss event to occur before a credit loss is recognized. Management’s estimate of probableexpected credit losses inherent in the loan portfolio. The adequacy of SHUSA's ALLL and reserve for unfunded lending commitments is regularly evaluated. This evaluation process is subject to several estimates and applications of judgment. Management'sbased on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the adequacyfuture collectability of the allowance to absorb loan and lease lossesreported amounts. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans that havewith loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originationsforecasts and other relevant factors. Management also considersWhile management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
The Company uses a statistical methodology based on an expected credit losses approach that focuses on forecasting the expected credit loss components (i.e., PD, payoff, LGD and EAD) on a loan quality, changeslevel basis to estimate the expected future lifetime losses. The individual loan balances used in the size and charactermodels are measured on an amortized cost basis. Regardless of the loan portfolio, the amount of NPLs, and industry trends. Changes in these estimates could have a direct material impact on the provision for credit losses recorded in the Consolidated Statements of Operations and/or could result in a change in the recorded allowance and reserve for unfunded lending commitments. The loan portfolio represents the largest asset on the Consolidated Balance Sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ALLL and reserve for unfunded lending commitments in the Consolidated Balance Sheets. A discussionextent of the factors driving changes in the amountCompany's analysis of the ALLL and reserve for unfunded lending commitments for the periods presented is included in the Credit Risk Management section of this MD&A.
The ALLL includes: (i) an allocated allowance, which is comprised of allowancescustomer performance, portfolio evaluations, trends or risk management processes established, on loans specifically evaluated for impairment and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends general economic conditions and other risk factors, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Generally,will always exist due to the Company’s loans held for investment are carried at amortized cost, netjudgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains a qualitative reserve as a component of the ALLL. The ALLL includesACL to recognize the estimateexistence of credit losses to be realized during the loss emergence period based on the recorded investment in the loan, including net discounts that are expected at the time of charge-off. In the case of loans purchased in a bulk purchase or business combination, the entire discount on the loan portfolio is considered as available to absorb the credit losses when determining the ALLL. For these loans, the Company records provisions for credit losses when incurred losses exceed the unaccreted purchase discount. Reserve levels are collectively reviewed for adequacy and approved quarterly.
The Company's allocated reserves are principally based on various models subject to the Company's Model Risk Management Framework. New models are approved by the Company's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.
The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio.exposures. Imprecisions include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in deriving the general and specific componentsquantitative component of the allowance, as well as potential variability in estimates. Period-to-periodThe qualitative adjustment is also established in consideration of several factors such as the interpretation of economic trends, changes in the Company's historical unallocated ALLL positionsnature and volume of our loan portfolio, trends in delinquency and collateral values, and concentration risks.This analysis is conducted at least quarterly, and the Company revises the qualitative component of the allowance when necessary in order to address improving or deteriorating credit quality trends or specific risks associated with loan pool classification not otherwise captured in the quantitative models.
The Company generally uses a third-party vendor's consensus baseline macroeconomic scenario for the quantitative estimate and additional positive and negative macroeconomic scenarios to make qualitative adjustments for macroeconomic uncertainty, and considers adjustments to macroeconomic inputs based on market volatility. The baseline scenario was based on the latest consensus forecasts available which showed an improvement in key variables during the second half of 2020, including a sharp decrease in unemployment rates (which are considereda key driver to losses). Using the weighted-average of our economic forecast scenarios, we estimated at December 31, 2020 that the unemployment rate is expected to be to be approximately 7% at the end of 2021, with the labor market continuing to recover in light2022. While the economy has seen significant recovery in recent months, there is still considerable uncertainty regarding overall lifetime loss estimates. The scenarios used are periodically updated over a reasonable and supportable time horizon with weightings assigned by management and approved through established committee governance.
Management reviews, updates, and validates its process and loss assumptions on a periodic basis. This process involves an analysis of these factors.data integrity, review of loss and credit trends, a retrospective evaluation of actual loss information to loss forecasts, and other analyses.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Valuation of Automotive Lease Assets and Residuals
The Company has significant investments in vehicles in SC's operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third-party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of leased assets.
To account for residual risk, the Company depreciates automobile operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the leased vehicle at termination based on current market conditions and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease.
The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values occurs. These circumstances could include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices (which may have a pronounced impact on certain models of vehicles) or pervasive manufacturer defects (which may systemically affect the value of a particular brand or model). Impairment is determined to exist if the fair value of the leased asset is less than its carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by DCF. No such impairment was recognized in 2020, 2019, 2018, or 2017.2018.
The Company's depreciation methodology for operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automobile lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) our remarketing abilities, and (4) automobile manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automobile manufacturers
related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted.
Accretion of Discounts and Subvention on RICs
LHFI include the RIC portfolio which consists largely of nonprime automobile loans, and which are primarily acquired individually from dealers at a nonrefundable discount from the contractual principal amount. The Company also pays dealer participation on certain receivables. The amortization of discounts, subvention payments from manufacturers, and other origination costs are recognized as adjustments to the yield of the related contracts. The Company applies significant assumptions, including prepayment speeds, in estimating the accretion rates used to approximate effective yield.
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 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.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Goodwill
The acquisition method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of an acquired business over the fair value of the identifiable assets and liabilities represents goodwill. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing.
As more fully described in Note 2322 to the Company's Consolidated Financial Statements, a reporting unit is an operating segment or one level below. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis on October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. As of December 31, 2019,2020, the reporting units with assigned goodwill were Consumer and Business Banking,CBB, C&I, CRE & VF, CIB, and SC.
An entity's quantitative goodwill impairment analysis must be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, and that no impairment exists. An entity has an unconditional option to bypass the preceding qualitative assessment for any reporting unit in any period and proceed directly to the quantitative analysis of the goodwill impairment test.
The quantitative analysis requires a comparison of the fair value of each reporting unit to its carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, impairment is measured as the excess of the carrying amount over the fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit, and cannot subsequently be reversed even if the fair value of the reporting unit recovers. The Company utilizes the market capitalization approach to determine the fair value of its SC reporting unit, as it is a publicly traded company that has a single reporting unit. Determining the fair value of the remaining reporting units requires significant valuation inputs, assumptions, and estimates.
The Company determines the carrying value of each reporting unit using a risk-based capital approach. Certain of the Company's assets are assigned to a Corporate/Other category. These assets are related to the Company's corporate-only programs, such as BOLI, and are not employed in or related to the operations of a reporting unit or considered in determining the fair value of a reporting unit.
Goodwill impairment testing involves management's judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value. This is performed using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies), the market capitalization approach (share price of the reporting unit and control premium of comparable public companies), and the income approach (the DCF method). The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data.
The guideline public company market approach ("market approach") includes earnings and price-to-tangible book value multiples of comparable public companies which were applied to the earnings and equity for all of the Company's reporting units. The market capitalization plus control premium approach was applied to the Company's SC reporting unit, as the SC reporting unit is a publicly traded subsidiary whose securities are traded in an active market.
In connection with the market capitalization plus control premium approach applied to the Company's SC reporting unit, the Company used SC's stock price as of the date of the annual impairment analysis. The Company also considered historical auto loan industry transactions and control premiums over the last three years in determining the control premium.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The DCF method of the income approach incorporates the reporting units' forecasted cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of the forecasts. The discount rates utilized to obtain the net present value of the reporting units' cash flows were estimated using a capital asset pricing model. Significant inputs to this model include a risk-free rate of return, beta (which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit), market equity risk premium, and, in certain cases, additional premium for size and/or unsystematic company-specific risk factors. The Company utilized discount rates that it believes adequately reflect the risk and uncertainty in the financial markets. The Company estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of the reporting unit. The Company uses its internal forecasts to estimate future cash flows, so actual results may differ from forecasted results.
All of the preceding fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions in the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impacts the estimated fair value of the aforementioned reporting units include such items as:
•a prolonged downturn in the business environment in which the reporting units operate;
•an economic recovery that significantly differs from our assumptions in timing or degree;
•volatility in equity and debt markets resulting in higher discount rates and unexpected regulatory changes;
•Specific to the SC reporting unit, a decrease in SC's share price would impact the fair value of the reporting segment.price.
Refer to the Financial Condition, Goodwill section of this MD&A for further details on the Company's goodwill, including the results of management's goodwill impairment analyses.
Fair Value Measurements
The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. Refer to Note 1614 to the Consolidated Financial Statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 1614 to the Consolidated Financial Statements to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. Accordingly, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value.
The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations are benchmarked to market indices when appropriate and available.
Considerable judgment is used in forming conclusions from observable market data used to estimate the Company's Level 2 fair value measurements and in estimating inputs to the Company's internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Income Taxes
The Company accounts for income taxes under the asset and liability method, which includes considerable judgment. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, including investments in subsidiaries. Deferred tax assets and liabilities are measured using enacted tax rates that apply or will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets. The critical assumptions used in the Company's deferred tax asset valuation allowance analysis are as follows: (a) the expectation of future earnings; (b) estimates of the Company's long-term annual growth rate, based on the Company's long-term economic outlook in the U.S.; (c) estimates of the dividend income payout ratio from the Company's consolidated subsidiary, SC, based on current policies and practices of SC; (d) estimates of book income to tax income differences, based on the analysis of historical differences and the historical timing of the reversal of temporary differences; (e) the ability to carry back losses to recoup taxes previously paid; (f) estimates of tax credits to be earned on current investments, based on the Company's evaluation of the credits applicable to each investment; (g) experience with operating loss and tax credit carryforwards not expiring unused; (h) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (i) tax planning strategies; and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences. The Company makes certain assertions in regardswith regard to its investment in subsidiaries, which impact whether a deferred tax liability is recorded for the book over tax basis difference in the investment in these subsidiaries. This requires the Company to make judgments with respect to its ability to permanently reinvest its earnings in foreign subsidiaries and its ability to recover its investment in domestic subsidiaries in a tax free manner.
The Company bases its expectations of future earnings, which are used to assess the realizability of its deferred tax assets, on financial performance forecasts of its operating subsidiaries and unconsolidated investees. The budgets and estimates used in these forecasts are approved by the Company's management, and the assumptions underlying the forecasts are reviewed at least annually and adjusted as necessary based on current developments or when new information becomes available. The updates made and the variances between the Company's forecasts and its actual performance have not been significant enough to alter the Company's conclusions with regard to the realizability of its deferred tax asset. The Company continues to forecast sufficient taxable income to fully realize its current deferred tax assets. Forecasted taxable income is subject to changes in overall market and global economic conditions.
In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws in the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending on changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and as new information becomes available. Interest and penalties on income tax payments are included within income tax expense in the Consolidated Statements of Operations.
The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority assuming full knowledge of the position and all relevant facts. See Note 1516 of the Consolidated Financial Statements for details on the Company's income taxes.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The following MD&Adiscussion compares and discusses operating results for the years ended December 31, 20192020 and 2018.2019. For a discussion of our results of operations for 2018 versus 2017, Seecomparing the two prior years, see Part II, Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operation" included in our 20182019 Form 10-K, filed with the SEC on March 15, 2019.11, 2020.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2019 AND 2018
56
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | Year To Date Change |
(dollars in thousands) | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | $ | 6,442,768 |
| | $ | 6,344,850 |
| | $ | 97,918 |
| | 1.5 | % |
Provision for credit losses | (2,292,017 | ) | | (2,339,898 | ) | | (47,881 | ) | | (2.0 | )% |
Total non-interest income | 3,729,117 |
| | 3,244,308 |
| | 484,809 |
| | 14.9 | % |
General, administrative and other expenses | (6,365,852 | ) | | (5,832,325 | ) | | 533,527 |
| | 9.1 | % |
Income before income taxes | 1,514,016 |
|
| 1,416,935 |
| | 97,081 |
| | 6.9 | % |
Income tax provision | 472,199 |
| | 425,900 |
| | 46,299 |
| | 10.9 | % |
Net income | $ | 1,041,817 |
| | $ | 991,035 |
| | $ | 50,782 |
| | 5.1 | % |
Net income attributable to non-controlling interest | 288,648 |
| | 283,631 |
| | 5,017 |
| | 1.8 | % |
Net income attributable to SHUSA | $ | 753,169 |
| | $ | 707,404 |
| | $ | 45,765 |
| | 6.5 | % |
The Company reported pre-tax income of $1.5 billion for the year ended December 31, 2019, compared to pre-tax income of $1.4 billion for the corresponding period in 2018. Factors contributing to this change have been discussed further in the sections below.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NET INTEREST INCOME AND NET INTEREST MARGIN |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS |
| YEAR ENDED DECEMBER 31, 2019 AND 2018 |
| 2019 (1) | | 2018 (1) | | | Change due to |
(dollars in thousands) | Average Balance | | Interest | | Yield/ Rate(2) | | Average Balance | | Interest | | Yield/ Rate(2) | | Increase/(Decrease) | Volume | Rate |
EARNING ASSETS | | | | | | | | | | | | | | | |
INVESTMENTS AND INTEREST EARNING DEPOSITS | $ | 22,175,778 |
| | $ | 551,713 |
| | 2.49 | % | | $ | 21,342,992 |
| | $ | 522,677 |
| | 2.45 | % | | $ | 29,036 |
| $ | 20,470 |
| $ | 8,566 |
|
LOANS(3): | | | | | | | | | | | | |
|
|
|
Commercial loans | 33,452,626 |
| | 1,430,831 |
| | 4.28 | % | | 31,416,207 |
| | 1,325,001 |
| | 4.22 | % | | 105,830 |
| 86,791 |
| 19,039 |
|
Multifamily | 8,398,303 |
| | 346,766 |
| | 4.13 | % | | 8,191,487 |
| | 328,147 |
| | 4.01 | % | | 18,619 |
| 8,520 |
| 10,099 |
|
Total commercial loans | 41,850,929 |
| | 1,777,597 |
| | 4.25 | % | | 39,607,694 |
| | 1,653,148 |
| | 4.17 | % | | 124,449 |
| 95,311 |
| 29,138 |
|
Consumer loans: | | | | | | | | | | | | | | | |
Residential mortgages | 9,959,837 |
| | 400,943 |
| | 4.03 | % | | 9,716,021 |
| | 392,660 |
| | 4.04 | % | | 8,283 |
| 9,189 |
| (906 | ) |
Home equity loans and lines of credit | 5,081,252 |
| | 256,030 |
| | 5.04 | % | | 5,602,240 |
| | 261,745 |
| | 4.67 | % | | (5,715 | ) | (38,604 | ) | 32,889 |
|
Total consumer loans secured by real estate | 15,041,089 |
| | 656,973 |
| | 4.37 | % | | 15,318,261 |
| | 654,405 |
| | 4.27 | % | | 2,568 |
| (29,415 | ) | 31,983 |
|
RICs and auto loans | 32,594,822 |
| | 4,972,829 |
| | 15.26 | % | | 27,559,139 |
| | 4,570,641 |
| | 16.58 | % | | 402,188 |
| 712,717 |
| (310,529 | ) |
Personal unsecured | 2,449,744 |
| | 664,069 |
| | 27.11 | % | | 2,362,910 |
| | 630,394 |
| | 26.68 | % | | 33,675 |
| 23,407 |
| 10,268 |
|
Other consumer(4) | 374,712 |
| | 27,014 |
| | 7.21 | % | | 526,170 |
| | 37,788 |
| | 7.18 | % | | (10,774 | ) | (10,932 | ) | 158 |
|
Total consumer | 50,460,367 |
| | 6,320,885 |
| | 12.53 | % | | 45,766,480 |
| | 5,893,228 |
| | 12.88 | % | | 427,657 |
| 695,777 |
| (268,120 | ) |
Total loans | 92,311,296 |
| | 8,098,482 |
| | 8.77 | % | | 85,374,174 |
| | 7,546,376 |
| | 8.84 | % | | 552,106 |
| 791,088 |
| (238,982 | ) |
Intercompany investments | — |
| | — |
| | — | % | | 3,572 |
| | 142 |
| | 3.98 | % | | (142 | ) | (142 | ) | — |
|
TOTAL EARNING ASSETS | 114,487,074 |
| | 8,650,195 |
| | 7.56 | % | | 106,720,738 |
| | 8,069,195 |
| | 7.56 | % | | 581,000 |
| 811,416 |
| (230,416 | ) |
Allowance for loan losses(5) | (3,802,702 | ) | | | | | | (3,835,182 | ) | | | | | | | | |
Other assets(6) | 31,624,211 |
| | | | | | 28,346,465 |
| | | | | | | | |
TOTAL ASSETS | $ | 142,308,583 |
| | | | | | $ | 131,232,021 |
| | | | | | | | |
INTEREST-BEARING FUNDING LIABILITIES | | | | | | | | | | | | | | | |
Deposits and other customer related accounts: | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 10,724,077 |
| | $ | 83,794 |
| | 0.78 | % | | $ | 9,116,631 |
| | $ | 40,355 |
| | 0.44 | % | | $ | 43,439 |
| $ | 8,071 |
| $ | 35,368 |
|
Savings | 5,794,992 |
| | 13,132 |
| | 0.23 | % | | 5,887,341 |
| | 12,325 |
| | 0.21 | % | | 807 |
| (159 | ) | 966 |
|
Money market | 24,962,744 |
| | 317,300 |
| | 1.27 | % | | 25,308,245 |
| | 248,683 |
| | 0.98 | % | | 68,617 |
| (3,321 | ) | 71,938 |
|
CDs | 8,291,400 |
| | 160,245 |
| | 1.93 | % | | 5,989,993 |
| | 87,765 |
| | 1.47 | % | | 72,480 |
| 39,944 |
| 32,536 |
|
TOTAL INTEREST-BEARING DEPOSITS | 49,773,213 |
| | 574,471 |
| | 1.15 | % | | 46,302,210 |
| | 389,128 |
| | 0.84 | % | | 185,343 |
| 44,535 |
| 140,808 |
|
BORROWED FUNDS: | | | | | | | | | | | | | | | |
FHLB advances, federal funds, and repurchase agreements | 5,471,080 |
| | 143,804 |
| | 2.63 | % | | 2,066,575 |
| | 53,674 |
| | 2.60 | % | | 90,130 |
| 89,499 |
| 631 |
|
Other borrowings | 41,710,311 |
| | 1,489,152 |
| | 3.57 | % | | 38,152,038 |
| | 1,281,401 |
| | 3.36 | % | | 207,751 |
| 124,401 |
| 83,350 |
|
TOTAL BORROWED FUNDS (7) | 47,181,391 |
| | 1,632,956 |
| | 3.46 | % | | 40,218,613 |
| | 1,335,075 |
| | 3.32 | % | | 297,881 |
| 213,900 |
| 83,981 |
|
TOTAL INTEREST-BEARING FUNDING LIABILITIES | 96,954,604 |
| | 2,207,427 |
| | 2.28 | % | | 86,520,823 |
| | 1,724,203 |
| | 1.99 | % | | 483,224 |
| 258,435 |
| 224,789 |
|
Noninterest bearing demand deposits | 14,572,605 |
| | | | | | 15,117,229 |
| | | | | | | | |
Other liabilities(8) | 6,141,813 |
| | | | | | 5,490,385 |
| | | | | | | | |
TOTAL LIABILITIES | 117,669,022 |
| | | | | | 107,128,437 |
| | | | | | | | |
STOCKHOLDER’S EQUITY | 24,639,561 |
| | | | | | 24,103,584 |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 142,308,583 |
| | | | | | $ | 131,232,021 |
| | | | | | | | |
| | | | | | | | | | | | | | | |
NET INTEREST SPREAD (9) | | | | | 5.28 | % | | | | | | 5.57 | % | | | | |
NET INTEREST MARGIN (10) | | | | | 5.63 | % | | | | | | 5.95 | % | | | | |
NET INTEREST INCOME (11) | | | $ | 6,442,768 |
| | | | | | $ | 6,344,850 |
| | | | | | |
| |
(1) | Average balances are based on daily averages when available. When daily averages are unavailable, mid-month averages are substituted. |
| | | | | |
(2) | Yields calculated using taxable equivalent net interest income. |
| | | | | | | | | | | | | | | | | | |
(3) | Interest on loans includes amortization of premiums and discounts on purchased loan portfolios and amortization of deferred loan fees, net of origination costs. Average loan balances includes non-accrual loans and LHFS. |
| | | | | | | | | | | | | | | | | | |
(4) | Other consumer primarily includes RV and marine loans. |
| | | | | | | | | | | | | | | | | | |
(5) | Refer to Note 4 to the Consolidated Financial Statements for further discussion. |
| | | | | | | | | | | | | | | | | | |
(6) | Other assets primarily includes leases, goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, BOLI, accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs. Refer to Note 9 to the Consolidated Financial Statements for further discussion. |
| | | | | | | | | | | | | | | | | | |
(7) | Refer to Note 11 to the Consolidated Financial Statements for further discussion. |
| | | | | | | | | | | | | | | | | | |
(8) | Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability. |
| | | | | | | | | | | | | | | | | | |
(9) | Represents the difference between the yield on total earning assets and the cost of total funding liabilities. |
| | | | | | | | | | | | | | | | | | |
(10) | Represents annualized, taxable equivalent net interest income divided by average interest-earning assets. |
| | | | | | | | | | | | | | | | | | |
(11) | Intercompany investment income is eliminated from this line item. | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS |
| YEARS ENDED DECEMBER 31, 2020 AND 2019 |
| 2020 (1) | | 2019 (1) | | | Change due to |
(dollars in thousands) | Average Balance | | Interest | | Yield/ Rate(2) | | Average Balance | | Interest | | Yield/ Rate(2) | | Increase/(Decrease) | Volume | Rate |
EARNING ASSETS | | | | | | | | | | | | | | | |
INVESTMENTS AND INTEREST EARNING DEPOSITS | $ | 26,948,991 | | | $ | 363,194 | | | 1.35 | % | | $ | 22,175,778 | | | $ | 551,713 | | | 2.49 | % | | $ | (188,519) | | $ | 167,273 | | $ | (355,792) | |
LOANS(3): | | | | | | | | | | | | | | | |
Commercial loans | 32,836,569 | | | 1,131,851 | | | 3.45 | % | | 33,452,626 | | | 1,430,831 | | | 4.28 | % | | (298,980) | | (25,922) | | (273,058) | |
Multifamily | 8,499,746 | | | 304,098 | | | 3.58 | % | | 8,398,303 | | | 346,766 | | | 4.13 | % | | (42,668) | | 4,254 | | (46,922) | |
Total commercial loans | 41,336,315 | | | 1,435,949 | | | 3.47 | % | | 41,850,929 | | | 1,777,597 | | | 4.25 | % | | (341,648) | | (21,668) | | (319,980) | |
Consumer loans: | | | | | | | | | | | | | | | |
Residential mortgages | 8,186,116 | | | 293,830 | | | 3.59 | % | | 9,959,837 | | | 400,943 | | | 4.03 | % | | (107,113) | | (66,399) | | (40,714) | |
Home equity loans and lines of credit | 4,442,712 | | | 155,981 | | | 3.51 | % | | 5,081,252 | | | 256,030 | | | 5.04 | % | | (100,049) | | (29,294) | | (70,755) | |
Total consumer loans secured by real estate | 12,628,828 | | | 449,811 | | | 3.56 | % | | 15,041,089 | | | 656,973 | | | 4.37 | % | | (207,162) | | (95,693) | | (111,469) | |
RICs and auto loans | 39,022,741 | | | 5,178,166 | | | 13.27 | % | | 32,594,822 | | | 4,972,829 | | | 15.26 | % | | 205,337 | | 606,196 | | (400,859) | |
Personal unsecured | 2,035,356 | | | 574,251 | | | 28.21 | % | | 2,449,744 | | | 664,069 | | | 27.11 | % | | (89,818) | | (118,165) | | 28,347 | |
Other consumer(4) | 269,050 | | | 18,913 | | | 7.03 | % | | 374,712 | | | 27,014 | | | 7.21 | % | | (8,101) | | (7,442) | | (659) | |
Total consumer | 53,955,975 | | | 6,221,141 | | | 11.53 | % | | 50,460,367 | | | 6,320,885 | | | 12.53 | % | | (99,744) | | 384,896 | | (484,640) | |
Total loans | 95,292,290 | | | 7,657,090 | | | 8.04 | % | | 92,311,296 | | | 8,098,482 | | | 8.77 | % | | (441,392) | | 363,228 | | (804,620) | |
Intercompany investments | | | — | | | — | % | | — | | | — | | | — | % | | — | | — | | — | |
TOTAL EARNING ASSETS | 122,241,281 | | | 8,020,284 | | | 6.56 | % | | 114,487,074 | | | 8,650,195 | | | 7.56 | % | | (629,911) | | 530,501 | | (1,160,412) | |
Allowance for loan losses(5) | (6,883,161) | | | | | | | (3,802,702) | | | | | | | | | |
Other assets(6) | 34,287,746 | | | | | | | 31,624,211 | | | | | | | | | |
TOTAL ASSETS | $ | 149,645,866 | | | | | | | $ | 142,308,583 | | | | | | | | | |
INTEREST-BEARING FUNDING LIABILITIES | | | | | | | | | | | | | | | |
Deposits and other customer related accounts: | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 11,234,908 | | | $ | 23,525 | | | 0.21 | % | | $ | 10,724,077 | | | $ | 83,794 | | | 0.78 | % | | $ | (60,269) | | $ | 4,201 | | $ | (64,470) | |
Savings | 5,595,609 | | | 7,806 | | | 0.14 | % | | 5,794,992 | | | 13,132 | | | 0.23 | % | | (5,326) | | (430) | | (4,896) | |
Money market | 30,074,345 | | | 164,730 | | | 0.55 | % | | 24,962,744 | | | 317,300 | | | 1.27 | % | | (152,570) | | 86,263 | | (238,833) | |
CDs | 6,091,246 | | | 94,344 | | | 1.55 | % | | 8,291,400 | | | 160,245 | | | 1.93 | % | | (65,901) | | (37,834) | | (28,067) | |
TOTAL INTEREST-BEARING DEPOSITS | 52,996,108 | | | 290,405 | | | 0.55 | % | | 49,773,213 | | | 574,471 | | | 1.15 | % | | (284,066) | | 52,200 | | (336,266) | |
BORROWED FUNDS: | | | | | | | | | | | | | | | |
FHLB advances, federal funds, and repurchase agreements | 4,840,413 | | | 67,209 | | | 1.39 | % | | 5,471,080 | | | 143,804 | | | 2.63 | % | | (76,595) | | (15,051) | | (61,544) | |
Other borrowings | 44,864,694 | | | 1,303,189 | | | 2.90 | % | | 41,710,311 | | | 1,489,152 | | | 3.57 | % | | (185,963) | | 125,506 | | (311,469) | |
TOTAL BORROWED FUNDS (7) | 49,705,107 | | | 1,370,398 | | | 2.76 | % | | 47,181,391 | | | 1,632,956 | | | 3.46 | % | | (262,558) | | 110,455 | | (373,013) | |
TOTAL INTEREST-BEARING FUNDING LIABILITIES | 102,701,215 | | | 1,660,803 | | | 1.62 | % | | 96,954,604 | | | 2,207,427 | | | 2.28 | % | | (546,624) | | 162,655 | | (709,279) | |
Noninterest bearing demand deposits | 17,815,420 | | | | | | | 14,572,605 | | | | | | | | | |
Other liabilities(8) | 7,409,555 | | | | | | | 6,141,813 | | | | | | | | | |
TOTAL LIABILITIES | 127,926,190 | | | | | | | 117,669,022 | | | | | | | | | |
STOCKHOLDER’S EQUITY | 21,719,676 | | | | | | | 24,639,561 | | | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 149,645,866 | | | | | | | $ | 142,308,583 | | | | | | | | | |
| | | | | | | | | | | | | | | |
NET INTEREST SPREAD (9) | | | | | 4.94 | % | | | | | | 5.28 | % | | | | |
NET INTEREST MARGIN (10) | | | | | 5.20 | % | | | | | | 5.63 | % | | | | |
NET INTEREST INCOME (11) | | | $ | 6,359,481 | | | | | | | $ | 6,442,768 | | | | | | | |
| | | | | | | | | | | | | | | |
(1)Average balances are based on daily averages when available. When daily averages are unavailable, mid-month averages are substituted.
(2)Yields calculated using taxable equivalent net interest income.
(3)Interest on loans includes amortization of premiums and discounts on purchased loan portfolios and amortization of deferred loan fees, net of origination costs. Average loan balances includes non-accrual loans and LHFS.
(4)Other consumer primarily includes RV and marine loans.
(5)Refer to Note 3 to the Consolidated Financial Statements for further discussion.
(6)Other assets primarily includes leases, goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, BOLI, accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs. Refer to Note 7 to the Consolidated Financial Statements for further discussion.
(7)Refer to Note 10 to the Consolidated Financial Statements for further discussion.
(8)Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability.
(9)Represents the difference between the yield on total earning assets and the cost of total funding liabilities.
(10)Represents annualized, taxable equivalent net interest income divided by average interest-earning assets.
(11)Intercompany investment income is eliminated from this line item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NET INTEREST INCOME
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | YTD Change |
(dollars in thousands) | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
INTEREST INCOME: | | | | | | | |
Interest-earning deposits | $ | 174,189 |
| | $ | 137,753 |
| | $ | 36,436 |
| | 26.5 | % |
Investments AFS | 280,927 |
| | 297,557 |
| | (16,630 | ) | | (5.6 | )% |
Investments HTM | 70,815 |
| | 68,525 |
| | 2,290 |
| | 3.3 | % |
Other investments | 25,782 |
| | 18,842 |
| | 6,940 |
| | 36.8 | % |
Total interest income on investment securities and interest-earning deposits | 551,713 |
| | 522,677 |
| | 29,036 |
| | 5.6 | % |
Interest on loans | 8,098,482 |
| | 7,546,376 |
| | 552,106 |
| | 7.3 | % |
Total interest income | 8,650,195 |
| | 8,069,053 |
| | 581,142 |
| | 7.2 | % |
INTEREST EXPENSE: | | | | |
| |
|
Deposits and customer accounts | 574,471 |
| | 389,128 |
| | 185,343 |
| | 47.6 | % |
Borrowings and other debt obligations | 1,632,956 |
| | 1,335,075 |
| | 297,881 |
| | 22.3 | % |
Total interest expense | 2,207,427 |
| | 1,724,203 |
| | 483,224 |
| | 28.0 | % |
NET INTEREST INCOME | $ | 6,442,768 |
| | $ | 6,344,850 |
| | $ | 97,918 |
| | 1.5 | % |
Net interest income increased $97.9decreased $83.3 million for the year ended December 31, 20192020, respectively, compared to 2018.2019. The most significant factors contributing to these changes are as follows:
Interest Income on Investment Securities and Interest-Earning Deposits
Interest income on investment securities and interest-earning deposits increased $29.0decreased $188.5 million for the year ended December 31, 20192020 compared to 2018.2019. The average balances of investment securities and interest-earning deposits for the year ended December 31, 20192020 was $26.9 billion with an average yield of 1.35%, compared to an average balance of $22.2 billion with an average yield of 2.49%, compared to an average balance of $21.3 billion with an average yield of 2.45% for the corresponding period in 2018.2019. The increasedecrease in interest income on investment securities and interest-earning deposits for the year ended December 31, 20192020 was primarily due to an increasea decrease in the average yield on interest-earning deposits resulting from 2018 increasesthe Federal Reserve response to the federal funds rate. During 2019, the federal funds rate was lowered three times; this has had an effectoutbreak of partially offsetting increases in interest income on deposits and investments.COVID-19.
Interest Income on Loans
Interest income on loans increased $552.1 milliondecreased for the year ended December 31, 2019,2020, compared to 2018.2019. This increase was primarily due to the growth of total loans. The average balance of total loans increased $6.9 billion for the year ended December 31, 2019 compared to 2018. This overall increasedecrease reflected decreasing rates, offset by increases in loans was primarily driven by the continued growth of the commercial portfolio, auto loans and RICs; however, the average rate has decreased on the RIC portfolio due to more prime loan originations as a result of the SBNA origination program.balances during 2020.
Interest Expense on Deposits and Related Customer Accounts
Interest expense on deposits and related customer accounts increased $185.3decreased $284.1 million for the year ended December 31, 20192020 compared to 2018. This increase was primarily due to2019. These decreases were a result of the near zero interest rate environment offset by builds in overall higher interest rates and increased deposits. Higher rates were offered to customers on various deposit products in order to attract and grow the customer base. The average balance of total interest-bearing deposits was $49.8 billion with an average cost of 1.15% for the year ended December 31, 2019, compared to an average balance of $46.3 billion with an average cost of 0.84% for the year ended December 31, 2018.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Interest Expense on Borrowed Funds
Interest expense on borrowed funds increased $297.9decreased $262.6 million for the year ended December 31, 20192020 compared to 2018.2019. This increasedecrease was due to higherlower interest rates being paid andoffset by increased balances during the year ended December 31, 2019.2020. The average balance of total borrowings was $49.7 billion with an average cost of 2.76% for the year ended December 31, 2020, compared to an average balance of $47.2 billion with an average cost of 3.46% for the year ended December 31, 2019, compared to an average balance of $40.2 billion with an average cost of 3.32% for 2018.2019. The average balance of borrowed funds increased for the year ended December 31, 20192020 compared to the year ended December 31, 2018,2019, primarily due to increases in FHLB advances, credit facilities and secured structured financings.
CREDIT LOSSESLOSS EXPENSE
Credit loss expense was $2.9 billion for the year ended December 31, 2020, compared to $2.3 billion for the comparative period in 2019. The provisionincrease year over year was primarily due to reserve build during the first and second quarters of 2020 associated with a weaker economic outlook related to COVID-19.
Total charge-offs of $3.8 billion for credit losses is based on credit loss experience, growth or contraction of specific segmentsyear ended December 31, 2020 were lower by $1.8 billion from the comparative period in 2019 as a result of the loan portfolio, and the estimate of losses inherentCompany's programs in the portfolio. The provision for credit losses was primarily comprised of the provision for loan and lease losses for the years ended December 31, 2019 and December 31, 2018 of $2.3 billion and $2.4 billion, respectively.response to COVID-19. Total recoveries during these periods also decreased.
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(in thousands) | | 2019 | | 2018 | | Dollar | Percentage |
ALLL, beginning of period | | $ | 3,897,130 |
| | $ | 3,994,887 |
| | $ | (97,757 | ) | (2.4 | )% |
Charge-offs: | | | | | | | |
Commercial | | (185,035 | ) | | (108,750 | ) | | (76,285 | ) | 70.1 | % |
Consumer | | (5,364,673 | ) | | (4,974,547 | ) | | (390,126 | ) | 7.8 | % |
Unallocated | | (275 | ) | | — |
| | (275 | ) | 100.0 | % |
Total charge-offs | | (5,549,983 | ) | | (5,083,297 | ) | | (466,686 | ) | 9.2 | % |
Recoveries: | | | | | | | |
Commercial | | 53,819 |
| | 60,140 |
| | (6,321 | ) | (10.5 | )% |
Consumer | | 2,954,391 |
| | 2,572,607 |
| | 381,784 |
| 14.8 | % |
Total recoveries | | 3,008,210 |
| | 2,632,747 |
| | 375,463 |
| 14.3 | % |
Charge-offs, net of recoveries | | (2,541,773 | ) | | (2,450,550 | ) | | (91,223 | ) | 3.7 | % |
Provision for loan and lease losses (1) | | 2,290,832 |
| | 2,352,793 |
| | (61,961 | ) | (2.6 | )% |
ALLL, end of period | | $ | 3,646,189 |
| | $ | 3,897,130 |
| | $ | (250,941 | ) | (6.4 | )% |
Reserve for unfunded lending commitments, beginning of period | | $ | 95,500 |
| | $ | 109,111 |
| | $ | (13,611 | ) | (12.5 | )% |
Release of reserves for unfunded lending commitments (1) | | 1,185 |
| | (12,895 | ) | | 14,080 |
| (109.2 | )% |
Loss on unfunded lending commitments | | (4,859 | ) | | (716 | ) | | (4,143 | ) | 578.6 | % |
Reserve for unfunded lending commitments, end of period | | 91,826 |
| | 95,500 |
| | (3,674 | ) | (3.8 | )% |
Total ACL, end of period | | $ | 3,738,015 |
| | $ | 3,992,630 |
| | $ | (254,615 | ) | (6.4 | )% |
| |
(1) | The provision for credit losses in the Consolidated Statement of Operations is the sum of the total provision for loan and lease losses and the provision for unfunded lending commitments. |
The Company's net charge-offs increased $91.2 million for the year ended December 31, 2019 compared to 2018.
Consumer charge-offs increased $390.1 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $391.2 million increase in RIC and consumer auto loan charge-offs.
Consumer recoveries increased $381.8 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of a $345.6 million increase in RIC and consumer auto loan recoveries, and a $21.1 million increase in indirect purchased loan recoveries.
Consumer net charge-offs as a percentage of average consumer loans were 4.8% for the year ended December 31, 2019 compared to 5.2% in 2018.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial charge-offs increased $76.3 million for the year ended December 31, 2019 compared to 2018. The increase was primarily comprised of an $89.1 million increase in Corporate Banking charge-offs.
Commercial recoveries decreased $6.3 million for the year ended December 31, 2019 compared to 2018.
NON-INTEREST INCOME
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Consumer fees | | | | | | $ | 338,169 | | | $ | 391,495 | | | | | | | $ | (53,326) | | | (13.6) | % |
Commercial fees | | | | | | 133,732 | | | 157,351 | | | | | | | (23,619) | | | (15.0) | % |
Lease income | | | | | | 3,037,284 | | | 2,872,857 | | | | | | | 164,427 | | | 5.7 | % |
Miscellaneous income, net | | | | | | 409,506 | | | 301,598 | | | | | | | 107,908 | | | 35.8 | % |
Net gains recognized in earnings | | | | | | 31,297 | | | 5,816 | | | | | | | 25,481 | | | 438.1 | % |
Total non-interest income | | | | | | $ | 3,949,988 | | | $ | 3,729,117 | | | | | | | $ | 220,871 | | | 5.9 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Consumer fees | | $ | 391,495 |
| | $ | 413,934 |
| | $ | (22,439 | ) | | (5.4 | )% |
Commercial fees | | 157,351 |
| | 154,213 |
| | 3,138 |
| | 2.0 | % |
Lease income | | 2,872,857 |
| | 2,375,596 |
| | 497,261 |
| | 20.9 | % |
Miscellaneous income, net | | 301,598 |
| | 307,282 |
| | (5,684 | ) | | (1.8 | )% |
Net gains/(losses) recognized in earnings | | 5,816 |
| | (6,717 | ) | | 12,533 |
| | 186.6 | % |
Total non-interest income | | $ | 3,729,117 |
| | $ | 3,244,308 |
| | $ | 484,809 |
| | 14.9 | % |
Total non-interest income increased $484.8$220.9 million for the year ended December 31, 20192020 compared to 2018. Thisthe corresponding period in 2019. The increase for the period ended December 31, 2020 was primarily due to an increase in lease income. The increase wasincome and miscellaneous income, net, partially offset by decreasesa decrease in consumer fees due to the reduction of loans serviced by the Company.fees.
Consumer fees
Consumer fees decreased $22.4$53.3 million for the year ended December 31, 20192020 compared to 2018.2019. This decrease was primarily related to a decrease in loanconsumer deposit fees, income, which was attributablerelated to a reductionmore fee waivers given in loans serviced by the Company.2020 compared to 2019 in response to COVID-19 outbreak.
Commercial fees
Commercial fees consists of deposit overdraft fees, deposit automated teller machine fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees remained relatively stable for the year ended December 31, 2019 compared to 2018.
Lease income
Lease income increased $497.3$164.4 million for the year ended December 31, 20192020 compared to 2018.2019. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $15.3$16.5 billion for the year ended December 31, 2019,2020, compared to $12.3$15.3 billion for 2018.2019.
Miscellaneous income/(loss)income
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Mortgage banking income, net | | | | | | $ | 49,082 | | | $ | 44,315 | | | | | | | $ | 4,767 | | | 10.8 | % |
BOLI | | | | | | 58,981 | | | 62,782 | | | | | | | (3,801) | | | (6.1) | % |
Capital market revenue | | | | | | 227,421 | | | 197,042 | | | | | | | 30,379 | | | 15.4 | % |
Net gain on sale of operating leases | | | | | | 243,189 | | | 135,948 | | | | | | | 107,241 | | | 78.9 | % |
Asset and wealth management fees | | | | | | 208,732 | | | 175,611 | | | | | | | 33,121 | | | 18.9 | % |
Loss on sale of non-mortgage loans | | | | | | (366,976) | | | (397,965) | | | | | | | 30,989 | | | 7.8 | % |
Other miscellaneous (loss) / income, net | | | | | | (10,923) | | | 83,865 | | | | | | | (94,788) | | | (113.0) | % |
Total miscellaneous income | | | | | | $ | 409,506 | | | $ | 301,598 | | | | | | | $ | 107,908 | | | 35.8 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Mortgage banking income, net | | $ | 44,315 |
| | $ | 34,612 |
| | $ | 9,703 |
| | 28.0 | % |
BOLI | | 62,782 |
| | 58,939 |
| | 3,843 |
| | 6.5 | % |
Capital market revenue | | 197,042 |
| | 165,392 |
| | 31,650 |
| | 19.1 | % |
Net gain on sale of operating leases | | 135,948 |
| | 202,793 |
| | (66,845 | ) | | (33.0 | )% |
Asset and wealth management fees | | 175,611 |
| | 165,765 |
| | 9,846 |
| | 5.9 | % |
Loss on sale of non-mortgage loans | | (397,965 | ) | | (351,751 | ) | | (46,214 | ) | | (13.1 | )% |
Other miscellaneous income, net | | 83,865 |
| | 31,532 |
| | 52,333 |
| | 166.0 | % |
Total miscellaneous income/(loss) | | $ | 301,598 |
| | $ | 307,282 |
| | $ | (5,684 | ) | | (1.8 | )% |
Miscellaneous income decreased $5.7increased $107.9 million for the year ended December 31, 20192020 as compared to 2018. This decrease wasthe corresponding period in 2019. The increase is primarily duerelated to a decreasean increase in net gain on sale of operating leases and an increaseleases. The change in lossother miscellaneous (loss) income, net is primarily due to the fair value adjustment on salethe transfer of non-mortgage loans,BSPR's loan portfolio to HFS, partially offset by an increase in capital market revenue and an increase in Other miscellaneous income due to lower lossesthe gain recognized on securitization transactions.the sale of SBC.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Compensation and benefits | | | | | $ | 1,896,480 | | | $ | 1,945,047 | | | | | | | $ | (48,567) | | | (2.5) | % |
Occupancy and equipment expenses | | | | | 632,424 | | | 603,716 | | | | | | | 28,708 | | | 4.8 | % |
Technology, outside services, and marketing expense | | | | | 548,662 | | | 656,681 | | | | | | | (108,019) | | | (16.4) | % |
Loan expense | | | | | 328,549 | | | 405,367 | | | | | | | (76,818) | | | (19.0) | % |
Lease expense | | | | | 2,393,339 | | | 2,067,611 | | | | | | | 325,728 | | | 15.8 | % |
Impairment of goodwill | | | | | 1,848,228 | | | — | | | | | | | 1,848,228 | | | 100% |
Other expenses | | | | | 560,552 | | | 687,430 | | | | | | | (126,878) | | | (18.5) | % |
Total general, administrative and other expenses | | | | | $ | 8,208,234 | | | $ | 6,365,852 | | | | | | | $ | 1,842,382 | | | 28.9 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar | | Percentage |
Compensation and benefits | | $ | 1,945,047 |
| | $ | 1,799,369 |
| | $ | 145,678 |
| | 8.1 | % |
Occupancy and equipment expenses | | 603,716 |
| | 659,789 |
| | (56,073 | ) | | (8.5 | )% |
Technology, outside services, and marketing expense | | 656,681 |
| | 590,249 |
| | 66,432 |
| | 11.3 | % |
Loan expense | | 405,367 |
| | 384,899 |
| | 20,468 |
| | 5.3 | % |
Lease expense | | 2,067,611 |
| | 1,789,030 |
| | 278,581 |
| | 15.6 | % |
Other expenses | | 687,430 |
| | 608,989 |
| | 78,441 |
| | 12.9 | % |
Total general, administrative and other expenses | | $ | 6,365,852 |
| | $ | 5,832,325 |
| | $ | 533,527 |
| | 9.1 | % |
Total general, administrative and other expenses increased $533.5$1.8 billion for the year ended December 31, 2020, compared to 2019. The most significant contributing factors were as follows:
•During the second quarter of 2020 the Company took a $1.8 billion goodwill impairment. For additional discussion please see Note 6 and the goodwill section in this MD&A.
•Technology, outside services, and marketing expense decreased $108.0 million for the year ended December 31, 20192020 compared to 2018. The most significant factors contributing2019. This decrease was driven by reductions in marketing and technology spending that have resulted in response to these increases were as follows:the COVID-19 pandemic.
Technology, outside services, and marketing
•Loan expense increased $66.4decreased $76.8 million for the year ended December 31, 2019,2020 compared to 2018. The increase was2019. This is primarily due to increases in outside service expenses.the lower repossession volumes as a result of the COVID-19 pandemic.
•Lease expense increased $278.6$325.7 million for the year ended December 31, 20192020 compared to 2018.2019. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio.more depreciation on a larger lease portfolio and fewer liquidations.
•Other expenses increased $78.4decreased $126.9 million for the year ended December 31, 2019,2020, compared to the corresponding period in 2018.2019. This increasedecrease was primarily attributable to an increase in legal expenses and investments in qualified housing, offset by a decrease in legal and operational risk. FDIC insurance premiums for the year ended December 31, 2019 includes $25.3 million of FDIC insurance premiums that relate to periods from the first quarter 2015 through the fourth quarter of 2018 which was partially offset due to the FDIC surcharges that ended in 2018risk expenses. Travel and entertainment expenses also saw a significant decrease as disclosed in Note 17 to the Consolidated Financial Statements.COVID-19 has limited corporate travel.
INCOME TAX PROVISION
An income tax benefit of $110.6 million and a provision of $472.2 million waswere recorded for the yearyears ended December 31, 2020 and 2019, compared to an income tax provision of $425.9 million for 2018.respectively. This resulted in an ETR of 14.4% and 31.2% for the yearyears ended December 31, 2020 and 2019, compared to 30.1% for 2018.respectively.
The Company's ETR in future periods will be affected by the results of operations allocated to the various tax jurisdictions in which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries.
Refer to Note 1516 to the Consolidated Financial Statements for the year-to-year comparison of the ETR.
LINE OF BUSINESS RESULTS
General
The Company's segments at December 31, 2020 and 2019 consisted of Consumer and Business Banking,CBB, C&I, CRE & VF, CIB and SC. For additional information with respect to the Company's reporting segments and changes to the segments beginning in the first quarter of 2019, see Note 23 to the Consolidated Financial Statements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results Summary
Consumer and Business BankingCBB
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Net interest income | | | | | $ | 1,359,280 | | | $ | 1,288,540 | | | | | | | $ | 70,740 | | | 5.5 | % |
Total non-interest income | | | | | 291,116 | | | 342,373 | | | | | | | (51,257) | | | (15.0) | % |
Credit loss expense | | | | | 370,250 | | | 150,329 | | | | | | | 219,921 | | | 146.3 | % |
Total expenses | | | | | 3,083,520 | | | 1,598,837 | | | | | | | 1,484,683 | | | 92.9 | % |
Income / (loss)/ before income taxes | | | | | (1,803,374) | | | (118,253) | | | | | | | (1,685,121) | | | 1,425.0 | % |
Intersegment revenue | | | | | (856) | | | (933) | | | | | | | 77 | | | (8.3) | % |
Total assets | | | | | 21,947,514 | | | 23,841,001 | | | | | | | (1,893,487) | | | (7.9) | % |
|
| | | | | | | | | | | | | | |
| Year Ended December 31, | | YTD Change |
(dollars in thousands) | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | $ | 1,504,887 |
| | $ | 1,298,571 |
| | $ | 206,316 |
| | 15.9 | % |
Total non-interest income | 359,849 |
| | 310,839 |
| | 49,010 |
| | 15.8 | % |
Provision for credit losses | 156,936 |
| | 100,523 |
| | 56,413 |
| | 56.1 | % |
Total expenses | 1,655,923 |
| | 1,575,407 |
| | 80,516 |
| | 5.1 | % |
Income/(loss) before income taxes | 51,877 |
| | (66,520 | ) | | 118,397 |
| | 178.0 | % |
Intersegment revenue | 2,093 |
| | 2,507 |
| | (414 | ) | | (16.5 | )% |
Total assets | 23,934,172 |
| | 21,024,740 |
| | 2,909,432 |
| | 13.8 | % |
Consumer and Business BankingCBB reported incomea loss before income taxes of $51.9$1.8 billion for the year ended December 31, 2020, compared to a loss before income taxes of $118.3 million for the year ended December 31, 2019, compared2019. Factors contributing to losses beforethis change were:
•Non-interest income taxes of $66.5decreased $51.3 million for the year ended December 31, 2018. Factors contributing2020 compared to this change were:the corresponding period of 2019. This decrease was due to a one-time gain recorded on the sale of branches in 2019, and decreased fee income in 2020 resulting from lower transaction volumes during the COVID-19 pandemic.
Net interest income•Credit loss expense increased $206.3$219.9 million for the year ended December 31, 2019compared2020 compared to 2018.the corresponding period of 2019. This increase was primarily driven by deposit product margin due to a higher interest rate environment combined with increasedlarge reserve builds in response to the economic uncertainty related to the COVID-19 outbreak and the growing auto loan volumes.portfolio.
Non-interest•Total expenses increased $1.5 billion for the year ended December 31, 2020 compared to the corresponding period of 2019. This increase was due to the goodwill impairment that was recorded in the second quarter of 2020.
C&I Banking
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Net interest income | | | | | $ | 339,386 | | | $ | 329,368 | | | | | | | $ | 10,018 | | | 3.0 | % |
Total non-interest income | | | | | 67,241 | | | 87,467 | | | | | | | (20,226) | | | (23.1) | % |
Credit loss expense | | | | | 135,400 | | | 38,102 | | | | | | | 97,298 | | | 255.4 | % |
Total expenses | | | | | 541,397 | | | 298,877 | | | | | | | 242,520 | | | 81.1 | % |
Income / (Loss) before income taxes | | | | | (270,170) | | | 79,856 | | | | | | | (350,026) | | | (438.3) | % |
Intersegment revenue | | | | | 12,617 | | | 9,403 | | | | | | | 3,214 | | | 34.2 | % |
Total assets | | | | | 7,960,282 | | | 8,758,027 | | | | | | | (797,745) | | | (9.1) | % |
C&I reported a loss before income increased by $49.0taxes of $270.2 million for the year ended December 31, 2019compared2020, compared to 2018. This increase wasincome before income taxes of $79.9 million for the result of gains on the sale of 14 branches and gains on the sale of conforming mortgage loan portfolios.corresponding period in 2019. Factors contributing to these changes were:
The provision for credit losses
•Credit loss expense increased $56.4$97.3 million for the year ended December 31, 20192020 compared to 2018.the corresponding period of 2019. This increase was due to large reserve builds forin response to the large growth ofeconomic uncertainty related to the auto portfolio in 2019.COVID-19 outbreak.
•Total assetsexpenses increased $2.9 billion for the year ended December 31, 2019 compared to 2018. This increase was primarily driven by an increase in auto loans.
C&I Banking
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 231,270 |
| | $ | 228,491 |
| | $ | 2,779 |
| | 1.2 | % |
Total non-interest income | | 71,323 |
| | 82,435 |
| | (11,112 | ) | | (13.5 | )% |
(Release of) /provision for credit losses | | 31,796 |
| | (35,069 | ) | | 66,865 |
| | 190.7 | % |
Total expenses | | 238,681 |
| | 225,495 |
| | 13,186 |
| | 5.8 | % |
Income before income taxes | | 32,116 |
| | 120,500 |
| | (88,384 | ) | | (73.3 | )% |
Intersegment revenue | | 6,377 |
| | 4,691 |
| | 1,686 |
| | 35.9 | % |
Total assets | | 7,031,238 |
| | 6,823,633 |
| | 207,605 |
| | 3.0 | % |
C&I reported income before income taxes of $32.1$242.5 million for the year ended December 31, 2019,2020 compared to income before income taxesthe corresponding period of $120.5 million for 2018. Contributing to these changes were:
The provision for credit losses increased $66.9 million for the year ended December 31, 2019 compared to 2018.2019. This increase was primarily due to releasethe result of reservesthe goodwill impairment recorded during the second quarter of 2020, offset by small reductions in 2018travel and entertainment expenses, and marketing expenses related to the strategic exits of middle market, asset-based lending, and legacy oil and gas portfolios.COVID-19 outbreak.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CRE & VF
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Net interest income | | | | | $ | 379,710 | | | $ | 400,506 | | | | | | | $ | (20,796) | | | (5.2) | % |
Total non-interest income | | | | | 13,221 | | | 18,231 | | | | | | | (5,010) | | | (27.5) | % |
Credit loss expense / (Release of) credit loss expense | | | | | 106,201 | | | 13,507 | | | | | | | 92,694 | | | 686.3 | % |
Total expenses | | | | | 117,449 | | | 119,686 | | | | | | | (2,237) | | | (1.9) | % |
Income before income taxes | | | | | 169,281 | | | 285,544 | | | | | | | (116,263) | | | (40.7) | % |
Intersegment revenue | | | | | 4,879 | | | 5,950 | | | | | | | (1,071) | | | (18.0) | % |
Total assets | | | | | 20,506,030 | | | 21,117,141 | | | | | | | (611,111) | | | (2.9) | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 417,418 |
| | $ | 413,541 |
| | $ | 3,877 |
| | 0.9 | % |
Total non-interest income | | 11,270 |
| | 6,643 |
| | 4,627 |
| | 69.7 | % |
(Release of) /provision for credit losses | | 13,147 |
| | 15,664 |
| | (2,517 | ) | | (16.1 | )% |
Total expenses | | 135,319 |
| | 116,392 |
| | 18,927 |
| | 16.3 | % |
Income before income taxes | | 280,222 |
| | 288,128 |
| | (7,906 | ) | | (2.7 | )% |
Intersegment revenue | | 5,950 |
| | 4,729 |
| | 1,221 |
| | 25.8 | % |
Total assets | | 19,019,242 |
| | 18,888,676 |
| | 130,566 |
| | 0.7 | % |
CRE & VF reported income before income taxes of $280.2$169.3 million for the year ended December 31, 20192020, compared to income before income taxes of $288.1$285.5 million for 2018. The results2019. Factors contributing to these changes were:
•Credit loss expense increased $92.7 million for the year ended December 31, 2020 compared to the corresponding period of this reportable segment were relatively consistent period-over-period.2019. This increase was due to large reserve builds in response to the economic uncertainty related to COVID-19 outbreak.
CIB
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Net interest income | | | | | $ | 157,855 | | | $ | 152,041 | | | | | | | $ | 5,814 | | | 3.8 | % |
Total non-interest income | | | | | 263,966 | | | 208,851 | | | | | | | 55,115 | | | 26.4 | % |
Credit loss expense / (release of) credit loss expenses | | | | | 28,099 | | | 6,045 | | | | | | | 22,054 | | | (364.8) | % |
Total expenses | | | | | 258,793 | | | 270,065 | | | | | | | (11,272) | | | (4.2) | % |
Income before income taxes | | | | | 134,929 | | | 84,782 | | | | | | | 50,147 | | | 59.1 | % |
Intersegment expense | | | | | (16,640) | | | (14,420) | | | | | | | (2,220) | | | (15.4) | % |
Total assets | | | | | 10,965,616 | | | 10,074,677 | | | | | | | 890,939 | | | 8.8 | % |
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 152,083 |
| | $ | 136,582 |
| | $ | 15,501 |
| | 11.3 | % |
Total non-interest income | | 208,955 |
| | 195,023 |
| | 13,932 |
| | 7.1 | % |
(Release of)/Provision for credit losses | | 6,045 |
| | 9,335 |
| | (3,290 | ) | | (35.2 | )% |
Total expenses | | 270,226 |
| | 234,949 |
| | 35,277 |
| | 15.0 | % |
Income before income taxes | | 84,767 |
| | 87,321 |
| | (2,554 | ) | | (2.9 | )% |
Intersegment expense | | (14,420 | ) | | (12,362 | ) | | (2,058 | ) | | (16.6 | )% |
Total assets | | 9,943,547 |
| | 8,521,004 |
| | 1,422,543 |
| | 16.7 | % |
CIB reported income before income taxes of $84.8$134.9 million for the year ended December 31, 2019,2020, compared to income before income taxes of $87.3$84.8 million for 2018.2019. Factors contributing to this changethese changes were:
•Total expensesnon-interest income increased $35.3$55.1 million for the year ended December 31, 20192020 compared to 2018,the corresponding period of 2019. This increase was due to higher compensation related to higher headcount.
Total assets increased $1.4 billion for the year ended December 31, 2019 compared to 2018, primarily driven by an increase in loan balancesfee income resulting from the large amounts of debt underwritten during 2020 in response to the global transaction banking portfolio as a result of generating business with new customers.COVID-19 related economic uncertainty, and higher fixed income revenues.
Other
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 72,535 |
| | $ | 240,110 |
| | $ | (167,575 | ) | | (69.8 | )% |
Total non-interest income | | 415,473 |
| | 402,006 |
| | 13,467 |
| | 3.3 | % |
(Release of)/Provision for credit losses | | (7,322 | ) | | 24,254 |
| | (31,576 | ) | | (130.2 | )% |
Total expenses | | 770,254 |
| | 786,543 |
| | (16,289 | ) | | (2.1 | )% |
Loss before income taxes | | (274,924 | ) | | (168,681 | ) | | (106,243 | ) | | (63.0 | )% |
Intersegment (expense)/revenue | | — |
| | 435 |
| | (435 | ) | | (100.0 | )% |
Total assets | | 40,648,746 |
| | 36,416,377 |
| | 4,232,369 |
| | 11.6 | % |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Other category reported losses before income taxes of $274.9•Credit loss expense increased $22.1 million for the year ended December 31, 20192020 compared to lossesthe corresponding period of 2019. This increase was due to large reserve builds in response to the economic uncertainty related to the COVID-19 outbreak.
Other
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Net interest income | | | | | $ | (43,120) | | | $ | 207,738 | | | | | | | $ | (250,858) | | | (120.8) | % |
Total non-interest income | | | | | 323,982 | | | 409,948 | | | | | | | (85,966) | | | (21.0) | % |
(Release of Credit loss expense)/Credit loss expense | | | | | (137,065) | | | (7,381) | | | | | | | (129,684) | | | 1,757.0 | % |
Total expenses | | | | | 591,122 | | | 782,938 | | | | | | | (191,816) | | | (24.5) | % |
Income / (Loss) before income taxes | | | | | (173,195) | | | (157,871) | | | | | | | (15,324) | | | (9.7) | % |
| | | | | | | | | | | | | | | |
Total assets | | | | | 39,165,741 | | | 36,786,099 | | | | | | | 2,379,642 | | | 6.5 | % |
The Other category reported loss before income taxes of $168.7 million for 2018. Factors contributing to this change were:
Net interest income decreased $167.6$173.2 million for the year ended December 31, 20192020, respectively, compared to 2018, dueloss before income taxes of $157.9 million for 2019. Factors contributing to higherthese changes were:
•Net interest rates.
The provision for credit lossesincome decreased $31.6$250.9 million for the year ended December 31, 20192020 compared to 2018,the corresponding period of 2019, due to lower rates.
•Total non-interest income decreased $86.0 million for the year ended December 31, 2020 compared to the corresponding period of 2019, due to fair value adjustments related to the transfer of loans to HFS in the second quarter of 2020, offset by the gain on sale of SBC.
•Credit loss expense decreased $129.7 million for the year ended December 31, 2020 compared to the corresponding period of 2019, due to the release of reservesprovision related to SBC during the salesecond quarter of loan portfolios at BSPR,2020.
•Total expenses decreased $191.8 million for the year ended December 31, 2020 compared to the corresponding period of 2019, due tolower operational risk expenses and loan portfolios that were in run-off.lower FDIC premiums.
SC
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | YTD Change |
(dollars in thousands) | | | | | 2020 | | 2019 | | | | | | Dollar increase/(decrease) | | Percentage |
Net interest income | | | | | $ | 4,151,344 | | | $ | 3,971,826 | | | | | | | $ | 179,518 | | | 4.5 | % |
Total non-interest income | | | | | 3,024,918 | | | 2,760,370 | | | | | | | 264,548 | | | 9.6 | % |
Credit loss expense | | | | | 2,364,460 | | | 2,093,749 | | | | | | | 270,711 | | | 12.9 | % |
Total expenses | | | | | 3,601,970 | | | 3,284,179 | | | | | | | 317,791 | | | 9.7 | % |
Income before income taxes | | | | | 1,209,832 | | | 1,354,268 | | | | | | | (144,436) | | | (10.7) | % |
| | | | | | | | | | | | | | | |
Total assets | | | | | 48,887,493 | | | 48,922,532 | | | | | | | (35,039) | | | (0.1) | % |
The CODM manages SC on a historical basis by reviewing the results of SC prior to the first quarter 2014 change in control and consolidation of SC (the "Change in Control") basis. The line of business results table discloses SC's operating information on the same basis that it is reviewed by the CODM.
|
| | | | | | | | | | | | | | | |
| | Year Ended December 31, | | YTD Change |
(dollars in thousands) | | 2019 | | 2018 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 3,971,826 |
| | $ | 3,958,280 |
| | $ | 13,546 |
| | 0.3 | % |
Total non-interest income | | 2,760,370 |
| | 2,297,517 |
| | 462,853 |
| | 20.1 | % |
Provision for credit losses | | 2,093,749 |
| | 2,205,585 |
| | (111,836 | ) | | (5.1 | )% |
Total expenses | | 3,284,179 |
| | 2,857,944 |
| | 426,235 |
| | 14.9 | % |
Income before income taxes | | 1,354,268 |
| | 1,192,268 |
| | 162,000 |
| | 13.6 | % |
Intersegment revenue | | — |
| | — |
| | — |
| | 0.0% |
|
Total assets | | 48,922,532 |
| | 43,959,855 |
| | 4,962,677 |
| | 11.3 | % |
SC reported income before income taxes of $1.4$1.2 billion for the year ended December 31, 2019,2020 compared to income before income taxes of $1.2$1.4 billion for 2018.2019. Contributing to this change were:was:
Total non-interest income•Credit loss expense increased $462.9$270.7 million for the year ended December 31, 20192020 compared to 2018,the corresponding period of 2019, due to increasing operating lease income fromlarge reserve builds in response to the continued growth ineconomic uncertainty related to the operating lease vehicle portfolio.COVID-19 outbreak.
The provision of credit losses decreased $111.8 million for the year ended December 31, 2019 compared to 2018, due to lower TDR balances and better recovery rates.
Total expenses increased $426.2 million for the year ended December 31, 2019 compared to 2018, due to increasing lease expense from the continued growth in the operating lease vehicle portfolio.
Total assets increased $5.0 billion for the year ended December 31, 2019 compared to 2018, due to continued growth in RICs and operating lease receivables. This growth was driven by increased originations.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL CONDITION
LOAN PORTFOLIO
The Company's LHFI portfolioconsisted of the following at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | December 31, 2020 | | December 31, 2019 | | | December 31, 2018 | | December 31, 2017 | | December 31, 2016 |
| | December 31, 2019 | | December 31, 2018 | | December 31, 2017 | | December 31, 2016 | | December 31, 2015 | |
(dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | (dollars in thousands) | | Amount | | Percent | | Amount | | Percent | | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Commercial LHFI: | | | | | | | | | | | | | | | | | | | | | Commercial LHFI: | | | | | | | | | | | | | | | | | | | | | |
CRE | | $ | 8,468,023 |
| | 9.1 | % | | $ | 8,704,481 |
| | 10.0 | % | | $ | 9,279,225 |
| | 11.5 | % | | $ | 10,112,043 |
| | 11.8 | % | | $ | 9,846,236 |
| | 11.3 | % | CRE | | $ | 7,327,853 | | | 8.0 | % | | $ | 8,468,023 | | | 9.1 | % | | | $ | 8,704,481 | | | 10.0 | % | | $ | 9,279,225 | | | 11.5 | % | | $ | 10,112,043 | | | 11.8 | % |
C&I | | 16,534,694 |
| | 17.8 | % | | 15,738,158 |
| | 18.1 | % | | 14,438,311 |
| | 17.9 | % | | 18,812,002 |
| | 21.9 | % | | 20,908,107 |
| | 24.0 | % | C&I | | 16,537,899 | | | 17.9 | % | | 16,534,694 | | | 17.8 | % | | | 15,738,158 | | | 18.1 | % | | 14,438,311 | | | 17.9 | % | | 18,812,002 | | | 21.9 | % |
Multifamily | | 8,641,204 |
| | 9.3 | % | | 8,309,115 |
| | 9.5 | % | | 8,274,435 |
| | 10.1 | % | | 8,683,680 |
| | 10.1 | % | | 9,438,463 |
| | 10.8 | % | Multifamily | | 8,367,147 | | | 9.1 | % | | 8,641,204 | | | 9.3 | % | | | 8,309,115 | | | 9.5 | % | | 8,274,435 | | | 10.1 | % | | 8,683,680 | | | 10.1 | % |
Other commercial | | 7,390,795 |
| | 8.2 | % | | 7,630,004 |
| | 8.8 | % | | 7,174,739 |
| | 8.9 | % | | 6,832,403 |
| | 8.0 | % | | 6,257,072 |
| | 7.2 | % | Other commercial | | 7,455,504 | | | 8.1 | % | | 7,390,795 | | | 8.2 | % | | | 7,630,004 | | | 8.8 | % | | 7,174,739 | | | 8.9 | % | | 6,832,403 | | | 8.0 | % |
Total commercial loans (1) | | 41,034,716 |
| | 44.4 | % | | 40,381,758 |
| | 46.4 | % | | 39,166,710 |
| | 48.4 | % | | 44,440,128 |
| | 51.8 | % | | 46,449,878 |
| | 53.3 | % | Total commercial loans (1) | | 39,688,403 | | | 43.1 | % | | 41,034,716 | | | 44.4 | % | | | 40,381,758 | | | 46.4 | % | | 39,166,710 | | | 48.4 | % | | 44,440,128 | | | 51.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans secured by real estate: | | | | | | | | | | | | | | | | | | | | | Consumer loans secured by real estate: | | | |
Residential mortgages | | 8,835,702 |
| | 9.5 | % | | 9,884,462 |
| | 11.4 | % | | 8,846,765 |
| | 11.0 | % | | 7,775,272 |
| | 9.1 | % | | 7,566,301 |
| | 8.7 | % | Residential mortgages | | 6,590,168 | | | 7.2 | % | | 8,835,702 | | | 9.5 | % | | | 9,884,462 | | | 11.4 | % | | 8,846,765 | | | 11.0 | % | | 7,775,272 | | | 9.1 | % |
Home equity loans and lines of credit | | 4,770,344 |
| | 5.1 | % | | 5,465,670 |
| | 6.3 | % | | 5,907,733 |
| | 7.3 | % | | 6,001,192 |
| | 7.1 | % | | 6,151,232 |
| | 7.1 | % | Home equity loans and lines of credit | | 4,108,505 | | | 4.5 | % | | 4,770,344 | | | 5.1 | % | | | 5,465,670 | | | 6.3 | % | | 5,907,733 | | | 7.3 | % | | 6,001,192 | | | 7.1 | % |
Total consumer loans secured by real estate | | 13,606,046 |
| | 14.6 | % | | 15,350,132 |
| | 17.7 | % | | 14,754,498 |
| | 18.3 | % | | 13,776,464 |
| | 16.2 | % | | 13,717,533 |
| | 15.8 | % | Total consumer loans secured by real estate | | 10,698,673 | | | 11.7 | % | | 13,606,046 | | | 14.6 | % | | | 15,350,132 | | | 17.7 | % | | 14,754,498 | | | 18.3 | % | | 13,776,464 | | | 16.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Consumer loans not secured by real estate: | | | | | | | | | | | | | | | | | | | | | Consumer loans not secured by real estate: | | | |
RICs and auto loans | | 36,456,747 |
| | 39.3 | % | | 29,335,220 |
| | 33.7 | % | | 24,966,121 |
| | 30.9 | % | | 25,573,721 |
| | 29.8 | % | | 24,647,798 |
| | 28.3 | % | RICs and auto loans | | 40,698,642 | | | 44.1 | % | | 36,456,747 | | | 39.3 | % | | | 29,335,220 | | | 33.7 | % | | 24,966,121 | | | 30.9 | % | | 25,573,721 | | | 29.8 | % |
Personal unsecured loans | | 1,291,547 |
| | 1.4 | % | | 1,531,708 |
| | 1.8 | % | | 1,285,677 |
| | 1.6 | % | | 1,234,094 |
| | 1.4 | % | | 1,177,998 |
| | 1.4 | % | Personal unsecured loans | | 824,430 | | | 0.9 | % | | 1,291,547 | | | 1.4 | % | | | 1,531,708 | | | 1.8 | % | | 1,285,677 | | | 1.6 | % | | 1,234,094 | | | 1.4 | % |
Other consumer | | 316,384 |
| | 0.3 | % | | 447,050 |
| | 0.4 | % | | 617,675 |
| | 0.8 | % | | 795,378 |
| | 0.8 | % | | 1,032,579 |
| | 1.2 | % | Other consumer | | 223,034 | | | 0.2 | % | | 316,384 | | | 0.3 | % | | | 447,050 | | | 0.4 | % | | 617,675 | | | 0.8 | % | | 795,378 | | | 0.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Total consumer loans | | 51,670,724 |
| | 55.6 | % | | 46,664,110 |
| | 53.6 | % | | 41,623,971 |
| | 51.6 | % | | 41,379,657 |
| | 48.2 | % | | 40,575,908 |
| | 46.7 | % | Total consumer loans | | 52,444,779 | | | 56.9 | % | | 51,670,724 | | | 55.6 | % | | | 46,664,110 | | | 53.6 | % | | 41,623,971 | | | 51.6 | % | | 41,379,657 | | | 48.2 | % |
Total LHFI | | $ | 92,705,440 |
| | 100.0 | % | | $ | 87,045,868 |
| | 100.0 | % | | $ | 80,790,681 |
| | 100.0 | % | | $ | 85,819,785 |
| | 100.0 | % | | $ | 87,025,786 |
| | 100.0 | % | Total LHFI | | $ | 92,133,182 | | | 100.0 | % | | $ | 92,705,440 | | | 100.0 | % | | | $ | 87,045,868 | | | 100.0 | % | | $ | 80,790,681 | | | 100.0 | % | | $ | 85,819,785 | | | 100.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
Total LHFI with: | | | | | | | | | | | | | | | | | | | | | Total LHFI with: | | | |
Fixed | | $ | 61,775,942 |
| | 66.6 | % | | $ | 56,696,491 |
| | 65.1 | % | | $ | 50,703,619 |
| | 62.8 | % | | $ | 51,752,761 |
| | 60.3 | % | | $ | 52,283,715 |
| | 60.1 | % | Fixed | | $ | 64,036,154 | | | 69.5 | % | | $ | 61,775,942 | | | 66.6 | % | | | $ | 56,696,491 | | | 65.1 | % | | $ | 50,703,619 | | | 62.8 | % | | $ | 51,752,761 | | | 60.3 | % |
Variable | | 30,929,498 |
| | 33.4 | % | | 30,349,377 |
| | 34.9 | % | | 30,087,062 |
| | 37.2 | % | | 34,067,024 |
| | 39.7 | % | | 34,742,071 |
| | 39.9 | % | Variable | | 28,097,028 | | | 30.5 | % | | 30,929,498 | | | 33.4 | % | | | 30,349,377 | | | 34.9 | % | | 30,087,062 | | | 37.2 | % | | 34,067,024 | | | 39.7 | % |
Total LHFI | | $ | 92,705,440 |
| | 100.0 | % | | $ | 87,045,868 |
| | 100.0 | % | | $ | 80,790,681 |
| | 100.0 | % | | $ | 85,819,785 |
| | 100.0 | % | | $ | 87,025,786 |
| | 100.0 | % | Total LHFI | | $ | 92,133,182 | | | 100.0 | % | | $ | 92,705,440 | | | 100.0 | % | | | $ | 87,045,868 | | | 100.0 | % | | $ | 80,790,681 | | | 100.0 | % | | $ | 85,819,785 | | | 100.0 | % |
(1) As of December 31, 2019,2020, the Company had $395.8$338.5 million of commercial loans that were denominated in a currency other than the U.S. dollar.
Commercial
Commercial loans increaseddecreased approximately $653.0 million,$1.3 billion, or 1.6%3.3%, from December 31, 20182019 to December 31, 2019.2020. This increasedecrease was comprised of increasesdecreases in C&ICRE loans of $796.5 million$1.1 billion and multifamily loans of $332.1 million, offset by decreases in other commercial loans of $239.2 million, and CRE loans of $236.5$274.1 million. The increaseThis decrease is reflective of continued investmentthe sale of resources to growSBC, largely in the commercial business.CRE and C&I portfolios, offset by originations of C&I loans, including PPP loans.
| | | | At December 31, 2019, Maturing | | At December 31, 2020, Maturing |
(in thousands) | | In One Year Or Less | | One to Five Years | | After Five Years | | Total (1) | (in thousands) | | In One Year Or Less | | One to Five Years | | After Five Years | | Total (1) |
CRE loans | | $ | 1,748,087 |
| | $ | 5,245,277 |
|
| $ | 1,474,659 |
| | $ | 8,468,023 |
| CRE loans | | $ | 1,787,067 | | | $ | 4,623,996 | | | $ | 944,808 | | | $ | 7,355,871 | |
C&I and other commercial | | 10,683,269 |
| | 11,367,553 |
|
| 1,990,960 |
| | 24,041,782 |
| C&I and other commercial | | 11,500,027 | | | 11,056,299 | | | 1,659,758 | | | 24,216,084 | |
Multifamily loans | | 734,815 |
| | 5,447,661 |
|
| 2,458,728 |
| | 8,641,204 |
| Multifamily loans | | 952,415 | | | 4,985,413 | | | 2,433,074 | | | 8,370,902 | |
Total | | $ | 13,166,171 |
|
| $ | 22,060,491 |
|
| $ | 5,924,347 |
| | $ | 41,151,009 |
| Total | | $ | 14,239,509 | | | $ | 20,665,708 | | | $ | 5,037,640 | | | $ | 39,942,857 | |
Loans with: | | | | | | | | | Loans with: | | | | | | | | |
Fixed rates | | $ | 4,815,879 |
| | $ | 8,569,337 |
|
| $ | 3,455,594 |
| | $ | 16,840,810 |
| Fixed rates | | $ | 5,391,113 | | | $ | 8,902,568 | | | $ | 2,982,493 | | | $ | 17,276,174 | |
Variable rates | | 8,350,292 |
| | 13,491,154 |
|
| 2,468,753 |
| | 24,310,199 |
| Variable rates | | 8,848,396 | | | 11,763,140 | | | 2,055,147 | | | 22,666,683 | |
Total | | $ | 13,166,171 |
|
| $ | 22,060,491 |
|
| $ | 5,924,347 |
| | $ | 41,151,009 |
| Total | | $ | 14,239,509 | | | $ | 20,665,708 | | | $ | 5,037,640 | | | $ | 39,942,857 | |
(1) Includes LHFS.
65
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consumer Loans Secured By Real Estate
Consumer loans secured by real estate decreased $1.7$2.9 billion, or 11.4%21.4%, from December 31, 20182019 to December 31, 2019.2020. This decrease was comprised of a decreasedecreases in the residential mortgage portfolio of $1.0$2.2 billion, primarily duewhich is partially attributable to the sale of residential mortgage loans to the FNMA in 2019,SBC, and a decreasedecreases in the home equity loans and lines of credit portfolio of $695.3$661.8 million.
Consumer Loans Not Secured By Real Estate
RICs and auto loans
RICs and auto loans increased $7.1$4.2 billion, or 24.3%11.6%, from December 31, 20182019 to December 31, 2019.2020. The increase in the RIC and auto loan portfolio was primarily due to an increase of purchased financial receivables from third-party lenders andin originations, net of securitizations. RICs are collateralized by vehicle titles, and the lender 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 RICs held for investmentHFI are pledged against warehouse lines or securitization bonds. Refer to further discussion of these in Note 1110 to the Consolidated Financial Statements.
As of December 31, 2019, 66.2% (includes loans with no FICO score equivalent to 8.7% of the total portfolio)2020, 62.5% of the Company's RIC and auto loan portfolio balance was comprised of nonprime loans (defined(defined by the Company as customers with a FICO score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. payments. This also includes 8.5% of loans for which no FICO score was available or legacy portfolios for which FICO is not considered in the ALLL model. While underwriting guidelines are designed to establish that the customer would be a reasonable credit risk, nonprime loans will nonetheless experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decreased consumer demand for used automobiles and other consumer products, weaken collateral values and increase losses in the event of default. Because SC's historical focus for such credit has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn.
The Company's automated originations process for these credits reflects a disciplined approach to credit risk management to mitigate the risks of nonprime customers. The Company's robust historical data on both organically originated and acquired loans provides it with the ability to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary custom score using information such as FICO scores, DTI ratios, LTV ratios, and over 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The pricing in each tier is continuously monitored and adjusted to reflect market and risk trends. In addition to the Company's automated process, it maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers.
At December 31, 2019,2020, a typical RIC was originated with an average annual percentage rate of 16.3%14.1% and was purchased from the dealer at a premium of 0.5%1.1%. All of the Company's RICs and auto loans are fixed-rate loans.
The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date.
Personal unsecured and other consumer loans
Personal unsecured and other consumer loans decreased from December 31, 20182019 to December 31, 20192020 by $370.8$560.5 million.
As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of the agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for aan initial term ending in 2020 orrenewable through April 2022 if extended at Bluestem's option. The Bluestem loan portfolio is carried as held-for-sale in our Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on this portfolio, and there may be further such adjustmentsadjustments required in future period financial statements. Management is currently evaluating alternatives for the Bluestem portfolio. As of December 31, 2019,2020, SC's personal unsecured portfolio was held-for-sale and thus does not have a related allowance.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CREDIT RISK MANAGEMENT
Extending credit to customers exposes the Company to credit risk, which is the risk that contractual principal and interest due on loans will not be collected due to the inability or unwillingness of the borrower to repay the loan. The Company manages credit risk in its loan portfolio through adherence to consistent standards, guidelines, and limitations established by the Company’s Board of Directors as set forth in its Board-approved Risk Appetite Statement. Written loan policies further implement these underwriting standards, lending limits, and other standards or limits deemed necessary and prudent. Various approval levels based on the amount of the loan and other key credit attributes have also been created. To ensure credit quality, loans are originated in accordance with the Company’s credit and governance standards consistent with its Enterprise Risk Management Framework. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.
The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk and the Audit Committees of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the liquidity and value of the collateral, economic conditions, or other factors. Loan credit quality is subject to scrutiny by business unit management, credit risk professionals, and Internal Audit.
The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses SHUSA’s strategies for managing the related credit risk. Additional credit risk management related considerations are discussed further in the "ALLL" section of this MD&A.
Commercial Loans
Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to C&I customers, and automotive dealer floor plan loans. Credit risk associated with commercial loans is primarily influenced by prevailing and expected economic conditions and the level of underwriting risk SHUSA is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. C&I loans are generally secured by the borrower’s assets and by guarantees. CRE loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified LTV ratios and often by a guarantee.
Consumer Loans Secured by Real Estate
Credit risk in the direct and indirect consumer loan portfolio is controlled by strict adherence to underwriting standards that consider DTI levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, CLTV ratios are generally limited to 90% for both first and second liens. SHUSA originates and purchases fixed-rate and adjustable rate residential mortgage loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of the FHLMC or the FNMA. Credit risk is further reduced, since a portion of the Company’s mortgage loan production is sold to investors in the secondary market without recourse.
Consumer Loans Not Secured by Real Estate
The Company’s consumer loans not secured by real estate include RICs acquired from manufacturer-franchised dealers in connection with their sale of used and new automobiles and trucks, as well as acquired consumer marine, RV and credit card loans. Credit risk is mitigated to the extent possible through early and robust collection practices, which includes the repossession of vehicles.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Collections
The Company closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts generally begin within 15 days after a loan payment is missed by attempting to contact all borrowers and offer a variety of loss mitigation alternatives. If these attempts fail, the Company will attempt to gain control of collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all money owed to the Company. The Company monitors delinquency trends at 30, 60, and 90 DPD. These trends are discussed at monthly management Credit Risk Review Committee meetings and at the Company's and the Bank's Board of Directors' meetings.
NON-PERFORMING ASSETS
The following table presents the composition of non-performing assets at the dates indicated: | | | | Period Ended | | Change | | Period Ended | | Change | |
(dollars in thousands) | | December 31, 2019 | | December 31, 2018 | | Dollar | | Percentage | (dollars in thousands) | | December 31, 2020 | | December 31, 2019 | | Dollar | | Percentage | |
Non-accrual loans: | | | | | | | | | Non-accrual loans: | | | | | | | | | |
Commercial: | | | | | | | | | Commercial: | | | | | | |
CRE | | $ | 83,117 |
| | $ | 88,500 |
| | $ | (5,383 | ) | | (6.1 | )% | CRE | | $ | 106,751 | | | $ | 83,117 | | | $ | 23,634 | | | 28.4 | % | |
C&I | | 153,428 |
| | 189,827 |
| | (36,399 | ) | | (19.2 | )% | C&I | | 107,053 | | | 153,428 | | | (46,375) | | | (30.2) | % | |
Multifamily | | 5,112 |
| | 13,530 |
| | (8,418 | ) | | (62.2 | )% | Multifamily | | 72,392 | | | 5,112 | | | 67,280 | | | 1,316.1 | % | |
Other commercial | | 31,987 |
| | 72,841 |
| | (40,854 | ) | | (56.1 | )% | Other commercial | | 20,019 | | | 31,987 | | | (11,968) | | | (37.4) | % | |
Total commercial loans | | 273,644 |
| | 364,698 |
| | (91,054 | ) | | (25.0 | )% | Total commercial loans | | 306,215 | | | 273,644 | | | 32,571 | | | 11.9 | % | |
| | | | | | | | | | | | | | | | | |
Consumer loans secured by real estate: | | |
| | |
| | | | | Consumer loans secured by real estate: | | | | | | |
Residential mortgages | | 134,957 |
| | 216,815 |
| | (81,858 | ) | | (37.8 | )% | Residential mortgages | | 160,172 | | | 134,957 | | | 25,215 | | | 18.7 | % | |
Home equity loans and lines of credit | | 107,289 |
| | 115,813 |
| | (8,524 | ) | | (7.4 | )% | Home equity loans and lines of credit | | 91,606 | | | 107,289 | | | (15,683) | | | (14.6) | % | |
Consumer loans not secured by real estate: | | | | | |
|
| |
|
| Consumer loans not secured by real estate: | | |
RICs and auto loans | | 1,643,459 |
| | 1,545,322 |
| | 98,137 |
| | 6.4 | % | RICs and auto loans | | 1,174,317 | | | 1,643,459 | | | (469,142) | | | (28.5) | % | |
Personal unsecured loans | | 2,212 |
| | 3,602 |
| | (1,390 | ) | | (38.6 | )% | Personal unsecured loans | | — | | | 2,212 | | | (2,212) | | | (100.0) | % | |
Other consumer | | 11,491 |
| | 9,187 |
| | 2,304 |
| | 25.1 | % | Other consumer | | 6,325 | | | 11,491 | | | (5,166) | | | (45.0) | % | |
Total consumer loans | | 1,899,408 |
| | 1,890,739 |
| | 8,669 |
| | 0.5 | % | Total consumer loans | | 1,432,420 | | | 1,899,408 | | | (466,988) | | | (24.6) | % | |
Total non-accrual loans | | 2,173,052 |
| | 2,255,437 |
| | (82,385 | ) | | (3.7 | )% | Total non-accrual loans | | 1,738,635 | | | 2,173,052 | | | (434,417) | | | (20.0) | % | |
| | | | | | | | | | |
Other real estate owned | | 66,828 |
| | 107,868 |
| | (41,040 | ) | | (38.0 | )% | Other real estate owned | | 29,799 | | | 66,828 | | | (37,029) | | | (55.4) | % | |
Repossessed vehicles | | 212,966 |
| | 224,046 |
| | (11,080 | ) | | (4.9 | )% | Repossessed vehicles | | 204,653 | | | 212,966 | | | (8,313) | | | (3.9) | % | |
Other repossessed assets | | 4,218 |
| | 1,844 |
| | 2,374 |
| | 128.7 | % | Other repossessed assets | | 3,247 | | | 4,218 | | | (971) | | | (23.0) | % | |
Total OREO and other repossessed assets | | 284,012 |
| | 333,758 |
| | (49,746 | ) | | (14.9 | )% | Total OREO and other repossessed assets | | 237,699 | | | 284,012 | | | (46,313) | | | (16.3) | % | |
Total non-performing assets | | $ | 2,457,064 |
| | $ | 2,589,195 |
| | $ | (132,131 | ) | | (5.1 | )% | Total non-performing assets | | $ | 1,976,334 | | | $ | 2,457,064 | | | $ | (480,730) | | | (19.6) | % | |
| | | | | | | | | | | | | | | | | |
Past due 90 days or more as to interest or principal and accruing interest | | $ | 93,102 |
| | $ | 98,979 |
| | $ | (5,877 | ) | | (5.9)% | Past due 90 days or more as to interest or principal and accruing interest | | $ | 52,863 | | | $ | 93,102 | | | $ | (40,239) | | | (43.2)% | |
Annualized net loan charge-offs to average loans (1) | | 2.8 | % | | 2.9 | % | | n/a | | n/a | Annualized net loan charge-offs to average loans (1) | | 1.7 | % | | 2.8 | % | | n/a | | n/a | |
Non-performing assets as a percentage of total assets | | 1.6 | % | | 1.9 | % | | n/a | | n/a | Non-performing assets as a percentage of total assets | | 1.3 | % | | 1.6 | % | | n/a | | n/a | |
NPLs as a percentage of total loans | | 2.3 | % | | 2.6 | % | | n/a | | n/a | NPLs as a percentage of total loans | | 1.8 | % | | 2.3 | % | | n/a | | n/a | |
| ALLL as a percentage of total NPLs | | 167.8 | % | | 172.8 | % | | n/a | | n/a | ALLL as a percentage of total NPLs | | 422.1 | % | | 167.8 | % | | n/a | | n/a | |
(1) Annualized net loan charge-offs are based on year-to-date charge-offs.
The increase in the ALLL as a percentage of total NPLs is a result of the adoption of the CECL standard effective January 1, 2020.
Potential problem loans are loans not currently classified as NPLs for which management has doubts about the borrowers’ ability to comply with the present repayment terms. These assets are principally loans delinquent for more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately $179.9$229.2 million and $98.8$179.9 million at December 31, 20192020 and December 31, 2018,2019, respectively. This increase was primarily due to loans to one large borrower within the CREmultifamily portfolio.
Potential problem consumer loans amounted to $3.2 billion and $4.7 billion at December 31, 20192020 and December 31, 2018.2019, respectively. Management has included these loans in its evaluation of the Company's ACL and reserved for them during the respective periods.
Non-performing assets decreased to $2.0 billion, or 1.3% of total assets, at December 31, 2020, compared to $2.5 billion, or 1.6% of total assets, at December 31, 2019, compareddue to $2.6 billion, or 1.9% of total assets, at December 31, 2018, primarily attributable to a decrease inlower NPLs in consumer RICs.resulting from COVID-19 deferral program.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial
Commercial NPLs decreased $91.1increased $32.6 million from December 31, 20182019 to December 31, 2019.2020. Commercial NPLs accounted for 0.7% and 0.9%0.8% of commercial LHFI at December 31, 20192020 and December 31, 2018,2019, respectively. The decreaseincrease in commercial NPLs was primarily comprised of increases of $67.3 million in the multifamily and $23.6 million in the CRE portfolios offset by decreases of $36.4$46.4 million in C&I and $40.9 million in the Other commercial portfolio.&I.
Consumer Loans Not Secured by Real Estate
RICs and amortizing personal loans are classified as non-performing when they are more than 60 DPD (i.e., 61 or more DPD) with respect to principal or interest. Except for loans accounted for using the FVO, at the time a loan is placed on non-performing status, previously accrued and uncollected interest is reversed against interest income. When an account is 60 days or less past due, it is returned to performing status and the Company returns to accruing interest on the loan. The accrual of interest on revolving personal loans continues until the loan is charged off.
RIC TDRs are placed on non-accrual status when the account becomes past due more than 60 days. For loans in non-accrual 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 the loans should also be placed on a cost recovery basis. For loans on non-accrual status, the accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on a cost recovery basis, the Company returns to accrual status when a sustained period of repayment performance has been achieved. NPLs in the RIC and auto loan portfolio increaseddecreased by $98.1$469.1 million from December 31, 20182019 to December 31, 2019.2020. Non-performing RICs and auto loans accounted for 4.5%2.9% and 5.3%4.5% of total RICs and auto loans at December 31, 20192020 and December 31, 2018,2019, respectively.
Consumer Loans Secured by Real Estate
The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of December 31, 20192020 and December 31, 2018,2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
(dollars in thousands) | | Residential mortgages | | Home equity loans and lines of credit | | Residential mortgages | | Home equity loans and lines of credit |
NPLs - HFI | | $ | 74,473 | | | $ | 91,606 | | | $ | 134,957 | | | $ | 107,289 | |
Total LHFI | | 6,590,168 | | | 4,108,505 | | | 8,835,702 | | | 4,770,344 | |
NPLs as a percentage of total LHFI | | 1.1 | % | | 2.2 | % | | 1.5 | % | | 2.2 | % |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(dollars in thousands) | | Residential mortgages | | Home equity loans and lines of credit | | Residential mortgages | | Home equity loans and lines of credit |
NPLs | | $ | 134,957 |
| | $ | 107,289 |
| | $ | 216,815 |
| | $ | 115,813 |
|
Total LHFI | | 8,835,702 |
| | 4,770,344 |
| | 9,884,462 |
| | 5,465,670 |
|
NPLs as a percentage of total LHFI | | 1.5 | % | | 2.2 | % | | 2.2 | % | | 2.1 | % |
NPLs in foreclosure status | | 15.5 | % | | 84.2 | % | | 43.3 | % | | 56.7 | % |
The NPL ratio is usually higher for the Company's residential mortgage loan portfolio compared to its consumerthe home equity loans secured by real estateand lines of credit portfolio due to a number of factors, including the prolonged workout and foreclosure resolution processes for residential mortgage loans, differences in risk profiles, and mortgage loans located outside the Northeast and Mid-Atlantic United States. As of December 31, 2019, theForeclosures on consumer loans secured by real estate portfolio has a higher NPL ratiowere $46.2 million or 27.8% of non-performing consumer loans secured by real estate at December 31, 2020, compared to the residential mortgage portfolio, primarily due to the NPL loan sale in$111.3 million or 45.9% of consumer loans secured by real estate at December 31, 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Delinquencies
The Company generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.
At December 31, 2019 and December 31, 2018, the Company's delinquencies consisted of the following:
|
| | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(dollars in thousands) | | Consumer Loans Secured by Real Estate | RICs and auto loans | Personal Unsecured and Other Consumer Loans | Commercial Loans | Total | | Consumer Loans Secured by Real Estate | RICs and auto loans | Personal Unsecured and Other Consumer Loans | Commercial Loans | Total |
Total delinquencies | | $404,945 | $4,768,833 | $206,703 | $339,844 | $5,720,325 | | $495,854 | $4,760,361 | $226,181 | $232,264 | $5,714,660 |
Total loans(1) | | $13,902,871 | $36,456,747 | $2,615,036 | $41,151,009 | $94,125,663 | | $15,564,653 | $29,335,220 | $3,047,515 | $40,381,758 | $88,329,146 |
Delinquencies as a % of loans | | 2.9% | 13.1% | 7.9% | 0.8% | 6.1% | | 3.2% | 16.2% | 7.4% | 0.6% | 6.5% |
Overall, total delinquencies increaseddecreased by $5.7 million,$1.5 billion, or 0.1%26.7%, from December 31, 20182019 to December 31, 2019, primarily driven by commercial loans, which increased $107.6 million, offset by consumer loans secured by real estate,2020, most significantly within the RICs and auto loan portfolio, which decreased $90.9 million. The increase in the commercial portfolio was due to loans to two customers that became delinquent in the fourth quarter$1.5 billion. Delinquent balances and nonaccrual balances overall were lower as of 2019, partially offset by the mortgage decrease December 31, 2020 primarily due to the NPL and FNMA sales.large number of deferrals granted to borrowers impacted by COVID-19.
TDRs
TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.
TDRs are generally placed inon nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after a sustained period of repayment performance, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC 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 more than 60 DPD. RIC TDRs are considered for return to accrual when a sustained period of repayment performance has been achieved.the account becomes 60 days or less past due. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.
The following table summarizes TDRs at the dates indicated:
| | | | As of December 31, 2019 | | As of December 31, 2020 |
(in thousands) | | Commercial | % | | Consumer Loans Secured by Real Estate | % | | RICs and Auto Loans | % | | Other Consumer | % | | Total TDRs | (in thousands) | | Commercial | % | | Consumer Loans Secured by Real Estate | % | | RICs and Auto Loans | % | | Other Consumer | % | | Total TDRs |
Performing | | $ | 64,538 |
| 49.5 | % | | $ | 182,105 |
| 67.8 | % | | $ | 3,332,246 |
| 86.6 | % | | $ | 67,465 |
| 91.7 | % | | $ | 3,646,354 |
| Performing | | $ | 73,950 | | 43.2 | % | | $ | 87,896 | | 66.8 | % | | $ | 3,655,681 | | 91.7 | % | | $ | 33,095 | | 98.0 | % | | $ | 3,850,622 | |
Non-performing | | 65,741 |
| 50.5 | % | | 86,335 |
| 32.2 | % | | 515,573 |
| 13.4 | % | | 6,128 |
| 8.3 | % | | 673,777 |
| Non-performing | | 97,054 | | 56.8 | % | | 43,605 | | 33.2 | % | | 332,164 | | 8.3 | % | | 684 | | 2.0 | % | | 473,507 | |
Total | | $ | 130,279 |
| 100.0 | % | | $ | 268,440 |
| 100.0 | % | | $ | 3,847,819 |
| 100.0 | % | | $ | 73,593 |
| 100.0 | % | | $ | 4,320,131 |
| Total | | $ | 171,004 | | 100.0 | % | | $ | 131,501 | | 100.0 | % | | $ | 3,987,845 | | 100.0 | % | | $ | 33,779 | | 100.0 | % | | $ | 4,324,129 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
% of loan portfolio | | 0.3 | % | n/a |
| | 2.0 | % | n/a |
| | 10.6 | % | n/a |
| | 4.6 | % | n/a |
| | 4.7 | % | % of loan portfolio | | 0.4 | % | n/a | | 1.2 | % | n/a | | 9.8 | % | n/a | | 3.2 | % | n/a | | 4.7 | % |
(1) Excludes LHFS. | (1) Excludes LHFS. | | | | | | | | | | | | | (1) Excludes LHFS. | |
| | | | | | | | | | | | | | | | |
| | As of December 31, 2018 | | As of December 31, 2019 |
(in thousands) | | Commercial | % | | Consumer Loans Secured by Real Estate | % | | RICs and Auto Loans | % | | Other Consumer | % | | Total TDRs | (in thousands) | | Commercial | % | | Consumer Loans Secured by Real Estate | % | | RICs and Auto Loans | % | | Other Consumer | % | | Total TDRs |
Performing | | $ | 78,744 |
| 42.4 | % | | $ | 262,449 |
| 72.3 | % | | $ | 4,587,081 |
| 87.3 | % | | $ | 141,605 |
| 79.6 | % | | $ | 5,069,879 |
| Performing | | $ | 64,538 | | 49.5 | % | | $ | 182,105 | | 67.8 | % | | $ | 3,332,246 | | 86.6 | % | | $ | 67,465 | | 91.7 | % | | $ | 3,646,354 | |
Non-performing | | 107,024 |
| 57.6 | % | | 100,543 |
| 27.7 | % | | 664,688 |
| 12.7 | % | | 36,235 |
| 20.4 | % | | 908,490 |
| Non-performing | | 65,741 | | 50.5 | % | | 86,335 | | 32.2 | % | | 515,573 | | 13.4 | % | | 6,128 | | 8.3 | % | | 673,777 | |
Total | | $ | 185,768 |
| 100.0 | % | | $ | 362,992 |
| 100.0 | % | | $ | 5,251,769 |
| 100.0 | % | | $ | 177,840 |
| 100.0 | % | | $ | 5,978,369 |
| Total | | $ | 130,279 | | 100.0 | % | | $ | 268,440 | | 100.0 | % | | $ | 3,847,819 | | 100.0 | % | | $ | 73,593 | | 100.0 | % | | $ | 4,320,131 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
% of loan portfolio | | 0.5 | % | n/a |
| | 2.3 | % | n/a |
| | 17.9 | % | n/a |
| | 9.0 | % | n/a |
| | 6.9 | % | % of loan portfolio | | 0.3 | % | n/a | | 2.0 | % | n/a | | 10.6 | % | n/a | | 4.6 | % | n/a | | 4.7 | % |
(1) Excludes LHFS.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table provides a summary of TDR activity:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Year Ended December 31, 2020 | | Year Ended December 31, 2019 |
(in thousands) | | RICs and Auto Loans | | All Other Loans(1)(2) | | RICs and Auto Loans | | All Other Loans(1) |
TDRs, beginning of period | | $ | 3,847,819 | | | $ | 472,312 | | | $ | 5,251,769 | | | $ | 726,600 | |
New TDRs(1) | | 2,085,351 | | | 279,628 | | | 1,153,160 | | | 145,135 | |
Charged-Off TDRs | | (772,542) | | | (9,091) | | | (1,389,044) | | | (13,706) | |
Sold TDRs(2) | | (27,971) | | | (246,191) | | | (1,139) | | | (83,204) | |
Payments on TDRs | | (1,144,812) | | | (160,374) | | | (1,166,927) | | | (302,513) | |
TDRs, end of period | | $ | 3,987,845 | | | $ | 336,284 | | | $ | 3,847,819 | | | $ | 472,312 | |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 | | Year Ended December 31, 2018 |
(in thousands) | | RICs and Auto Loans | | All Other Loans(1) | | RICs and Auto Loans | | All Other Loans(1)(2) |
TDRs, beginning of period | | $ | 5,251,769 |
| | $ | 726,600 |
| | $ | 6,037,695 |
| | $ | 805,292 |
|
New TDRs(1) | | 1,153,160 |
| | 145,135 |
| | 1,877,058 |
| | 192,733 |
|
Charged-Off TDRs | | (1,389,044 | ) | | (13,706 | ) | | (1,706,788 | ) | | (14,554 | ) |
Sold TDRs | | (1,139 | ) | | (83,204 | ) | | (2,884 | ) | | (7,148 | ) |
Payments on TDRs | | (1,166,927 | ) | | (302,513 | ) | | (953,312 | ) | | (249,723 | ) |
TDRs, end of period | | $ | 3,847,819 |
| | $ | 472,312 |
| | $ | 5,251,769 |
| | $ | 726,600 |
|
| |
(1) | New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs. |
(2) Rollforward adjusted through the New TDRs line itemincludes drawdowns on lines of credit that have previously been classified as TDRs.
(2) Includes loans originated for investment and reclassified to include RV/Marine TDRs in the amountheld for sale, but not yet sold as of $56.0 million that were not identified at December 31, 2018.2020, of $83.0 million .
The decrease in total delinquent TDRs was primarily due to the significant increase in deferrals provided to borrowers in response to COVID-19 impacts.
In accordance with itsthe Company’s policies and guidelines, the Company at times offers payment deferralsmay offer extensions (deferrals) to borrowersconsumers on its RICs, under whichwhereby the consumer is allowed to move up toa maximum of three delinquent payments per event to the end of the loan. More than 90% of deferrals granted are for two months. ThePrior to March 2020, the Company’s policies and guidelines limitlimited the number and frequency of deferrals that may be grantedeach new deferral to one deferral every six months, andregardless of the length of any prior deferral. Further, the maximum number of lifetime months extended for all automobile RICs was eight, months over the life of a loan, while some marine and RV contracts havehad a maximum of twelve months in extensionsextended to reflect their longer term. Additionally, the Company generally limitslimited the granting of deferrals on new accounts until a requisite number of payments hasmonths have passed since origination. However, many of these practices have been received.temporarily revised to accommodate borrowers impacted by COVID-19, including increasing the maximum number of extensions, allowing more than one deferral every six months and removing the requirement that a requisite number of months have passed since origination. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.
AtHowever in March 2020, the timefederal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and concludes that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were impacted by COVID-19 and who were less than 30 DPD as of the implementation date of a relief program are not TDRs. Additionally, Section 4013 of the CARES Act grants companies the option of not applying the GAAP TDR guidance to certain loans with COVID-19 modifications.
In March 2020, the Company began actively working with its borrowers impacted by COVID-19 and provided loan modification programs to mitigate the adverse effects of COVID-19. In both its consumer and commercial portfolios, the programs generally include payment deferrals for a period of one to six months. In the Company's RIC and auto loan portfolio, the predominant program offering is a deferral is granted, all delinquent amounts may be deferred or paid, which may result inof payments to the classificationend of the loan term and waiver of late charges of up to three months. For credit cards, we offer a temporary payment reduction program for a period of up to three months. Payment deferrals on mortgages can be for up to one year. The Company does not consider payment deferrals of up to six months to customers who were current prior to implementation of the Company's relief programs to be TDRs, in accordance with its accounting policy and interagency regulatory guidelines. Additionally, the Company applies the TDR provisions of the CARES Act to certain consumer loans that received COVID19 modifications, if they were current as of December 31, 2019. Consumer loans that are granted deferrals beyond 180 days are not classified as TDRs if they comply with the requirements of the CARES Act.
Since the implementation of the programs in March 2020, we experienced a sharp increase in requests for extensions related to COVID-19 nationwide and a significant number of such extensions have been granted.
The following table provides a summary of SBNA and SC loan balances with active payment deferrals due to COVID-19 as of the end of each reporting period:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | September 30, 2020 |
| | Loan balance of active extensions (1) | | % of Portfolio | | Loan balance of active extensions (1) | | % of Portfolio |
Santander Bank | | | | | | | | |
Commercial: | | | | | | | | |
CRE | | $ | 148,049 | | | 2.0% | | $ | 297,119 | | | 4.0% |
C&I | | 102,818 | | | 0.6% | | 173,766 | | | 1.1% |
Multifamily | | 95,456 | | | 1.1% | | 428,183 | | | 4.9% |
Other commercial | | 6,260 | | | 0.2% | | 50,551 | | | 1.6% |
Consumer: | | | | | | | | |
Residential mortgages | | 147,988 | | | 2.2 | % | | 315,637 | | | 4.4 | % |
Home equity loans and lines of credit | | 63,400 | | | 1.5 | % | | 45,322 | | | 1.1 | % |
RICs and auto loans | | 79,286 | | | 0.9 | % | | 68,198 | | | 0.9 | % |
Personal unsecured loans | | 12,923 | | | 1.6 | % | | 10,347 | | | 1.2 | % |
Other consumer | | 964 | | | 0.5 | % | | 1,762 | | | 0.8 | % |
Total SBNA | | $ | 657,144 | | | 1.2 | % | | $ | 1,390,885 | | | 2.5 | % |
Santander Consumer | | | | | | | | |
RICs | | $ | 1,067,072 | | | 3.2 | % | | $ | 959,236 | | | 2.9 | % |
(1) Santander Consumer balances exclude deferrals with payments due in the current month.
As of December 31, 2020, over 44,000 SBNA customer accounts have received extensions. Of these accounts, 79% had exited deferral, 10% remain in active deferral and therefore not considered delinquent. However, there are instances when a11% had paid down or charged off. Of the loans that have exited deferral is granted butstatus, 92% of the loan is not brought completely current, such as when the account's DPD is greater than the deferment period granted. Suchcustomer accounts are agedless than 30 DPD. Past due status is based on the timelymodified payment schedule under the deferral arrangement.
Through December 31, 2020, over 697,000 of future installmentsSC's unique accounts have received COVID-19 deferrals. Of these accounts, 79% have exited deferral status, 8% remain in active deferral, 8% have paid-off, and 5% have charged off. Of the same manner as any other account. Historically, the majorityloans that have exited deferral status, 80% are less than 30 DPD and 98% 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 toaccounts have made at least 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.payment since their first COVID-19 extension.
The Company evaluates the results of its deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred compared to 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.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 deferrals impact the ultimate timing of when an account is charged off,charged-off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts used in the determination of the adequacy of the ALLL for loans classified as TDRs are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the ALLL and related provision for loan and lease losses.credit loss expense. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses.credit loss expense. 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 allowance and related provision for credit lossesloss expense 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 costs to sell.
ACL
CREDIT RISK
The ACL is maintained at levels management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risksrisk inherent in the portfolio, pastCompany’s loan and lease loss experience, specific loansportfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide facts such as changes in unemployment, GDP, HPI, CRE price index, used vehicle index growth rates, and other factors. In general, there is an inverse relationship between credit quality of transactions and projections of impairment losses so that transactions with loss potential,better credit quality require a lower expected loss. The Company manages this risk through its underwriting, pricing and credit approval guidelines and servicing policies and practices, as well as geographic and industry concentrations, delinquency trends, the level of originations, credit quality metrics such as FICOscores and CLTV, internal risk ratings, economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustmentsconcentration limits.
The Company's ACL is principally based on various models subject to the ACL may be necessary if conditions differ substantially fromCompany's Model Risk Management Framework. New models are approved by the assumptions used in making the evaluations.
Item 7. Management’s DiscussionCompany's Model Risk Management Committee. Models, inputs and Analysis of Financial Conditiondocumentation are further reviewed and Results of Operations
The following table presents the allocation of the ALLLvalidated at least annually, and the percentage of each loan type to total LHFI at the dates indicated:
|
| | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(dollars in thousands) | | Amount | | % of Loans to Total LHFI | | Amount | | % of Loans to Total LHFI |
Allocated allowance: | | | | | | | | |
Commercial loans | | $ | 399,829 |
| | 44.4 | % | | $ | 441,083 |
| | 46.4 | % |
Consumer loans | | 3,199,612 |
| | 55.6 | % | | 3,409,024 |
| | 53.6 | % |
Unallocated allowance | | 46,748 |
| | n/a |
| | 47,023 |
| | n/a |
|
Total ALLL | | 3,646,189 |
| | 100.0 | % | | 3,897,130 |
| | 100.0 | % |
Reserve for unfunded lending commitments | | 91,826 |
| | | | 95,500 |
| | |
Total ACL | | $ | 3,738,015 |
| | | | $ | 3,992,630 |
| | |
General
The ACL decreased by $254.6 million from December 31, 2018 to December 31, 2019. This change in the overall ACL was primarily attributable to the decreased amount of TDRs within SC's RIC and auto loan portfolio.
Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquencies and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.
The risk factors inherent in the ACL are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performscompletes a comprehensivedetailed variance analysis of the ACLhistorical model projections against actual observed results on a quarterly basis. In addition,Required actions resulting from the Company performs a review each quarter of allowance levels and trendsCompany's analysis, if necessary, are governed by major portfolio againstits ACL Committee.
Management uses the levels of peer banking institutionsqualitative framework to benchmark our allowance and industry norms.
Commercial
For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and/or additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower’s current risk profile and the related collateral position.
The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the credit monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework and risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.
If a loan is identified as impaired and is not collateral-dependent, impairment is measured based on a DCF methodology.
The portion of the ALLL related to the commercial portfolio was $399.8 million at December 31, 2019 (1.0% of commercial LHFI) and $441.1 million at December 31, 2018 (1.1% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio was in part due to the charge-off to three large commercial borrowers.
Consumer
The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratios, and internal and external credit scores. Management evaluates the consumer portfolios throughout their lifecycles on a portfolio basis. When problem loans are identifiedexercise judgment about matters that are secured with collateral, management examines the loan files to evaluate the natureinherently uncertain and type of collateral. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist to determine the value to compare against the committed loan amount.
Residential mortgages not adequately secured by collateral are generally charged off to fair value less cost to sell when deemed to be uncollectible or are delinquent 180 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment likelihood include a loan that is secured by collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.
For residential mortgage loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various CLTV bands in these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's ALLL incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals at the individual property level are not considered cost-effective or necessaryby the quantitative framework. These adjustments are documented and reviewed through the Company’s risk management processes. Furthermore, management reviews, updates, and validates its process and loss assumptions on a recurring basis; however, reappraisalsperiodic basis. This process involves an analysis of data integrity, review of loss and credit trends, a retrospective evaluation of actual loss information to loss forecasts, and other analyses.
ACL levels are performed on certain higher risk accounts to support line management activitiescollectively reviewed for adequacy and default servicing decisions, or when other situations arise for whichapproved quarterly. Required actions resulting from the Company believesCompany's analysis, if necessary, are governed by its ACL Committee. The ACL levels are approved by the additional expense is warranted.Board-level committees quarterly.
ACL
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
A home equity loan or line of credit not adequately secured by collateral is treated similarlyChanges to the way residential mortgagesACL are treated. The Company incorporates home equity loan or line of credit loss severity assumptions into the loan and lease loss reserve model following the same methodology as for residential mortgage loans. To ensure the Company has captured losses inherentdiscussed in its home equity portfolios, the Company estimates its ALLL for home equity loans and lines of credit by segmenting its portfolio into sub-segments based on the nature of the portfolio and certain risk characteristics such as product type, lien positions, and origination channels. Projected future defaulted loan balances are estimated within each portfolio sub-segment by incorporating risk parameters, including the current payment status as well as historical trends in delinquency rates. Other assumptions, including prepayment and attrition rates, are also calculated at the portfolio sub-segment level and incorporated into the estimation of the likely volume of defaulted loan balances. The projected default volume is stratified across CLTV ratio bands, and a loss severity rate for each CLTV band is applied based on the Company's historical net credit loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market, or industry conditions, or changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral.
The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 23.5% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.1% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impactsNote 3 to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.Consolidated Financial Statements.
Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The Company's home equity lines of credit generated after 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 20 years. The Company currently monitors delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics, including FICO credit scoring model scores and LTV ratios. The Company's home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, the Company currently does not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.
For RICs, including RICs acquired from a third-party lender that are considered to have no credit deterioration at acquisition, and personal unsecured loans at SC, the Company maintains an ALLL for the Company's HFI portfolio not classified as TDRs at a level estimated to be adequate to absorb credit losses of the recorded investment inherent in the portfolio, based on a holistic assessment, including both quantitative and qualitative considerations. For TDR loans, the allowance is comprised of impairment measured using a DCF model. RICs and personal unsecured loans are considered separately in assessing the required ALLL using product-specific allowance methodologies applied on a pooled basis.
The quantitative framework is supported by credit models that consider several credit quality indicators including, but not limited to, historical loss experience and current portfolio trends. The transition-based Markov model provides data on a granular and disaggregated/segment basis as it utilizes recently observed loan transition rates from various loan statuses to forecast future losses. Transition matrices in the Markov model are categorized based on account characteristics such as delinquency status, TDR type (e.g., deferment, modification, etc.), internal credit risk, origination channel, seasoning, thin/thick file and time since TDR event. The credit models utilized differ among the Company's RIC and personal loan portfolios. The credit models are adjusted by management through qualitative reserves to incorporate information reflective of the current business environment.
The allowance for consumer loans was $3.2 billion and $3.4 billion at December 31, 2019 and December 31, 2018, respectively. The allowance as a percentage of HFI consumer loans was 6.2% at December 31, 2019 and 7.3% at December 31, 2018. The decrease in the allowance for consumer loans was primarily attributable to lower TDR volume and rate improvement in SC's RIC and auto loan portfolio.
The Company's allowance models and reserve levels are back-tested on a quarterly basis to ensure that both remain within appropriate ranges. As a result, management believes that the current ALLL is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Unallocated
The Company reserves for certain inherent but undetected losses that are probable within the loan and lease portfolios. This is considered to be reasonably sufficient to absorb imprecisions of models and to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ALLL positions are considered in light of these factors. The unallocated ALLL was $46.7 million and $47.0 million at December 31, 2019 and December 31, 2018, respectively.
Reserve for Unfunded Lending Commitments
The reserve for unfunded lending commitments decreased $3.7 millionincreased from $95.5 million at December 31, 2018 to $91.8 million at December 31, 2019.2019 to $146.5 million at December 31, 2020. The decreaseincrease of the reserve for unfunded reserve islending commitments included an increase from the adoption of the CECL standard of $10.4 million, while the remainder was primarily related to changes in the Company strategically reducing its exposure to certain business relationships and industries.environment resulting from COVID-19. The net impact of thebusiness as usual change in the reserve for unfunded lending commitments to the overall ACL was immaterial.
INVESTMENT SECURITIES
Investment securities consist primarily of U.S. Treasuries, MBS, ABS and FHLB and FRB stock. MBS consist of pass-through, CMOs and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.
Total investment securities AFS increased $2.7decreased $3.0 billion to $11.3 billion at December 31, 2020, compared to $14.3 billion at December 31, 2019, compared to $11.6 billion at December 31, 2018.2019. During the year ended December 31, 2019,2020, the composition of the Company's investment portfolio changed due to an increasea decrease in U.S. Treasury securities, and MBS, partially offset by a decreasean increase in ABS.MBS. U.S. Treasuries increaseddecreased by $2.3$3.9 billionprimarily due to investment purchases of $3.8 billion as offset by $1.5 billion of sales.sales and maturities. MBS increased by $739.4$907.1 million primarily due to investment purchases and a decreasean increase in unrealized losses,gains, partially offset by investment sales, maturities and principal paydowns. For additional information with respect to the Company’s investment securities, see Note 32 to the Consolidated Financial Statements.
Debt securities for which the Company has the positive intent and ability to hold the securities until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities HTM were $3.9$5.5 billion at December 31, 2019.2020. The Company had 99133 investment securities classified as HTM as of December 31, 2019.2020.
Total gross unrealized lossesgain/(loss) position on investment securities AFS decreasedincreased by $258.2$184.7 million during the year ended December 31, 2019.2020. This decreaseincrease was primarily related to a decreasean increase in unrealized lossesgains of $246.1$186.3 million on MBS, primarily due to a decrease in interest rates.
The average life of the AFS investment portfolio (excluding certain ABS) at December 31, 20192020 was approximately 3.863.29 years. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, 20192020 was approximately 2.852.35 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the fair value of investment securities by obligor at the dates indicated:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2020 | | December 31, 2019 |
Investment securities AFS: | | | | |
U.S. Treasury securities and government agencies | | $ | 5,440,139 | | | $ | 9,735,337 | |
FNMA and FHLMC securities | | 5,608,296 | | | 4,326,299 | |
State and municipal securities | | 1 | | | 9 | |
Other securities (1) | | 265,053 | | | 278,113 | |
Total investment securities AFS | | 11,313,489 | | | 14,339,758 | |
Investment securities HTM: | | | | |
U.S. government agencies | | 5,504,685 | | | 3,938,797 | |
Total investment securities HTM(2) | | 5,504,685 | | | 3,938,797 | |
| | | | |
Other investments | | 1,553,862 | | | 995,680 | |
Total investment portfolio | | $ | 18,372,036 | | | $ | 19,274,235 | |
|
| | | | | | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
Investment securities AFS: | | | | |
U.S. Treasury securities and government agencies | | $ | 9,735,337 |
| | $ | 5,485,392 |
|
FNMA and FHLMC securities | | 4,326,299 |
| | 5,550,628 |
|
State and municipal securities | | 9 |
| | 16 |
|
Other securities (1) | | 278,113 |
| | 596,951 |
|
Total investment securities AFS | | 14,339,758 |
| | 11,632,987 |
|
Investment securities HTM: | | | | |
U.S. government agencies | | 3,938,797 |
| | 2,750,680 |
|
Total investment securities HTM(2) | | 3,938,797 |
| | 2,750,680 |
|
Other investments | | 995,680 |
| | 805,357 |
|
Total investment portfolio | | $ | 19,274,235 |
| | $ | 15,189,024 |
|
(1) Other securities primarily include corporate debt securities and ABS. | |
(1) | Other securities primarily include corporate debt securities and ABS. |
| |
(2) | HTM securities are measured and presented at amortized cost. |
(2) HTM securities are measured and presented at amortized cost.
The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's stockholder's equity that were held by the Company at December 31, 2019:2020:
| | | | | | | | | | | | | | |
| | December 31, 2020 |
(in thousands) | | Amortized Cost | | Fair Value |
FNMA | | $ | 3,136,873 | | | $ | 3,187,163 | |
FHLMC | | 2,391,680 | | | 2,421,133 | |
GNMA (1) | | 10,634,103 | | | 10,901,810 | |
| | | | |
Total | | $ | 16,162,656 | | | $ | 16,510,106 | |
(1) Includes U.S. government agency MBS.
|
| | | | | | | | |
| | December 31, 2019 |
(in thousands) | | Amortized Cost | | Fair Value |
FNMA | | $ | 2,467,867 |
| | $ | 2,463,166 |
|
GNMA (1) | | 9,581,198 |
| | 9,601,626 |
|
Government - Treasuries | | 4,086,733 |
| | 4,090,938 |
|
Total | | $ | 16,135,798 |
| | $ | 16,155,730 |
|
| |
(1) | Includes U.S. government agency MBS. |
GOODWILL
The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At December 31, 2019,2020, goodwill totaled $4.4$2.6 billion and represented 3.0%1.7% of total assets and 18.2%12.2% of total stockholder's equity. The following table shows goodwill by reporting units at December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | CBB | | C&I | | CRE & VF | | CIB | | SC | | | | | | Total |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Goodwill at December 31, 2020 | | $ | 297,802 | | | $ | 52,198 | | | $ | 1,095,071 | | | $ | 131,130 | | | $ | 1,019,960 | | | | | | | $ | 2,596,161 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Consumer and Business Banking | | C&I(1) | | CRE and Vehicle Finance | | CIB | | SC | | Total |
Goodwill at December 31, 2018 | | $ | 1,880,304 |
| | $ | 1,412,995 |
| | $ | — |
| | $ | 131,130 |
| | $ | 1,019,960 |
| | $ | 4,444,389 |
|
Re-allocations during the period | | — |
| | (1,095,071 | ) | | 1,095,071 |
| | — |
| | — |
| | — |
|
Goodwill at December 31, 2019 | | $ | 1,880,304 |
| | $ | 317,924 |
| | $ | 1,095,071 |
| | $ | 131,130 |
| | $ | 1,019,960 |
| | $ | 4,444,389 |
|
(1) Formerly Commercial Banking
The Company madecontinually assesses whether or not there have been events requiring a change in its reportable segments beginning January 1, 2019 and, accordingly, has re-allocated goodwillreview of goodwill. During the second quarter of 2020, primarily due to the relatedongoing economic impacts of the COVID-19 pandemic, the Company determined that a goodwill triggering event occurred for the CBB, C&I, and CRE & VF reporting units. Based on its goodwill impairment analysis performed as of June 30, 2020, the Company concluded that a goodwill impairment charge of $1.6 billion and $0.3 billion was required for the CBB and C&I reporting units, based on therespectively. The CRE & VF reporting unit’s estimated fair value of each reporting unit. Upon re-allocation, management testedexceeded its carrying value by less than 5%.
In addition, the new reporting units for impairment, using the same methodology and assumptions as used in the October 1, 2018 goodwill impairment test, and noted that there was no impairment. See Note 23 to the Consolidated Financial Statements for additional details on the change in reportable segments.
The Company conducted its annual goodwill impairment tests as of October 1, 20192020 using generally accepted valuation methods. The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the 2019 fourth quarter review, the Company did not identify any indicators which resulted in the Company's conclusion that an interim impairment test would be required to be completed.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For the Consumer and Business BankingCBB reporting unit's fair valuation analysis, an equala 25%/75% weighting of the market approach ("market approach") and income approach, respectively, was applied. For the market approach, the Company selected a 25.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.4x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 9.1%, which was most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Consumer and Business Banking reporting unit by 10.3%, indicating the reporting unit was not considered to be impaired.
For the C&I reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 25.0%30.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.4x1.0x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 11.1%, which was most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 2.5% were applied in determining the terminal value. The results of the fair value analyses exceeded the carrying value for the CBB reporting unit by 9.3%, indicating that the reporting unit was not considered to be impaired.
For the C&I reporting unit's fair valuation analysis, a 25%/75% weighting of the market approach and income approach, respectively, was applied. For the market approach, the Company selected a 30.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 0.9x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 12.7%11.4%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 4.0%2.5% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 18.0%17.8%, indicating that the C&I reporting unit was not considered to be impaired.
For the CRE&VF reporting unit's fair valuation analysis, an equala 25%/75% weighting of the market approach and income approach, respectively, was applied. For the market approach, the Company selected a 25.0%30.0% control premium based on the Company's review of transactions observable in the marketplace that were determined to be comparable. The projected TBV of 1.5x1.2x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 9.4%11.7%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 3.0%2.5% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 20.5%6.1%, indicating that the CRE&VF reporting unit was not considered to be impaired or at risk for impairment.
For the CIB reporting unit's fair valuation analysis, an equala 25%/75% weighting of the market approach and income approach, respectively, was applied. For the market approach, the Company selected a 25.0%30.0% control premium based on the Company's review of transactions observable in the market placemarketplace that were determined to be comparable. The projected TBV of 1.3x0.9x was selected based on the selected publicly traded peers of the reporting unit and was equally considered with the projected earnings multiples of 8.0x and 7.5x and 7.0x, which were
applied to the reporting unit's 2019, 2020, and 2021 projected earnings, respectively, due to the nature of the business, which operates outside of the traditional savings and loan bank model.unit. For the income approach, the Company selected a discount rate of 10.3%10.6%, which is most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 3.0%2.5% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the CIB reporting unit by 25.2%13.2%, indicating that the CIB reporting unit was not considered to be impaired or at risk for impairment.
For the SC reporting unit's fair valuation analysis, the Company used only the market capitalization approach. For the market capitalization approach, SC's stock price from October 1, 2019 of $25.532020 was used$18.59 and a 25.0%30.0% control premium was used based on the Company's review of transactions observable in the market-place that were determined to be comparable. The results of the fair value analyses exceeded the carrying value of the SC reporting unit by 67.9%8.8%, indicating that the SC reporting unit was not considered to be impaired. Management continues to monitor SC's stock price, along with changes in the financial position and results of operations that would impact the reporting unit's carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.2020.
During the fourth quarter of 2020, the Company implemented organizational changes which resulted in the transfer of Upper Business Banking customers into the C&I segment from the CBB segment. Refer to Note 22 to these Consolidated Financial Statements for additional details on the Company's reportable segments. As a result of the re-organization, the Company re-allocated approximately $25.1 million of goodwill from the CBB reporting unit to the C&I reporting unit. Upon re-allocation, the Company performed a post evaluation for impairment on the CBB and C&I reporting units utilizing assumptions consistent with our October 1, 2020 impairment test and noted no impairment.
Management continues to monitor changes in financial position and results of operations that would impact each of the reporting units estimated fair value or carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2019.2020.
DEFERRED TAXES AND OTHER TAX ACTIVITY
The Company had a net deferred tax liability balance of $171.2 million at December 31, 2020 (consisting of a deferred tax asset balance of $11.1 million and a deferred tax liability balance of $182.4 million), compared to a net deferred tax liability balance of $1.0 billion at December 31, 2019 (consisting of a deferred tax asset balance of $503.7 million and a deferred tax liability balance of $1.5 billion), compared. During the third quarter, the Company’s ownership of SC reached the 80% threshold which requires SC to file a netconsolidated federal tax return with the Company. As a result, SHUSA reversed its deferred tax liability balance of $587.5$306.6 million at December 31, 2018 (consisting of a deferredfor the book over tax asset balance of $625.1basis difference in its investment in SC. The $846.1 million and a deferred tax liability balance of $1.2 billion). The $429.9 million increasedecrease in net deferred liabilitiesliability for the year ended December 31, 20192020 was primarily due to an increase inthe adoption of the CECL standard during the first quarter of 2020 and the reversal of the deferred tax liabilities related to accelerated depreciation from leasing transactions and changes in depreciation on company owned assets.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OFF-BALANCE SHEET ARRANGEMENTS
See further discussion ofliability for the Company's off-balance sheet arrangements in Note 7 and Note 20 to the Consolidated Financial Statements, and the Liquidity and Capital Resources section of this MD&A.
For a discussion of the status of litigation with which the Company is involvedbook over tax basis difference associated with the IRS, please refer to Note 15 toCompany’s investment in SC during the Consolidated Financial Statements.third quarter of 2020.
BANK REGULATORY CAPITAL
The Company's capital priorities are to support client growth and business investment while maintaining appropriate capital in light of economic uncertainty and the Basel III framework.
The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At December 31, 20192020 and December 31, 2018,2019, based on the Bank’s capital calculations, the Bank was considered well-capitalized under the applicable capital framework. In addition, the Company's capital levels as of December 31, 20192020 and December 31, 2018,2019, based on the Company’s capitalcapital calculations, exceeded the required capital ratios for BHCs.
For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned "Regulatory Matters" in this MD&A.
Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years, (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. The OCC's prior approval would also be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.
Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the years ended December 31, 2020, 2019, and 2018 the Company paid cash dividends of $125.0 million, $400.0 million, and $410.0 million respectively, to its common stock shareholder and cash dividends to preferred shareholdersshareholder.
The following schedule summarizes the actual capital balances of SHUSA and the Bank at December 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | |
| | SHUSA |
| | | | | | |
| | December 31, 2020 | | Well-capitalized Requirement(1) | | Minimum Requirement(1) |
CET1 capital ratio | | 15.94 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 17.40 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 18.80 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 13.77 | % | | 5.00 | % | | 4.00 | % |
|
| | | | | | | | | |
| | SHUSA |
| | | | | | |
| | December 31, 2019 | | Well-capitalized Requirement(1) | | Minimum Requirement(1) |
CET1 capital ratio | | 14.63 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 15.80 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 17.23 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 13.13 | % | | 5.00 | % | | 4.00 | % |
| |
(1) | As defined by Federal Reserve regulations. The Company's ratios are presented under a Basel III phasing-in basis. |
|
| | | | | | | | | |
| | Bank |
| | | | | | |
| | December 31, 2019 | | Well-capitalized Requirement(2) | | Minimum Requirement(2) |
CET1 capital ratio | | 15.80 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 15.80 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 16.77 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 12.77 | % | | 5.00 | % | | 4.00 | % |
| |
(2) | As defined by OCC regulations. The Bank's ratios are presented on a Basel III phasing-in basis. |
| | | | | | | | | | | | | | | | | | | | |
| | Bank |
| | | | | | |
| | December 31, 2020 | | Well-capitalized Requirement(1) | | Minimum Requirement(1) |
CET1 capital ratio | | 15.67 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 15.67 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 16.92 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 12.13 | % | | 5.00 | % | | 4.00 | % |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In February 2019, the Federal Reserve announced that the Company, as well as other less complex firms, would receive a one-year extension of the requirement to submit its results for the supervisory capital stress tests until April 5, 2020. The Federal Reserve also announced that, for the period beginning on July 1, 2019(1) Capital ratios through June 30,March 31, 2020 the Company would be allowed to make capital distributions up to an amount that would have allowed the Company to remain well-capitalizedcalculated under the minimum capital requirements for CCAR 2018.U.S. Basel III framework on a transitional basis. Capital ratios starting in the first quarter of 2020 calculated under CECL transition provisions permitted by the CARES Act
In June 2019, the Company announced its planned capital actions for the period from July 1, 2019 through June 30, 2020. These planned capital actions are: (1) common stock dividends of $125 million per quarter from SHUSA to Santander, (2) common stock dividends paid by SC, and (3) an authorization to repurchase up to $1.1 billion of SC’s outstanding common stock. Refer to the Liquidity and Capital Resources section below for discussion of the capital actions taken, including SC’s share repurchase plans and activities.
Refer to the Liquidity and Capital Resources section below for discussion of the capital actions taken, including SC's share repurchase plans and activities.
LIQUIDITY AND CAPITAL RESOURCES
Overall
The Company continues to maintain strong liquidity. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Company's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.
Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would increase its borrowing costs and require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the "Economic and Business Environment" section of this MD&A.
Sources of Liquidity
Company and Bank
The Company and the Bank have several sources of funding to meet liquidity requirements, including the Bank's core deposit base, liquid investment securities portfolio, ability to acquire large deposits, FHLB borrowings, wholesale deposit purchases, and federal funds purchased, as well as through securitizations in the ABS market and committed credit lines from third-party banks and Santander. TheIn addition, the Company has the following majorother sources of funding to meet its liquidity requirements:requirements such as dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets.
SC
SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 13 third-party banks, Santander and SHUSA, and through securitizations in the ABS market and flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates. SC has more than $7.3$5.6 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
During the year ended December 31, 2019,2020, SC completed on-balance sheet funding transactions totaling approximately $18.2$14.1 billion, including:
•private amortizing lease facilities for approximately $4.0 billion;
•securitizations on its SDART platform for approximately $3.2$5.7 billion;
•securitizations on its DRIVE, deeper subprime platform, for approximately $4.5$2.0 billion;
•lease securitizations on its SRT platform for approximately $3.7$2.3 billion; and
lease securitization on its PSRT platform for approximately $1.2 billion;
private amortizing lease facilities for approximately $4.6 billion;
securitization on its SREV platform for approximately $0.9 billion;
issuance of retained bonds on its SDART platform for approximately $129.8 million; and
•issuance of a retained bond on its SRT platform for approximately $60.4$54.1 million.
SC also completed approximately $1.1 billion in asset sales to third parties.
For information regarding SC's debt, see Note 1110 to the Consolidated Financial Statements.
IHC
On June 6,In 2017, SIS entered into a revolving subordinated loan agreement with SHUSA, not to exceed $290.0 million for a two-year term to mature in 2019. On October 16, 2018, the revolving loan agreementmillion. This was subsequently increased to $895.0 million.million in 2018, and will mature in October 2021.
As needed, SIS will draw down from another subordinated loan with Santander in order to enable SIS to underwrite certain large transactions in excess of the subordinated loan described above. At December 31, 2019,2020, there was no outstanding balance on the subordinated loan.
BSI's primary sources of liquidity are from customer deposits and deposits from affiliated banks.
BSPR's primary sources of liquidity include core deposits, FHLB borrowings, wholesale and/or brokered deposits, and liquid investment securities.
Institutional borrowings
The Company regularly projects its funding needs under various stress scenarios, and maintains contingency plans consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash, unencumbered liquid assets, and capacity to borrow at the FHLB and the FRB’s discount window.
Available Liquidity
As of December 31, 2019,2020, the Bank had approximately $20.3$18.6 billion in committed liquidity from the FHLB and the FRB. Of this amount, $12.4$17.1 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At December 31, 20192020 and December 31, 2018,2019, liquid assets (cash and cash equivalents and LHFS) and securities AFS exclusive of securities pledged as collateral) totaled approximately $15.0$23.5 billion and $15.9$15.0 billion, respectively. These amounts represented 24.3%31.8% and 25.8%24.3% of total deposits at December 31, 20192020 and December 31, 2018,2019, respectively. As of December 31, 2019,2020, the Bank BSI and BSPRBSI had $1.1 billion $1.3and $1.6 billion, and $838.4 million, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.
BSPR has $647.6 million in committed liquidity from the FHLB, all of which was unused as of December 31, 2019, as well as $2.2 billion in liquid assets aside from cash unused as of December 31, 2019.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash, cash equivalents, and restricted cash
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2020 | | 2019 | | 2018 |
Net cash flows from operating activities | | $ | 5,268,999 | | | $ | 6,849,157 | | | $ | 7,015,061 | |
Net cash flows from investing activities | | (1,549,253) | | | (17,242,333) | | | (12,460,839) | |
Net cash flows from financing activities | | 2,678,743 | | | 11,197,124 | | | 5,829,308 | |
As of January 1, 2018, the classification of restricted cash within the Company's SCF changed. Refer to Note 1 to the Consolidated Financial Statements for additional details.
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2019 | | 2018 | | 2017 |
Net cash flows from operating activities | | $ | 6,849,157 |
| | $ | 7,015,061 |
| | $ | 4,964,060 |
|
Net cash flows from investing activities | | (17,242,333 | ) | | (12,460,839 | ) | | 3,281,179 |
|
Net cash flows from financing activities | | 11,197,124 |
| | 5,829,308 |
| | (10,959,272 | ) |
Cash flows from operating activities
Net cash flow from operating activities for the year ended December 31, 2020 was $6.8primarily comprised of $1.8 billion in proceeds from sales of LHFS, $2.8 billion in depreciation, amortization and accretion, $2.9 billion of credit loss expense, and $1.8 billion from impairment of goodwill, partially offset by a net loss of $656.3 million and $3.4 billion of originations of LHFS, net of repayments.
Net cash flow from operating activities for the year ended December 31, 2019 which was primarily comprised of net income of $1.0 billion, $1.6 billion in proceeds from sales of LHFS, $2.4 billion in depreciation, amortization and accretion, and $2.3 billion of provisions for credit losses,loss expense, partially offset by $1.5 billion of originations of LHFS, net of repayments.
Net cash flow from operating activities was $7.0 billion for the year ended December 31, 2018 which was primarily comprised of net income of $991.0 million, $4.3 billion in proceeds from sales of LHFS, $1.9 billion in depreciation, amortization and accretion, and $2.3 billion of provision for credit losses,loss expense, partially offset by $3.0 billion of originations of LHFS, net of repayments.
Net cash flowCash flows from operatinginvesting activities was $5.0 billion for
For the year ended December 31, 2017, which2020, net cash flow from investing activities was primarily compriseddue to $3.8 billion in normal loan activity, $7.6 billion of net incomepurchases of $958.0 million, $4.6investment securities AFS, $6.9 billion in operating lease purchases and originations, and $2.7 billion of purchases of HTM investment securities, partially offset by $10.8 billion of AFS investment securities sales, maturities and prepayments, $1.2 billion of HTM investment securities maturities and prepayments, $4.3 billion in proceeds from sales and terminations of operating leases, and $3.5 billion in proceeds from sales of LHFS, $1.6 billion in depreciation, amortization and accretion, and $2.8 billion of provision for credit losses, partially offset by $4.9 billion of originations of LHFS, net of repayments.LHFI.
Cash flows from investing activities
For the year ended December 31, 2019, net cash flow from investing activities was $(17.2) billion, primarily due to $10.2 billion in normal loan activity, $10.5 billion of purchases of investment securities AFS, $8.6 billion in operating lease purchases and originations and $1.6 billion of purchases of HTM investment securities, partially offset by $8.1 billion of AFS investment securities sales, maturities and prepayments, $2.6 billion in proceeds from sales of LHFI, and $3.5 billion in proceeds from sales and terminations of operating leases.
For the year ended December 31, 2018, net cash flow from investing activities was $(12.5) billion, primarily due to $8.5 billion in normal loan activity, $2.4 billion of purchases of investment securities AFS, and $9.9 billion in operating lease purchases and originations, partially offset by $3.9 billion of AFS investment securities sales, maturities and prepayments, $1.0 billion in proceeds from sales of LHFI, and $3.6 billion in proceeds from sales and terminations of operating leases.
Cash flows from financing activities
For the year ended December 31, 2017, net cash flow from investing activities was $3.3 billion, primarily due to $8.4 billion of AFS investment securities sales, maturities and prepayments, $2.7 billion in normal loan activity, $3.1 billion in proceeds from sales and terminations of operating leases, and $1.2 billion in proceeds from sales of LHFI, partially offset by $6.2 billion of purchases of investment securities AFS and $6.0 billion in operating lease purchases and originations.
Cash flows from financing activities
For the year ended December 31, 2019,2020, net cash flow from financing activities was $11.2primarily due to an $8.0 billion whichincrease in deposits, partially offset by a decrease in net borrowing activity of $4.3 billion, $125.0 million in dividends paid on common stock, $771.5 million in stock repurchases attributable to NCI, and $50.5 million in dividends paid to NCI.
Net cash flow from financing activities for the year ended December 31, 2019 was primarily due to an increase in net borrowing activity of $5.6 billion and a $6.3 billion increase in deposits, partially offset by $400.0 million in dividends paid on common stock and $338.0 million in stock repurchases attributable to NCI.
Net cash flow from financing activities for the year ended December 31, 2018 was $5.8 billion, which was primarily due to an increase in net borrowing activity of $5.9 billion, partially offset by $410.0 million in dividends paid on common stock and $200.0 million in redemption of preferred stock.
Net cash flow from financing activities for the year ended December 31, 2017 was $(11.0) billion, which was primarily due to a decrease in net borrowing activity of $4.7 billion and a $6.2 billion decrease in deposits.
See the SCF for further details on the Company's sources and uses of cash.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Credit Facilities
Third-Party Revolving Credit Facilities
Warehouse Lines
SC uses warehouse facilities to fund its originations. Each facility specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse facilities generally are backed by auto RICs or auto leases. These facilities generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily and long-term funding forecasts for originations, acquisitions, and other large outflows such as tax payments to balance the desire to minimize funding costs with its liquidity needs.
SC's warehouse facilities generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain of SC's warehouse facilities, delinquency and net loss ratios are calculated with respect to its serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurred under one of these agreements, the lenders could elect to declare all amounts outstanding under the impacted agreement to be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict SC's ability to obtain additional borrowings under the agreement, and/or remove SC as servicer. SC has never had a warehouse facility terminated due to failure to comply with any ratio or a failure to meet any covenant. A default under one of these agreements can be enforced only with respect to the impacted warehouse facility.
SC has one credit facility with eight banks providing an aggregate commitment of $5.0$3.5 billion for the exclusive use of providing short-term liquidity needs to support Chrysler FinanceCapital lease financing. As of December 31, 2019,2020, there was an outstanding balance of approximately $1.1$0.4 billion on this facility in the aggregate. The facility requires reduced advance rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds.
SC has seveneight credit facilities with eleven banks providing an aggregate commitment of $6.5$8.3 billion for the exclusive use of providing short-term liquidity needs to support core and Chrysler Capital loan financing. As of December 31, 2019,2020, there was an outstanding balance of approximately $3.9$3.6 billion on these facilities in the aggregate. These facilities reduced advance rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds.
Repurchase Agreements
SC also obtains financing through investment management or repurchase agreements under which it pledges retained subordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of December 31, 2019 and December 31, 2018,2020, there werewas an outstanding balancesbalance of $422.3$168.0 million and $298.9 million, respectively, under these repurchase agreements.
SHUSA Lending to SCRelated Party Credit Facilities
The Company provides SC with $3.5$0.5 billion of committed revolving credit and $2.5 billion of contingent liquidity that can be drawn on an unsecured basis. The Company also provides SC with $5.7$6.8 billion of term promissory notesfinancing with maturities ranging from March 2021 to May 2020 to July 2024.2025. These loans eliminate in the consolidation of SHUSA. Santander provides SC with $4.0 billion of unsecured financing with maturities ranging from June 2022 and September 2022.
Secured Structured Financings
SC's secured structured financings primarily consist of both public, SEC-registered securitizations, as well as private securitizations under Rule 144A of the Securities Act, and privately issues amortizing notes. SC has on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $28.0$26.0 billion.
Deficiency and Debt Forward Flow AgreementsAgreement
In addition to SC's credit facilities and secured structured financings, SC 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 SC's balance sheet, but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. SC continues to actively seek additional flow agreements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Off-Balance Sheet Financing
Beginning in 2017, SC had the option to sell a contractually determined amount of eligible prime loans to Santander through securitization platforms. As all of the notes and residual interests in the securitizations are acquired by Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its consolidated balance sheets.Consolidated Balance Sheets. Beginning in 2018, this program was replaced with a new program with SBNA, whereby SC has agreed to provide SBNA with origination support services in connection with the processing, underwriting, and purchasing of retail loans, primarily from FCA dealers, all of which are serviced by SC.
SC also continues to periodically execute securitizations under Rule 144A of the Securities Act. After retaining the required credit risk retention via a 5% vertical interest, SC transfers all remaining notes and residual interests in these securitizations to third parties. SC subsequently records these transactions as true sales of the RICs securitized, and removes the sold assets from its Consolidated Balance Sheets.
Uses of Liquidity
The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.
SIS uses liquidity primarily to support underwriting transactions.
The primary use of liquidity for BSI is to meet customer liquidity requirements, such as maturing deposits, investment activities, funds transfers, and payment of its operating expenses.
BSPR uses liquidity for funding loan commitments and satisfying deposit withdrawal requests.
At December 31, 2019,2020, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.
Dividends, Contributions and Stock Issuances
As of December 31, 2019,2020, the Company had 530,391,043 shares of common stock outstanding. During the year ended December 31, 2019,2020, the Company paid dividends of $400.0$125.0 million to its sole shareholder, Santander. During the first quarter of 2020, the Company declared a cash dividend of $125.0 million on its common stock, which was paid on March 2, 2020.
During the year ended December 31, 2019, Santander made cash contributions of $88.9 million to the Company.
SC paid a dividend of $0.20 per share in February and May 2019, and a dividend of $0.22 per share in February 2020, May 2020, and August 2020. On September 30, 2020, the Federal Reserve extended the Interim Policy prohibiting share repurchases and November 2019. Further,limiting dividends to all CCAR banks to the average trailing net income. Based on the Company's expected average trailing four quarters of net income, SC declaredis prohibited from paying a cash dividend in the fourth quarter of $0.22 per share, which was paid2020. Although SC’s standalone income is sufficient to declare and pay a dividend, SC is consolidated into the Company’s capital plan and, therefore, is subject to the Federal Reserve Board's Interim Policy that utilizes the Company’s average trailing income to determine the cap on February 20, 2020, to shareholderscommon stock dividends. SC did not declare or pay a dividend in the fourth quarter of record as of the close of business on February 10, 2020.
SC has paid a total of $291.5$212.6 million in dividends through December 31, 2019,2020, of which $85.2$50.5 million has been paid to NCI and $206.3$162.1 million has been paid to the Company, which eliminates in the consolidated results of the Company.
The following table presents information regardingDuring the three months ended March 31, 2020, SC purchased shares of SC Common Stock repurchased during the year ended December 31, 2019 ($ in thousands, except per share amounts):through a modified Dutch auction tender offer.
|
| | | | |
$200 Million Share Repurchase Program - January 2019 (1) | | |
Total cost (including commissions paid) of shares repurchased | | $ | 17,780 |
|
Average price per share | | $ | 18.40 |
|
Number of shares repurchased | | 965,430 |
|
| | |
$400 Million Share Repurchase Program - May 2019 through June 2019 | | |
Total cost (including commissions paid) of shares repurchased | | $ | 86,864 |
|
Average price per share | | $ | 23.16 |
|
Number of shares repurchased | | 3,749,692 |
|
| | |
$1.1 Billion Share Repurchase Program - July 2019 through June 2020 | | |
Total cost (including commissions paid) of shares repurchased | | $ | 233,350 |
|
Average price per share | | $ | 25.47 |
|
Number of shares repurchased | | 9,155,288 |
|
(1) During the year ended December 31, 2018, SC purchased 9.5 million shares of SC Common Stock under its share repurchase program at a cost of approximately $182 million.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In June 2018, the SC Board of Directors announced purchases of up to $200 million, excluding commissions, of outstanding SC Common Stock through June 2019.
In May 2019, the Company announced an amendment to its 2018 capital plan, which authorized SC to repurchase up to $400 million of outstanding SC Common Stock through June 30, 2019, which concluded with the repurchase of $86.8 million of SC Common Stock.
In June 2019, SC announced that the SC Board of Directors had authorized purchases by SC of up to $1.1 billion, excluding commissions, of its planned capital actions foroutstanding common stock effective from the third quarter of 2019 through the second quarter of 2020, which includes an authorization to repurchase up to $1.1 billion of outstanding SC Common Stock through the end of the second quarter of 2020. SC extended the share repurchase program through the end of the third quarter of 2020. On July 31, 2020, SC announced that the Company’s request for certain exceptions to the Interim Policy, prohibiting share repurchases and limiting dividends to all CCAR institutions to the average trailing net income, had been approved. Such approval permitted the SC Board of Directors to authorize SC to continue its share repurchase program through the end of the third quarter of 2020.
On August 10, 2020, SC announced that it had substantially exhausted the amount of shares SC was permitted to repurchase under the previously disclosed exception to the Interim Policy, and that SC has acquired an aggregate of 9.58 million of its shares in a combination of open market and privately negotiated repurchases since July 31, 2020. As a result of these repurchases, SHUSA now owns approximately 80.2% of SC.
Subsequently, the Federal Reserve Board extended the Interim Policy through the first quarter of 2021. As a result of the extension of the Interim Policy, SC may continue, consistent with the Interim Policy, to repurchase a number of shares of SC Common Stock equal to the amount of share issuances related to SC’s expensed employee compensation through the first quarter of 2021.
Please find below the details of SC's tender offer and other share repurchase programs for the years ended December 31, 2020 and 2019:
| | | | | | | | | | | | | | | | | | |
| | | | For the Year Ended December 31, |
| | | | | | 2020 | | 2019 |
Tender offer:(1) | | | | | | | | |
Number of shares purchased | | | | | | 17,514,707 | | — |
Average price per share | | | | | | $ | 26.00 | | | $ | — | |
Cost of shares purchased(2) | | | | | | $ | 455,382 | | | $ | — | |
| | | | | | | | |
Other share repurchases: | | | | | | | | |
Number of shares purchased | | | | | | 15,956,561 | | 13,870,410 |
Average price per share | | | | | | $ | 20.00 | | | $ | 24.35 | |
Cost of shares purchased(2) | | | | | | $ | 319,075 | | | $ | 337,754 | |
| | | | | | | | |
Total number of shares purchased | | | | | | 33,471,268 | | 13,870,410 |
Average price per share | | | | | | $ | 23.14 | | | $ | 24.35 | |
Total cost of shares purchased(2) | | | | | | $ | 774,457 | | | $ | 337,754 | |
(1) During the three months ended March 31, 2020, SC purchased shares of SC Common Stock through a modified Dutch Auction Tender Offer.
(2) Cost of shares exclude commissions
During the year ended December 31, 2019, SC purchased 13.9 million shares of SC Common Stock under its share repurchase program at a cost of approximately $338 million, excluding commissions.
On January 30, 2020, SC commenced a tender offer to purchase for cash up to $1 billion of shares of SC Common Stock, at a range of between $23 and $26 per share. The tender offer expired on February 27, 2020 and was closed on March 4, 2020. In connection with the completion of the tender offer, SC acquired approximately 17.5 million shares of SC Common Stock for approximately $455.4 million. After the completion of the tender offer, SHUSA's ownership in SC increased to approximately 76.3%.
During the year ended December 31, 2019, SHUSA's subsidiaries had the following capital activity which eliminated in consolidation:
The Bank•BSI declared and paid $250.0$35.0 million in dividends to SHUSA.
BSI•SIS declared and paid $25.0$16.0 million in dividends to SHUSA.
Santander BanCorp declared and paid $1.25 million in dividends to SHUSA.
•SHUSA contributed $110.0 million to SSLLC.
SHUSA contributed $105.0$25.0 million to SFS.
OFF-BALANCE SHEET ARRANGEMENTS
See further discussion of the Company's off-balance sheet arrangements in Note 8 and Note 19 to the Consolidated Financial Statements, and the "Liquidity and Capital Resources" section of this MD&A.
For a discussion of the status of litigation with which the Company is involved with the IRS, please refer to Note 16 to the Consolidated Financial Statements.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
(in thousands) | | Total | | Less than 1 year | | Over 1 year to 3 years | | Over 3 years to 5 years | | Over 5 years |
Payments due for contractual obligations: | | | | | | | | | | |
FHLB advances (1) | | $ | 1,156,377 | | | $ | 905,468 | | | $ | 250,909 | | | $ | — | | | $ | — | |
Notes payable - revolving facilities | | 4,159,955 | | | 345,567 | | | 3,814,388 | | | — | | | — | |
Notes payable - secured structured financings | | 26,253,417 | | | 225,410 | | | 9,066,879 | | | 11,284,738 | | | 5,676,390 | |
Other debt obligations (1) (2) | | 18,605,401 | | | 2,296,550 | | | 9,737,824 | | | 4,394,636 | | | 2,176,391 | |
CDs (1) | | 3,926,986 | | | 3,119,192 | | | 761,435 | | | 43,074 | | | 3,285 | |
Non-qualified pension and post-retirement benefits | | 68,988 | | | 7,235 | | | 14,336 | | | 13,958 | | | 33,459 | |
Operating leases(3) | | 665,436 | | | 132,331 | | | 230,588 | | | 164,706 | | | 137,811 | |
Total contractual cash obligations | | $ | 54,836,560 | | | $ | 7,031,753 | | | $ | 23,876,359 | | | $ | 15,901,112 | | | $ | 8,027,336 | |
Other commitments: | | | | | | | | | | |
Commitments to extend credit | | $ | 30,883,502 | | | $ | 6,840,790 | | | $ | 7,606,387 | | | $ | 5,220,823 | | | $ | 11,215,502 | |
Letters of credit | | 1,432,764 | | | 1,116,237 | | | 238,100 | | | 47,526 | | | 30,901 | |
Total Contractual Obligations and Other Commitments | | $ | 87,152,826 | | | $ | 14,988,780 | | | $ | 31,720,846 | | | $ | 21,169,461 | | | $ | 19,273,739 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Payments Due by Period |
(in thousands) | | Total | | Less than 1 year | | Over 1 year to 3 years | | Over 3 years to 5 years | | Over 5 years |
Payments due for contractual obligations: | | | | | | | | | | |
FHLB advances (1) | | $ | 7,136,454 |
| | $ | 5,830,669 |
| | $ | 1,305,785 |
| | $ | — |
| | $ | — |
|
Notes payable - revolving facilities | | 5,399,931 |
| | 1,864,182 |
| | 3,535,749 |
| | — |
| | — |
|
Notes payable - secured structured financings | | 28,206,898 |
| | 203,114 |
| | 10,381,235 |
| | 11,461,822 |
| | 6,160,727 |
|
Other debt obligations (1) (2) | | 14,569,222 |
| | 2,728,846 |
| | 3,607,386 |
| | 4,580,226 |
| | 3,652,764 |
|
CDs (1) | | 9,493,234 |
| | 7,037,872 |
| | 2,354,465 |
| | 94,654 |
| | 6,243 |
|
Non-qualified pension and post-retirement benefits | | 124,840 |
| | 13,376 |
| | 26,860 |
| | 26,996 |
| | 57,608 |
|
Operating leases(3) | | 794,537 |
| | 139,597 |
| | 250,416 |
| | 197,677 |
| | 206,847 |
|
Total contractual cash obligations | | $ | 65,725,116 |
| | $ | 17,817,656 |
| | $ | 21,461,896 |
| | $ | 16,361,375 |
| | $ | 10,084,189 |
|
Other commitments: | | | | | | | | | | |
Commitments to extend credit | | $ | 30,685,478 |
| | $ | 5,623,071 |
| | $ | 5,044,127 |
| | $ | 7,282,066 |
| | $ | 12,736,214 |
|
Letters of credit | | 1,592,726 |
| | 1,090,622 |
| | 238,958 |
| | 227,671 |
| | 35,475 |
|
Total Contractual Obligations and Other Commitments | | $ | 98,003,320 |
| | $ | 24,531,349 |
| | $ | 26,744,981 |
| | $ | 23,871,112 |
| | $ | 22,855,878 |
|
(1)Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at December 31, 2020. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid. | |
(1) | Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at December 31, 2019. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid. |
| |
(2) | Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments. |
| |
(3) | Does not include future expected sublease income or interest of $82.9 million. |
(2)Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments.
(3)Does not include future expected sublease income or interest of $59.4 million.
Excluded from the above table are deposits of $58.0$71.4 billion that are due on demand by customers.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 1413 and Note 2019 to the Consolidated Financial Statements.
ASSET AND LIABILITY MANAGEMENT
Interest Rate Risk
Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing
net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.
Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month LIBOR. Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.
Net Interest Income Simulation Analysis
The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.
The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at December 31, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | |
| | The following estimated percentage increase/(decrease) to net interest income would result |
If interest rates changed in parallel by the amounts below | | December 31, 2020 | | December 31, 2019 |
Down 100 basis points | | (1.12) | % | | (1.12) | % |
Up 100 basis points | | 3.18 % | | 1.31 | % |
Up 200 basis points | | 6.25 % | | 2.56 | % |
|
| | | | | | |
| | The following estimated percentage increase/(decrease) to net interest income would result |
If interest rates changed in parallel by the amounts below | | December 31, 2019 | | December 31, 2018 |
Down 100 basis points | | (1.12 | )% | | (3.07 | )% |
Up 100 basis points | | 1.31 | % | | 2.87 | % |
Up 200 basis points | | 2.56 | % | | 5.58 | % |
MVE Analysis
The Company also evaluates the impact of interest rate risk by utilizing MVE modeling. This analysis measures the present value of all estimated future cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet, and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships or product spreads, which may mitigate the impact of any interest rate changes.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at December 31, 20192020 and December 31, 2018.2019.
| | | | | | | | | | | | | | |
| | The following estimated percentage increase/(decrease) to MVE would result |
If interest rates changed in parallel by the amounts below | | December 31, 2020 | | December 31, 2019 |
Down 100 basis points | | (6.18) | % | | (3.01) | % |
Up 100 basis points | | 1.62 % | | (0.49) | % |
Up 200 basis points | | 0.51 % | | (3.17) | % |
|
| | | | | | |
| | The following estimated percentage increase/(decrease) to MVE would result |
If interest rates changed in parallel by the amounts below | | December 31, 2019 | | December 31, 2018 |
Down 100 basis points | | (3.01 | )% | | (1.55 | )% |
Up 100 basis points | | (0.49 | )% | | (1.25 | )% |
Up 200 basis points | | (3.17 | )% | | (3.49 | )% |
As of December 31, 2019,2020, the Company’s profile reflected a decrease of MVE of 3.01%6.18% for downward parallel interest rate shocks of 100 basis points and an increase of 0.49%1.62 % for upward parallel interest rate shocks of 100 basis points. The asymmetrical sensitivity between up 100 and down 100 shock is due to the negative convexity as a result of the prepayment option embedded in mortgage-related products, the impact of which is not fully offset by the behavior of the funding base (largely NMDs).
In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates remaining at comparatively low levels, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks, extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks, the loss in market value is not offset by the change in NMD.NMDs.
Limitations of Interest Rate Risk Analyses
Since the assumptions used are inherently uncertain, the Company cannot predict precisely the effect of higher or lower interest rates on net interest income or MVE. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume, characteristics of new business, behavior of existing positions, and changes in market conditions and management strategies, among other factors.
Uses of Derivatives to Manage Interest Rate and Other Risks
To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows.
Through the Company’s capital markets and mortgage banking activities, it is subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, SHUSA's Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.
Management uses derivative instruments to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environments.
The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.
The Company typically retains the servicing rights related to residential mortgage loans that are sold. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 1614 to the Consolidated Financial Statements.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
The Company also utilizes forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage its market risk associated with certain customer deposit products.
For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 1413 to the Consolidated Financial Statements.
BORROWINGS AND OTHER DEBT OBLIGATIONS
The Company has term loans and lines of credit with Santander and other lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 20192020 were $50.7$46.4 billion, compared to $45.0$50.7 billion at December 31, 2018.2019. Total borrowings increased $5.7decreased $4.3 billion, primarily due to new debt issuances of $3.8 billion, an increasea decrease in FHLB advances at the Bank of $2.2$5.9 billion and $1.4 billion of debt maturities and calls, partially offset by new debt issuances of $2.1 billion and an overall increase of $2.2 billion in SC debt partially offset by $2.3 billion of debt maturities and calls.$0.8 billion. See further detail on borrowings activity in Note 1110 to the Consolidated Financial Statements.
| | | | Year Ended December 31, | | Year Ended December 31, | |
(Dollars in thousands) | | 2019 | | 2018 | (Dollars in thousands) | | 2020 | | 2019 | |
Parent Company & other subsidiary borrowings and other debt obligations | | | | | Parent Company & other subsidiary borrowings and other debt obligations | | | | | |
Parent Company senior notes: | | | | | Parent Company senior notes: | | |
Balance | | $9,949,214 | | $8,351,685 | Balance | | $10,656,350 | | $9,949,214 | |
Weighted average interest rate at year-end | | 3.68 | % | | 3.79 | % | Weighted average interest rate at year-end | | 3.65 | % | | 3.68 | % | |
Maximum amount outstanding at any month-end during the year | | $9,949,214 | | $8,351,685 | Maximum amount outstanding at any month-end during the year | | $11,132,959 | | $9,949,214 | |
Average amount outstanding during the year | | $8,961,588 | | $7,626,199 | Average amount outstanding during the year | | $10,528,483 | | $8,961,588 | |
Weighted average interest rate during the year | | 3.81 | % | | 3.66 | % | Weighted average interest rate during the year | | 3.62 | % | | 3.81 | % | |
Junior subordinated debentures to capital trusts:(1) | | | | | |
Balance | | $0 | | $0 | |
Weighted average interest rate at year-end | | — | % | | — | % | |
Maximum amount outstanding at any month-end during the year | | $0 | | $154,640 | |
Average amount outstanding during the year | | $0 | | $118,650 | |
Weighted average interest rate during the year | | — | % | | 3.92 | % | |
| Subsidiary subordinated notes: | | | | | Subsidiary subordinated notes: | | |
Balance | | $602 | | $40,703 | Balance | | $11 | | $602 | |
Weighted average interest rate at year-end | | 2.00 | % | | 2.00 | % | Weighted average interest rate at year-end | | 2.00 | % | | 2.00 | % | |
Maximum amount outstanding at any month-end during the year | | $41,026 | | $40,934 | Maximum amount outstanding at any month-end during the year | | $284 | | $41,026 | |
Average amount outstanding during the year | | $30,791 | | $40,784 | Average amount outstanding during the year | | $148 | | $30,791 | |
Weighted average interest rate during the year | | 2.12 | % | | 2.03 | % | Weighted average interest rate during the year | | 2.71 | % | | 2.12 | % | |
Subsidiary short-term and overnight borrowings: | | | | | Subsidiary short-term and overnight borrowings: | | |
Balance | | $1,831 | | $59,900 | Balance | | $215,750 | | $1,831 | |
Weighted average interest rate at year-end | | 0.38 | % | | 1.86 | % | Weighted average interest rate at year-end | | 0.10 | % | | 0.38 | % | |
Maximum amount outstanding at any month-end during the year | | $34,323 | | $132,827 | Maximum amount outstanding at any month-end during the year | | $215,750 | | $34,323 | |
Average amount outstanding during the year | | $19,162 | | $71,432 | Average amount outstanding during the year | | $57,938 | | $19,162 | |
Weighted average interest rate during the year | | 3.42 | % | | 2.19 | % | Weighted average interest rate during the year | | 0.03 | % | | 3.42 | % | |
(1) Includes related common securities.
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, | | |
(Dollars in thousands) | | 2020 | | 2019 | | |
Bank borrowings and other debt obligations | | | | | | |
REIT preferred: | | | | | | |
Balance | | $0 | | $125,943 | | |
Weighted average interest rate at year-end | | — | % | | 13.17 | % | | |
Maximum amount outstanding at any month-end during the year | | $126,388 | | $146,066 | | |
Average amount outstanding during the year | | $46,873 | | $133,068 | | |
Weighted average interest rate during the year | | 13.08 | % | | 13.04 | % | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Term loans: | | | | | | |
Balance | | $0 | | $0 | | |
Weighted average interest rate at year-end | | — | % | | — | % | | |
Maximum amount outstanding at any month-end during the year | | $0 | | $126,257 | | |
Average amount outstanding during the year | | $0 | | $21,023 | | |
Weighted average interest rate during the year | | — | % | | 5.86 | % | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
FHLB advances: | | | | | | |
Balance | | $1,150,000 | | $7,035,000 | | |
Weighted average interest rate at year-end | | 0.64 | % | | 2.30 | % | | |
Maximum amount outstanding at any month-end during the year | | $8,435,000 | | $7,035,000 | | |
Average amount outstanding during the year | | $4,836,639 | | $5,465,329 | | |
Weighted average interest rate during the year | | 1.39 | % | | 2.63 | % | | |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2020 | | 2019 | | |
SC borrowings and other debt obligations | | | | | | |
Revolving credit facilities: | | | | | | |
Balance | | $4,159,955 | | $5,399,931 | | |
Weighted average interest rate at year-end | | 2.21 | % | | 3.44 | % | | |
Maximum amount outstanding at any month-end during the year | | $6,521,679 | | $6,753,790 | | |
Average amount outstanding during the year | | $4,634,770 | | $5,532,273 | | |
Weighted average interest rate during the year | | 6.82 | % | | 6.58 | % | | |
Revolving credit facilities with Santander: | | | | | | |
Balance | | $4,000,000 | | $0 | | |
Weighted average interest rate at year-end | | 1.22 | % | | — | % | | |
Maximum amount outstanding at any month-end during the year | | $4,000,000 | | $0 | | |
Average amount outstanding during the year | | $1,833,333 | | $0 | | |
Weighted average interest rate during the year | | 1.13 | % | | — | % | | |
Public securitizations: | | | | | | |
Balance | | $18,942,160 | | $18,807,773 | | |
Weighted average interest rate range at year-end | | 0.60% - 3.42% | | 1.35% - 3.42% | | |
Maximum amount outstanding at any month-end during the year | | $19,736,036 | | $19,656,531 | | |
Average amount outstanding during the year | | $18,584,787 | | $19,000,303 | | |
Weighted average interest rate during the year | | 2.30 | % | | 2.54 | % | | |
Privately issued amortizing notes: | | | | | | |
Balance | | $7,235,241 | | $9,334,112 | | |
Weighted average interest rate range at year-end | | 1.28% - 3.90% | | 1.05% - 3.90% | | |
Maximum amount outstanding at any month-end during the year | | $10,074,482 | | $9,334,112 | | |
Average amount outstanding during the year | | $8,998,150 | | $7,983,672 | | |
Weighted average interest rate during the year | | 1.61 | % | | 3.48 | % | | |
|
| | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2019 | | 2018 |
Bank borrowings and other debt obligations | | | | |
REIT preferred: | | | | |
Balance | | $125,943 | | $145,590 |
Weighted average interest rate at year-end | | 13.17 | % | | 13.22 | % |
Maximum amount outstanding at any month-end during the year | | $146,066 | | $145,590 |
Average amount outstanding during the year | | $133,068 | | $144,827 |
Weighted average interest rate during the year | | 13.04 | % | | 13.22 | % |
Bank subordinated notes: | | | | |
Balance | | $0 | | $0 |
Weighted average interest rate at year-end | | — | % | | — | % |
Maximum amount outstanding at any month-end during the year | | $0 | | $192,125 |
Average amount outstanding during the year | | $0 | | $78,408 |
Weighted average interest rate during the year | | — | % | | 9.04 | % |
Term loans: | | | | |
Balance | | $0 | | $126,172 |
Weighted average interest rate at year-end | | — | % | | 8.57 | % |
Maximum amount outstanding at any month-end during the year | | $126,257 | | $139,888 |
Average amount outstanding during the year | | $21,023 | | $130,722 |
Weighted average interest rate during the year | | 5.86 | % | | 5.70 | % |
Securities sold under repurchase agreements: | | | | |
Balance | | $0 | | $0 |
Weighted average interest rate at year-end | | — | % | | — | % |
Maximum amount outstanding at any month-end during the year | | $0 | | $150,000 |
Average amount outstanding during the year | | $0 | | $41,096 |
Weighted average interest rate during the year | | — | % | | 1.90 | % |
FHLB advances: | | | | |
Balance | | $7,035,000 | | $4,850,000 |
Weighted average interest rate at year-end | | 2.30 | % | | 2.74 | % |
Maximum amount outstanding at any month-end during the year | | $7,035,000 | | $4,850,000 |
Average amount outstanding during the year | | $5,465,329 | | $2,025,479 |
Weighted average interest rate during the year | | 2.63 | % | | 2.61 | % |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | |
| | Year Ended December 31, |
(Dollars in thousands) | | 2019 | | 2018 |
SC borrowings and other debt obligations | | | | |
Revolving credit facilities: | | | | |
Balance | | $5,399,931 | | $4,478,214 |
Weighted average interest rate at year-end | | 3.44 | % | | 3.92 | % |
Maximum amount outstanding at any month-end during the year | | $6,753,790 | | $5,632,053 |
Average amount outstanding during the year | | $5,532,273 | | $5,043,462 |
Weighted average interest rate during the year | | 6.58 | % | | 5.60 | % |
Public securitizations: | | | | |
Balance | | $18,807,773 | | $19,225,169 |
Weighted average interest rate range at year-end | | 1.35% - 3.42% |
| | 1.16% - 3.53% |
|
Maximum amount outstanding at any month-end during the year | | $19,656,531 | | $19,647,748 |
Average amount outstanding during the year | | $19,000,303 | | $18,353,127 |
Weighted average interest rate during the year | | 2.54 | % | | 2.52 | % |
Privately issued amortizing notes: | | | | |
Balance | | $9,334,112 | | $7,676,351 |
Weighted average interest rate range at year-end | | 1.05% - 3.90% |
| | 0.88% - 3.17% |
|
Maximum amount outstanding at any month-end during the year | | $9,334,112 | | $7,676,351 |
Average amount outstanding during the year | | $7,983,672 | | $6,379,987 |
Weighted average interest rate during the year | | 3.48 | % | | 3.54 | % |
NON-GAAP FINANCIAL MEASURES
The Company's non-GAAP information has limitations as an analytical tool and, therefore, should not be considered in isolation or as a substitute for analysis of our results or any performance measures under GAAP as set forth in the Company's financial statements. These limitations should be compensated for by relying primarily on the Company's GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.
The Company considers various measures when evaluating capital utilization and adequacy. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because GAAP does not include capital ratio measures, the Company believes that there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP and are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Company's capital adequacy using these ratios, the Company believes they are useful to provide investors the ability to assess its capital adequacy on the same basis. The Company believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures may allow readers to compare certain aspects of the Company's capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Company's calculations may not be directly comparable with those of other organizations, and the usefulness of these measures to investors may be limited. As a result, the Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table includes the related GAAP measures included in our non-GAAP financial measures.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
(Dollars in thousands) | 2020(1) | | 2019 | | 2018 | | 2017 | | 2016 | | |
Return on Average Assets: | | | | | | | | | | | |
Net income/(loss) | $ | (656,303) | | | $ | 1,041,817 | | | $ | 991,035 | | | $ | 957,975 | | | $ | 640,763 | | | |
Average assets | 149,645,866 | | | 142,308,583 | | | 131,232,021 | | | 134,522,957 | | | 141,921,781 | | | |
Return on average assets | (0.44)% | | 0.73% | | 0.76% | | 0.71% | | 0.45% | | |
| | | | | | | | | | | |
Return on Average Equity: | | | | | | | | | | | |
Net income/(loss) | $ | (656,303) | | | $ | 1,041,817 | | | $ | 991,035 | | | $ | 957,975 | | | $ | 640,763 | | | |
Average equity | 21,719,676 | | | 24,639,561 | | | 24,103,584 | | | 23,388,410 | | | 22,232,729 | | | |
Return on average equity | (3.02)% | | 4.23% | | 4.11% | | 4.10% | | 2.88% | | |
| | | | | | | | | | | |
Average Equity to Average Assets: | | | | | | | | | | | |
Average equity | $ | 21,719,676 | | | $ | 24,639,561 | | | $ | 24,103,584 | | | $ | 23,388,410 | | | $ | 22,232,729 | | | |
Average assets | 149,645,866 | | | 142,308,583 | | | 131,232,021 | | | 134,522,957 | | | 141,921,781 | | | |
Average equity to average assets | 14.51% | | 17.31% | | 18.37% | | 17.39% | | 15.67% | | |
| | | | | | | | | | | |
Efficiency Ratio: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
General, administrative, and other expenses (numerator) | $ | 8,208,234 | | | $ | 6,365,852 | | | $ | 5,832,325 | | | $ | 5,764,324 | | | $ | 5,386,194 | | | |
| | | | | | | | | | | |
Net interest income | $ | 6,359,481 | | | $ | 6,442,768 | | | $ | 6,344,850 | | | $ | 6,423,950 | | | $ | 6,564,692 | | | |
Non-interest income | 3,949,988 | | | 3,729,117 | | | 3,244,308 | | | 2,901,253 | | | 2,755,705 | | | |
Total net interest income and non-interest income (denominator) | 10,309,469 | | | 10,171,885 | | | 9,589,158 | | | 9,325,203 | | | 9,320,397 | | | |
| | | | | | | | | | | |
Efficiency ratio | 79.62% | | 62.58% | | 60.82% | | 61.81% | | 57.79% | | |
(1) General, administrative, and other expenses includes $1.8 billion goodwill impairment charge on SBNA. | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Transitional | | Fully Phased In(4) |
| SBNA | | SHUSA | | SBNA | | SHUSA |
| December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2020 |
| CET 1(1) | | CET 1(1) | | CET 1(1) | | CET 1(1) | | CET 1(1) | | CET 1(1) |
| | | | | | | | | | | |
Total stockholder's equity (GAAP) | $ | 11,922,375 | | | $ | 13,680,941 | | | $ | 19,886,878 | | | $ | 22,021,460 | | | $ | 11,922,375 | | | $ | 19,886,878 | |
| | | | | | | | | | | |
Goodwill | (1,554,410) | | | (3,402,637) | | | (2,596,161) | | | (4,444,389) | | | (1,554,410) | | | (2,596,161) | |
Intangible assets | (1,488) | | | (1,802) | | | (357,547) | | | (416,204) | | | (1,488) | | | (357,547) | |
Deferred taxes on goodwill and intangible assets | 111,231 | | | 242,333 | | | 123,945 | | | 397,485 | | | 111,231 | | | 123,945 | |
Other adjustments to CET1(3) | 126,282 | | | (238,923) | | | 1,481,707 | | | (39,362) | | | (231,273) | | | (125,585) | |
Disallowed deferred tax assets | (131,589) | | | (129,885) | | | (4,325) | | | (215,330) | | | (131,589) | | | (4,325) | |
Accumulated other comprehensive loss | (205,613) | | | 69,792 | | | (166,295) | | | 88,207 | | | (205,613) | | | (166,295) | |
CET1 capital (numerator) | $ | 10,266,788 | | | $ | 10,219,819 | | | $ | 18,368,202 | | | $ | 17,391,867 | | | $ | 9,909,233 | | | $ | 16,760,910 | |
RWAs (denominator)(2) | 65,519,986 | | | 64,677,883 | | | 115,205,746 | | | 118,898,213 | | | 65,313,771 | | | 112,521,016 | |
Ratio | 15.67 | % | | 15.80 | % | | 15.94 | % | | 14.63 | % | | 15.17 | % | | 14.90 | % |
| | | | | | | | | | | |
(1) CET1 is calculated under Basel III regulations.
(2) 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 and the Bank's total RWAs.
(3) Represent the impact of NCI, and CECL transition adjustments for regulatory capital.
(4) Represents non-GAAP measures.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
(Dollars in thousands) | 2019 | | 2018 | | 2017 | | 2016 | | 2015(1) | | |
Return on Average Assets: | | | | | | | | | | | |
Net income/(loss) | $ | 1,041,817 |
| | $ | 991,035 |
| | $ | 957,975 |
| | $ | 640,763 |
| | $ | (3,055,436 | ) | | |
Average assets | 142,308,583 |
| | 131,232,021 |
| | 134,522,957 |
| | 141,921,781 |
| | 140,461,913 |
| | |
Return on average assets | 0.73% | | 0.76% | | 0.71% | | 0.45% | | (2.18)% | | |
| | | | | | | | | | | |
Return on Average Equity: | | | | | | | | | | | |
Net income/(loss) | $ | 1,041,817 |
| | $ | 991,035 |
| | $ | 957,975 |
| | $ | 640,763 |
| | $ | (3,055,436 | ) | | |
Average equity | 24,639,561 |
| | 24,103,584 |
| | 23,388,410 |
| | 22,232,729 |
| | 25,495,652 |
| | |
Return on average equity | 4.23% | | 4.11% | | 4.10% | | 2.88% | | (11.98)% | | |
| | | | | | | | | | | |
Average Equity to Average Assets: | | | | | | | | | | | |
Average equity | $ | 24,639,561 |
| | $ | 24,103,584 |
| | $ | 23,388,410 |
| | $ | 22,232,729 |
| | $ | 25,495,652 |
| | |
Average assets | 142,308,583 |
| | 131,232,021 |
| | 134,522,957 |
| | 141,921,781 |
| | 140,461,913 |
| | |
Average equity to average assets | 17.31% | | 18.37% | | 17.39% | | 15.67% | | 18.15% | | |
| | | | | | | | | | | |
Efficiency Ratio: | | | | | | | | | | | |
General, administrative, and other expenses (numerator) | $ | 6,365,852 |
| | $ | 5,832,325 |
| | $ | 5,764,324 |
| | $ | 5,386,194 |
| | $ | 9,381,892 |
| | |
| | | | | | | | | | | |
Net interest income | $ | 6,442,768 |
| | $ | 6,344,850 |
| | $ | 6,423,950 |
| | $ | 6,564,692 |
| | $ | 6,901,406 |
| | |
Non-interest income | 3,729,117 |
| | 3,244,308 |
| | 2,901,253 |
| | 2,755,705 |
| | 2,905,035 |
| | |
Total net interest income and non-interest income (denominator) | 10,171,885 |
| | 9,589,158 |
| | 9,325,203 |
| | 9,320,397 |
| | 9,806,441 |
| | |
| | | | | | | | | | | |
Efficiency ratio | 62.58% | | 60.82% | | 61.81% | | 57.79% | | 95.67% | | |
(1) General, administrative, and other expenses includes $4.5 billion goodwill impairment charge on SC. | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Transitional | | Fully Phased In(4) |
| SBNA | | SHUSA | | SBNA | | SHUSA |
| December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2018 | | December 31, 2019 | | December 31, 2019 |
| Common Equity Tier 1(1) | | Common Equity Tier 1(1) | | Common Equity Tier 1(1) | | Common Equity Tier 1(1) | | Common Equity Tier 1(1) | | Common Equity Tier 1(1) |
| | | | | | | | | | | |
Total stockholder's equity (GAAP) | $ | 13,680,941 |
| | $ | 13,407,676 |
| | $ | 22,021,460 |
| | $ | 21,321,057 |
| | $ | 13,680,941 |
| | $ | 22,021,460 |
|
Goodwill | (3,402,637 | ) | | (3,402,637 | ) | | (4,444,389 | ) | | (4,444,389 | ) | | (3,402,637 | ) | | (4,444,389 | ) |
Intangible assets | (1,802 | ) | | (2,176 | ) | | (416,204 | ) | | (475,193 | ) | | (1,802 | ) | | (416,204 | ) |
Deferred taxes on goodwill and intangible assets | 242,333 |
| | 238,747 |
| | 397,485 |
| | 392,563 |
| | 242,333 |
| | 397,485 |
|
Other adjustments to CET1(3) | (238,923 | ) | | (230,942 | ) | | (39,362 | ) | | (39,275 | ) | | (238,923 | ) | | (39,362 | ) |
Disallowed deferred tax assets | (129,885 | ) | | (167,701 | ) | | (215,330 | ) | | (317,667 | ) | | (129,885 | ) | | (215,330 | ) |
Accumulated other comprehensive loss | 69,792 |
| | 336,332 |
| | 88,207 |
| | 321,652 |
| | 69,792 |
| | 88,207 |
|
CET1 capital (numerator) | $ | 10,219,819 |
| | $ | 10,179,299 |
| | $ | 17,391,867 |
| | $ | 16,758,748 |
| | $ | 10,219,819 |
| | $ | 17,391,867 |
|
RWAs (denominator)(2) | 64,677,883 |
| | 59,394,280 |
| | 118,898,213 |
| | 107,915,606 |
| | 66,140,440 |
| | 119,981,713 |
|
Ratio | 15.80 | % | | 17.14 | % | | 14.63 | % | | 15.53 | % | | 15.45 | % | | 14.50 | % |
| | | | | | | | | | | |
| |
(1) | CET1 is calculated under Basel III regulations required as of January 1, 2015. |
| |
(2) | 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 and the Bank's total RWAs. |
| |
(3) | Represents the impact of NCI, transitional and other intangible adjustments for regulatory capital. |
| |
(4) | Represents non-GAAP measures |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
The following table presented selected quarterly consolidated financial data (unaudited):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | THREE MONTHS ENDED |
(in thousands) | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 | | December 31, 2018 | | September 30, 2018 | | June 30, 2018 | | March 31, 2018 |
Total interest income | | $ | 2,147,955 |
| | $ | 2,185,107 |
| | $ | 2,176,090 |
| | $ | 2,141,043 |
| | $ | 2,094,575 |
| | $ | 2,042,938 |
| | $ | 2,001,073 |
| | $ | 1,930,467 |
|
Total interest expense | | 548,907 |
| | 565,997 |
| | 554,365 |
| | 538,158 |
| | 490,925 |
| | 444,177 |
| | 408,987 |
| | 380,114 |
|
Net interest income | | 1,599,048 |
| | 1,619,110 |
| | 1,621,725 |
| | 1,602,885 |
| | 1,603,650 |
| | 1,598,761 |
| | 1,592,086 |
| | 1,550,353 |
|
Provision for credit losses | | 607,539 |
| | 603,635 |
| | 480,632 |
| | 600,211 |
| | 731,202 |
| | 621,014 |
| | 433,802 |
| | 553,880 |
|
Net interest income after provision for credit loss | | 991,509 |
| | 1,015,475 |
| | 1,141,093 |
| | 1,002,674 |
| | 872,448 |
| | 977,747 |
| | 1,158,284 |
| | 996,473 |
|
Total fees and other income | | 866,385 |
| | 998,865 |
| | 960,605 |
| | 897,446 |
| | 806,664 |
| | 823,744 |
| | 818,754 |
| | 801,863 |
|
Gain/(loss) on investment securities, net | | 3,170 |
| | 2,267 |
| | 2,379 |
| | (2,000 | ) | | (4,785 | ) | | (1,688 | ) | | 419 |
| | (663 | ) |
General, administrative and other expenses | | 1,647,808 |
| | 1,633,244 |
| | 1,542,386 |
| | 1,542,414 |
| | 1,490,829 |
| | 1,450,387 |
| | 1,449,749 |
| | 1,441,360 |
|
Income before income taxes | | 213,256 |
| | 383,363 |
| | 561,691 |
| | 355,706 |
| | 183,498 |
| | 349,416 |
| | 527,708 |
| | 356,313 |
|
Income tax provision | | 87,732 |
| | 112,927 |
| | 155,326 |
| | 116,214 |
| | 51,738 |
| | 109,949 |
| | 168,151 |
| | 96,062 |
|
Net income before NCI | | 125,524 |
| | 270,436 |
| | 406,365 |
| | 239,492 |
| | 131,760 |
| | 239,467 |
| | 359,557 |
| | 260,251 |
|
Less: Net income attributable to NCI | | 38,562 |
| | 66,831 |
| | 110,743 |
| | 72,512 |
| | 31,861 |
| | 72,491 |
| | 104,141 |
| | 75,138 |
|
Net income attributable to SHUSA | | $ | 86,962 |
| | $ | 203,605 |
| | $ | 295,622 |
| | $ | 166,980 |
| | $ | 99,899 |
| | $ | 166,976 |
| | $ | 255,416 |
| | $ | 185,113 |
|
20192020 FOURTH QUARTER RESULTS
SHUSA reported net income for the fourth quarter of 20192020 of $125.5$487.9 million compared to net income of $270.4$874.5 million for the third quarter of 2019.2020. The most significant period-over-period variances were:
an increase•a decrease in total fees and other income of $132.5$212.9 million, primarily comprised of the mark to market on the personal unsecured portfolio HFS included in miscellaneous income, net.net, and lower fourth quarter gains on the sale of residual leases. Third quarter other income also included the gain on sale of SBC.
a decrease•an increase in the income tax provision of $25.2$215.5 million primarily due to lower income before taxes.
SHUSA reported net income for the fourththird quarter of 2019 of $125.5 million, compared to net income of $131.8 million for the fourth quarter of 2018. The most significant period over period variances were:
an increase in interest expense of $58.0 million, due to higher deposit volume and rates.
a decrease in the provision for credit losses of $123.6 million as a result of lower TDR balances and better recovery rates
an increase in general and administrative and other expenses of $157.0 million, including an increase in lease expense of $78.0 million,recorded tax benefit resulting from the increasing leased vehicle portfolio, and an increase in compensation and benefits expenseThe Company reaching 80% ownership of $45.7 million as a resultSC.
an increase in income tax provision of $36.0 million as a result of higher income before taxes.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Part II, Item 7, MD&A — "Asset and Liability Management" above.
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS
| | | | | |
| |
| |
Index to Consolidated Financial Statements and Supplementary Data | Page |
| |
| |
| |
| |
| |
| |
| |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Tothe Board of Directors and Stockholder of
Santander Holdings USA, Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Santander Holdings USA, Inc. and its subsidiaries (the “Company”) as of December 31, 20192020 and 2018,2019, and the related consolidated statements of operations, of comprehensive income (loss), of stockholder's equity and of cash flows for each of the three years in the period ended December 31, 2019,2020, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 20192020 and 2018,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 20192020 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2019,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on financial instruments in 2020.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan and Lease Losses on Loans Held for Investment – Significant adjustments to macroeconomic inputs and qualitative adjustments
As described in Notes 1 and 3 to the consolidated financial statements, management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. As of December 31, 2020, the allowance for loan and lease losses was $7.3 billion on total loans held for investment of $92.1 billion. Management estimates current expected credit losses based on prospective information as well as account-level models based on historical data. Unemployment, Housing Price Index (HPI), gross domestic product (GDP), commercial real estate (CRE) price index and used vehicle index growth rates, along with loan level characteristics, are the key inputs used in the models for estimation of the likelihood that the borrower will default in the forecasted period. To estimate the loss in the event of default, the models use unemployment, HPI, CRE and used vehicle indices, along with loan level characteristics as key inputs. Management utilizes qualitative factors to capture any additional risks that may not be captured in either the economic forecasts or in the historical data, including consideration of the portfolio metrics and collateral value. Management generally uses a third-party vendor's consensus baseline macroeconomic scenario for the quantitative estimate and additional positive and negative macroeconomic scenarios to make qualitative adjustments for macroeconomic uncertainty and considers adjustments to macroeconomic inputs and outputs based on market volatility. The scenarios used are periodically updated over a reasonable and supportable time horizon with weightings assigned by management.
The principal considerations for our determination that performing procedures relating to significant adjustments to macroeconomic inputs and qualitative adjustments to the allowance for loan and lease losses on loans held for investment is a critical audit matter are (i) the significant judgment by management in determining the allowance for loan and lease losses, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the significant adjustments to macroeconomic inputs and qualitative adjustments related to macroeconomic scenario weighting, portfolio metrics, and collateral value; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the Company’s allowance for loan and lease losses on loans held for investment estimation process, which included controls over the significant adjustments to macroeconomic inputs and qualitative adjustments. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the estimate of expected credit losses, which included evaluating the appropriateness of the methodology and models, testing the data used in the estimate and evaluating the reasonableness of the significant adjustments to macroeconomic inputs and qualitative adjustments related to macroeconomic scenario weighting, portfolio metrics, and collateral value.
Goodwill Impairment Assessment – Consumer Business Banking (CBB), Commercial & Industrial (C&I) and Commercial Real Estate & Vehicle Financing (CRE & VF) Reporting Units
As described in Notes 1 and 6 to the consolidated financial statements, the Company’s goodwill balance was $2.6 billion as of December 31, 2020, and the goodwill associated with the CBB, C&I and CRE & VF reporting units was $297.8 million, $52.2 million and $1.1 billion, respectively. Management conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. Management determines the fair value of reporting units using a combination of the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies) and the income approach (the discounted cash flows method). For the income approach, management determines a discount rate and a long-term growth rate. If the carrying value of the reporting unit is higher than the fair value, impairment is measured as the excess of carrying value over fair value. During the second quarter of 2020, management concluded that, primarily due to the ongoing economic impacts of the COVID-19 pandemic, a goodwill triggering event occurred for the CBB, C&I and CRE & VF reporting units. Based on the goodwill impairment analysis performed as of June 30, 2020, management concluded that a goodwill impairment charge of $1.6 billion and $0.3 billion was required for the CBB and C&I reporting units, respectively. The CRE & VF reporting unit’s estimated fair value exceeded its carrying value by less than 5%.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the CBB, C&I and CRE & VF reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value of the CBB, C&I and CRE & VF reporting units, which in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence relating to the long-term growth rates and discount rates used by management in determining the fair value of the reporting units; and (ii) the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessments, including controls over the fair value of the Company’s reporting units. These procedures also included, among others, the involvement of professionals with specialized skill and knowledge to assist in testing management’s process for determining the fair value of the CBB, C&I and CRE & VF reporting units, which included evaluating the appropriateness of the methodology including the discounted cash flows method, testing the data used in the estimate and evaluating the reasonableness of the long-term growth rates and discount rates used by management in determining the fair value of the reporting units. Evaluating the reasonableness of management’s assumptions related to the long-term growth rates involved consideration of (i) the current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
March 11, 20203, 2021
We have served as the Company’s auditor since 2016.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Audited (In thousands)
| | | | | | | | | | | |
| December 31, 2020 | | December 31, 2019 |
| | | |
ASSETS | | | |
Cash and cash equivalents | $ | 12,621,281 | | | $ | 7,644,372 | |
Investment securities: | | | |
AFS at fair value | 11,313,489 | | | 14,339,758 | |
| | | |
HTM (fair value of $5,677,929 and $3,957,227 as of December 31, 2020 and December 31, 2019, respectively) | 5,504,685 | | | 3,938,797 | |
Other investments (includes trading securities of $40,435 and $1,097 as of December 31, 2020 and December 31, 2019, respectively) | 1,553,862 | | | 995,680 | |
LHFI(1) (5) | 92,133,182 | | | 92,705,440 | |
ALLL (5) | (7,338,493) | | | (3,646,189) | |
Net LHFI | 84,794,689 | | | 89,059,251 | |
LHFS (2) | 2,226,196 | | | 1,420,223 | |
Premises and equipment, net (3) | 787,341 | | | 798,122 | |
Operating lease assets, net (5)(6) | 16,412,929 | | | 16,495,739 | |
| | | |
| | | |
Goodwill | 2,596,161 | | | 4,444,389 | |
Intangible assets, net | 357,547 | | | 416,204 | |
BOLI | 1,908,806 | | | 1,860,846 | |
Restricted cash (5) | 5,303,460 | | | 3,881,880 | |
| | | |
Other assets (4) (5) | 4,052,230 | | | 4,204,216 | |
TOTAL ASSETS | $ | 149,432,676 | | | $ | 149,499,477 | |
LIABILITIES | | | |
Accounts payables and Accrued expenses | $ | 4,700,349 | | | $ | 4,476,072 | |
Deposits and other customer accounts | 75,303,707 | | | 67,326,706 | |
Borrowings and other debt obligations (5) | 46,359,467 | | | 50,654,406 | |
Advance payments by borrowers for taxes and insurance | 144,214 | | | 153,420 | |
Deferred tax liabilities, net | 182,353 | | | 1,521,034 | |
Other liabilities (5) | 1,479,874 | | | 969,009 | |
TOTAL LIABILITIES | 128,169,964 | | | 125,100,647 | |
Commitments and contingencies (Note 19) | 0 | | 0 |
STOCKHOLDER'S EQUITY | | | |
| | | |
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2020 and December 31, 2019) | 17,876,818 | | | 17,954,441 | |
Accumulated other comprehensive income/(loss), net of taxes | 166,295 | | | (88,207) | |
Retained earnings | 1,843,765 | | | 4,155,226 | |
TOTAL SHUSA STOCKHOLDER'S EQUITY | 19,886,878 | | | 22,021,460 | |
NCI | 1,375,834 | | | 2,377,370 | |
TOTAL STOCKHOLDER'S EQUITY | 21,262,712 | | | 24,398,830 | |
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 149,432,676 | | | $ | 149,499,477 | |
|
| | | | | | | |
| December 31, 2019 | | December 31, 2018 |
ASSETS | | | |
Cash and cash equivalents | $ | 7,644,372 |
| | $ | 7,790,593 |
|
Investment securities: | | | |
AFS at fair value | 14,339,758 |
| | 11,632,987 |
|
HTM (fair value of $3,957,227 and $2,676,049 as of December 31, 2019 and December 31, 2018, respectively) | 3,938,797 |
| | 2,750,680 |
|
Other investments (includes trading securities of $1,097 and $10 as of December 31, 2019 and December 31, 2018, respectively) | 995,680 |
| | 805,357 |
|
LHFI(1) (5) | 92,705,440 |
| | 87,045,868 |
|
ALLL (5) | (3,646,189 | ) | | (3,897,130 | ) |
Net LHFI | 89,059,251 |
| | 83,148,738 |
|
LHFS (2) | 1,420,223 |
| | 1,283,278 |
|
Premises and equipment, net (3) | 798,122 |
| | 805,940 |
|
Operating lease assets, net (5)(6) | 16,495,739 |
| | 14,078,793 |
|
Goodwill | 4,444,389 |
| | 4,444,389 |
|
Intangible assets, net | 416,204 |
| | 475,193 |
|
BOLI | 1,860,846 |
| | 1,833,290 |
|
Restricted cash (5) | 3,881,880 |
| | 2,931,711 |
|
Other assets (4) (5) | 4,204,216 |
| | 3,653,336 |
|
TOTAL ASSETS | $ | 149,499,477 |
| | $ | 135,634,285 |
|
LIABILITIES | | | |
Accrued expenses and payables | $ | 4,476,072 |
| | $ | 3,035,848 |
|
Deposits and other customer accounts | 67,326,706 |
| | 61,511,380 |
|
Borrowings and other debt obligations (5) | 50,654,406 |
| | 44,953,784 |
|
Advance payments by borrowers for taxes and insurance | 153,420 |
| | 160,728 |
|
Deferred tax liabilities, net | 1,521,034 |
| | 1,212,538 |
|
Other liabilities (5) | 969,009 |
| | 912,775 |
|
TOTAL LIABILITIES | 125,100,647 |
| | 111,787,053 |
|
Commitments and contingencies (Note 20) |
| |
|
STOCKHOLDER'S EQUITY | | | |
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2019 and December 31, 2018) | 17,954,441 |
| | 17,859,304 |
|
Accumulated other comprehensive loss | (88,207 | ) | | (321,652 | ) |
Retained earnings | 4,155,226 |
| | 3,783,405 |
|
TOTAL SHUSA STOCKHOLDER'S EQUITY | 22,021,460 |
| | 21,321,057 |
|
NCI | 2,377,370 |
| | 2,526,175 |
|
TOTAL STOCKHOLDER'S EQUITY | 24,398,830 |
| | 23,847,232 |
|
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 149,499,477 |
| | $ | 135,634,285 |
|
(1) LHFI includes $102.0$50.4 million and $126.3$102.0 million of loans recorded at fair value at December 31, 20192020 and December 31, 2018,2019, respectively.
(2) IncludesIncludes $265.4 million and $289.0 million and $209.5 million of loans recorded at the FVO at December 31, 20192020 and December 31, 2018,2019, respectively.
(3) Net of accumulated depreciation of $1.5$1.6 billion and $1.4$1.5 billion at December 31, 20192020 and December 31, 2018,2019, respectively.
(4) Includes MSRs of $77.5 million and $130.9 million and $149.7 million at December 31, 20192020 and December 31, 2018,2019, respectively, for which the Company has elected the FVO. See Note 1614 to these Consolidated Financial Statements for additional information.
(5) The Company has interests in certain Trusts that are considered VIEs for accounting purposes. At December 31, 20192020 and December 31, 2018,2019, LHFI included $26.5$22.6 billion and $24.1$26.5 billion, Operating leases assets, net included $16.5$16.4 billion and $14.0$16.5 billion, restricted cash included $1.6included $1.7 billionand $1.6 billion, other assets included $625.4$791.3 million and $685.4$625.4 million, Borrowings and other debt obligations included $34.2$31.7 billion and $31.9$34.2 billion, and Other liabilities included $188.1$84.9 million and $122.0$188.1 million of assets or liabilities that were included within VIEs, respectively. See Note 78 to these Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $4.2$4.8 billion and $3.5$4.2 billion at December 31, 20192020 and December 31, 2018,2019, respectively.
See accompanying unaudited notes to Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Audited (In thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
INTEREST INCOME: | | | | | | | | | |
Loans | | | | | $ | 7,657,090 | | | $ | 8,098,482 | | | $ | 7,546,376 | |
Interest-earning deposits | | | | | 53,406 | | | 174,189 | | | 137,753 | |
Investment securities: | | | | | | | | | |
AFS | | | | | 191,451 | | | 280,927 | | | 297,557 | |
HTM | | | | | 96,763 | | | 70,815 | | | 68,525 | |
Other investments | | | | | 21,574 | | | 25,782 | | | 18,842 | |
TOTAL INTEREST INCOME | | | | | 8,020,284 | | | 8,650,195 | | | 8,069,053 | |
INTEREST EXPENSE: | | | | | | | | | |
Deposits and other customer accounts | | | | | 290,405 | | | 574,471 | | | 389,128 | |
Borrowings and other debt obligations | | | | | 1,370,398 | | | 1,632,956 | | | 1,335,075 | |
TOTAL INTEREST EXPENSE | | | | | 1,660,803 | | | 2,207,427 | | | 1,724,203 | |
NET INTEREST INCOME | | | | | 6,359,481 | | | 6,442,768 | | | 6,344,850 | |
Credit loss expense | | | | | 2,868,183 | | | 2,292,017 | | | 2,339,898 | |
NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE | | | | | 3,491,298 | | | 4,150,751 | | | 4,004,952 | |
| | | | | | | | | |
NON-INTEREST INCOME: | | | | | | | | | |
Consumer and commercial fees | | | | | 471,901 | | | 548,846 | | | 568,147 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Lease income | | | | | 3,037,284 | | | 2,872,857 | | | 2,375,596 | |
Miscellaneous income, net(1) (2) | | | | | 409,506 | | | 301,598 | | | 307,282 | |
TOTAL FEES AND OTHER INCOME | | | | | 3,918,691 | | | 3,723,301 | | | 3,251,025 | |
| | | | | | | | | |
| | | | | | | | | |
Net gain(loss) on sale of investment securities | | | | | 31,297 | | | 5,816 | | | (6,717) | |
| | | | | | | | | |
TOTAL NON-INTEREST INCOME | | | | | 3,949,988 | | | 3,729,117 | | | 3,244,308 | |
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES: | | | | | | | | | |
Compensation and benefits | | | | | 1,896,480 | | | 1,945,047 | | | 1,799,369 | |
Occupancy and equipment expenses | | | | | 632,424 | | | 603,716 | | | 659,789 | |
Technology, outside service, and marketing expense | | | | | 548,662 | | | 656,681 | | | 590,249 | |
| | | | | | | | | |
| | | | | | | | | |
Loan expense | | | | | 328,549 | | | 405,367 | | | 384,899 | |
Lease expense | | | | | 2,393,339 | | | 2,067,611 | | | 1,789,030 | |
Impairment of goodwill | | | | | 1,848,228 | | | 0 | | | 0 | |
Other expenses | | | | | 560,552 | | | 687,430 | | | 608,989 | |
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES | | | | | 8,208,234 | | | 6,365,852 | | | 5,832,325 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
INCOME / (LOSS) BEFORE INCOME TAX (BENEFIT)/PROVISION | | | | | (766,948) | | | 1,514,016 | | | 1,416,935 | |
Income tax (benefit)/provision | | | | | (110,645) | | | 472,199 | | | 425,900 | |
NET INCOME / (LOSS) INCLUDING NCI | | | | | (656,303) | | | 1,041,817 | | | 991,035 | |
LESS: NET INCOME ATTRIBUTABLE TO NCI | | | | | 184,061 | | | 288,648 | | | 283,631 | |
NET INCOME / (LOSS) ATTRIBUTABLE TO SHUSA | | | | | $ | (840,364) | | | $ | 753,169 | | | $ | 707,404 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
INTEREST INCOME: | | | | | |
Loans | $ | 8,098,482 |
| | $ | 7,546,376 |
| | $ | 7,377,345 |
|
Interest-earning deposits | 174,189 |
| | 137,753 |
| | 86,205 |
|
Investment securities: | | | | | |
AFS | 280,927 |
| | 297,557 |
| | 352,601 |
|
HTM | 70,815 |
| | 68,525 |
| | 38,609 |
|
Other investments | 25,782 |
| | 18,842 |
| | 21,319 |
|
TOTAL INTEREST INCOME | 8,650,195 |
| | 8,069,053 |
| | 7,876,079 |
|
INTEREST EXPENSE: | | | | | |
Deposits and other customer accounts | 574,471 |
| | 389,128 |
| | 241,044 |
|
Borrowings and other debt obligations | 1,632,956 |
| | 1,335,075 |
| | 1,211,085 |
|
TOTAL INTEREST EXPENSE | 2,207,427 |
| | 1,724,203 |
| | 1,452,129 |
|
NET INTEREST INCOME | 6,442,768 |
| | 6,344,850 |
| | 6,423,950 |
|
Provision for credit losses | 2,292,017 |
| | 2,339,898 |
| | 2,759,944 |
|
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 4,150,751 |
| | 4,004,952 |
| | 3,664,006 |
|
NON-INTEREST INCOME: | | | | | |
Consumer and commercial fees | 548,846 |
| | 568,147 |
| | 616,438 |
|
Lease income | 2,872,857 |
| | 2,375,596 |
| | 2,017,775 |
|
Miscellaneous income, net(1) (2) | 301,598 |
| | 307,282 |
| | 269,484 |
|
TOTAL FEES AND OTHER INCOME | 3,723,301 |
| | 3,251,025 |
| | 2,903,697 |
|
Net gain/(loss) on sale of investment securities | 5,816 |
| | (6,717 | ) | | (2,444 | ) |
TOTAL NON-INTEREST INCOME | 3,729,117 |
| | 3,244,308 |
| | 2,901,253 |
|
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES: | | | | | |
Compensation and benefits | 1,945,047 |
| | 1,799,369 |
| | 1,895,326 |
|
Occupancy and equipment expenses | 603,716 |
| | 659,789 |
| | 669,113 |
|
Technology, outside service, and marketing expense | 656,681 |
| | 590,249 |
| | 581,164 |
|
Loan expense | 405,367 |
| | 384,899 |
| | 386,468 |
|
Lease expense | 2,067,611 |
| | 1,789,030 |
| | 1,553,096 |
|
Other expenses | 687,430 |
| | 608,989 |
| | 679,157 |
|
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES | 6,365,852 |
| | 5,832,325 |
| | 5,764,324 |
|
INCOME BEFORE INCOME TAX PROVISION/(BENEFIT) | 1,514,016 |
| | 1,416,935 |
| | 800,935 |
|
Income tax provision/(benefit) | 472,199 |
| | 425,900 |
| | (157,040 | ) |
NET INCOME INCLUDING NCI | 1,041,817 |
| | 991,035 |
| | 957,975 |
|
LESS: NET INCOME ATTRIBUTABLE TO NCI | 288,648 |
| | 283,631 |
| | 405,625 |
|
NET INCOME ATTRIBUTABLE TO SHUSA | $ | 753,169 |
| | $ | 707,404 |
| | $ | 552,350 |
|
(1) Netted down by impact of$404.6 million, $382.3 million, and $386.4 million for the years ended December 31, 2019, 2018 and 2017 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.portfolio of$509.2 million, $404.6 million, and $382.3 million for the years ended December 31, 2020, 2019, and 2018, respectively.
(2) Includes equity investment income/(expense), net.
See accompanying unaudited notes to Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Audited (In thousands)
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
| | | | | | | | | |
NET INCOME / (LOSS) INCLUDING NCI | | | | | $ | (656,303) | | | $ | 1,041,817 | | | $ | 991,035 | |
OCI, NET OF TAX | | | | | | | | | |
Net unrealized changes in cash flow hedge derivative financial instruments, net of tax (1) (2) | | | | | 98,281 | | | (301) | | | (3,796) | |
Net unrealized (losses) / gains on AFS investment securities, net of tax (2) | | | | | 140,143 | | | 222,887 | | | (80,891) | |
Pension and post-retirement actuarial gains, net of tax (2) | | | | | 16,078 | | | 10,859 | | | 560 | |
TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX | | | | | 254,502 | | | 233,445 | | | (84,127) | |
COMPREHENSIVE INCOME / (LOSS) | | | | | (401,801) | | | 1,275,262 | | | 906,908 | |
NET INCOME / (LOSS) ATTRIBUTABLE TO NCI | | | | | 184,061 | | | 288,648 | | | 283,631 | |
COMPREHENSIVE INCOME / (LOSS) ATTRIBUTABLE TO SHUSA | | | | | $ | (585,862) | | | $ | 986,614 | | | $ | 623,277 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
NET INCOME INCLUDING NCI | $ | 1,041,817 |
| | $ | 991,035 |
| | $ | 957,975 |
|
OCI, NET OF TAX | | | | | |
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax (1) (2) | (301 | ) | | (3,796 | ) | | 337 |
|
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax (2) | 222,887 |
| | (80,891 | ) | | (9,744 | ) |
Pension and post-retirement actuarial gains, net of tax (2) | 10,859 |
| | 560 |
| | 4,184 |
|
TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX | 233,445 |
| | (84,127 | ) | | (5,223 | ) |
COMPREHENSIVE INCOME | 1,275,262 |
| | 906,908 |
| | 952,752 |
|
NET INCOME ATTRIBUTABLE TO NCI | 288,648 |
| | 283,631 |
| | 405,625 |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA | $ | 986,614 |
| | $ | 623,277 |
| | $ | 547,127 |
|
(1) Excludes $(7.4) million, $(18.3) million and $(3.1) million and $6.0 million of OCIOther comprehensive income/(loss) attributable to NCI for the years ended December 31, 2020, 2019, 2018 and 2017,2018, respectively.
(2) Excludes $39.1 million impact of OCI reclassified to Retained earnings as a result of the adoption of ASU 2018-02 for the year ended December 31, 2018.
See accompanying unaudited notes to Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
Audited (In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Preferred Stock | | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive (Loss)/Income | | Retained Earnings | | Noncontrolling Interest | | Total Stockholder's Equity |
Balance, January 1, 2017 | 530,391 |
| | $ | 195,445 |
| | $ | 16,599,497 |
| | $ | (193,208 | ) | | $ | 3,020,149 |
| | $ | 2,756,875 |
| | $ | 22,378,758 |
|
Cumulative effect adjustment upon adoption of ASU 2016-09 | — |
| | — |
| | (26,457 | ) | | — |
| | 14,763 |
| | 37,401 |
| | 25,707 |
|
Comprehensive (loss)/income Attributable to SHUSA | — |
| | — |
| | — |
| | (5,223 | ) | | 552,350 |
| | — |
| | 547,127 |
|
Other comprehensive income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 6,048 |
| | 6,048 |
|
Net income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 405,625 |
| | 405,625 |
|
Impact of SC Stock Option Activity | — |
| | — |
| | — |
| | — |
| | — |
| | 22,116 |
| | 22,116 |
|
Contribution of SFS from Shareholder (Note 1) | | | — |
| | 430,783 |
| | — |
| | (108,705 | ) | | — |
| | 322,078 |
|
Capital contribution from shareholder (Note 13) | — |
| | — |
| | 11,747 |
| | — |
| | — |
| | — |
| | 11,747 |
|
Contribution of incremental SC shares from shareholder | — |
| | — |
| | 707,589 |
| | — |
| | — |
| | (707,589 | ) | | — |
|
Dividends paid to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | (4,475 | ) | | (4,475 | ) |
Stock issued in connection with employee benefit and incentive compensation plans | — |
| | — |
| | (149 | ) | | — |
| | — |
| | 850 |
| | 701 |
|
Dividends declared and paid on common stock | — |
| | — |
| | — |
| | — |
| | (10,000 | ) | | — |
| | (10,000 | ) |
Dividends declared and paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (14,600 | ) | | — |
| | (14,600 | ) |
Balance, December 31, 2017 | 530,391 |
| | $ | 195,445 |
| | $ | 17,723,010 |
| | $ | (198,431 | ) | | $ | 3,453,957 |
| | $ | 2,516,851 |
| | $ | 23,690,832 |
|
Cumulative-effect adjustment upon adoption of new ASUs and other (Note 1) | — |
| | — |
| | — |
| | (39,094 | ) | | 47,549 |
| | — |
| | 8,455 |
|
Comprehensive (loss)/income attributable to SHUSA | — |
| | — |
| | — |
| | (84,127 | ) | | 707,404 |
| | — |
| | 623,277 |
|
Other comprehensive loss attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | (3,130 | ) | | (3,130 | ) |
Net income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 283,631 |
| | 283,631 |
|
Impact of SC stock option activity | — |
| | — |
| | — |
| | — |
| | — |
| | 12,411 |
| | 12,411 |
|
Contribution from shareholder and related tax impact (Note 13) | — |
| | — |
| | 88,468 |
| | — |
| | — |
| | — |
| | 88,468 |
|
Contribution of SAM from Shareholder (Note 1) | — |
| | — |
| | 4,396 |
| | — |
| | — |
| | — |
| | 4,396 |
|
Redemption of preferred stock | — |
| | (195,445 | ) | | — |
| | — |
| | (4,555 | ) | | — |
| | (200,000 | ) |
Dividends declared and paid on common stock | — |
| | — |
| | — |
| | — |
| | (410,000 | ) | | — |
| | (410,000 | ) |
Dividends paid to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | (57,511 | ) | | (57,511 | ) |
Stock repurchase attributable to NCI | — |
| | — |
| | 43,430 |
| | — |
| | — |
| | (226,077 | ) | | (182,647 | ) |
Dividends paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (10,950 | ) | | — |
| | (10,950 | ) |
Balance, December 31, 2018 | 530,391 |
| | $ | — |
| | $ | 17,859,304 |
| | $ | (321,652 | ) | | $ | 3,783,405 |
| | $ | 2,526,175 |
| | $ | 23,847,232 |
|
Cumulative-effect adjustment upon adoption of ASU 2016-02 | — |
| | — |
| | — |
| | — |
| | 18,652 |
| | — |
| | 18,652 |
|
Comprehensive income attributable to SHUSA | — |
| | — |
| | — |
| | 233,445 |
| | 753,169 |
| | — |
| | 986,614 |
|
Other comprehensive loss attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | (18,265 | ) | | (18,265 | ) |
Net income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 288,648 |
| | 288,648 |
|
Impact of SC stock option activity | — |
| | — |
| | — |
| | — |
| | — |
| | 10,176 |
| | 10,176 |
|
Contribution from shareholder (Note 13) | — |
| | — |
| | 88,927 |
| | — |
| | — |
| | — |
| | 88,927 |
|
Dividends declared and paid on common stock | — |
| | — |
| | — |
| | — |
| | (400,000 | ) | | — |
| | (400,000 | ) |
Dividends paid to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | (85,160 | ) | | (85,160 | ) |
Stock repurchase attributable to NCI | — |
| | — |
| | 6,210 |
| | — |
| | — |
| | (344,204 | ) | | (337,994 | ) |
Balance, December 31, 2019 | 530,391 |
| | $ | — |
| | $ | 17,954,441 |
| | $ | (88,207 | ) | | $ | 4,155,226 |
| | $ | 2,377,370 |
| | $ | 24,398,830 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Common Shares Outstanding | | Preferred Stock | | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive (Loss)/Income | | Retained Earnings | | Noncontrolling Interest | | Total Stockholder's Equity |
Balance, January 1, 2018 | 530,391 | | | $ | 195,445 | | | $ | 17,723,010 | | | $ | (198,431) | | | $ | 3,453,957 | | | $ | 2,516,851 | | | $ | 23,690,832 | |
Cumulative effect adjustment upon adoption of new ASU and other | — | | | — | | | — | | | (39,094) | | | 47,549 | | | — | | | 8,455 | |
Comprehensive (loss) / income Attributable to SHUSA | — | | | — | | | — | | | (84,127) | | | 707,404 | | | — | | | 623,277 | |
Other comprehensive loss attributable to NCI | — | | | — | | | — | | | — | | | — | | | (3,130) | | | (3,130) | |
Net Income Attributable to NCI | — | | | — | | | — | | | — | | | — | | | 283,631 | | | 283,631 | |
Impact of SC Stock Option Activity | — | | | — | | | — | | | — | | | — | | | 12,411 | | | 12,411 | |
Contribution from shareholder and related tax impact | | | — | | | 88,468 | | | — | | | — | | | — | | | 88,468 | |
Contribution of SAM from shareholder | — | | | — | | | 4,396 | | | — | | | — | | | — | | | 4,396 | |
Redemption of Preferred Stock | — | | | (195,445) | | | — | | | — | | | (4,555) | | | — | | | (200,000) | |
Dividends declared and paid to common stock | — | | | — | | | — | | | — | | | (410,000) | | | — | | | (410,000) | |
Dividends paid to NCI | — | | | — | | | — | | | — | | | — | | | (57,511) | | | (57,511) | |
Stock repurchase attributable to NCI | — | | | — | | | 43,430 | | | — | | | — | | | (226,077) | | | (182,647) | |
Dividends paid on preferred stock | — | | | — | | | — | | | — | | | (10,950) | | | — | | | (10,950) | |
Balance, December 31, 2018 | 530,391 | | | $ | 0 | | | $ | 17,859,304 | | | $ | (321,652) | | | $ | 3,783,405 | | | $ | 2,526,175 | | | $ | 23,847,232 | |
| | | | | | | | | | | | | |
Cumulative-effect adjustment upon adoption of ASU 2016-02 | — | | | — | | | — | | | — | | | 18,652 | | | — | | | 18,652 | |
Comprehensive income attributable to SHUSA | — | | | — | | | — | | | 233,445 | | | 753,169 | | | — | | | 986,614 | |
Other comprehensive loss attributable to NCI | — | | | — | | | — | | | — | | | — | | | (18,265) | | | (18,265) | |
Net income attributable to NCI | — | | | — | | | — | | | — | | | — | | | 288,648 | | | 288,648 | |
Impact of SC stock option activity | — | | | — | | | — | | | — | | | — | | | 10,176 | | | 10,176 | |
Contribution from shareholder and related tax impact (Note 12) | — | | | — | | | 88,927 | | | — | | | — | | | — | | | 88,927 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Dividends declared and paid on common stock | — | | | — | | | — | | | — | | | (400,000) | | | — | | | (400,000) | |
Dividends paid to NCI | — | | | — | | | — | | | — | | | — | | | (85,160) | | | (85,160) | |
Stock repurchase attributable to NCI | — | | | — | | | 6,210 | | | — | | | — | | | (344,204) | | | (337,994) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance, December 31, 2019 | 530,391 | | | $ | 0 | | | $ | 17,954,441 | | | $ | (88,207) | | | $ | 4,155,226 | | | $ | 2,377,370 | | | $ | 24,398,830 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Cumulative-effect adjustment upon adoption of CECL Standard (Note 1) | — | | | — | | | — | | | — | | | (1,346,097) | | | (439,367) | | | (1,785,464) | |
Comprehensive income/(loss) attributable to SHUSA | — | | | — | | | — | | | 254,502 | | | (840,364) | | | — | | | (585,862) | |
Other comprehensive loss attributable to NCI | — | | | — | | | — | | | — | | | — | | | (7,372) | | | (7,372) | |
Net income attributable to NCI | — | | | — | | | — | | | — | | | — | | | 184,061 | | | 184,061 | |
Impact of SC stock option activity | — | | | — | | | — | | | — | | | — | | | 5,536 | | | 5,536 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Dividends declared and paid on common stock | — | | | — | | | — | | | — | | | (125,000) | | | — | | | (125,000) | |
Dividends paid to NCI | — | | | — | | | — | | | — | | | — | | | (50,546) | | | (50,546) | |
Stock repurchase attributable to NCI | — | | | — | | | (77,623) | | | — | | | — | | | (693,848) | | | (771,471) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance, December 31, 2020 | 530,391 | | | $ | 0 | | | $ | 17,876,818 | | | $ | 166,295 | | | $ | 1,843,765 | | | $ | 1,375,834 | | | $ | 21,262,712 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See accompanying unaudited notes to Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in(Unaudited) (in thousands)
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| | | | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net (loss)/income including NCI | $ | (656,303) | | | $ | 1,041,817 | | | $ | 991,035 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Impairment of goodwill | 1,848,228 | | | 0 | | | 0 | |
| | | | | |
Credit loss expense | 2,868,183 | | | 2,292,017 | | | 2,339,898 | |
Deferred tax (benefit)/expense | (276,155) | | | 339,152 | | | 416,875 | |
Depreciation, amortization and accretion | 2,766,050 | | | 2,402,611 | | | 1,913,225 | |
Net loss on sale of loans | 374,734 | | | 397,037 | | | 379,181 | |
Net (gain)/loss on sale of investment securities | (31,297) | | | (5,816) | | | 6,717 | |
| | | | | |
| | | | | |
| | | | | |
Loss on debt extinguishment | 10,887 | | | 2,735 | | | 3,470 | |
Net (gain)/loss on real estate owned, premises and equipment, and other | (66,150) | | | (19,637) | | | 10,610 | |
Stock-based compensation | 33 | | | 317 | | | 913 | |
Equity loss/(income) on equity method investments | 11,538 | | | (1,584) | | | (4,324) | |
Originations of LHFS, net of repayments | (3,413,366) | | | (1,462,963) | | | (2,982,366) | |
Purchases of LHFS | 0 | | | (387) | | | (1,381) | |
Proceeds from sales of LHFS | 1,770,402 | | | 1,563,206 | | | 4,264,959 | |
| | | | | |
| | | | | |
Net change in: | | | | | |
Revolving personal loans | (282,371) | | | (360,922) | | | (371,716) | |
Other assets, BOLI and trading securities | 621,985 | | | (152,520) | | | (200,380) | |
Other liabilities | (277,399) | | | 814,094 | | | 248,345 | |
| | | | | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 5,268,999 | | | 6,849,157 | | | 7,015,061 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Proceeds from sales of AFS investment securities | 2,665,593 | | | 1,423,579 | | | 1,262,409 | |
Proceeds from prepayments and maturities of AFS investment securities | 8,125,673 | | | 6,688,603 | | | 2,616,417 | |
Purchases of AFS investment securities | (7,632,295) | | | (10,534,918) | | | (2,421,286) | |
Proceeds from prepayments and maturities of HTM investment securities | 1,225,093 | | | 392,971 | | | 338,932 | |
Purchases of HTM investment securities | (2,707,302) | | | (1,595,777) | | | (135,898) | |
Proceeds from sales of other investments | 431,819 | | | 264,364 | | | 153,294 | |
Proceeds from maturities of other investments | 85 | | | 13,673 | | | 45 | |
Purchases of other investments | (902,090) | | | (369,361) | | | (214,427) | |
| | | | | |
Proceeds from sales of LHFI | 3,489,035 | | | 2,583,563 | | | 1,016,652 | |
| | | | | |
Distributions from equity method investments | 8,053 | | | 4,539 | | | 9,889 | |
Contributions to equity method and other investments | (135,298) | | | (228,275) | | | (122,816) | |
Proceeds from settlements of BOLI policies | 11,023 | | | 34,941 | | | 20,931 | |
Purchases of LHFI | (77,136) | | | (897,907) | | | (1,243,574) | |
Net change in loans other than purchases and sales | (3,751,019) | | | (10,184,035) | | | (8,462,103) | |
Purchases and originations of operating leases | (6,860,838) | | | (8,597,560) | | | (9,859,861) | |
Proceeds from the sale and termination of operating leases | 4,273,115 | | | 3,502,677 | | | 3,588,820 | |
Manufacturer incentives | 433,062 | | | 794,237 | | | 1,098,055 | |
Proceeds from sales of real estate owned and premises and equipment | 49,981 | | | 68,491 | | | 53,569 | |
Purchases of premises and equipment | (195,807) | | | (216,810) | | | (159,887) | |
Net cash paid for branch disposition | 0 | | | (329,328) | | | 0 | |
| | | | | |
| | | | | |
Upfront fee paid to FCA | 0 | | | (60,000) | | | 0 | |
NET CASH USED IN INVESTING ACTIVITIES | (1,549,253) | | | (17,242,333) | | | (12,460,839) | |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net change in deposits and other customer accounts (1) | 7,977,001 | | | 6,286,153 | | | 680,277 | |
Net change in short-term borrowings | (36,672) | | | 191,931 | | | (168,769) | |
Net proceeds from long-term borrowings | 42,867,377 | | | 48,043,664 | | | 46,461,404 | |
Repayments of long-term borrowings | (41,537,581) | | | (44,522,618) | | | (43,277,142) | |
Proceeds from FHLB advances (with terms greater than 3 months) | 2,500,000 | | | 4,435,000 | | | 4,900,000 | |
Repayments of FHLB advances (with terms greater than 3 months) | (8,135,882) | | | (2,500,000) | | | (2,000,000) | |
Net change in advance payments by borrowers for taxes and insurance | (9,206) | | | (7,308) | | | 1,407 | |
Cash dividends paid to preferred stockholders | 0 | | | 0 | | | (10,950) | |
Dividends paid on common stock | (125,000) | | | (400,000) | | | (410,000) | |
Dividends paid to NCI | (50,546) | | | (85,160) | | | (57,511) | |
Stock repurchase attributable to NCI | (771,471) | | | (337,994) | | | (182,647) | |
Proceeds from the issuance of common stock | 723 | | | 4,529 | | | 8,204 | |
Capital contribution from shareholder | 0 | | | 88,927 | | | 85,035 | |
Redemption of preferred stock | 0 | | | 0 | | | (200,000) | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 2,678,743 | | | 11,197,124 | | | 5,829,308 | |
| | | | | |
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 6,398,489 | | | 803,948 | | | 383,530 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 11,526,252 | | | 10,722,304 | | | 10,338,774 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (2) | $ | 17,924,741 | | | $ | 11,526,252 | | | $ | 10,722,304 | |
| | | | | |
SUPPLEMENTAL DISCLOSURES | | | | | |
Income taxes (received)/paid, net | $ | (60,703) | | | $ | 35,355 | | | $ | 26,261 | |
Interest paid | 1,689,643 | | | 2,210,838 | | | 1,694,850 | |
| | | | | |
NON-CASH TRANSACTIONS | | | | | |
Loans transferred to/(from) other real estate owned | (41,398) | | | (1,423) | | | 86,467 | |
Loans transferred from/(to) LHFI (from)/to LHFS, net | 3,009,343 | | | 2,727,067 | | | 731,944 | |
Unsettled purchases of investment securities | 113,537 | | | 3,108 | | | 2,298 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Contribution of SAM from shareholder (3) | 0 | | | 0 | | | 4,396 | |
AFS investment securities transferred to HTM investment securities | 0 | | | 0 | | | 1,167,189 | |
Adoption of lease accounting standard: | | | | | |
ROU assets | 0 | | | 664,057 | | | 0 | |
Accrued expenses and payables | 0 | | | 705,650 | | | 0 | |
|
| | | | | | | | | | | |
| Year Ended December 31, |
| 2019 |
| 2018 | | 2017 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | |
Net income including NCI | $ | 1,041,817 |
| | $ | 991,035 |
| | $ | 957,975 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Impairment of goodwill | — |
| | — |
| | 10,536 |
|
Provision for credit losses | 2,292,017 |
| | 2,339,898 |
| | 2,759,944 |
|
Deferred tax expense/(benefit) | 339,152 |
| | 416,875 |
| | (196,614 | ) |
Depreciation, amortization and accretion | 2,402,611 |
| | 1,913,225 |
| | 1,606,862 |
|
Net loss on sale of loans | 397,037 |
| | 379,181 |
| | 373,532 |
|
Net (gain)/loss on sale of investment securities | (5,816 | ) | | 6,717 |
| | 2,444 |
|
Loss on debt extinguishment | 2,735 |
| | 3,470 |
| | 30,349 |
|
Net (gain)/loss on real estate owned, premises and equipment, and other assets | (19,637 | ) | | 10,610 |
| | (9,567 | ) |
Stock-based compensation | 317 |
| | 913 |
| | 4,674 |
|
Equity (income)/loss on equity method investments | (1,584 | ) | | (4,324 | ) | | 28,323 |
|
Originations of LHFS, net of repayments | (1,462,963 | ) | | (2,982,366 | ) | | (4,920,570 | ) |
Purchases of LHFS | (387 | ) | | (1,381 | ) | | (4,280 | ) |
Proceeds from sales of LHFS | 1,563,206 |
| | 4,264,959 |
| | 4,601,777 |
|
Net change in: | | | | | |
Revolving personal loans | (360,922 | ) | | (371,716 | ) | | (329,168 | ) |
Other assets, BOLI and trading securities | (152,520 | ) | | (200,380 | ) | | (99,306 | ) |
Other liabilities | 814,094 |
| | 248,345 |
| | 147,149 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES | 6,849,157 |
| | 7,015,061 |
| | 4,964,060 |
|
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | |
Proceeds from sales of AFS investment securities | 1,423,579 |
| | 1,262,409 |
| | 3,216,595 |
|
Proceeds from prepayments and maturities of AFS investment securities | 6,688,603 |
| | 2,616,417 |
| | 5,231,910 |
|
Purchases of AFS investment securities | (10,534,918 | ) | | (2,421,286 | ) | | (6,248,059 | ) |
Proceeds from prepayments and maturities of HTM investment securities | 392,971 |
| | 338,932 |
| | 200,085 |
|
Purchases of HTM investment securities | (1,595,777 | ) | | (135,898 | ) | | (352,786 | ) |
Proceeds from sales of other investments | 264,364 |
| | 153,294 |
| | 327,029 |
|
Proceeds from maturities of other investments | 13,673 |
| | 45 |
| | 560 |
|
Purchases of other investments | (369,361 | ) | | (214,427 | ) | | (217,007 | ) |
Proceeds from sales of LHFI | 2,583,563 |
| | 1,016,652 |
| | 1,227,052 |
|
Proceeds from the sales of equity method investments | — |
| | — |
| | 25,145 |
|
Distributions from equity method investments | 4,539 |
| | 9,889 |
| | 10,522 |
|
Contributions to equity method and other investments | (228,275 | ) | | (122,816 | ) | | (87,267 | ) |
Proceeds from settlements of BOLI policies | 34,941 |
| | 20,931 |
| | 37,028 |
|
Purchases of LHFI | (897,907 | ) | | (1,243,574 | ) | | (723,793 | ) |
Net change in loans other than purchases and sales | (10,184,035 | ) | | (8,462,103 | ) | | 2,724,489 |
|
Purchases and originations of operating leases | (8,597,560 | ) | | (9,859,861 | ) | | (6,036,193 | ) |
Proceeds from the sale and termination of operating leases | 3,502,677 |
| | 3,588,820 |
| | 3,119,264 |
|
Manufacturer incentives | 794,237 |
| | 1,098,055 |
| | 878,219 |
|
Proceeds from sales of real estate owned and premises and equipment | 68,491 |
| | 53,569 |
| | 112,497 |
|
Purchases of premises and equipment | (216,810 | ) | | (159,887 | ) | | (164,111 | ) |
Net cash paid for branch disposition | (329,328 | ) | | — |
| | — |
|
Upfront fee paid to FCA | (60,000 | ) | | — |
| | — |
|
NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES | (17,242,333 | ) | | (12,460,839 | ) | | 3,281,179 |
|
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | |
Net change in deposits and other customer accounts | 6,286,153 |
| | 680,277 |
| | (6,218,010 | ) |
Net change in short-term borrowings | 191,931 |
| | (168,769 | ) | | (50,331 | ) |
Net proceeds from long-term borrowings | 48,043,664 |
| | 46,461,404 |
| | 43,325,311 |
|
Repayments of long-term borrowings | (44,522,618 | ) | | (43,277,142 | ) | | (44,005,642 | ) |
Proceeds from FHLB advances (with terms greater than 3 months) | 4,435,000 |
| | 4,900,000 |
| | 1,000,000 |
|
Repayments of FHLB advances (with terms greater than 3 months) | (2,500,000 | ) | | (2,000,000 | ) | | (5,000,000 | ) |
Net change in advance payments by borrowers for taxes and insurance | (7,308 | ) | | 1,407 |
| | (4,177 | ) |
Cash dividends paid to preferred stockholders | — |
| | (10,950 | ) | | (14,600 | ) |
Dividends paid on common stock | (400,000 | ) | | (410,000 | ) | | (10,000 | ) |
Dividends paid to NCI | (85,160 | ) | | (57,511 | ) | | (4,475 | ) |
Stock repurchase attributable to NCI | (337,994 | ) | | (182,647 | ) | | — |
|
Proceeds from the issuance of common stock | 4,529 |
| | 8,204 |
| | 13,652 |
|
Capital contribution from shareholder | 88,927 |
| | 85,035 |
| | 9,000 |
|
Redemption of preferred stock | — |
| | (200,000 | ) | | — |
|
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | 11,197,124 |
| | 5,829,308 |
| | (10,959,272 | ) |
| | | | | |
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 803,948 |
| | 383,530 |
| | (2,714,033 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 10,722,304 |
| | 10,338,774 |
| | 13,052,807 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (1) | $ | 11,526,252 |
| | $ | 10,722,304 |
| | $ | 10,338,774 |
|
| | | | | |
SUPPLEMENTAL DISCLOSURES | | | | | |
Income taxes paid, net | $ | 35,355 |
| | $ | 26,261 |
| | $ | 3,954 |
|
Interest paid | 2,210,838 |
| | 1,694,850 |
| | 1,442,484 |
|
| | | | | |
NON-CASH TRANSACTIONS | | | | | |
Loans transferred to/(from) other real estate owned | (1,423 | ) | | 86,467 |
| | 44,650 |
|
Loans transferred from/(to) HFI (from)/to HFS, net | 2,727,067 |
| | 731,944 |
| | 202,760 |
|
Unsettled sales of investment securities | — |
| | — |
| | 39,783 |
|
Contribution of SFS from shareholder (2) | — |
| | — |
| | 322,078 |
|
Contribution of incremental SC shares from shareholder | — |
| | — |
| | 707,589 |
|
Contribution of SAM from shareholder (2) | — |
| | 4,396 |
| | — |
|
AFS investment securities transferred to HTM investment securities | — |
| | 1,167,189 |
| | — |
|
Adoption of lease accounting standard: | | | | | |
ROU assets | 664,057 |
| | — |
| | — |
|
Accrued expenses and payables | 705,650 |
| | — |
| | — |
|
(1) The net change in deposits for the year ended December 31, 2020 includes the sale of $4.2 billion of SBC deposits. Refer to Note 1 for further information on the sale of SBC.
(2) The years ended December 31, 2020, 2019, 2018, and 20172018 include cash and cash equivalents balances of $12.6 billion, $7.6 billion, $7.8 billion, and $6.5$7.8 billion, respectively, and restricted cash balances of $5.3 billion, $3.9 billion, $2.9 billion, and $3.8$2.9 billion, respectively.
(2)(3) The contributionscontribution of SFS and SAM werewas accounted for as a non-cash transactions. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.transaction.
See accompanying unaudited notes to Consolidated Financial Statements.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Introduction
SHUSA is the Parent Companyparent holding company of SBNA, a national banking association; SC, a consumer finance company; Santander BanCorp, a financial holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR;Dallas, Texas; SSLLC, a broker-dealer headquartered in Boston, Massachusetts; BSI, a financial services company headquartered in Miami, Florida that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; and SIS, a registered broker-dealer headquartered in New York providing services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed income securities; as well asSFS, a consumer credit institution headquartered in Puerto Rico; and several other subsidiaries. SHUSA is headquartered in Boston and the Bank's home office is in Wilmington, Delaware. SSLLC, SIS, and another SHUSA subsidiary, SAM, are registered investment advisers with the SEC. SHUSA is headquartered in Boston and the Bank's home office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of Santander. The Parent Company'sSHUSA's two largest subsidiaries by asset size and revenue are the Bank and SC. SHUSA is a wholly-owned subsidiary of Santander.
As of December 31, 2020, SC was owned approximately 80.2% by SHUSA and 19.8% by other shareholders. SC Common Stock is listed on the NYSE under the trading symbol "SC."
On September 1, 2020 the Company sold its investment in Santander BanCorp ("SBC"), a financial holding company headquartered in Puerto Rico that offered a full range of financial services through its wholly-owned banking subsidiary, BSPR. Refer to the caption "Divestitures" below for more information.
The Bank’s primary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily loans, residential mortgage loans, home equity lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania,principally located in Massachusetts, New Jersey,Hampshire, Connecticut, Rhode Island, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island,Jersey, Pennsylvania, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.
SC is a specialized consumer finance company focused on vehicle finance and third-party servicing.servicing and delivering service to dealers and customers across the full credit spectrum. SC's primary business is the indirect origination and servicing of RICs and leases, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. Additionally, SC sells consumer RICs through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer RICs.
SAF is SC’s primary vehicle financing brand, and is available as a finance option for automotive dealers across the United States.
Since May 2013, under its agreement with FCA, SC has operated as FCA's preferred provider for consumer loans, leases, and dealer loans and provides services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. Refer to Note 20 for additional details. On June 28,In 2019, SC entered into an amendment to its agreement with FCA,the Chrysler Agreement which modified that agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.
SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has other relationships through which it provides other consumer finance products. However,
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Divestitures
In 2019 the Company entered into an agreement to sell the stock of SBC. On September 1, 2020, the Company completed the sale of SBC to FirstBank Puerto Rico for approximately $1.28 billion. The sale of SBC resulted in 2015, SC announcedthe recognition of a gain in the third quarter of 2020 totaling $62 million, reported in Miscellaneous income, net and a tax impact of $12 million, for a total net gain of $50 million. In addition, the Company reclassified to income approximately $23.6 million ($14.8 million after tax) of OCI related to its exit from personal lendinginvestment in SBC which is also recorded in Miscellaneous income, net. The final sales price and accordingly,gain on sale are subject to adjustments based on the buyer’s review of the transferred assets and liabilities, in accordance with the agreement. In the second quarter of 2020, the Company recorded a $39 million tax expense to establish a deferred tax liability for the book over tax basis in its investment in SBC. Transaction expenses related to the sale of SBC totaled approximately $10.0 million through September 30, 2020.
At August 31, 2020 and December 31, 2019, the Consolidated Balance Sheets of the Company included total assets of $5.5 billion and $6.0 billion, respectively, total liabilities of $4.3 billion and $4.8 billion, respectively, and total equity of $1.2 billion at both dates attributable to SBC.
The Consolidated Statements of Operations of the Company for the nine-months ended September 30, 2020 included $33.1 million of net income attributable to SBC and $66.6 million of net income attributable to SBC for the comparative period in 2019.
As part of the stipulations of the transaction, SBC transferred all of its personal lendingnon-performing assets are classified as HFS atto the Company's wholly-owned subsidiary, SFS. This resulted in three separate transactions executed in December 31, 2019.2019, August 2020, and October 2020 for a total of $160.0 million in loans and $30.0 million of real estate owned.
As of December 31, 2019, SC was owned approximately 72.4% by SHUSA and 27.6% by other shareholders. SC Common Stock is listed on the NYSE under the trading symbol "SC."Other transactions
During 2019, SBNA completed the sale of 14 bank branches and four4 ATMs located in central Pennsylvania, together with approximately $471 million of deposits and $102 million of retail and business loans, to First Commonwealth Bank for a gain of $30.9 million.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
IHC
The EPS mandated by Section 165 of the DFA Final Rule were enacted by the Board of Governors of the Federal Reserve
to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. Additionally, effective July 2, 2018, Santander transferred SAM to the IHC. The contribution of SAM to the Company transferred approximately $5.4 million of assets, $1.0 million of liabilities, and $4.4 million of equity to the Company.
Although SAM is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company elected to report the results of SAM on a prospective basis beginning July 2, 2018. SFS’s results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company and the Company also elected to report its results prospectively. As a result of the 2017 contribution of SFS in 2017 and SAM in 2018, SHUSA's net income is understated by $1.0 million and $6.0 million for the years ended December 31, 2018 and 2017, respectively. In addition, a contribution to stockholder's equity of $4.4 million and $322.1 million was recorded on July 2, 2018, and July 1, 2017, respectively. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.
On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that owns BSPR) for a total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At December 31, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.0 billion. Among other conditions precedent to the closing, the transaction requires the Company to transfer all of BSPR's non-performing assets and the equity of SAM to the Company or a third party prior to closing. In addition, the transaction requires review and approval of various regulators, whose input is uncertain. Subject to satisfaction of the closing conditions, the transaction is expected to close in the middle of 2020. Once it becomes apparent that this transaction is more likely than not to receive regulatory approval, the Company will recognize a deferred tax liability of approximately $50 million for the unremitted earnings of Santander BanCorp. Consummation of the transaction is not expected to result in any material gain or loss.
Basis of Presentation
These Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries, andincluding certain special purpose financing trustsTrusts that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and VOEs in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.
These Consolidated Financial Statements have been prepared in accordance with GAAP and pursuant to SEC regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and SCF for the periods indicated, and contain adequate disclosure of this interim financial information to make the information presented not misleading.
Certain prior-year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. The most significant estimates pertain to fair value measurements,include the ALLL and reserve for unfunded lending commitments,ACL, accretion of discounts and subvention on RICs, estimates offair value measurements, expected end-of-term lease residual values, values of leased vehicles subject to operating leases,repossessed assets, goodwill, and income taxes. Actual resultsThese estimates, although based on actual historical trends and modeling, may differ from the estimates, and the differences may be material to the Consolidated Financial Statements.
potentially show significant variances over time.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Recently Adopted Accounting Standards
Since January 1, 2019,2020, the Company adopted the following FASB ASUs:
•Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance significantly changed how entities measure credit losses for most financial assets. The amendment introduced a new credit reserving framework known as CECL, which replaced the incurred loss impairment framework with one that reflects expected credit losses over the expected lives of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it was under the OTTI framework. The Company adopted the new guidance on January 1, 2020 on a modified retrospective basis which resulted in an increase in the ACL of approximately $2.5 billion, a decrease in stockholder's equity of approximately $1.8 billion and a decrease in deferred tax liabilities, net of approximately $0.7 billion at January 1, 2020. The increase was based on forecasts of expected future economic conditions and was primarily driven by the fact that the allowance covers expected credit losses over the full expected life of the loan portfolios.
•In March 2020, the FASB issued ASU 2016-02, Leases2020-04, Reference Rate Reform (Topic 842)848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients to reduce the costs and complexity associated with the high volume of contractual modifications expected in the transition away from LIBOR as the benchmark rate in contracts and hedges. These optional expedients allow entities to negate many of the accounting impacts of modifying contracts and hedging relationships necessitated by reference rate reform, allowing them to generally maintain the accounting as if a change had not occurred. The Company adopted this standard during the three-month period ended March 31, 2020, electing the practical expedients relative to the Company’s contracts and hedging relationships modified as a result of reference rate reform through December 31, 2022. Topic 848 was amended by ASU 2021-01 in January 2021. These practical expedients did not have a material impact on the Company’s business, financial position, results of operations, or disclosures.
•In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general tax accounting principles and simplifying other specific tax scenarios. The Company adopted this standard as of January 1, 2019, resulting in2020 reflecting the recognition ofchange prospectively. It did not have a ROU asset ($664.1 million) and lease liability ($705.7 million) in the Consolidated Balance Sheet for all operating leases with a term greater than 12 months. The Company adopted this ASU using the modified retrospective approach, with application at the adoption date and a cumulative-effect adjustmentmaterial impact to the opening balanceCompany’s business, financial position, results of retained earnings. Under this approach, comparative periods were not adjusted. We elected the package of practical expedients permitted under transition guidance, which allowed us to carry forward the historical lease classification. We also elected not to recognize a lease liability and associated ROU asset for short-term leases. We did not elect (1) the hindsight practical expedient when determining the lease term and (2) the practical expedient to not separate non-lease components from lease components. The ASU required the Company to accelerate the recognition of $18.7 million of previously deferred gains on sale-leaseback transactions, with such impact recorded to the opening balance of Retained earnings.
operations, or disclosures.
The ROU asset and lease liability will subsequently be de-recognized in a manner that effectively yields a straight-line lease expense over the lease term. Lessee accounting requirements for finance leases (previously described as capital leases) and lessor accounting requirements for operating, sales-type, and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. This standard did not materially affect our Consolidated Statements of Operations or SCF.
The adoption of the following ASUs did not have a material impact on the Company's financial position or results of operations:
•ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
•ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20)2018-17, Consolidation (Topic 810): 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):Targeted Improvements to Nonemployee Share-Based Payment Accounting.Related Party Guidance for Variable Interest Entities
Recently Issued Accounting Standards Not Yet Adopted
There are no recently issued GAAP accounting developments that we expect will have a material impact on the Company's business, financial position, results of operations, or disclosures upon adoption.
ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.
Significant Accounting Policies
Consolidation
In accordance with the applicable accounting guidance for consolidations, the Consolidated Financial Statements include any VOEs in which the Company has a controlling financial interest and any VIEs for which the Company is deemed to be the primary beneficiary. The Company consolidates its VIEs if the Company has (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity's economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., the Company is considered to be the primary beneficiary). The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. Interests in VIEs and VOEs can include equity interests in corporations, partnerships and similar legal entities, subordinated debt, securitizations, derivatives contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Upon the occurrence of certain significant events, as required by the VIE model, the Company reassesses whether a legal entity in which the Company is involved is a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the entities with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE, depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.
The Company uses the equity method to account for unconsolidated investments in VOEs if the Company has significant influence over the entity's operating and financing decisions but does not maintain a controlling financial interest. Unconsolidated investments in VOEs or VIEs in which the Company has a voting or economic interest of less than 20% generally are carried at cost less any impairment. These investments are included in Other assets on the Consolidated Balance Sheets, and the Company's proportionate share of income or loss is included in Miscellaneous income, net within the Consolidated Statements of Operations.
Sales of RICs and Leases
The Company, through SC, transfers RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the RICs. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the SPEs and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and are consolidated when the Company has: (a) power over the significant activities of the entity and (b) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company has power over the significant activities of those Trusts as servicer of the financial assets held in the Trust. Servicing fees are not considered significant variable interests in the Trusts; however, when the Company also retains a residual interest in the Trust, either in the form of a debt security or equity interest, the Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the SPE. Accordingly,For all VIEs in which the Company is involved, the Company assesses whether it is the primary beneficiary of the VIE on an ongoing basis. In circumstances where the Company have both the power to direct the activities that most significantly impact the VIEs performance and the obligation to absorb losses or the right to receive benefits of the VIE that could be significant, the Company would conclude that it is the primary beneficiary of the VIE, and accordingly, these Trusts are consolidated within the Consolidated Financial Statements, and the associated RICs, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in whichIn situations where the Company is not deemed to be the primary beneficiary of the VIE, the Company does not retain a residual interest or any other debt or equity interestconsolidate the VIE and only recognizes its interests in the VIE. These securitizations involving Trusts are treated as sales of the associated RICs.retail installment contracts. While these Trusts are included in our Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, are available only to satisfy the notes payable related to the securitized RICs, and are not available to the Company's creditors or other subsidiaries.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The Company also sells RICs and leases to VIEs or directly to third parties. The Company may determine that these transactions meet sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. The transferred financial assets are removed from the Company's Consolidated Balance Sheets at the time the sale is completed. The Company generally remains the servicer of the financial assets and receives servicing fees. The Company also recognizes a gain or loss for the difference between the fair value, as measured based on sales proceeds plus (or minus) the value of any servicing asset (or liability) retained and the carrying value of the assets sold.
See further discussion on the Company's securitizations in Note 78 to these Consolidated Financial Statements.
Cash, Cash Equivalents, and Restricted Cash
Cash and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. Cash and cash equivalents have original maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Cash deposited to support securitization transactions, lockbox collections, and the related required reserve accounts is recorded in the Company's Consolidated Balance Sheets as restricted cash. Excess cash flows generated by Trusts are added to the restricted cash reserve account, creating additional over-collateralization until the contractual securitization requirement has been reached. Once the targeted reserve requirement is satisfied, additional excess cash flows generated by the Trusts are released to the Company as distributions from the Trusts. Lockbox collections are added to restricted cash and released when transferred to the appropriate warehouse facility or Trust. The Company also maintains restricted cash primarily related to cash posted as collateral related to derivative agreements and cash restricted for investment purposes.
Investment Securities and Other Investments
InvestmentInvestments in debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities are generally recorded at fair value with changes recorded in earnings. Management determines the appropriate classification at the time of purchase.
Debt securities expected to be held for an indefinite period of time are classified as AFS and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes.
Debt securities purchased whichthat the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for payments, charge offs, amortization of premium and accretion of discount.Impairment of HTM securities is recorded using a valuation reserve which represents management’s best estimate of expected credit losses during the lives of the securities.Securities for which management has an expectation that nonpayment of the amortized costs basis is zero, do not have a reserve.The Company has a zero loss expectation when the securities are issued or guaranteed by certain US government entities, and those entities have a long history of no defaults and the highest credit ratings issued by rating agencies. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCIAOCI and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities. Any reserve for credit losses on investments recorded while the security was classified as AFS will be reversed through provision expense in non-interest income.Thereafter, the allowance will be recorded through provision expense using the HTM valuation reserve.
Debt securities expected to be held for an indefinite period of time are classified as AFS and recorded on the balance sheet at fair value. If the fair value of an AFS debt security declines below its amortized cost basis and the Company does not have the intention or requirement to sell the security before it recovers its amortized cost basis, declines due to credit factors will be recorded in earnings through an a reserve for credit losses on investments, and declines due to non-credit factors will be recorded in AOCI, net of taxes. Subsequent to recognition of a credit loss, improvements to the expectation of collectability will be reversed through the allowance.If the Company has the intention or requirement to sell the security, the Company will record its fair value changes in earnings as a direct write down to the security.Increases in fair value above amortized cost basis are recorded in AOCI, net of taxes.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The Company conducts a comprehensive security-level impairment assessment quarterly on all AFS securities with a fair value that is less than their amortized cost basis to determine whether the loss represents OTTI.is due to credit factors. The quarterly OTTI assessment takes into consideration whether (i) the Company has the intent to sell or (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. Similar to HTM securities, securities for which management expects risk of nonpayment of the amortized costs basis is zero do not have a reserve. The Company has a zero loss expectation when the securities are issued or guaranteed by certain US government entities, and those entities have a long history of no defaults and the highest credit ratings issued by rating agencies. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and by the recording of a valuation reserve. The non-credit component is recorded within accumulated OCI.AOCI.
Prior to the adoption of CECL, credit losses on HTM and AFS securities were recorded as direct write downs of the investment in the asset and in noninterest income.
The Company does not measure an ACL for accrued interest, and instead writes off uncollectible accrued interest balances in a timely manner. The Company places securities on nonaccrual and reverses any uncollectible accrued interest when the full and timely collection of interest or principal becomes uncertain, but no later than at 90 days past due.
Realized gains and losses on sales of investment securities are recognized on the trade date and included in earnings within Net (losses)/gains on sale of investment securities, which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.
Debt securities held for trading purposes and equity securities are carried at fair value, with changes in fair value recorded in non-interest income. Investments that are purchased principally for the purpose of economically hedging the MSR in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Miscellaneous income, net line of the Consolidated Statements of Operations.
Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. Although FHLB and FRB stock are equity interests in the FHLB and FRB, respectively, neither has a readily determinable fair value, because ownership is restricted and they are not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock and FRB stock are carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
See Note 32 to the Consolidated Financial Statements for details on the Company's investments.
LHFI
LHFI include commercial and consumer loans (including RICs) originated by the Company as well as loans acquired by the Company, which the Company intends to hold for the foreseeable future or until maturity. RICs consist largely of nonprime automobile finance receivables that are acquired individually from dealers at a nonrefundable discount from the contractual principal amount. RICs also include receivables originated through a direct lending program and loan portfolios purchased from other lenders.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Originated LHFI
Originated LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the Company's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over their estimated lives as adjustments to interest income utilizing the effective interest method using estimated prepayment speeds, which are updated on a monthly basis. 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 experiencing higher voluntary prepayment rates than lower credit quality loans. 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. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 9.8% to 16.2% at December 31, 2020 and 5.1% to 11.0% at December 31, 2019 and 5.7% to 10.8% at December 31, 2018.2019.
The Company’s LHFI are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:
•Origination costs.
•Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.
•Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.
•Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.
Originated loans are initially recorded at the proceeds paid to fund the loan. Loan origination fees and costs and any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.
Collateral is generally required for originated loans. For commercial loans, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. C&I loans are generally secured by the borrower’s assets and by guarantees. CRE loans are secured by real estate at specified LTV ratios and often by a guarantee. SHUSA originates and purchases residential mortgage loans and home equity loans and lines that are secured by the underlying 1-4 family residential properties. RICs and auto loans are secured by the underlying vehicles.
See LHFS subsection below for accounting treatment when an HFI loan is re-designated as LHFS.
Purchased LHFI
Purchased loans are generally loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans.
Loans that at acquisition the Company deems to have more than insignificant deterioration in credit quality since origination (i.e., PCI loans) require the recognition of an ACL at purchase. The allowance for credit losses is added to the purchase price at the date of acquisition to determine the initial amortized cost basis of the PCI loan. The ACL is calculated using the same methodology as originated loans, as described below. Alternatively, the Company can elect the fair value option at the time of purchase for any financial asset. Under the FVO, loans are recorded at fair value with changes in value recognized immediately in income. There is no ACL for loans under the FVO.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Purchase discounts and premiums on purchased loans that are deemed performing are accreted over the remaining expected lives of the loans to their par values, generally using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.
PurchasedFor loans with evidence of credit quality deterioration as ofunder the purchase date for which it is probable thatFVO, the Company will not receive all contractually required payments receivable are accounted for as PCI loans. At acquisition, PCI loans are recorded at fair value with no allowance for credit losses, and accounted for individually or aggregated in pools based on similar risk characteristics. The Company estimates the amount and timing of expected cash flows for each loan or pool of loans. The expected cash flows in excess of the amount paid for the loans is referred to as the accretable yield and is recorded as interest income over the remaining estimated life of the loan or pool of loans.
The Company may irrevocably elect to account for certain loans acquired with evidence of credit deterioration at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these loans and recognizes the fair value adjustments on these loans as part of other non-interest income in the Company’s Consolidated Statements of Operations. Generally, the Company does not recognize interest income on non-accrual loans under the FVO. For certain loans which the Company has elected to account for at fair value that are not considered non-accrual, the Company separately recognizes interest income from the total fair value adjustment. No ALLL is recognized
Allowance for loans that the Company has elected to account for at fair value.Credit Losses
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
ALLL for Loan Losses and Reserve for Unfunded Lending Commitments
The ALLL and reserve for unfunded lendingoff-balance sheet commitments (together, the ACL) are maintained at levels that management considersrepresent management’s best estimate of expected credit losses in the Company’s HFI loan portfolios, excluding those loans accounted for under the FVO. Credit loss expenses are charged in amounts sufficient to maintain the ACL at levels considered adequate to providecover expected credit losses in the Company’s HFI loan portfolios. The allowance for expected credit losses is measured based on the recorded investmenta current expected loss model, which means that it is not necessary for a loss event to occur before a credit loss is recognized. Management’s estimate of the loan portfolio,expected credit losses is based uponon an evaluation of knownrelevant information about past events, current conditions, and inherent risks inreasonable and supportable forecasts that affect the loan portfolio.future collectability of the reported amounts. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic conditionsforecasts and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
The ALLL is a valuation account that is deducted from, or added to, the amortized cost basis to present the net amount expected to be collected on the Company’s HFI loan portfolios. The reserve for off-balance sheet commitments represents the expected credit losses for unfunded lending commitments and financial guarantees, and is presented within Other liabilities on the Company's Consolidated Balance Sheets. The reserve for off-balance sheet commitments, together with the ALLL, is generally referred to collectively throughout this Form 10-K as the ACL, despite the presentation differences.
The Company measures expected losses of all components of the amortized cost basis of its loans.For all loans except TDRs and credit cards, the Company has elected to exclude accrued interest receivable balances from the measurement of expected credit losses because it applies a nonaccrual policy that results in the timely write off of uncollectible interest.
Off-balance sheet commitments which are not unconditionally cancellable by the Company are subject to credit risk. Additions to the reserve for off-balance sheet commitments are made by charges to the credit loss expense.The Company does not calculate a liability for expected credit losses for off-balance sheet credit exposures which are unconditionally cancellable by the lender, because these instruments do not expose the Company to credit risk.At SHUSA, this generally applies to credit cards and commercial demand lines of credit.
Methodology
The Company uses several methodologies for the measurement of ACL. The ACL is made up of a quantitative and a qualitative component. To determine the quantitative component, the Company generally uses a DCF approach for determining ALLL consistsfor TDRs and other individually assessed loans, and loss rate statistical methodology for other loans. The methodologies utilized by the Company to estimate expected credit losses vary by product type.
Expected credit losses are estimated on a collective basis when similar risk characteristics exist.Expected credit losses are estimated on an individual basis only if the individual asset or exposure does not share similar risk attributes with other financial assets or exposures, including when an asset is treated as a collateral dependent asset.The estimate of two elements: (i)expected credit losses reflects information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of reported amounts.This information includes internal information, external information, or a combination of both.The Company uses historical loss experience as a starting point for estimating expected credit losses.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The ACL estimate includes significant assumptions including the reasonable and supportable economic forecast period, which considers the availability of forward-looking scenarios and their respective time horizons, as well as the reversion method to historical losses. The economic scenarios used by the Company are available up to the contractual maturities of the assets, and therefore the Company can project losses through the respective contractual maturities, using an allocated allowance, whichinput reversion approach. This method results in a single, quantitatively consistent credit model across the entire projection period as the macroeconomic effects in the historical data are controlled for the estimate of the long-run loss level.
The Company uses multiple scenarios in its CECL estimation process.The selection of scenarios is comprised of allowances established on loans specifically evaluated for impairment,reviewed quarterly and loans collectively evaluated for impairment,governed by the ACL Committee.Additionally, the results from the CECL models are reviewed and adjusted, if necessary, based on historicalmanagement’s judgment, as discussed in the section captioned "Qualitative Reserves" below.
CECL Models
The Company uses a statistical methodology based on an expected credit loss approach that focuses on forecasting the expected credit loss components (i.e., PD, payoff, LGD and EAD) on a loan level basis to estimate the expected future lifetime losses.
•In calculating the PD and leasepayoff, the Company developed model forecasts which consider variables such as delinquency status, loan tenor and credit quality as measured by internal risk ratings assigned to individual loans and credit facilities.
•The LGD component forecasts the extent of losses given that a default has occurred and considers variables such as collateral, LTV and credit quality.
•The EAD component captures the effects of expected partial prepayments and underpayments that are expected to occur during the forecast period and considers variables such as LTV, collateral and credit quality indicators.
The above expected credit loss components are used to compute an ACL based on the weighted average of the results of four macroeconomic scenarios.The weighting of these scenarios is governed and approved quarterly by management through established committee governance. These ECL components are inputs to both the Company’s DCF approach for TDRs and individually assessed loans, and the non-DCF approach for other loans.
When using a non-DCF method to measure the ACL, the Company measures expected credit losses over the asset’s contractual term, adjusted for (a) expected prepayments, (b) expected extensions associated with assets for which management has a reasonable expectation at the reporting date that it will execute a TDR with the borrower, and (c) expected extensions or renewal options (excluding those that are accounted for as derivatives) included in the original or modified contract at the reporting date that are not unconditionally cancellable by the Company.
In addition to the ALLL, management estimates expected losses related to off-balance sheet commitments using the same models and procedures used to estimate expected loan losses. Off-balance sheet commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with a forecast of expected usage of committed amounts and an analysis of historical loss experience, reasonable and supportable forecasts of economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for off-balance sheet commitments.
DCF Approaches
A DCF method measures expected credit losses by forecasting expected future principal and interest cash flows and discounting them using the financial asset’s EIR. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows.When using a DCF method to measure the ACL, the period of exposure is determined as a function of the Company’s expectations of the timing of principal and interest payments. The Company considers estimated prepayments in the future principal and interest cash flows when utilizing a DCF method.The Company generally uses a DCF approach for TDRs and impaired commercial loans. The Company reports the entire change in present value in credit loss expense.
Collateral-Dependent Assets
A loan is considered a collateral-dependent financial asset when:
•The Company determines foreclosure is probable, or
•The borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
For all collateral-dependent loans, the Company measures the ACL as the difference between the asset’s amortized cost basis and the fair value of the underlying collateral as of the reporting date, adjusted for current trends and both general economic conditions and other risk factorsexpected costs to sell.If repayment or satisfaction of the loan is dependent only on the operation, rather than the sale of the collateral, the measure of credit losses does not incorporate estimated costs to sell.
A collateral dependent loan is written down (i.e., charged-off) to the fair value of the collateral adjusted for costs to sell (if repayment from sale is expected.)Any subsequent increase or decrease in the collateral’s fair value less cost to sell is recognized as an adjustment to the related loan’s ACL. Negative ACLs are limited to the amount previously charged-off.
Collateral Maintenance Provisions
For certain loans with collateral maintenance provisions which are secured by highly liquid collateral, the Company expects nonpayment of the amortized cost basis to be zero when such provisions require the borrower to continually replenish collateral in the event the fair value of the collateral changes.For these loans, the Company records no ACL.
Negative Allowance
Negative allowance is defined as the amount of future recovery expected for accounts that have already been charged-off.The Company performs an analysis of the actual historical recovery values to determine the pattern of recovery and expected rate of recovery over a given historic period, and uses the results of this analysis to determine a negative allowance. Negative allowance reduces the ACL.
Qualitative Reserves
Regardless of the extent of the Company's loan portfolios, and (ii) an unallocated allowance to account foranalysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains a qualitative reserve as a component of the ACL to recognize the existence of these exposures.Imprecisions include loss factors inherent in management's estimation process. the loan portfolio that may not have been discreetly contemplated in deriving the quantitative component of the allowance, as well as potential variability in estimates.
Quantitative models have certain limitations regarding estimating expected losses in times of rapidly changing macro-economic forecasts.The ACL estimate includes qualitative adjustments to adjust for limitations in modeled results with respect to forecasted economic conditions that are well outside of historic economic conditions used to develop the models and to give consideration to significant government relief programs, stimulus, and internal credit accommodations. Management believes the qualitative component of the ACL, which incorporates management’s expert judgment related to expected future credit losses, will continue to represent a significant portion of the ACL for the foreseeable future.
The qualitative adjustment is also established in consideration of several factors such as the interpretation of economic trends, changes in the nature and volume of our loan portfolios, trends in delinquency and collateral values, and concentration risk. This analysis is conducted at least quarterly, and the Company revises the qualitative component of the allowance when necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.
Governance
A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency and NPLs, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions, trends and forecasts.Risk factors are continuously reviewed and revised by management when conditions warrant.
The Company's reserves are principally based on various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's Internal Audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its ACL Committee.
In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The ALLL includesACL is subject to review by banking regulators. The Company's primary bank regulators conduct examinations of the estimate of credit losses that management expects will be realized duringACL and make assessments regarding the loss emergence period, including the amount of net discounts that is includedmethodology employed in its determination.
Changes in the loans' recorded investment atassumptions used in these estimates could have a direct material impact on credit loss expense in the timeConsolidated Statements of charge-off. Operations and in the allowance for loan losses.The Company’s models incorporate a variety of assumptions based on historical experience, current conditions and forecasts.Management also applies its judgement in evaluating the appropriateness of the allowance.Material changes to the ACL might be necessary if prevailing conditions differ materially from the assumptions and estimates utilized in calculating the ACL.
In 2019 (prior to the caseadoption of loans purchased in a bulk purchase or business combination, the entire discount on the loan portfolio is considered as available to absorb the credit losses when determining the ALLL. For these loans,CECL), the Company records provisions for credit losses when incurred losses exceed the unaccreted purchase discount.
Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company usesused the incurred loss approach in providing an ACL on the recorded investment of its existing loans. This approach requires that loan loss provisions are recognized and the corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent. For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions relatedSimilar to the Company’s charge-off policies are provided in the “Charge-offs of Uncollectible Loans” section below.
When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans in excess of $1 million) as of the balance sheet date,CECL methodology, the Company measures impairment based onconsiders whether to adjust the present value of expected future cash flows discounted atquantitative reserves for certain external and internal qualitative factors, which may increase or decrease the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows (including the fair value of the collateral for collateral dependent loans) the Company recalculates the impairment and adjusts the specific reserve. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of the estimated cash flows of an impaired loan is less than its carrying amount, the Company recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis.
The Company's allocated reserves are principally based on its various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates.
The unallocated allowance is also established in consideration of several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.
Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.
For the commercial loan portfolio segment, the Company has specialized credit officers and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are reviewed on an ongoing basis by Credit Risk Management and revised, if needed, to reflect the borrower's current risk profile and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower's risk rating on no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.
When a loan's risk rating is downgraded beyond a certain level, the Company's Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees, depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management's strategies for the customer relationship going forward.
The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral supporting the loans. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist, to determine the value to compare against the committed loan amount.
Within the consumer loan portfolio segment, for both residential and home equity loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge off. These assumptions are based on recent loss experience for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.
For non-TDR RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.
In addition to the ALLL, management estimates probable losses related to unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Consolidated Balance Sheets.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Risk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.
The ACL is subject to review by banking regulators. The Company's primary bank regulators conduct examinations of the ACL and make assessments regarding its adequacy and the methodology employed in its determination.
Interest Recognition and Non-accrual loans
Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement.
The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. Additionally, loans may be placed on nonaccrual status based on other circumstances, such as receipt of notification of a customer’s bankruptcy filing. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are generally applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the carrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Collateral-Collateral dependent loans are generally not returned to accrual status. Please referRefer to the TDRs section below for discussion related to TDR loans placed on non-accrual status.
Consumer loans (excluding RICs and auto loans) are placed on nonaccrual status when they meet certain delinquency thresholds, or sooner if collectability of the amortized cost basis is in doubt. Residential mortgages, home equity loans and lines and unsecured loans are generally placed on nonaccrual status at 90 days past due, and returned to accrual status when they become current.
Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.
For RICs and auto loans, the accrual of interest is discontinued and accrued but uncollected interest is reversed once a RIC becomes more than 60 days past due, (i.e. 61 or more days past due),DPD) and is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. The Company considers an accounta RICs and auto loans delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. The payment following the partial paymentmust be a full payment, or the account will move into delinquency status at that time. LoansRICs and auto loans accounted for using the FVO are not placed on nonaccrual.
Charge-off of Uncollectible Loans
Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy, (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than a quarterly basis, with additional charge-offs or loan and lease loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met.
The Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Loans with respect to which a bankruptcy notice is received or for which fraud is discoveredRICs and auto loans are written downcharged-off to the collateralestimated net recovery value less costsin the month an account becomes greater than 120 days delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession to sell within 60 daysestimated net recovery value when the automobile is repossessed and legally available for disposition. For RICs and auto loans, a net charge off represents the difference between the estimated net sales proceeds and the Company's amortized cost basis of such notice or discovery.the related contract. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy.
Accounts in repossession that have been charged off and are pending liquidation are removed from loans and the related repossessed assets are included in Other assets in the Company's Consolidated Balance Sheets. For residential mortgages, foreclosed real estate is moved to Other assets when the Company has obtained legal title to the property.
Loans receiving a bankruptcy notice or for which fraud has been discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment include a loan that is secured by collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
RICs and auto loans are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the related contract. Accounts in repossession that have been chargedExpected recoveries of amounts previously written off and are pending liquidation are removed from loans and the related repossessed automobilesexpected to be written off are included in Other assets in the Company's Consolidated Balance Sheets.Allowance for Credit Losses up to the aggregate of amounts previously written off and expected to be written off by the Company.
TDRs
TDRs are loans that have been modified for which the Company has agreed to make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing financial difficulties and the loan is modified to provideinvolving a concession that would otherwise not be granted to the borrower. The types of concessions granted are generally payment deferrals, interest rate reductions, limitations on accrued interest charged, term extensions and deferments of principal. TDRs are generally placed on non-accrual status at the time of modification, unless(unless the loan was performing immediately prior to modificationmodification) and returned to accrual after a sustained period of repayment performance. Collateral dependent TDRsTDRS are generally not returned to accrual status. All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.
Short-term modifications are generally not classified as TDRs. In response to the 2020 COVID-19 pandemic, the Company implemented loan modification programs to assist borrowers impacted by the pandemic. Under these programs, payment deferrals of up to six months to borrowers who were performing prior to the modification are considered short term modifications and are not classified as TDRs. Additionally, certain consumer loans that are granted deferrals beyond 180 days are not classified as TDRs if they comply with the requirements of the CARES Act.
Commercial Loan TDRs
All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. Commercial loan TDRs are generally restructured to allow for an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically 12 months for monthly payment schedules). As TDRs, they will be subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Consumer Loan TDRs
The majority of the Company's TDR balance is comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio generally include one or a combination of:of a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.
In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICsRIC and auto loan consumers under which the consumer is allowed to defer a maximum of three3 payments per event to the end of the loan. More than 90% of deferrals granted are for two2 payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one1 deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight,8, while some marine and RV contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs and auto loans that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs. Additionally, restructurings through bankruptcy proceedings are deemed to be TDRs.
RIC and auto loan TDRs are placed on non-accrual 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 RICs and auto loans on nonaccrual status, interest income is recognized on a cash basis. For TDR loans on nonaccrual status, theThe accrual of interest is resumed if a delinquent account subsequently becomes 60 days or less past due.
At the time a deferral is granted on a RIC or auto loan, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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 ALLL are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of ALLL and related provision for loan and lease losses.
The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific DTI ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.
Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status atuntil the timeCompany believes repayment under the revised terms is reasonably assured and a sustained period of modification, and returned to accrual when they have made six consecutive on-time payments.repayment performance has been achieved. In addition to those identified as TDRs above, loans discharged under Chapter 7 bankruptcy are considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to the fair market value of collateral and classified as non-accrual/non-performing for the remaining life of the loan.
TDR
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Impact to ALLLACL
The ALLL is establishedCompany’s policies for estimating the ACL also apply to recognize lossesTDRs as follows:
•The Company reflects the impact of the concession in funded loans that are probablethe ACL for TDRs. Interest rate concessions and significant term deferrals can only be reasonably estimated. Prior to loans being placedcaptured within the ACL by using a DCF method. Therefore, in TDR status,circumstances in which the Company generally measuresoffers such extensions in its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.
Upon TDR modification, it uses a DCF Method to calculate the ACL.
•The Company recognizes the impact of a TDR modification to the ACL when the Company generally measures impairment based onhas a present value of expected future cash flows methodology considering all available evidence usingreasonable expectation that the effective interest rate or fair value of collateral (less costs to sell). The amount of the required valuation allowance is equal to the difference between the loan’s impaired value and the recorded investment.TDR modification will be executed.
RIC TDRs that subsequently default continue to have impairment measured based on the difference between the recorded investment of the RIC and the present value of expected cash flows. For the Company's other consumer TDR portfolios, impairment on subsequently defaulted loans is generally measured based on the fair value of the collateral, if applicable, less its estimated cost to sell.
Typically, commercial loans whose terms are modified in a TDR will have been identified as impaired prior to modification and accounted for generally using a present value of expected future cash flows methodology, unless the loan is considered collateral-dependent. Loans considered collateral-dependent are measured for impairment based on the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology generally remains unchanged.
ImpairedFor consumer loans,
A loan is considered prior to be impaired when, based upon current information and events, it is probable thatloans being placed in TDR status, the Company will be unable to collect all amounts due according togenerally measures its allowance under a loss contingency methodology in which loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores. Upon TDR modification, the contractual terms of the loan. An insignificant delay (e.g., less than 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in theCompany generally measures consumer loan being identified as impaired.
The Company considers all of its TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The Company measures impairment on impaired loans based on thea present value of expected future cash flows discounted atmethodology considering all available evidence using the loan's original effective interest rate exceptor fair value of collateral. The amount of the required valuation allowance is equal to the difference between the loan’s impaired value and the amortized cost basis.
RIC and auto loan TDRs that as a practical expedient, the Company may measuresubsequently default continue to have impairment measured based on a loan's observable market price,the difference between the amortized cost basis of the RIC or auto loan and the present value of expected cash flows. For the Company's other consumer TDR portfolios, impairment on subsequently defaulted loans is generally measured based on the fair value of the collateral, if applicable, less its estimated cost to sell.
When a DCF methodology is used, cash flows are generally discounted at the costs to sell, ifindividual asset’s EIR, or an individual asset’s prepay-adjusted EIR. The Company has made the loanfollowing elections:
•RICs and auto loans: When a DCF methodology is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment andused, the Company utilizes historical loan loss experience information as part of its evaluation.discounts cash flows using the prepay-adjusted EIR.
•All Other Assets: When a DCF methodology is used, the Company determines that the present value of the estimateddiscounts cash flows of an impaired loan is less than its carrying amount,using the Company recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis.EIR.
LHFS
LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Applying fair value accounting to the residential mortgage LHFS better aligns the reported results of the economic changes in the value of these loans and their related economic hedge instruments.Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Miscellaneous income, net. For residential mortgages for which the FVO is selected, direct loan origination fees are
recorded in Miscellaneous income, net at origination.
All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, the Company will recognize a charge-off to the ALLL, if warranted under the Company’s charge off policies. Any excess ALLL for the transferred loans is reversed through provision expense. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneousMiscellaneous income, net as lower of cost or market adjustments.
Interest income on the Company’s LHFS is recognized when earned based on their respective contractual rates in Interest income on loans in the Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Leases (as Lessor)
The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.
The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the effective interest method, which provides a constant periodic rate of return on the outstanding investment on the lease.
Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.
Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.
The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. NoNaN impairment for leased assets was recognized during the years ended December 31, 2020, 2019, 2018, or 2017.2018.
Leases (as Lessee)
Operating lease ROU assets and lease liabilities are recognized upon lease commencement based on the present value of lease payments over the lease term, discounted at the Company's estimated rate of interest for a collateralized borrowing for a similar term. The lease term includes options to extend or terminate a lease when the Company considers it reasonably certain that such options will be exercised. Lease expense for operating leases is recognized on a straight-line basis over the lease term.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Premises and Equipment
Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:
|
| | | | | | | |
Office buildings | | 10 to 50 years |
Leasehold improvements(1) | | 10 to 30 years |
Software(2) | | 3 to 7 years |
Furniture, fixtures and equipment | | 3 to 10 years |
Automobiles | | 5 years |
(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases.
(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a seven-year period is utilized.
Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.
Equity Method Investments
The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." Investments accounted for under the equity method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.
An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.
The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.
MSRs
The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own discounted cash flow DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.
See Note 1612 to these Consolidated Financial Statements for detail on MSRs.
BOLI
BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.
OREO and Other Repossessed Assets
OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs and leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a valuation allowance with a charge to non-interest income. Increases in the fair value of OREO and repossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often sells derivative products to commercial loan customers to hedge interest rate risk associated with loans made by the Company. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. Derivative financial instruments are recognized as either assets or liabilities in the consolidated balance sheetsConsolidated Balance Sheets at fair value. The accounting for changes in the fair value of each derivative financial instrument depends on whether it has been designated and qualifies as a hedge for accounting purposes, as well as the type of hedging relationship identified.
Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.
Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the change in the fair value of the derivative, net of tax, recorded in accumulated OCIAOCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated OCIAOCI to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCIAOCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.
We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.
Changes in the fair value of derivatives not designated in hedging relationships are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 1411 to the Consolidated Financial Statements for further discussion.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, the TCJA was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and as new information becomes available. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.
The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 1514 to the Consolidated Financial Statements for details on the Company's income taxes.
Stock-Based Compensation
The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Guarantees
Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.
Business Combinations
The Company accounts for business combinations using the acquisition method of accounting, and records the identifiable assets, liabilities and any NCI of the acquired business at their acquisition date fair values. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Any changes in the estimated acquisition date fair values of the net assets recorded prior to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.
The results of operations of the acquired companies are recorded in the Consolidated Statements of Operations from the date of acquisition. The application of business combination principles, including the determination of the fair value of the net assets acquired, requires the use of significant estimates and assumptions.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Revenue Recognition
The Company primarily earns interest and non-interest income from various sources, including:
•Lending (interest income and loan fees)
•Investment securities
•Loan sales and servicing
•Finance leases
•BOLI
•Depository services
•Commissions and trailer fees
•Interchange income, net.
•Underwriting service Fees
•Asset and wealth management fees
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Lending and Investment Securities
The principal source of revenue is interest income from loans and investment securities. Interest income is recognized on an accrual basis primarily according to non-discretionary formulas in written contracts, such as loan agreements or securities contracts. Revenue earned on interest-earning assets, including amortization of deferred loan fees and origination costs and the accretion of discounts recognized on acquired or purchased loans, is recognized based on the constant effective yield of such interest-earning assets.
Gains or losses on sales of investment securities are recognized on the trade date.
Loan Sales and Servicing
The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third parties based on the specific contractual terms and changes in the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the sale is complete.
Finance Leases
Income from finance leases is recognized as part of interest income over the term of the lease using the constant effective yield method, while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.
BOLI
Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.
Depository services
Depository services are performed under an agreement with a customer, and those services include personal deposit account opening and maintenance, checking services, online banking services, debit card services, etc. Depository service fees related to customer deposits can generally be distinguished between monthly service fees and transactional fees within the single performance obligation of providing depository account services. Monthly account service and maintenance fees are provided over a period of time (usually a month), and revenue is recognized as the Company performs the service (usually at the end of the month). The services for transactional fees are performed at a point in time and revenue is recognized when the transaction occurs.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Commissions and trailer fees
Commission fees are earned from the selling of annuity contracts to customers on behalf of insurance companies, acting as the broker for certain equity trading, and sales of interests in mutual funds. The Company elected the expected value method for estimating commission fees due to the large number of customer contracts with similar characteristics. However, commissions and trailer fees are fully constrained as the Company cannot sufficiently estimate the consideration which it could be entitled to earn. Commissions are generally associated with point-in-time transactions or agreements that are one year or less. The performance obligation is satisfied immediately and revenue is recognized as the Company performs the service.
Interchange income, net
The Company has entered into agreements with payment networks under which the Company will issue the payment network's credit card as part of the Company's credit card portfolio. Each time a cardholder makes a purchase at a merchant and the transaction is processed, the Company receives an interchange fee in exchange for the authorization and settlement services provided to the payment networks.
The performance obligation for the Company is to provide authorization and settlement services to the payment network when the payment network submits a transaction for authorization. The Company considers the payment network to be the customer, and the Company is acting as a principal when performing the transaction authorization and settlement services. The performance obligation for authorization and settlement services is satisfied at a point in time, and revenue is recognized on the date when the Company authorizes and routes the payment to the merchant. The expenses paid to payment networks are accounted for as consideration payable to the customer and therefore reduce the transaction price. Therefore, interchange income is recorded net against the expenses paid to the payment network and the cost of rewards programs.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The agreements also contain immaterial fixed consideration related to upfront sign-on bonuses and program development bonuses, which are amortized over the remainder of the agreements' life on a straight-line basis.
Underwriting service fees
SIS, as a registered broker-dealer, performs underwriting services by raising investment capital from investors on behalf of corporations that are issuing securities. Underwriting services have one performance obligation, which is satisfied on the day SIS purchases the securities.
Underwriting services include multiple parties in delivering the performance obligation. The Company has evaluated whether it is the principal or agent when we provide underwriting services. The Company acts as the principal when performing underwriting services, and recognizes fees on a gross basis. Revenue is recorded as the difference between the price the Company pays the issuer of the securities and the public offering price, and expenses are recorded as the proportionate share of the underwriting costs incurred by SIS. The Company is the principal because we obtain control of the services provided by third-party vendors and combine them with other services as part of delivering on the underwriting service.
Asset and wealth management fees
Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned for the management of the assets in the customer's account and are recognized as earned and charged to the customer on a quarterly basis. Non-discretionary investment advisory fees are earned for providing investment advisory services to customers, such as recommending the re-balancing or restructuring of the assets in the customer’s account. The investment advisory fee is recognized as earned and charged to the customer on a quarterly basis. The fee for the discretionary and nondiscretionary contracts is based on a percentage of the average assets included in the customer’s account.
NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Fair Value Measurements
The Company uses fair value measurements to estimate the fair value of certain assets and liabilities for both measurement and disclosure purposes. The Company values assets and liabilities based on the principal market in which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.
When measuring the fair value of a liability, the Company assumes that the transfer will not affect the nonperformance risk associated with the liability. The Company considers the effect of the credit risk on the fair value for any period in which fair value is measured.
There are three valuation approaches for measuring fair value: the market approach, the income approach and the cost approach. Selecting the appropriate technique for valuing a particular asset or liability should consider the exit market for the asset or liability, the nature of the asset or liability being measured, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment. These assumptions result in classification of financial instruments into the
The fair value hierarchy categorizes the underlying assumptions and inputs to valuation techniques that are used to measure fair value into three levels. The three fair value hierarchy classification levels are defined 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 in Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3 inputs are those that are unobservable or not readily observable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.
The fair value hierarchy is used for disclosure purposes.purposes, with assets and liabilities classified into one of the three levels defined above, based upon the level of the most significant assumptions used in the valuation.
Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on the Company's own information or assessment of assumptions used by other market participants in pricing the asset or liability. The unobservable inputs are based on the best and most current information available on the measurement date.The Company uses valuation techniques that maximize the use of relevant observable inputs and minimize the use of unobservable inputs in its fair value measurements.
Subsequent Events
The Company evaluated events from the date of thethese Consolidated Financial Statements on December 31, 20192020 through the issuance of these Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements for the year ended December 31, 2019 other than the transaction disclosed2020 except as noted in Note 13Notes 3 and 19.
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments measured at amortized cost. The amendment introduces a new credit reserving framework known as CECL, which replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the current OTTI framework. The Company adopted the new guidance on January 1, 2020.
The Company established a cross-functional working group for implementation of this standard. Generally, our implementation process included data sourcing and validation, development and validation of loss forecasting methodologies and models, including determining the length of the reasonable and supportable forecast period and selecting macroeconomic forecasting methodologies to comply with the new guidance, updating the design of our established governance, financial reporting, and internal control over financial reporting frameworks, and updating accounting policies and procedures. The status of our implementation was periodically presented to the Audit Committee and the Risk Committee. The Company completed multiple parallel model runs to test and refine its current expected credit loss models to satisfy the requirements of the new standard.
The adoption of this standard resulted in the increase in the ACL of approximately $2.5 billion and a decrease to opening retained earnings, net of income taxes, at January 1, 2020. The estimated increase is based on forecasts of expected future economic conditions and is primarily driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios. The standard did not have a material impact on the Company’s other financial instruments. Additionally, we elected to utilize regulatory relief which will permit us to phase in 25 percent of the capital impact of CECL in our calculation of regulatory capital amounts and ratios in 2020, and an additional 25 percent each subsequent year until fully phased-in by the first quarter of 2023.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This ASU requires disclosure of changes in unrealized gains and losses for the period included in OCI (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted the new guidance effective January 1, 2020 and it did not have a material impact on the Company’s business, financial position or results of operations.
In addition to those described in detail above, on January 1, 2020, the Company adopted ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, and it did not have a material impact on the Company's business, financial position, results of operations, or disclosures.
NOTE 3. INVESTMENT SECURITIES
Summary of Investments in Debt Securities - AFS and HTM
The following tables presenttable presents the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities AFS at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
U.S. Treasury securities | | $ | 168,074 | | | $ | 2,578 | | | $ | 0 | | | $ | 170,652 | | | $ | 4,086,733 | | | $ | 4,497 | | | $ | (292) | | | $ | 4,090,938 | |
Corporate debt securities | | 155,610 | | | 114 | | | (9) | | | 155,715 | | | 139,696 | | | 39 | | | (22) | | | 139,713 | |
ABS | | 109,888 | | | 686 | | | (1,236) | | | 109,338 | | | 138,839 | | | 1,034 | | | (1,473) | | | 138,400 | |
State and municipal securities | | 1 | | | 0 | | | 0 | | | 1 | | | 9 | | | 0 | | | 0 | | | 9 | |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | 3,467,611 | | | 69,864 | | | (1,350) | | | 3,536,125 | | | 4,868,512 | | | 12,895 | | | (16,066) | | | 4,865,341 | |
GNMA - Commercial | | 1,706,648 | | | 26,949 | | | (235) | | | 1,733,362 | | | 773,889 | | | 6,954 | | | (1,785) | | | 779,058 | |
FHLMC and FNMA - Residential | | 5,464,821 | | | 77,813 | | | (4,351) | | | 5,538,283 | | | 4,270,426 | | | 14,296 | | | (30,325) | | | 4,254,397 | |
FHLMC and FNMA - Commercial | | 63,732 | | | 6,283 | | | (2) | | | 70,013 | | | 69,242 | | | 2,665 | | | (5) | | | 71,902 | |
Total investments in debt securities AFS | | $ | 11,136,385 | | | $ | 184,287 | | | $ | (7,183) | | | $ | 11,313,489 | | | $ | 14,347,346 | | | $ | 42,380 | | | $ | (49,968) | | | $ | 14,339,758 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
U.S. Treasury securities | | $ | 4,086,733 |
| | $ | 4,497 |
| | $ | (292 | ) | | $ | 4,090,938 |
| | $ | 1,815,914 |
| | $ | 560 |
| | $ | (11,729 | ) | | $ | 1,804,745 |
|
Corporate debt securities | | 139,696 |
| | 39 |
| | (22 | ) | | 139,713 |
| | 160,164 |
| | 12 |
| | (62 | ) | | 160,114 |
|
ABS | | 138,839 |
| | 1,034 |
| | (1,473 | ) | | 138,400 |
| | 435,464 |
| | 3,517 |
| | (2,144 | ) | | 436,837 |
|
State and municipal securities | | 9 |
| | — |
| | — |
| | 9 |
| | 16 |
| | — |
| | — |
| | 16 |
|
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | 4,868,512 |
| | 12,895 |
| | (16,066 | ) | | 4,865,341 |
| | 2,829,075 |
| | 861 |
| | (85,675 | ) | | 2,744,261 |
|
GNMA - Commercial | | 773,889 |
| | 6,954 |
| | (1,785 | ) | | 779,058 |
| | 954,651 |
| | 1,250 |
| | (19,515 | ) | | 936,386 |
|
FHLMC and FNMA - Residential | | 4,270,426 |
| | 14,296 |
| | (30,325 | ) | | 4,254,397 |
| | 5,687,221 |
| | 267 |
| | (188,515 | ) | | 5,498,973 |
|
FHLMC and FNMA - Commercial | | 69,242 |
| | 2,665 |
| | (5 | ) | | 71,902 |
| | 51,808 |
| | 384 |
| | (537 | ) | | 51,655 |
|
Total investments in debt securities AFS | | $ | 14,347,346 |
| | $ | 42,380 |
| | $ | (49,968 | ) | | $ | 14,339,758 |
| | $ | 11,934,313 |
| | $ | 6,851 |
| | $ | (308,177 | ) | | $ | 11,632,987 |
|
The following tables presenttable presents the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities HTM at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
ABS | | $ | 44,841 | | | $ | 765 | | | $ | 0 | | | $ | 45,606 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | |
| | | | | | | | | | | | | | | | |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | 1,966,247 | | | 51,417 | | | (1,819) | | | 2,015,845 | | | 1,948,025 | | | 11,354 | | | (7,670) | | | 1,951,709 | |
GNMA - Commercial | | 3,493,597 | | | 124,429 | | | (1,548) | | | 3,616,478 | | | 1,990,772 | | | 20,115 | | | (5,369) | | | 2,005,518 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total investments in debt securities HTM | | $ | 5,504,685 | | | $ | 176,611 | | | $ | (3,367) | | | $ | 5,677,929 | | | $ | 3,938,797 | | | $ | 31,469 | | | $ | (13,039) | | | $ | 3,957,227 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | $ | 1,948,025 |
| | $ | 11,354 |
| | $ | (7,670 | ) | | $ | 1,951,709 |
| | $ | 1,718,687 |
| | $ | 1,806 |
| | $ | (54,184 | ) | | $ | 1,666,309 |
|
GNMA - Commercial | | 1,990,772 |
| | 20,115 |
| | (5,369 | ) | | 2,005,518 |
| | 1,031,993 |
| | 1,426 |
| | (23,679 | ) | | 1,009,740 |
|
Total investments in debt securities HTM | | $ | 3,938,797 |
| | $ | 31,469 |
| | $ | (13,039 | ) | | $ | 3,957,227 |
| | $ | 2,750,680 |
| | $ | 3,232 |
| | $ | (77,863 | ) | | $ | 2,676,049 |
|
The Company continuously evaluates its investment strategies in light of changes in the regulatory and market environments that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible that the Company may elect to pursue other strategies relative to its investment securities portfolio.
As of December 31, 20192020 and December 31, 2018,2019, the Company had investment securities with an estimated carrying value of $7.5$3.5 billion and $6.6$7.5 billion, respectively, pledged as collateral, which were comprised of the following: $2.7 billion$754.1 million and $3.0$2.7 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $3.5$2.2 billion and $2.7$3.5 billion, respectively, were pledged to secure public fund deposits; $148.5$103.4 million and $78.0$148.5 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $699.1 million0 and $423.3$699.1 million, respectively, were pledged to deposits with clearing organizations; and $461.9$388.0 million and $415.1$461.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.
At December 31, 20192020 and December 31, 2018,2019, the Company had $46.0$34.6 million and $40.2$46.0 million, respectively, of accrued interest related to investment securities which is included in the Other assets line of the Company's Consolidated Balance Sheets. No accrued interest related to investment securities was written off during the periods ended December 31, 2020 or December 31, 2019.
There were no transfers of securities between AFS and HTM during the yearyears ended December 31, 2020 or December 31, 2019. In 2018, the Company transferred securities with approximately a $1.2 billion carrying value (fair value $1.2 billion) from AFS to HTM. Unrealized holding losses of $29.1 million were retained in OCI at the date of transfer and will be amortized over the remaining lives of the securities.
NOTE 3.2. INVESTMENT SECURITIES (continued)
Contractual Maturity of Investments in Debt Securities
Contractual maturities of the Company’s investments in debt securities AFS at December 31, 20192020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
(in thousands) | | Due Within One Year | | Due After 1 Within 5 Years | | Due After 5 Within 10 Years | | Due After 10 Years/No Maturity | | Total(1) | | Weighted Average Yield(2) |
U.S Treasuries | | $ | 97,028 | | | $ | 73,624 | | | $ | 0 | | | $ | 0 | | | $ | 170,652 | | | 1.21 | % |
Corporate debt securities | | 155,702 | | | 0 | | | 13 | | | 0 | | | 155,715 | | | 1.24 | % |
ABS | | 50,393 | | | 9,913 | | | 0 | | | 49,032 | | | 109,338 | | | 1.71 | % |
State and municipal securities | | 1 | | | 0 | | | 0 | | | 0 | | | 1 | | | 14.39 | % |
MBS: | | | | | | | | | | | | |
GNMA - Residential | | 0 | | | 29 | | | 26,827 | | | 3,509,269 | | | 3,536,125 | | | 1.21 | % |
GNMA - Commercial | | 0 | | | 0 | | | 0 | | | 1,733,362 | | | 1,733,362 | | | 1.99 | % |
FHLMC and FNMA - Residential | | 7 | | | 31,527 | | | 264,395 | | | 5,242,354 | | | 5,538,283 | | | 1.29 | % |
FHLMC and FNMA - Commercial | | 0 | | | 10,167 | | | 42,754 | | | 17,092 | | | 70,013 | | | 2.87 | % |
Total fair value | | $ | 303,131 | | | $ | 125,260 | | | $ | 333,989 | | | $ | 10,551,109 | | | $ | 11,313,489 | | | 1.38 | % |
Weighted Average Yield | | 1.12 | % | | 2.15 | % | | 1.95 | % | | 1.36 | % | | 1.38 | % | | |
Total amortized cost | | $ | 302,306 | | | $ | 121,075 | | | $ | 318,886 | | | $ | 10,394,118 | | | $ | 11,136,385 | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
(in thousands) | | Due Within One Year | | Due After 1 Within 5 Years | | Due After 5 Within 10 Years | | Due After 10 Years/No Maturity | | Total(1) | | Weighted Average Yield(2) |
U.S Treasuries | | $ | 3,289,865 |
| | $ | 801,073 |
| | $ | — |
| | $ | — |
| | $ | 4,090,938 |
| | 1.91 | % |
Corporate debt securities | | 139,699 |
| | — |
| | 14 |
| | — |
| | 139,713 |
| | 2.60 | % |
ABS | | 12,234 |
| | 63,123 |
| | — |
| | 63,043 |
| | 138,400 |
| | 4.23 | % |
State and municipal securities | | — |
| | 9 |
| | — |
| | — |
| | 9 |
| | 7.75 | % |
MBS: | | | | | | | | | | | | |
GNMA - Residential | | 1,738 |
| | 48 |
| | 60,710 |
| | 4,802,845 |
| | 4,865,341 |
| | 2.31 | % |
GNMA - Commercial | | — |
| | — |
| | — |
| | 779,058 |
| | 779,058 |
| | 2.41 | % |
FHLMC and FNMA - Residential | | 301 |
| | 8,024 |
| | 266,204 |
| | 3,979,868 |
| | 4,254,397 |
| | 1.96 | % |
FHLMC and FNMA - Commercial | | — |
| | 430 |
| | 52,298 |
| | 19,174 |
| | 71,902 |
| | 3.00 | % |
Total fair value | | $ | 3,443,837 |
| | $ | 872,707 |
| | $ | 379,226 |
| | $ | 9,643,988 |
| | $ | 14,339,758 |
| | 2.12 | % |
Weighted Average Yield | | 2.02 | % | | 1.87 | % | | 2.27 | % | | 2.18 | % | | 2.12 | % | | |
Total amortized cost | | $ | 3,441,868 |
| | $ | 869,377 |
| | $ | 375,291 |
| | $ | 9,660,810 |
| | $ | 14,347,346 |
| |
|
| |
(1) | The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments. |
| |
(2) | Yields on tax-exempt securities are calculated on a tax equivalent basis and are based on the statutory federal tax rate. |
Contractual maturities of the Company’s investments in debt securities HTM at December 31, 20192020 were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
(in thousands) | | Due Within One Year | | Due After 1 Within 5 Years | | Due After 5 Within 10 Years | | Due After 10 Years/No Maturity | | Total(1) | | Weighted Average Yield(2) |
MBS: | | | | | | | | | | | | |
GNMA - Residential | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,951,709 |
| | $ | 1,951,709 |
| | 2.26 | % |
GNMA - Commercial | | — |
| | — |
| | — |
| | 2,005,518 |
| | 2,005,518 |
| | 2.39 | % |
Total fair value | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,957,227 |
| | $ | 3,957,227 |
| | 2.32 | % |
Weighted average yield | | — | % | | — | % | | — | % | | 2.32 | % | | 2.32 | % | | |
Total amortized cost | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3,938,797 |
| | $ | 3,938,797 |
| | |
(1) (2) See corresponding footnotes to the December 31, 2019 "Contractual Maturity of Debt Securities" table above for investments in debt securities AFS.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | |
(in thousands) | | Due Within One Year | | Due After 1 Within 5 Years | | Due After 5 Within 10 Years | | Due After 10 Years/No Maturity | | Total(1) | | Weighted Average Yield(2) |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
ABS | | $ | 174 | | | $ | 32,020 | | | $ | 13,412 | | | $ | 0 | | | $ | 45,606 | | | 1.00 | % |
| | | | | | | | | | | | |
MBS: | | | | | | | | | | | | |
GNMA - Residential | | 0 | | | 0 | | | 0 | | | 2,015,845 | | | 2,015,845 | | | 1.37 | % |
GNMA - Commercial | | 0 | | | 0 | | | 0 | | | 3,616,478 | | | 3,616,478 | | | 2.18 | % |
Total fair value | | $ | 174 | | | $ | 32,020 | | | $ | 13,412 | | | $ | 5,632,323 | | | $ | 5,677,929 | | | 1.88 | % |
Weighted average yield | | 0.01 | % | | 0.18 | % | | 2.98 | % | | 1.89 | % | | 1.88 | % | | |
Total amortized cost | | $ | 174 | | | $ | 31,880 | | | $ | 12,787 | | | $ | 5,459,844 | | | $ | 5,504,685 | | | |
Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
Gross Unrealized Loss and Fair Value of Investments in Debt Securities AFS and HTM
The following table presents the aggregate amount of unrealized losses as of December 31, 20192020 and December 31, 20182019 on debt securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | Less than 12 months | | 12 months or longer | | Less than 12 months | | 12 months or longer |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 200,096 | | | $ | (167) | | | $ | 499,883 | | | $ | (125) | |
Corporate debt securities | | 98,800 | | | (9) | | | 0 | | | 0 | | | 110,802 | | | (22) | | | 0 | | | 0 | |
ABS | | 0 | | | 0 | | | 49,033 | | | (1,236) | | | 27,662 | | | (44) | | | 47,616 | | | (1,429) | |
| | | | | | | | | | | | | | | | |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | 347,821 | | | (1,334) | | | 8,875 | | | (16) | | | 2,053,763 | | | (6,895) | | | 997,024 | | | (9,171) | |
GNMA - Commercial | | 103,891 | | | (235) | | | 0 | | | 0 | | | 217,291 | | | (1,756) | | | 14,300 | | | (29) | |
FHLMC and FNMA - Residential | | 1,040,474 | | | (4,165) | | | 22,749 | | | (186) | | | 660,078 | | | (4,110) | | | 1,344,057 | | | (26,215) | |
FHLMC and FNMA - Commercial | | 0 | | | 0 | | | 420 | | | (2) | | | 0 | | | 0 | | | 430 | | | (5) | |
Total investments in debt securities AFS | | $ | 1,590,986 | | | $ | (5,743) | | | $ | 81,077 | | | $ | (1,440) | | | $ | 3,269,692 | | | $ | (12,994) | | | $ | 2,903,310 | | | $ | (36,974) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Less than 12 months | | 12 months or longer | | Less than 12 months | | 12 months or longer |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | | $ | 200,096 |
| | $ | (167 | ) | | $ | 499,883 |
| | $ | (125 | ) | | $ | 288,660 |
| | $ | (315 | ) | | $ | 914,212 |
| | $ | (11,414 | ) |
Corporate debt securities | | 110,802 |
| | (22 | ) | | — |
| | — |
| | 152,247 |
| | (62 | ) | | 13 |
| | — |
|
ABS | | 27,662 |
| | (44 | ) | | 47,616 |
| | (1,429 | ) | | 31,888 |
| | (249 | ) | | 77,766 |
| | (1,895 | ) |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | 2,053,763 |
| | (6,895 | ) | | 997,024 |
| | (9,171 | ) | | 102,418 |
| | (2,014 | ) | | 2,521,278 |
| | (83,661 | ) |
GNMA - Commercial | | 217,291 |
| | (1,756 | ) | | 14,300 |
| | (29 | ) | | 199,495 |
| | (2,982 | ) | | 622,989 |
| | (16,533 | ) |
FHLMC and FNMA - Residential | | 660,078 |
| | (4,110 | ) | | 1,344,057 |
| | (26,215 | ) | | 237,050 |
| | (5,728 | ) | | 5,236,028 |
| | (182,787 | ) |
FHLMC and FNMA - Commercial | | — |
| | — |
| | 430 |
| | (5 | ) | | — |
| | — |
| | 21,819 |
| | (537 | ) |
Total investments in debt securities AFS | | $ | 3,269,692 |
| | $ | (12,994 | ) | | $ | 2,903,310 |
| | $ | (36,974 | ) | | $ | 1,011,758 |
| | $ | (11,350 | ) | | $ | 9,394,105 |
| | $ | (296,827 | ) |
NOTE 3.2. INVESTMENT SECURITIES (continued)
The following table presents the aggregate amount of unrealized losses as of December 31, 20192020 and December 31, 20182019 on debt securities in the Company’s HTM investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | Less than 12 months | | 12 months or longer | | Less than 12 months | | 12 months or longer |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | $ | 212,471 | | | $ | (1,819) | | | $ | 0 | | | $ | 0 | | | $ | 559,058 | | | $ | (2,004) | | | $ | 657,733 | | | $ | (5,666) | |
GNMA - Commercial | | 155,263 | | | (1,548) | | | 0 | | | 0 | | | 731,445 | | | (5,369) | | | 0 | | | 0 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Total investments in debt securities HTM | | $ | 367,734 | | | $ | (3,367) | | | $ | 0 | | | $ | 0 | | | $ | 1,290,503 | | | $ | (7,373) | | | $ | 657,733 | | | $ | (5,666) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
| | Less than 12 months | | 12 months or longer | | Less than 12 months | | 12 months or longer |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
GNMA - Residential | | $ | 559,058 |
| | $ | (2,004 | ) | | $ | 657,733 |
| | $ | (5,666 | ) | | $ | 205,573 |
| | $ | (4,810 | ) | | $ | 1,295,554 |
| | $ | (49,374 | ) |
GNMA - Commercial | | 731,445 |
| | (5,369 | ) | | — |
| | — |
| | 221,250 |
| | (5,572 | ) | | 629,847 |
| | (18,107 | ) |
Total investments in debt securities HTM | | $ | 1,290,503 |
| | $ | (7,373 | ) | | $ | 657,733 |
| | $ | (5,666 | ) | | $ | 426,823 |
| | $ | (10,382 | ) | | $ | 1,925,401 |
| | $ | (67,481 | ) |
Allowance for credit-related losses on AFS securities
OTTI
Management evaluates all investments in debt securities in an unrealized loss position for OTTI on a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average FICO scores and weighted average LTV ratio, rating or scoring, credit ratings and market spreads, as applicable.
The Company assessesdid 0t record an allowance for credit-related losses on AFS and recognizes OTTIHTM securities at December 31, 2020 or December 31, 2019. As discussed in accordance with applicable accounting standards. Under these standards, if the Company determinesNote 1, securities for which management has an expectation that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recoverynonpayment of the amortized cost basis but the Company has determinedis zero do not have a reserve.
For securities that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.
The Company diddo not record any OTTI related to its investments in debt securitiesqualify for the years ended December 31, 2019, 2018 or 2017.
Managementzero credit loss expectation exception, management has concluded that the unrealized losses on its investments in debt securities for which it hasare not recognized OTTI (which were comprised of 727 individual securities at December 31, 2019) are temporary in naturecredit-related since (1) they reflect the increase in interest rates, which lowers the current fair value of the securities, (2) they are not related to the underlying credit quality of the issuers, (3)(2) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (4)(3) the Company does not intend to sell these investments at a loss and (5)(4) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which for the Company's debt securities may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other than temporary.
Gains (Losses) and Proceeds on Sales of Investments in Debt Securities
Proceeds from sales of investments in debt securities and the realized gross gains and losses from those sales were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Year Ended December 31, |
(in thousands) | | | | | | 2020 | | 2019 | | 2018 |
Proceeds from the sales of AFS securities | | | | | | $ | 2,665,593 | | | $ | 1,423,579 | | | $ | 1,262,409 | |
| | | | | | | | | | |
Gross realized gains | | | | | | $ | 32,915 | | | $ | 9,496 | | | $ | 5,517 | |
Gross realized losses | | | | | | (1,618) | | | (3,680) | | | (12,234) | |
Net realized gains/(losses) (1) | | | | | | $ | 31,297 | | | $ | 5,816 | | | $ | (6,717) | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2019 | | 2018 | | 2017 |
Proceeds from the sales of AFS securities | | $ | 1,423,579 |
| | $ | 1,262,409 |
| | $ | 3,256,378 |
|
| | | | | | |
Gross realized gains | | $ | 9,496 |
| | $ | 5,517 |
| | $ | 22,224 |
|
Gross realized losses | | (3,680 | ) | | (12,234 | ) | | (24,668 | ) |
OTTI | | — |
| | — |
| | — |
|
Net realized gains/(losses) (1) | | $ | 5,816 |
| | $ | (6,717 | ) | | $ | (2,444 | ) |
(1) Includes net realized gain/(losses) on trading securities of $(1.4) million, $(0.8) million and $(1.4) million for the years ended December 31, 2020, 2019 and 2018respectively. | |
(1) | Includes net realized gain/(losses) on trading securities of (0.8) million, $(1.4) million and $(4.2) million for the years ended December 31, 2019, 2018 and 2017, respectively. |
The Company uses the specific identification method to determine the cost of the securities sold and the gain or loss recognized.
NOTE 3. INVESTMENT SECURITIES (continued)
Other Investments
Other Investmentsinvestments consisted of the following as of:
| | | | | | | | | | | | | | |
(in thousands) | December 31, 2020 | | December 31, 2019 |
FHLB of Pittsburgh and FRB stock | | $ | 435,330 | | | $ | 716,615 | |
LIHTC investments | | 313,603 | | | 265,271 | |
Equity securities not held for trading (1) | | 14,494 | | | 12,697 | |
Interest-bearing deposits with an affiliate bank | | 750,000 | | | 0 | |
Trading securities | | 40,435 | | | 1,097 | |
Total | | $ | 1,553,862 | | | $ | 995,680 | |
(1) Includes $1.4 million and 0 of equity certificates related to an off-balance sheet securitization as of December 31, 2020 and December 31, 2019, respectively.
|
| | | | | | | | |
(in thousands) | December 31, 2019 | | December 31, 2018 |
FHLB of Pittsburgh and FRB stock | | $ | 716,615 |
| | $ | 631,239 |
|
LIHTC investments | | 265,271 |
| | 163,113 |
|
Equity securities not held for trading | | 12,697 |
| | 10,995 |
|
Trading securities | | 1,097 |
| | 10 |
|
Total | | $ | 995,680 |
| | $ | 805,357 |
|
NOTE 2. INVESTMENT SECURITIES (continued)
Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. These stocks do not have readily determinable fair values because their ownership is restricted and they lack a market.there is no market for their sale. The stocks can be sold back only at their par value of $100 per share, and FHLB stock can be sold back only to the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the year ended December 31, 2019,2020, the Company purchased $298.6$150.4 million of FHLB stock at par, and redeemed $212.4$389.8 million of FHLB stock at par. The Company redeemed $38.8 million of FRB stock at par during the year ended December 31, 2020. The Company did 0t purchase any FRB stock during the year ended December 31, 2020. There was no0 gain or loss associated with these redemptions. During the year ended December 31, 2019, the Company did not purchase FRB stock.
The Company's LIHTC investments are accounted for using the proportional amortization method. Equity securities are measured at fair value as of December 31, 2019,2020, with changes in fair value recognized in net income, and consist primarily of CRA mutual fund investments.
Interest-bearing deposits include deposits maturing in more than 90 days with Santander.
With the exception of equity and trading securities, which are measured at fair value, the Company evaluates these other investments for impairment based on the ultimate recoverability of the carrying value, rather than by recognizing temporary declines in value. The Company held an immaterial amount of equity securities without readily determinable fair values at the reporting date.
NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Overall
The Company's loansLHFI are generally reported at their outstanding principal balances net of any cumulative charge-offs, unamortized deferred fees and costs and unamortized premiums or discounts. The Company maintains an ACL to provideCertain LHFI are accounted for losses inherent in its portfolios.at fair value under the FVO. Certain loans are pledged as collateral for borrowings, securitizations, or SPEs. These loans totaled $52.0 billion at December 31, 2020 and $53.9 billion at December 31, 2019 and $49.5 billion at December 31, 2018.2019.
Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at December 31, 20192020 was $1.4$2.2 billion, compared to $1.3$1.4 billion at December 31, 2018.2019. During the third quarter of 2020, the Company returned $1.6 billion of RICs classified as LHFS into LHFI. During the residential mortgagefourth quarter of 2020, the Company transferred the entire commercial and consumer portfolio that were originatedof SFS loans with the intent to sell were $289.0 million as of December 31, 2019 and are reported at either estimateda fair value (if the FVO is elected) or the lower of cost or fair value.approximately $168 million, to held for sale. For a discussion on the valuation of LHFS at fair value, see Note 1614 to these Consolidated Financial Statements. Loans under SC’s personal lending platform have been classified as HFSLHFS and adjustments to lower of cost or market are recorded through Miscellaneous income, net on the Consolidated Statements of Operations. As of December 31, 2019,2020, the carrying value of the personal unsecured HFSheld for sale portfolio was $1.0 billion.
During 2019,$893.5 million. LHFS in the Company sold $1.4 billion of performing residential loans to FNMA for a net gain of $7.9 million.
In October 2019, SBNA agreedmortgage portfolio that were originated with the intent to sell from its portfolio certain restructured residential mortgagewere $265.4 million as of December 31, 2020 and home equity loans (with approximately $187.0 millionare reported at either estimated fair value (if the FVO is elected) or the lower of principal balances outstanding) to two unrelated third parties. This transaction settled in the fourth quarter with an immaterial impact on the Consolidated Statements of Operations. The loans were sold with servicing released to the purchasers.cost or fair value.
On October 4, 2019, SBNA agreed to sell approximately $768.2 million of equipment finance loans and approximately $74.2 million of operating leases to an unrelated third party. This transaction settled on November 29, 2019, with a gain of $5.6 million on the sale.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the interest method. Loan origination costs and fees and premiums and discounts on RICs are deferred and recognized in interest income over their estimated lives using estimated prepayment speeds, which are updated on a monthly basis. At December 31, 20192020 and December 31, 2018,2019, accrued interest receivable on the Company's loans was $589.2 million and $497.7 million, and $524.0 million, respectively.
During the years endedSubsequent to December 31, 2019, 2018 and 2017,2020, the Company purchased retail installment contract financial receivables from third-party lenders for $1.1 billion, $67.2 thousandapproved and zero, respectively. Theexecuted purchases of personal unsecured loans with a UPB of these loans as$100.1 million.
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Loan and Lease Portfolio Composition
The following presents the composition of gross loans and leases HFI by portfolio and by rate type:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
| | | | | | |
(dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
Commercial LHFI: | | | | | | | | |
CRE loans | | $ | 7,327,853 | | | 8.0 | % | | $ | 8,468,023 | | | 9.1 | % |
C&I loans | | 16,537,899 | | | 17.9 | % | | 16,534,694 | | | 17.8 | % |
Multifamily loans | | 8,367,147 | | | 9.1 | % | | 8,641,204 | | | 9.3 | % |
Other commercial(2) | | 7,455,504 | | | 8.1 | % | | 7,390,795 | | | 8.2 | % |
Total commercial LHFI | | 39,688,403 | | | 43.1 | % | | 41,034,716 | | | 44.4 | % |
Consumer loans secured by real estate: | | | | | | | | |
Residential mortgages | | 6,590,168 | | | 7.2 | % | | 8,835,702 | | | 9.5 | % |
Home equity loans and lines of credit | | 4,108,505 | | | 4.5 | % | | 4,770,344 | | | 5.1 | % |
Total consumer loans secured by real estate | | 10,698,673 | | | 11.7 | % | | 13,606,046 | | | 14.6 | % |
Consumer loans not secured by real estate: | | | | | | | | |
RICs and auto loans | | 40,698,642 | | | 44.1 | % | | 36,456,747 | | | 39.3 | % |
Personal unsecured loans | | 824,430 | | | 0.9 | % | | 1,291,547 | | | 1.4 | % |
Other consumer(3) | | 223,034 | | | 0.2 | % | | 316,384 | | | 0.3 | % |
Total consumer loans | | 52,444,779 | | | 56.9 | % | | 51,670,724 | | | 55.6 | % |
Total LHFI(1) | | $ | 92,133,182 | | | 100.0 | % | | $ | 92,705,440 | | | 100.0 | % |
Total LHFI: | | | | | | | | |
Fixed rate | | $ | 64,036,154 | | | 69.5 | % | | $ | 61,775,942 | | | 66.6 | % |
Variable rate | | 28,097,028 | | | 30.5 | % | | 30,929,498 | | | 33.4 | % |
Total LHFI(1) | | $ | 92,133,182 | | | 100.0 | % | | $ | 92,705,440 | | | 100.0 | % |
|
| | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(dollars in thousands) | | Amount | | Percent | | Amount | | Percent |
Commercial LHFI: | | | | | | | | |
CRE loans | | $ | 8,468,023 |
| | 9.1 | % | | $ | 8,704,481 |
| | 10.0 | % |
C&I loans | | 16,534,694 |
| | 17.8 | % | | 15,738,158 |
| | 18.1 | % |
Multifamily loans | | 8,641,204 |
| | 9.3 | % | | 8,309,115 |
| | 9.5 | % |
Other commercial(2) | | 7,390,795 |
| | 8.2 | % | | 7,630,004 |
| | 8.8 | % |
Total commercial LHFI | | 41,034,716 |
| | 44.4 | % | | 40,381,758 |
| | 46.4 | % |
Consumer loans secured by real estate: | | | | | | | | |
Residential mortgages | | 8,835,702 |
| | 9.5 | % | | 9,884,462 |
| | 11.4 | % |
Home equity loans and lines of credit | | 4,770,344 |
| | 5.1 | % | | 5,465,670 |
| | 6.3 | % |
Total consumer loans secured by real estate | | 13,606,046 |
| | 14.6 | % | | 15,350,132 |
| | 17.7 | % |
Consumer loans not secured by real estate: | | | | | | | | |
RICs and auto loans | | 36,456,747 |
|
| 39.3 | % |
| 29,335,220 |
|
| 33.7 | % |
Personal unsecured loans | | 1,291,547 |
| | 1.4 | % | | 1,531,708 |
| | 1.8 | % |
Other consumer(3) | | 316,384 |
| | 0.3 | % | | 447,050 |
| | 0.4 | % |
Total consumer loans | | 51,670,724 |
| | 55.6 | % | | 46,664,110 |
| | 53.6 | % |
Total LHFI(1) | | $ | 92,705,440 |
| | 100.0 | % | | $ | 87,045,868 |
| | 100.0 | % |
Total LHFI: | | | | | | | | |
Fixed rate | | $ | 61,775,942 |
| | 66.6 | % | | $ | 56,696,491 |
| | 65.1 | % |
Variable rate | | 30,929,498 |
| | 33.4 | % | | 30,349,377 |
| | 34.9 | % |
Total LHFI(1) | | $ | 92,705,440 |
| | 100.0 | % | | $ | 87,045,868 |
| | 100.0 | % |
(1)Total LHFI includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net increase in the loan balances of $3.2$3.1 billion and $1.4$3.2 billion as of December 31, 20192020 and December 31, 2018,2019, respectively.
(2)Other commercial includes CEVF leveraged leases and loans.
(3)Other consumer primarily includes RV and marine loans.
(4)Beginning in 2018, the Bank has an agreement with SC by which SC provides the Bank with origination support services in connection with the processing, underwriting and purchase of RICs, primarily from Chrysler dealers.
Portfolio segments and classes
GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. The Company utilizes similar categorization compared to the financial statement categorization of loans to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.
The commercial segmentation reflects line of business distinctions. The CRE line of business includes C&I owner-occupied real estate and specialized lending for investment real estate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for development and determination of the allowance is generally consistent between the two portfolios. "C&I"C&I includes non-real estate-related C&Icommercial loans. "Multifamily" represents loans for multifamily residential housing units. “Other commercial” includes loans to global customer relationships in Latin America which are not defined as commercial or consumer for regulatory purposes. The remainder of the portfolio primarily represents the CEVF portfolio.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The Company's portfolio classes are substantially the same as its financial statement categorization of loans for consumer loan populations. “Residential mortgages” includes mortgages on residential property, including single family and 1-4 family units. "Home equity loans and lines of credit" include all organic home equity contracts and purchased home equity portfolios. "RICs and auto loans" includes the Company's direct automobile loan portfolios, but excludes RV and marine RICs. "Personal unsecured loans" includes personal revolving loans and credit cards. “Other consumer” includes an acquired portfolio of marine RICs and RV contracts as well as indirect auto loans.
In accordance with the Company's accounting policy when establishing the collective ACL for originated loans, the Company's estimate of losses on recorded investment includes the estimate of the related net unaccreted discount balance that is expected at the time of charge-off, while it considers the entire unaccreted discount for loan portfolios purchased at a discount as available to absorb the credit losses when determining the ACL specific to these portfolios.
At December 31, 2019 and 2018, the Company had $279.4 million and $803.1 million, respectively, of loans originated prior to the Change in Control. The purchase marks on these portfolios were $726.5 thousand and $2.1 million at December 31, 2019 and 2018, respectively.
During the years ended December 31, 20192020 and 2018,2019, SC originated $12.8$14.2 billion and $7.9$12.8 billion, respectively, in Chrysler Capital loans (including through the SBNA originations program), which represented 56%60% and 46%56%, respectively, of the UPB of SC's total RIC originations (including the SBNA originations program).
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
ACL Rollforward by Portfolio Segment
The ACL is comprised of the ALLL and the reserve for unfunded lending commitments. The activity in the ACL by portfolio segment for the years ended December 31, 2019,2020 and 20182019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Year Ended December 31, 2020 |
(in thousands) | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | | $ | 399,829 | | | $ | 3,199,612 | | | $ | 46,748 | | | $ | 3,646,189 | |
Day 1: Adjustment to allowance for adoption of ASU 2016-13 | | 198,919 | | | 2,383,711 | | | (46,748) | | | 2,535,882 | |
Credit loss expense on loans | | 298,780 | | | 2,525,185 | | | 0 | | | 2,823,965 | |
| | | | | | | | |
| | | | | | | | |
Charge-offs | | (180,726) | | | (3,589,539) | | | 0 | | | (3,770,265) | |
Recoveries | | 35,394 | | | 2,067,328 | | | 0 | | | 2,102,722 | |
Charge-offs, net of recoveries | | (145,332) | | | (1,522,211) | | | 0 | | | (1,667,543) | |
ALLL, end of period | | $ | 752,196 | | | $ | 6,586,297 | | | $ | 0 | | | $ | 7,338,493 | |
| | | | | | | | |
Reserve for unfunded lending commitments, beginning of period | | $ | 85,934 | | | $ | 5,892 | | | $ | 0 | | | $ | 91,826 | |
Day 1: Adjustment to allowance for adoption of ASU 2016-13 | | 10,081 | | | 330 | | | 0 | | | 10,411 | |
Credit loss expense on unfunded lending commitments | | 23,114 | | | 21,104 | | | 0 | | | 44,218 | |
| | | | | | | | |
Reserve for unfunded lending commitments, end of period | | 119,129 | | | 27,326 | | | 0 | | | 146,455 | |
Total ACL, end of period | | $ | 871,325 | | | $ | 6,613,623 | | | $ | 0 | | | $ | 7,484,948 | |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2019 |
(in thousands) | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | | $ | 441,083 |
| | $ | 3,409,024 |
| | $ | 47,023 |
| | $ | 3,897,130 |
|
Provision for loan and lease losses | | 89,962 |
| | 2,200,870 |
| | — |
| | 2,290,832 |
|
Charge-offs | | (185,035 | ) | | (5,364,673 | ) | | (275 | ) | | (5,549,983 | ) |
Recoveries | | 53,819 |
| | 2,954,391 |
| | — |
| | 3,008,210 |
|
Charge-offs, net of recoveries | | (131,216 | ) | | (2,410,282 | ) | | (275 | ) | | (2,541,773 | ) |
ALLL, end of period | | $ | 399,829 |
| | $ | 3,199,612 |
| | $ | 46,748 |
| | $ | 3,646,189 |
|
Reserve for unfunded lending commitments, beginning of period | | $ | 89,472 |
| | $ | 6,028 |
| | $ | — |
| | $ | 95,500 |
|
(Release of) / Provision for reserve for unfunded lending commitments | | 1,321 |
| | (136 | ) | | — |
| | 1,185 |
|
Loss on unfunded lending commitments | | (4,859 | ) | | — |
| | — |
| | (4,859 | ) |
Reserve for unfunded lending commitments, end of period | | 85,934 |
| | 5,892 |
| | — |
| | 91,826 |
|
Total ACL, end of period | | $ | 485,763 |
| | $ | 3,205,504 |
| | $ | 46,748 |
| | $ | 3,738,015 |
|
Ending balance, individually evaluated for impairment(1) | | $ | 50,307 |
| | $ | 935,086 |
| | $ | — |
| | $ | 985,393 |
|
Ending balance, collectively evaluated for impairment | | 349,525 |
| | 2,264,523 |
| | 46,748 |
| | 2,660,796 |
|
| | | | | | | | |
Financing receivables:(2) | | | | | | | | |
Ending balance | | $ | 41,151,009 |
| | $ | 52,974,654 |
| | $ | — |
| | $ | 94,125,663 |
|
Ending balance, evaluated under the FVO or lower of cost or fair value | | 116,293 |
| | 1,376,911 |
| | — |
| | 1,493,204 |
|
Ending balance, individually evaluated for impairment(1) | | 342,295 |
| | 4,225,331 |
| | — |
| | 4,567,626 |
|
Ending balance, collectively evaluated for impairment | | 40,692,421 |
| | 47,372,412 |
| | — |
| | 88,064,833 |
|
| |
(1) | Consists of loans in TDR status. |
(2) Contains LHFS | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | Year Ended December 31, 2019 |
(in thousands) | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | | $ | 441,083 | | | $ | 3,409,024 | | | $ | 47,023 | | | $ | 3,897,130 | |
Credit loss expense on loans | | 89,962 | | | 2,200,870 | | | 0 | | | 2,290,832 | |
Charge-offs | | (185,035) | | | (5,364,673) | | | (275) | | | (5,549,983) | |
Recoveries | | 53,819 | | | 2,954,391 | | | 0 | | | 3,008,210 | |
Charge-offs, net of recoveries | | (131,216) | | | (2,410,282) | | | (275) | | | (2,541,773) | |
ALLL, end of period | | $ | 399,829 | | | $ | 3,199,612 | | | $ | 46,748 | | | $ | 3,646,189 | |
| | | | | | | | |
Reserve for unfunded lending commitments, beginning of period | | $ | 89,472 | | | $ | 6,028 | | | $ | 0 | | | $ | 95,500 | |
Release of unfunded lending commitments | | 1,321 | | | (136) | | | 0 | | | 1,185 | |
Loss on unfunded lending commitments | | (4,859) | | | 0 | | | 0 | | | (4,859) | |
Reserve for unfunded lending commitments, end of period | | 85,934 | | | 5,892 | | | 0 | | | 91,826 | |
Total ACL, end of period | | $ | 485,763 | | | $ | 3,205,504 | | | $ | 46,748 | | | $ | 3,738,015 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
(in thousands) | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | | $ | 443,796 | | | $ | 3,504,068 | | | $ | 47,023 | | | $ | 3,994,887 | |
Credit loss expense on loans | | 45,897 | | | 2,306,896 | | | 0 | | | 2,352,793 | |
| | | | | | | | |
Charge-offs | | (108,750) | | | (4,974,547) | | | 0 | | | (5,083,297) | |
Recoveries | | 60,140 | | | 2,572,607 | | | 0 | | | 2,632,747 | |
Charge-offs, net of recoveries | | (48,610) | | | (2,401,940) | | | 0 | | | (2,450,550) | |
ALLL, end of period | | $ | 441,083 | | | $ | 3,409,024 | | | $ | 47,023 | | | $ | 3,897,130 | |
| | | | | | | | |
Reserve for unfunded lending commitments, beginning of period | | $ | 103,835 | | | $ | 5,276 | | | $ | 0 | | | $ | 109,111 | |
Release of unfunded lending commitments | | (13,647) | | | 752 | | | 0 | | | (12,895) | |
Loss on unfunded lending commitments | | (716) | | | 0 | | | 0 | | | (716) | |
Reserve for unfunded lending commitments, end of period | | 89,472 | | | 6,028 | | | 0 | | | 95,500 | |
Total ACL end of period | | $ | 530,555 | | | $ | 3,415,052 | | | $ | 47,023 | | | $ | 3,992,630 | |
The credit risk in the Company’s loan portfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide factors. In general, there is an inverse relationship between the credit quality of $1.4 billionforloans and projections of impairment losses so that loans with better credit quality require a lower expected loss. The Company manages this risk through its underwriting, pricing strategies, credit policy standards, and servicing guidelines and practices, as well as the year ended December 31, 2019.application of geographic and other concentration limits.
NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The Company estimates current expected credit losses based on prospective information as well as account-level models based on historical data. Unemployment, HPI, GDP, CRE price index and used vehicle index growth rates, along with loan level characteristics, are the key inputs used in the models for prediction of the likelihood that the borrower will default in the forecasted period (the PD). To estimate the loss in the event of a default (the LGD), the models use unemployment, HPI, commercial real estate and used vehicle indices, along with loan level characteristics as key inputs. The historic volume of loan deferrals provided to customers impacted by COVID-19 has driven positive trends in delinquencies and severity in previous quarters, however, the inclusion of key loan characteristics as inputs to the models (including number of extensions) and management’s evaluation of qualitative factors ensure the allowance is appropriate. |
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2018 |
(in thousands) | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | | $ | 443,796 |
| | $ | 3,504,068 |
| | $ | 47,023 |
| | $ | 3,994,887 |
|
Provision for loan and lease losses | | 45,897 |
| | 2,306,896 |
| | — |
| | 2,352,793 |
|
Charge-offs | | (108,750 | ) | | (4,974,547 | ) | | — |
| | (5,083,297 | ) |
Recoveries | | 60,140 |
| | 2,572,607 |
| | — |
| | 2,632,747 |
|
Charge-offs, net of recoveries | | (48,610 | ) | | (2,401,940 | ) | | — |
| | (2,450,550 | ) |
ALLL, end of period | | $ | 441,083 |
| | $ | 3,409,024 |
| | $ | 47,023 |
| | $ | 3,897,130 |
|
Reserve for unfunded lending commitments, beginning of period | | $ | 103,835 |
| | $ | 5,276 |
| | $ | — |
| | $ | 109,111 |
|
Release of unfunded lending commitments | | (13,647 | ) | | 752 |
| | — |
| | (12,895 | ) |
Loss on unfunded lending commitments | | (716 | ) | | — |
| | — |
| | (716 | ) |
Reserve for unfunded lending commitments, end of period | | 89,472 |
| | 6,028 |
| | — |
| | 95,500 |
|
Total ACL, end of period | | $ | 530,555 |
| | $ | 3,415,052 |
| | $ | 47,023 |
| | $ | 3,992,630 |
|
Ending balance, individually evaluated for impairment (1) | | $ | 94,120 |
| | $ | 1,457,174 |
| | $ | — |
| | $ | 1,551,294 |
|
Ending balance, collectively evaluated for impairment | | 346,963 |
| | 1,951,850 |
| | 47,023 |
| | 2,345,836 |
|
| | | | | | | | |
Financing receivables:(2) | | | | | | | | |
Ending balance | | $ | 40,381,758 |
| | $ | 47,947,388 |
| | $ | — |
| | $ | 88,329,146 |
|
Ending balance, evaluated under the FVO or lower of cost or fair value | | — |
| | 1,393,476 |
| | — |
| | 1,393,476 |
|
Ending balance, individually evaluated for impairment(1) | | 444,031 |
| | 5,779,998 |
| | — |
| | 6,224,029 |
|
Ending balance, collectively evaluated for impairment | | 39,937,727 |
| | 40,773,914 |
| | — |
| | 80,711,641 |
|
| |
(1) | Consists of loans in TDR status. |
| |
(2) | Contains LHFS of $1.3 billion for the year ended December 31, 2018. |
|
| | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2017 |
(in thousands) | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | | $ | 449,837 |
| | $ | 3,317,604 |
| | $ | 47,023 |
| | $ | 3,814,464 |
|
Provision for loan losses | | 99,606 |
| | 2,670,950 |
| | — |
| | 2,770,556 |
|
Other(1) | | 356 |
| | 5,283 |
| | — |
| | 5,639 |
|
Charge-offs | | (144,002 | ) | | (4,891,383 | ) | | — |
| | (5,035,385 | ) |
Recoveries | | 37,999 |
| | 2,401,614 |
| | — |
| | 2,439,613 |
|
Charge-offs, net of recoveries | | (106,003 | ) | | (2,489,769 | ) | | — |
| | (2,595,772 | ) |
ALLL, end of period | | $ | 443,796 |
| | $ | 3,504,068 |
| | $ | 47,023 |
| | $ | 3,994,887 |
|
Reserve for unfunded lending commitments, beginning of period | | $ | 116,866 |
| | $ | 5,552 |
| | $ | — |
| | $ | 122,418 |
|
Provision for unfunded lending commitments | | (10,336 | ) | | (276 | ) | | — |
| | (10,612 | ) |
Loss on unfunded lending commitments | | (2,695 | ) | | — |
| | — |
| | (2,695 | ) |
Reserve for unfunded lending commitments, end of period | | 103,835 |
| | 5,276 |
| | — |
| | 109,111 |
|
Total ACL end of period | | $ | 547,631 |
| | $ | 3,509,344 |
| | $ | 47,023 |
| | $ | 4,103,998 |
|
Ending balance, individually evaluated for impairment(2) | | $ | 102,326 |
| | $ | 1,824,640 |
| | $ | — |
| | $ | 1,926,966 |
|
Ending balance, collectively evaluated for impairment | | 341,470 |
| | 1,679,428 |
| | 47,023 |
| | 2,067,921 |
|
| | | | | | | | |
Financing receivables:(3) | | | | | | | | |
Ending balance | | $ | 39,315,888 |
| | $ | 43,997,279 |
| | $ | — |
| | $ | 83,313,167 |
|
Ending balance, evaluated under the FVO or lower of cost or fair value(1) | | 149,177 |
| | 2,420,155 |
| | — |
| | 2,569,332 |
|
Ending balance, individually evaluated for impairment(2) | | 593,585 |
| | 6,652,949 |
| | — |
| | 7,246,534 |
|
Ending balance, collectively evaluated for impairment | | 38,573,126 |
| | 34,924,175 |
| | — |
| | 73,497,301 |
|
The Company has determined the reasonable and supportable period to be three years, at which time the economic forecasts generally tend to revert to historical averages. The Company utilizes qualitative factors to capture any additional risks that may not be captured in either the economic forecasts or in the historical data, including consideration of the portfolio metrics and collateral value.(1) Includes transfers in
The Company generally uses a third-party vendor's consensus baseline macroeconomic scenario for the period ending December 31, 2017 relatedquantitative estimate and additional positive and negative macroeconomic scenarios to make qualitative adjustments for macroeconomic uncertainty and considers adjustments to macroeconomic inputs and outputs based on market volatility.
The baseline scenario was based on the contributionlatest consensus forecasts available, which show an improvement in key variables in the second half of SFS2020, including a decrease in unemployment rates (which are a key driver to SHUSA.losses). The scenarios used are periodically updated over a reasonable and supportable time horizon, with weightings assigned by management and approved through established committee governance.
(2) Consists of loans in TDR status.
(3) Contains LHFS of $2.5The Company's allowance for loan losses increased $3.7 billion for the year ended December 31, 2017.2020. The primary drivers were a $2.5 billion increase at CECL adoption on January 1, 2020, driven mainly by the transition from an incurred loss reserve model to CECL, which includes an estimate of credit losses expected over the remaining estimated loan term and additional reserves specific to COVID-19 risk.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Non-accrual loans by Class of Financing Receivable
The recorded investment inamortized cost basis of financial instruments that are either non-accrual loanswith related expected credit loss or nonaccrual without related expected credit loss disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Non-accrual loans as of (1): | | Non-accrual loans with no allowance | | Interest Income recognized on nonaccrual loans |
(in thousands) | | December 31, 2020 | | December 31, 2019 | | December 31, 2020 | | December 31, 2020 |
| | | | | | | | |
Non-accrual loans: | | | | | | | | |
Commercial: | | | | | | | | |
CRE | | $ | 106,751 | | | $ | 83,117 | | | $ | 84,816 | | | $ | 0 | |
C&I | | 107,053 | | | 153,428 | | | 60,029 | | | 779 | |
Multifamily | | 72,392 | | | 5,112 | | | 65,936 | | | 0 | |
Other commercial | | 20,019 | | | 31,987 | | | 3,778 | | | 0 | |
Total commercial loans | | 306,215 | | | 273,644 | | | 214,559 | | | 779 | |
Consumer: | | | | | | | | |
Residential mortgages | | 160,172 | | | 134,957 | | | 98,308 | | | 0 | |
Home equity loans and lines of credit | | 91,606 | | | 107,289 | | | 32,130 | | | 0 | |
RICs and auto loans | | 1,174,317 | | | 1,643,459 | | | 191,370 | | | 107,766 | |
Personal unsecured loans | | 0 | | | 2,212 | | | 0 | | | 0 | |
Other consumer | | 6,325 | | | 11,491 | | | 34 | | | 0 | |
Total consumer loans | | 1,432,420 | | | 1,899,408 | | | 321,842 | | | 107,766 | |
Total non-accrual loans | | 1,738,635 | | | 2,173,052 | | | 536,401 | | | 108,545 | |
| | | | | | | | |
OREO | | 29,799 | | | 66,828 | | | — | | | — | |
Repossessed vehicles | | 204,653 | | | 212,966 | | | — | | | — | |
Foreclosed and other repossessed assets | | 3,247 | | | 4,218 | | | — | | | — | |
Total OREO and other repossessed assets | | 237,699 | | | 284,012 | | | — | | | — | |
Total non-performing assets | | $ | 1,976,334 | | | $ | 2,457,064 | | | $ | 536,401 | | | $ | 108,545 | |
(1) The December 31, 2019 table includes balances based on recorded investment. Differences between amortized cost and UPB were not material
|
| | | | | | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
| | | | |
Non-accrual loans: | | | | |
Commercial: | | | | |
CRE | | $ | 83,117 |
| | $ | 88,500 |
|
C&I | | 153,428 |
| | 189,827 |
|
Multifamily | | 5,112 |
| | 13,530 |
|
Other commercial | | 31,987 |
| | 72,841 |
|
Total commercial loans | | 273,644 |
| | 364,698 |
|
Consumer: | | | | |
Residential mortgages | | 134,957 |
| | 216,815 |
|
Home equity loans and lines of credit | | 107,289 |
| | 115,813 |
|
RICs and auto loans | | 1,643,459 |
| | 1,545,322 |
|
Personal unsecured loans | | 2,212 |
| | 3,602 |
|
Other consumer | | 11,491 |
| | 9,187 |
|
Total consumer loans | | 1,899,408 |
| | 1,890,739 |
|
Total non-accrual loans | | 2,173,052 |
| | 2,255,437 |
|
| | | | |
OREO | | 66,828 |
| | 107,868 |
|
Repossessed vehicles | | 212,966 |
| | 224,046 |
|
Foreclosed and other repossessed assets | | 4,218 |
| | 1,844 |
|
Total OREO and other repossessed assets | | 284,012 |
| | 333,758 |
|
Total non-performing assets | | $ | 2,457,064 |
| | $ | 2,589,195 |
|
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Age Analysis of Past Due Loans
The Company generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. When an account is deferred, the loan is returned to accrual status during the deferral period and accrued interest related to the loan is evaluated for collectability.
The age of recorded investmentsamortized cost in past due loans and accruing loans 90 days or greater past due disaggregated by class of financing receivables is summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of: |
| | December 31, 2020 |
(in thousands) | | 30-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total Financing Receivables | | Amortized Cost > 90 Days and Accruing |
Commercial: | | | | | | | | | | | | |
CRE(7) | | $ | 41,320 | | | $ | 70,304 | | | $ | 111,624 | | | $ | 7,244,247 | | | $ | 7,355,871 | | | $ | 0 | |
C&I(1) | | 59,759 | | | 45,883 | | | 105,642 | | | 16,654,606 | | | 16,760,248 | | | 0 | |
Multifamily(5) | | 47,116 | | | 66,664 | | | 113,780 | | | 8,257,122 | | | 8,370,902 | | | 0 | |
Other commercial(6) | | 80,993 | | | 9,214 | | | 90,207 | | | 7,365,629 | | | 7,455,836 | | | 56 | |
Consumer: | | | | | | | | | | | | |
Residential mortgages(2) | | 209,274 | | | 111,698 | | | 320,972 | | | 6,673,411 | | | 6,994,383 | | | 0 | |
Home equity loans and lines of credit | | 31,488 | | | 72,197 | | | 103,685 | | | 4,004,820 | | | 4,108,505 | | | 0 | |
RICs and auto loans(4) | | 2,944,376 | | | 284,985 | | | 3,229,361 | | | 38,143,329 | | | 41,372,690 | | | 0 | |
Personal unsecured loans(3) | | 56,041 | | | 56,582 | | | 112,623 | | | 1,605,286 | | | 1,717,909 | | | 52,807 | |
Other consumer | | 5,358 | | | 1,688 | | | 7,046 | | | 215,988 | | | 223,034 | | | 0 | |
Total | | $ | 3,475,725 | | | $ | 719,215 | | | $ | 4,194,940 | | | $ | 90,164,438 | | | $ | 94,359,378 | | | $ | 52,863 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| As of: |
| | December 31, 2019 |
(in thousands) | | 30-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total Financing Receivables | | Recorded Investment > 90 Days and Accruing |
Commercial: | | | | | | | | | | | | |
CRE | | $ | 51,472 |
| | $ | 65,290 |
| | $ | 116,762 |
| | $ | 8,351,261 |
| | $ | 8,468,023 |
| | $ | — |
|
C&I(1) | | 55,957 |
| | 84,640 |
| | 140,597 |
| | 16,510,391 |
| | 16,650,988 |
| | — |
|
Multifamily | | 10,456 |
| | 3,704 |
| | 14,160 |
| | 8,627,044 |
| | 8,641,204 |
| | — |
|
Other commercial | | 61,973 |
| | 6,352 |
| | 68,325 |
| | 7,322,469 |
| | 7,390,794 |
| | — |
|
Consumer: | | | | | | | | | | | | |
Residential mortgages(2) | | 154,978 |
| | 128,578 |
| | 283,556 |
| | 8,848,971 |
| | 9,132,527 |
| | — |
|
Home equity loans and lines of credit | | 45,417 |
| | 75,972 |
| | 121,389 |
| | 4,648,955 |
| | 4,770,344 |
| | — |
|
RICs and auto loans | | 4,364,110 |
| | 404,723 |
| | 4,768,833 |
| | 31,687,914 |
| | 36,456,747 |
| | — |
|
Personal unsecured loans(3) | | 85,277 |
| | 102,572 |
| | 187,849 |
| | 2,110,803 |
| | 2,298,652 |
| | 93,102 |
|
Other consumer | | 11,375 |
| | 7,479 |
| | 18,854 |
| | 297,530 |
| | 316,384 |
| | — |
|
Total | | $ | 4,841,015 |
| | $ | 879,310 |
| | $ | 5,720,325 |
| | $ | 88,405,338 |
| | $ | 94,125,663 |
| | $ | 93,102 |
|
(1) C&I loans includes $222.3 million of LHFS at December 31, 2020.
(2) Residential mortgages includes $404.2 million of LHFS at December 31, 2020.
(3) Personal unsecured loans includes $893.5 million of LHFS at December 31, 2020.
(4) RICs and auto loans includes $674.0 million of LHFS at December 31, 2020.
(5) Multifamily loans includes $3.8 million of LHFS at December 31, 2020.
(6) Other Commercial loans includes $0.3 million of LHFS at December 31, 2020.
(7) CRE loans include $28.0 million of LHFS at December 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| | December 31, 2019 |
(in thousands) | | 30-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total Financing Receivables | | Recorded Investment > 90 Days and Accruing |
Commercial: | | | | | | | | | | | | |
CRE | | $ | 51,472 | | | $ | 65,290 | | | $ | 116,762 | | | $ | 8,351,261 | | | $ | 8,468,023 | | | $ | 0 | |
C&I (1) | | 55,957 | | | 84,640 | | | 140,597 | | | 16,510,391 | | | 16,650,988 | | | 0 | |
Multifamily | | 10,456 | | | 3,704 | | | 14,160 | | | 8,627,044 | | | 8,641,204 | | | 0 | |
Other commercial | | 61,973 | | | 6,352 | | | 68,325 | | | 7,322,469 | | | 7,390,794 | | | 0 | |
Consumer: | | | | | | | | | | | | |
Residential mortgages(2) | | 154,978 | | | 128,578 | | | 283,556 | | | 8,848,971 | | | 9,132,527 | | | 0 | |
Home equity loans and lines of credit | | 45,417 | | | 75,972 | | | 121,389 | | | 4,648,955 | | | 4,770,344 | | | 0 | |
RICs and auto loans | | 4,364,110 | | | 404,723 | | | 4,768,833 | | | 31,687,914 | | | 36,456,747 | | | 0 | |
Personal unsecured loans(3) | | 85,277 | | | 102,572 | | | 187,849 | | | 2,110,803 | | | 2,298,652 | | | 93,102 | |
Other consumer | | 11,375 | | | 7,479 | | | 18,854 | | | 297,530 | | | 316,384 | | | 0 | |
Total | | $ | 4,841,015 | | | $ | 879,310 | | | $ | 5,720,325 | | | $ | 88,405,338 | | | $ | 94,125,663 | | | $ | 93,102 | |
(1)C&I loans included $116.3 million of LHFS at December 31, 2019.
(2) Residential mortgages includesincluded $296.8 million of LHFS at December 31, 2019.
(3) Personal unsecured loans includesincluded $1.0 billion of LHFS at December 31, 2019.
NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| As of |
| | December 31, 2018 |
(in thousands) | | 30-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total Financing Receivables | | Recorded Investment > 90 Days and Accruing |
Commercial: | | | | | | | | | | | | |
CRE | | $ | 20,179 |
| | $ | 49,317 |
| | $ | 69,496 |
| | $ | 8,634,985 |
| | $ | 8,704,481 |
| | $ | — |
|
C&I | | 61,495 |
| | 74,210 |
| | 135,705 |
| | 15,602,453 |
| | 15,738,158 |
| | — |
|
Multifamily | | 1,078 |
| | 4,574 |
| | 5,652 |
| | 8,303,463 |
| | 8,309,115 |
| | — |
|
Other commercial | | 16,081 |
| | 5,330 |
| | 21,411 |
| | 7,608,593 |
| | 7,630,004 |
| | 6 |
|
Consumer: | | | | | | | | | | | | |
Residential mortgages(1) | | 186,222 |
| | 171,265 |
| | 357,487 |
| | 9,741,496 |
| | 10,098,983 |
| | — |
|
Home equity loans and lines of credit | | 58,507 |
| | 79,860 |
| | 138,367 |
| | 5,327,303 |
| | 5,465,670 |
| | — |
|
RICs and auto loans | | 4,318,619 |
| | 441,742 |
| | 4,760,361 |
| | 24,574,859 |
| | 29,335,220 |
| | — |
|
Personal unsecured loans(2) | | 93,675 |
| | 102,463 |
| | 196,138 |
| | 2,404,327 |
| | 2,600,465 |
| | 98,973 |
|
Other consumer | | 16,261 |
| | 13,782 |
| | 30,043 |
| | 417,007 |
| | 447,050 |
| | — |
|
Total | | $ | 4,772,117 |
| | $ | 942,543 |
| | $ | 5,714,660 |
| | $ | 82,614,486 |
| | $ | 88,329,146 |
| | $ | 98,979 |
|
| |
(1) | Residential mortgages included $214.5 million of LHFS at December 31, 2018. |
| |
(2) | Personal unsecured loans included $1.1 billion of LHFS at December 31, 2018. |
Impaired Loans by Class of Financing Receivable
Impaired loans are generally defined as all TDRs plus commercial non-accrual loans in excess of $1.0 million.
Impaired loans disaggregated by class of financing receivables are summarized as follows:
|
| | | | | | | | | | | | | | | | |
| | December 31, 2019 |
(in thousands) | | Recorded Investment(1) | | UPB | | Related Specific Reserves | | Average Recorded Investment |
With no related allowance recorded: | | | | | | | | |
Commercial: | | | | | | | | |
CRE | | $ | 87,252 |
| | $ | 92,180 |
| | $ | — |
| | $ | 83,154 |
|
C&I | | 24,816 |
| | 26,814 |
| | — |
| | 25,338 |
|
Multifamily | | 2,927 |
| | 3,807 |
| | — |
| | 10,594 |
|
Other commercial | | 2,190 |
| | 2,205 |
| | — |
| | 4,769 |
|
Consumer: | | | | | | | | |
Residential mortgages | | 99,815 |
| | 149,887 |
| | — |
| | 122,357 |
|
Home equity loans and lines of credit | | 37,496 |
| | 39,675 |
| | — |
| | 41,783 |
|
RICs and auto loans | | 3,201 |
| | 3,222 |
| | — |
| | 5,132 |
|
Personal unsecured loans | | 10 |
| | 10 |
| | — |
| | 7 |
|
Other consumer | | 2,995 |
| | 2,995 |
| | — |
| | 3,293 |
|
With an allowance recorded: | | | | | | | | |
Commercial: | | | | | | | | |
CRE | | 59,778 |
| | 88,746 |
| | 10,725 |
| | 59,320 |
|
C&I | | 130,209 |
| | 147,959 |
| | 35,596 |
| | 155,194 |
|
Other commercial | | 22,587 |
| | 27,669 |
| | 3,986 |
| | 41,251 |
|
Consumer: | | | | | | | | |
Residential mortgages | | 141,093 |
| | 238,571 |
| | 13,006 |
| | 197,529 |
|
Home equity loans and lines of credit | | 33,498 |
| | 39,406 |
| | 3,182 |
| | 47,019 |
|
RICs and auto loans | | 3,844,618 |
| | 3,846,003 |
| | 913,642 |
| | 4,544,652 |
|
Personal unsecured loans | | 14,716 |
| | 14,947 |
| | 4,282 |
| | 15,449 |
|
Other consumer | | 51,090 |
| | 54,061 |
| | 974 |
| | 30,575 |
|
Total: | | | | | | | | |
Commercial | | $ | 329,759 |
| | $ | 389,380 |
| | $ | 50,307 |
| | $ | 379,620 |
|
Consumer | | 4,228,532 |
| | 4,388,777 |
| | 935,086 |
| | 5,007,796 |
|
Total | | $ | 4,558,291 |
| | $ | 4,778,157 |
| | $ | 985,393 |
| | $ | 5,387,416 |
|
| |
(1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, and net of discounts. |
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
|
| | | | | | | | | | | | | | | | |
| | December 31, 2018 |
(in thousands) | | Recorded Investment(1) | | UPB | | Related Specific Reserves | | Average Recorded Investment |
With no related allowance recorded: | | | | | | | | |
Commercial: | | | | | | | | |
CRE | | $ | 79,056 |
| | $ | 88,960 |
| | $ | — |
| | $ | 102,731 |
|
C&I | | 25,859 |
| | 36,067 |
| | — |
| | 54,200 |
|
Multifamily | | 18,260 |
| | 19,175 |
| | — |
| | 14,074 |
|
Other commercial | | 7,348 |
| | 7,380 |
| | — |
| | 4,058 |
|
Consumer: | | | | | | | | |
Residential mortgages | | 144,899 |
| | 201,905 |
| | — |
| | 126,110 |
|
Home equity loans and lines of credit | | 46,069 |
| | 48,021 |
| | — |
| | 49,233 |
|
RICs and auto loans | | 7,062 |
| | 9,072 |
| | — |
| | 11,628 |
|
Personal unsecured loans | | 4 |
| | 4 |
| | — |
| | 42 |
|
Other consumer | | 3,591 |
| | 3,591 |
| | — |
| | 6,574 |
|
With an allowance recorded: | | | | | | | | |
Commercial: | | | | | | | | |
CRE | | 58,861 |
| | 66,645 |
| | 6,449 |
| | 78,271 |
|
C&I | | 180,178 |
| | 197,937 |
| | 66,329 |
| | 178,474 |
|
Multifamily | | — |
| | — |
| | — |
| | 3,101 |
|
Other commercial | | 59,914 |
| | 59,914 |
| | 21,342 |
| | 68,813 |
|
Consumer: | | | | | | | | |
Residential mortgages | | 253,965 |
| | 289,447 |
| | 29,156 |
| | 288,029 |
|
Home equity loans and lines of credit | | 60,540 |
| | 71,475 |
| | 4,272 |
| | 62,684 |
|
RICs and auto loans | | 5,244,685 |
| | 5,346,013 |
| | 1,415,709 |
| | 5,633,094 |
|
Personal unsecured loans | | 16,182 |
| | 16,446 |
| | 6,875 |
| | 16,330 |
|
Other consumer | | 10,060 |
| | 13,275 |
| | 1,162 |
| | 10,826 |
|
Total: | | | | | | | | |
Commercial | | $ | 429,476 |
| | $ | 476,078 |
| | $ | 94,120 |
| | $ | 503,722 |
|
Consumer | | 5,787,057 |
| | 5,999,249 |
| | 1,457,174 |
| | 6,204,550 |
|
Total | | $ | 6,216,533 |
| | $ | 6,475,327 |
| | $ | 1,551,294 |
| | $ | 6,708,272 |
|
| |
(1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, and net of discounts. |
The Company recognized interest income of $585.5 million on approximately $3.6 billion of TDRs that were in performing status as of December 31, 2019 and $761.0 million on approximately $5.1 billion of TDRs that were in performing status as of December 31, 2018.
Commercial Lending Asset Quality Indicators
The Company's Risk Department performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications described below:
PASS. Asset is well-protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value less costs to acquire and sell any underlying collateral in a timely manner.
SPECIAL MENTION. Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special mention assets are not adversely classified.
SUBSTANDARD. Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
DOUBTFUL. Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
LOSS. Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Each commercial loan is evaluated to determine its risk rating at least annually. The indicators represent the rating for loans as of the date presented based on the most recent assessment performed. Amortized cost basis of loans in the commercial portfolio segment by credit quality indicators byindicator, class of financing receivablesreceivable, and year of origination are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2020 | | Commercial Loan Portfolio (1) |
(dollars in thousands) | | Amortized Cost by Origination Year |
Regulatory Rating: | | 2020(3) | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
CRE | | | | | | | | | | | | | | |
Pass | | $ | 722,210 | | | $ | 1,424,392 | | | $ | 1,656,560 | | | $ | 816,607 | | | $ | 542,979 | | | $ | 1,536,812 | | | $ | 6,699,560 | |
Special mention | | 28,876 | | | 15,480 | | | 81,167 | | | 43,368 | | | 79,555 | | | 83,751 | | | 332,197 | |
Substandard | | 8,259 | | | 16,609 | | | 29,761 | | | 33,833 | | | 45,936 | | | 189,716 | | | 324,114 | |
Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
N/A | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total CRE | | $ | 759,345 | | | $ | 1,456,481 | | | $ | 1,767,488 | | | $ | 893,808 | | | $ | 668,470 | | | $ | 1,810,279 | | | $ | 7,355,871 | |
C&I | | | | | | | | | | | | | | |
Pass | | $ | 4,661,409 | | | $ | 3,365,828 | | | $ | 2,798,209 | | | $ | 868,373 | | | $ | 585,083 | | | $ | 2,305,305 | | | $ | 14,584,207 | |
Special mention | | 11,000 | | | 136,413 | | | 134,388 | | | 49,601 | | | 99,042 | | | 254,102 | | | 684,546 | |
Substandard | | 60,034 | | | 15,309 | | | 173,900 | | | 59,814 | | | 84,642 | | | 213,908 | | | 607,607 | |
Doubtful | | 3,153 | | | 145 | | | 80 | | | 1,616 | | | 1,282 | | | 11,226 | | | 17,502 | |
N/A(2) | | 411,319 | | | 294,652 | | | 75,091 | | | 15,101 | | | 15,388 | | | 54,835 | | | 866,386 | |
Total C&I | | $ | 5,146,915 | | | $ | 3,812,347 | | | $ | 3,181,668 | | | $ | 994,505 | | | $ | 785,437 | | | $ | 2,839,376 | | | $ | 16,760,248 | |
Multifamily | | | | | | | | | | | | | | |
Pass | | $ | 880,199 | | | $ | 1,938,271 | | | $ | 1,361,178 | | | $ | 1,198,819 | | | $ | 503,267 | | | $ | 1,365,066 | | | $ | 7,246,800 | |
Special mention | | 0 | | | 39,433 | | | 147,872 | | | 110,906 | | | 31,348 | | | 59,072 | | | 388,631 | |
Substandard | | 5,355 | | | 104,945 | | | 203,437 | | | 148,251 | | | 49,445 | | | 224,038 | | | 735,471 | |
Doubtful | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
N/A | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total Multifamily | | $ | 885,554 | | | $ | 2,082,649 | | | $ | 1,712,487 | | | $ | 1,457,976 | | | $ | 584,060 | | | $ | 1,648,176 | | | $ | 8,370,902 | |
Remaining commercial | | | | | | | | | | | | | | |
Pass | | $ | 3,530,625 | | | $ | 1,416,704 | | | $ | 766,454 | | | $ | 443,244 | | | $ | 199,297 | | | $ | 1,038,584 | | | $ | 7,394,908 | |
Special mention | | 53 | | | 11,096 | | | 11,271 | | | 105 | | | 83 | | | 8,102 | | | 30,710 | |
Substandard | | 2,115 | | | 3,974 | | | 4,181 | | | 4,246 | | | 5,983 | | | 9,160 | | | 29,659 | |
Doubtful | | 351 | | | 0 | | | 99 | | | 0 | | | 101 | | | 8 | | | 559 | |
N/A | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
Total Remaining commercial | | $ | 3,533,144 | | | $ | 1,431,774 | | | $ | 782,005 | | | $ | 447,595 | | | $ | 205,464 | | | $ | 1,055,854 | | | $ | 7,455,836 | |
Total Commercial loans | | | | | | | | | | | | | | |
Pass | | $ | 9,794,443 | | | $ | 8,145,195 | | | $ | 6,582,401 | | | $ | 3,327,043 | | | $ | 1,830,626 | | | $ | 6,245,767 | | | $ | 35,925,475 | |
Special mention | | 39,929 | | | 202,422 | | | 374,698 | | | 203,980 | | | 210,028 | | | 405,027 | | | 1,436,084 | |
Substandard | | 75,763 | | | 140,837 | | | 411,279 | | | 246,144 | | | 186,006 | | | 636,822 | | | 1,696,851 | |
Doubtful | | 3,504 | | | 145 | | | 179 | | | 1,616 | | | 1,383 | | | 11,234 | | | 18,061 | |
N/A(2) | | 411,319 | | | 294,652 | | | 75,091 | | | 15,101 | | | 15,388 | | | 54,835 | | | 866,386 | |
Total commercial loans | | $ | 10,324,958 | | | $ | 8,783,251 | | | $ | 7,443,648 | | | $ | 3,793,884 | | | $ | 2,243,431 | | | $ | 7,353,685 | | | $ | 39,942,857 | |
(1)Includes $254.5 million of LHFS at December 31, 2020.
(2)Consists of loans that have not been assigned a regulatory rating.
(3)Loans originated during the year ended December 31, 2020.
|
| | | | | | | | | | | | | | | | | | | | |
December 31, 2019 | | CRE | | C&I | | Multifamily | | Remaining commercial | | Total(1) |
| | | | (in thousands) |
Rating: | | | | | | | | | | |
Pass | | $ | 7,513,567 |
| | $ | 14,816,669 |
| | $ | 8,356,377 |
| | $ | 7,072,083 |
| | $ | 37,758,696 |
|
Special mention | | 508,133 |
| | 743,462 |
| | 260,764 |
| | 260,051 |
| | 1,772,410 |
|
Substandard | | 379,199 |
| | 321,842 |
| | 24,063 |
| | 44,919 |
| | 770,023 |
|
Doubtful | | 24,378 |
| | 47,010 |
| | — |
| | 13,741 |
| | 85,129 |
|
N/A (2) | | 42,746 |
| | 722,005 |
| | — |
| | — |
| | 764,751 |
|
Total commercial loans | | $ | 8,468,023 |
| | $ | 16,650,988 |
| | $ | 8,641,204 |
| | $ | 7,390,794 |
| | $ | 41,151,009 |
|
| |
(1) | Financing receivables include LHFS. |
| |
(2) | Consists of loans that have not been assigned a regulatory rating. |
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued) | | December 31, 2018 | | CRE | | C&I | | Multifamily | | Remaining commercial | | Total(1) | |
| | | | (in thousands) | |
Rating: | | | | | | | | | | | |
December 31, 2019 | | December 31, 2019 | | CRE | | C&I | | Multifamily | | Remaining commercial | | Total(1) |
At Recorded Investment | | At Recorded Investment | | (in thousands) |
Regulatory Rating: | | Regulatory Rating: | |
Pass | | $ | 7,655,627 |
| | $ | 14,003,134 |
| | $ | 8,072,407 |
| | $ | 7,466,419 |
| | $ | 37,197,587 |
| Pass | | $ | 7,513,567 | | | $ | 14,816,669 | | | $ | 8,356,377 | | | $ | 7,072,083 | | | $ | 37,758,696 | |
Special mention | | 628,097 |
| | 772,704 |
| | 204,262 |
| | 67,313 |
| | 1,672,376 |
| |
Special Mention | | Special Mention | | 508,133 | | | 743,462 | | | 260,764 | | | 260,051 | | | 1,772,410 | |
Substandard | | 373,356 |
| | 408,515 |
| | 32,446 |
| | 36,255 |
| | 850,572 |
| Substandard | | 379,199 | | | 321,842 | | | 24,063 | | | 44,919 | | | 770,023 | |
Doubtful | | 4,655 |
| | 38,373 |
| | — |
| | 60,017 |
| | 103,045 |
| Doubtful | | 24,378 | | | 47,010 | | | 0 | | | 13,741 | | | 85,129 | |
N/A (2) | | 42,746 |
| | 515,432 |
| | — |
| | — |
| | 558,178 |
| N/A(2) | | 42,746 | | | 722,005 | | | 0 | | | 0 | | | 764,751 | |
Total commercial loans | | $ | 8,704,481 |
| | $ | 15,738,158 |
| | $ | 8,309,115 |
| | $ | 7,630,004 |
| | $ | 40,381,758 |
| Total commercial loans | | $ | 8,468,023 | | | $ | 16,650,988 | | | $ | 8,641,204 | | | $ | 7,390,794 | | | $ | 41,151,009 | |
| |
(1) | Financing receivables include LHFS. |
| |
(2) | Consists of loans that have not been assigned a regulatory rating. |
(1)Includes $116.3 million of LHFS at December 31, 2019.
(2)Consists of loans that have not been assigned a regulatory rating.
Consumer Lending Asset Quality Indicators-Credit Score
Consumer financing receivables for which either an internal or external credit score is a core component of the allowance model are summarized by credit score determined at origination as follows: | | Credit Score Range(2) | | December 31, 2019 | | December 31, 2018 | |
As of December 31, 2020 | | As of December 31, 2020 | | RICs and auto loans |
(dollars in thousands) | | RICs and auto loans | | Percent | | RICs and auto loans | | Percent | (dollars in thousands) | | Amortized Cost by Origination Year(3) |
Credit Score Range | | Credit Score Range | | 2020(2) | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total | Percent |
No FICO(1) | | $ | 3,178,459 |
| | 8.7 | % | | $ | 3,136,449 |
| | 10.7 | % | No FICO(1) | | $ | 1,326,026 | | | $ | 839,412 | | | $ | 450,539 | | | $ | 484,975 | | | $ | 230,382 | | | $ | 142,746 | | | $ | 3,474,080 | | 8.5 | % |
<600 | | 15,013,670 |
| | 41.2 | % | | 14,884,385 |
| | 50.7 | % | <600 | | 6,056,260 | | | 4,373,991 | | | 2,648,215 | | | 1,126,742 | | | 685,830 | | | 634,480 | | | 15,525,518 | | 38.2 | % |
600-639 | | 5,957,970 |
| | 16.3 | % | | 5,185,412 |
| | 17.7 | % | 600-639 | | 2,782,566 | | | 1,912,731 | | | 1,001,985 | | | 335,111 | | | 229,690 | | | 173,501 | | | 6,435,584 | | 15.8 | % |
>=640 | | 12,306,648 |
| | 33.8 | % | | 6,128,974 |
| | 20.9 | % | >=640 | | 8,427,478 | | | 4,832,173 | | | 1,382,133 | | | 264,635 | | | 200,430 | | | 156,611 | | | 15,263,460 | | 37.5 | % |
Total | | $ | 36,456,747 |
| | 100.0 | % | | $ | 29,335,220 |
| | 100.0 | % | Total | | $ | 18,592,330 | | | $ | 11,958,307 | | | $ | 5,482,872 | | | $ | 2,211,463 | | | $ | 1,346,332 | | | $ | 1,107,338 | | | $ | 40,698,642 | | 100.0 | % |
| |
(1) | Consists primarily of loans for which credit scores are not considered in the ALLL model. |
| |
(2) | FICO score at origination. |
(1) Consists primarily of loans for which credit scores are not available or are not considered in the ALLL model.
(2) Loans originated during the year ended December 31, 2020.
(3) Excludes LHFS.
| | | | | | | | | | | | | | |
December 31, 2019 | | RICs and auto loans |
Credit Score Range | | Recorded Investment (in thousands) | | Percent |
No FICO(1) | | $ | 3,178,459 | | | 8.7 | % |
<600 | | 15,013,670 | | | 41.2 | % |
600-639 | | 5,957,970 | | | 16.3 | % |
>=640 | | 12,306,648 | | | 33.8 | % |
Total | | $ | 36,456,747 | | | 100.0 | % |
(1) Consists primarily of loans for which credit scores are not available or are not considered in the ALLL model.
Consumer Lending Asset Quality Indicators-FICO and LTV Ratio
For both residential and home equity loans, loss severity assumptions are incorporated in the loan and lease loss reserve models to estimate loan balances that will ultimately charge off. These assumptions are based on recent loss experience within various current LTV bands within these portfolios. LTVs are refreshed quarterly by applying Federal Housing Finance Agency Home price index changes at a state-by-state level to the last known appraised value of the property to estimate the current LTV. The Company's ALLLCECL loss calculation incorporates the refreshed LTV information to update the distribution of defaulted loans by LTV as well as the associated loss given default for each LTV band. Reappraisals on a recurring basis at the individual property level are not considered cost-effective or necessary; however, reappraisals are performed on certain higher risk accounts to support line management activities, default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.
FICO scores are refreshed quarterly, where possible. The indicators disclosed represent the credit scores for loans as of the date presented based on the most recent assessment performed.
NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Residential mortgage and home equity financing receivables by LTV and FICO range are summarized as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2020 | | Residential Mortgages(1)(3) |
(dollars in thousands) | | Amortized Cost by Origination Year |
FICO Score | | 2020(4) | 2019 | 2018 | 2017 | 2016 | Prior | | Grand Total |
N/A(2) | | | | | | | | | |
LTV <= 70% | | $ | 750 | | $ | 0 | | $ | 521 | | $ | 500 | | $ | 0 | | $ | 3,148 | | | $ | 4,919 | |
70.01-80% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
80.01-90% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
90.01-100% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
100.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
LTV - N/A(2) | | 109,388 | | 2,170 | | 1,200 | | 1,547 | | 1,485 | | 4,410 | | | 120,200 | |
| | | | | | | | | |
| | | | | | | | | |
<600 | | | | | | | | | |
LTV <= 70% | | $ | 876 | | $ | 3,988 | | $ | 6,255 | | $ | 13,646 | | $ | 13,775 | | $ | 109,076 | | | $ | 147,616 | |
70.01-80% | | 1,053 | | 5,235 | | 4,603 | | 7,707 | | 3,406 | | 2,832 | | | 24,836 | |
80.01-90% | | 221 | | 8,801 | | 8,442 | | 1,577 | | 0 | | 1,102 | | | 20,143 | |
90.01-100% | | 292 | | 2,792 | | 0 | | 0 | | 219 | | 690 | | | 3,993 | |
100.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 353 | | | 353 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,445 | | | 1,445 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 92 | | | 92 | |
| | | | | | | | | |
| | | | | | | | | |
600-639 | | | | | | | | | |
LTV <= 70% | | $ | 3,058 | | $ | 3,923 | | $ | 4,275 | | $ | 11,593 | | $ | 10,710 | | $ | 81,496 | | | $ | 115,055 | |
70.01-80% | | 1,585 | | 4,839 | | 3,901 | | 5,300 | | 2,040 | | 2,935 | | | 20,600 | |
80.01-90% | | 1,233 | | 6,910 | | 5,693 | | 1,870 | | 249 | | 581 | | | 16,536 | |
90.01-100% | | 2,321 | | 2,364 | | 0 | | 0 | | 0 | | 193 | | | 4,878 | |
100.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 707 | | | 707 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 333 | | | 333 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
| | | | | | | | | |
| | | | | | | | | |
640-679 | | | | | | | | | |
LTV <= 70% | | $ | 11,264 | | $ | 21,946 | | $ | 17,039 | | $ | 24,447 | | $ | 26,992 | | $ | 124,559 | | | $ | 226,247 | |
70.01-80% | | 12,585 | | 18,756 | | 8,079 | | 7,117 | | 1,377 | | 2,426 | | | 50,340 | |
80.01-90% | | 2,385 | | 18,975 | | 12,715 | | 1,265 | | 0 | | 1,108 | | | 36,448 | |
90.01-100% | | 7,256 | | 4,501 | | 0 | | 0 | | 0 | | 573 | | | 12,330 | |
100.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 240 | | | 240 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 432 | | | 432 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | | 0 | |
| | | | | | | | | |
| | | | | | | | | |
680-719 | | | | | | | | | |
LTV <= 70% | | $ | 34,802 | | $ | 49,625 | | $ | 41,447 | | $ | 56,362 | | $ | 54,836 | | $ | 196,173 | | | $ | 433,245 | |
70.01-80% | | 38,582 | | 37,546 | | 20,202 | | 18,615 | | 5,047 | | 4,556 | | | 124,548 | |
80.01-90% | | 7,616 | | 39,239 | | 22,510 | | 2,195 | | 0 | | 3,025 | | | 74,585 | |
90.01-100% | | 29,050 | | 8,147 | | 0 | | 0 | | 0 | | 526 | | | 37,723 | |
100.01-110% | | 101 | | 0 | | 0 | | 0 | | 0 | | 475 | | | 576 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 802 | | | 802 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 73 | | | 73 | |
| | | | | | | | | |
| | | | | | | | | |
720-759 | | | | | | | | | |
LTV <= 70% | | $ | 105,769 | | $ | 89,140 | | $ | 88,485 | | $ | 145,301 | | $ | 132,720 | | $ | 285,308 | | | $ | 846,723 | |
70.01-80% | | 81,595 | | 62,488 | | 29,767 | | 25,421 | | 8,163 | | 5,334 | | | 212,768 | |
80.01-90% | | 16,714 | | 57,807 | | 30,850 | | 2,754 | | 355 | | 1,566 | | | 110,046 | |
90.01-100% | | 37,846 | | 12,066 | | 0 | | 0 | | 0 | | 563 | | | 50,475 | |
100.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 68 | | | 68 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 206 | | | 206 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 227 | | | 227 | |
| | | | | | | | | |
| | | | | | | | | |
>=760 | | | | | | | | | |
LTV <= 70% | | $ | 381,713 | | $ | 335,559 | | $ | 224,505 | | $ | 456,792 | | $ | 527,624 | | $ | 1,066,295 | | | $ | 2,992,488 | |
70.01-80% | | 221,896 | | 227,139 | | 71,681 | | 48,411 | | 17,893 | | 8,473 | | | 595,493 | |
80.01-90% | | 42,464 | | 134,309 | | 50,128 | | 7,977 | | 0 | | 3,886 | | | 238,764 | |
90.01-100% | | 37,279 | | 21,057 | | 0 | | 0 | | 74 | | 1,419 | | | 59,829 | |
100.01-110% | | 0 | | 0 | | 0 | | 571 | | 0 | | 1,008 | | | 1,579 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 92 | | 1,734 | | | 1,826 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 381 | | | 381 | |
Total - All FICO Bands | | | | | | | | | |
LTV <= 70% | | $ | 538,232 | | $ | 504,181 | | $ | 382,527 | | $ | 708,641 | | $ | 766,657 | | $ | 1,866,055 | | | $ | 4,766,293 | |
70.01-80% | | 357,296 | | 356,003 | | 138,233 | | 112,571 | | 37,926 | | 26,556 | | | 1,028,585 | |
80.01-90% | | 70,633 | | 266,041 | | 130,338 | | 17,638 | | 604 | | 11,268 | | | 496,522 | |
90.01-100% | | 114,044 | | 50,927 | | 0 | | 0 | | 293 | | 3,964 | | | 169,228 | |
100.01-110% | | 101 | | 0 | | 0 | | 571 | | 0 | | 2,851 | | | 3,523 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 92 | | 4,952 | | | 5,044 | |
LTV - N/A(2) | | 109,388 | | 2,170 | | 1,200 | | 1,547 | | 1,485 | | 5,183 | | | 120,973 | |
Grand Total | | $ | 1,189,694 | | $ | 1,179,322 | | $ | 652,298 | | $ | 840,968 | | $ | 807,057 | | $ | 1,920,829 | | | $ | 6,590,168 | |
| | | | | | | | | |
(1) Excludes LHFS.
(2) Balances in the "N/A" range for LTV or FICO score primarily represent loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) The ALLL model considers LTV for financing receivables in first lien position and CLTV for financing receivables in second lien position for the Company.
(4) Loans originated during the year ended December 31, 2020.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Mortgages(1)(3) |
December 31, 2019 | | N/A(2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total |
FICO Score | | (dollars in thousands) |
N/A(2) | | $ | 92,052 |
| | $ | 4,654 |
| | $ | 534 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 97,240 |
|
<600 | | 33 |
| | 180,465 |
| | 48,344 |
| | 36,401 |
| | 27,262 |
| | 1,518 |
| | 2,325 |
| | 296,348 |
|
600-639 | | 31 |
| | 122,675 |
| | 45,189 |
| | 34,690 |
| | 37,358 |
| | 636 |
| | 1,108 |
| | 241,687 |
|
640-679 | | 1,176 |
| | 263,781 |
| | 89,179 |
| | 78,215 |
| | 87,067 |
| | 946 |
| | 1,089 |
| | 521,453 |
|
680-719 | | 7,557 |
| | 511,018 |
| | 219,766 |
| | 132,076 |
| | 155,857 |
| | 1,583 |
| | 2,508 |
| | 1,030,365 |
|
720-759 | | 14,427 |
| | 960,290 |
| | 413,532 |
| | 195,335 |
| | 191,850 |
| | 1,959 |
| | 3,334 |
| | 1,780,727 |
|
>=760 | | 36,621 |
| | 3,324,285 |
| | 938,368 |
| | 353,989 |
| | 203,665 |
| | 3,673 |
| | 7,281 |
| | 4,867,882 |
|
Grand Total | | $ | 151,897 |
| | $ | 5,367,168 |
| | $ | 1,754,912 |
| | $ | 830,706 |
| | $ | 703,059 |
| | $ | 10,315 |
| | $ | 17,645 |
| | $ | 8,835,702 |
|
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As of December 31, 2020 | | Home Equity Loans and Lines of Credit(2) |
(in thousands) | | Amortized Cost by Origination Year |
FICO Score | | 2020(4) | 2019 | 2018 | 2017 | 2016 | Prior | Total | Revolving |
N/A(2) | | | | | | | | | |
LTV <= 70% | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 77 | | $ | 531 | | $ | 608 | | $ | 608 | |
70.01-90% | | 8 | | 0 | | 0 | | 0 | | 0 | | 0 | | 8 | | 8 | |
90.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
LTV - N/A(2) | | 2,840 | | 4,407 | | 5,504 | | 5,514 | | 4,083 | | 83,060 | | 105,408 | | 53,654 | |
| | | | | | | | | |
<600 | | | | | | | | | |
LTV <= 70% | | $ | 727 | | $ | 3,389 | | $ | 7,255 | | $ | 10,780 | | $ | 15,566 | | $ | 121,240 | | $ | 158,957 | | $ | 137,921 | |
70.01-90% | | 238 | | 1,901 | | 4,029 | | 2,727 | | 1,698 | | 13,383 | | 23,976 | | 21,484 | |
90.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 2,389 | | 2,389 | | 2,017 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 2,391 | | 2,391 | | 2,369 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 15 | | 0 | | 562 | | 577 | | 555 | |
| | | | | | | | | |
600-639 | | | | | | | | | |
LTV <= 70% | | $ | 1,265 | | $ | 2,589 | | $ | 8,921 | | $ | 13,240 | | $ | 11,873 | | $ | 100,148 | | $ | 138,036 | | $ | 128,515 | |
70.01-90% | | 728 | | 3,149 | | 5,618 | | 2,491 | | 433 | | 8,812 | | 21,231 | | 19,784 | |
90.01-110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 1,803 | | 1,803 | | 1,706 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 3,235 | | 3,235 | | 2,858 | |
LTV - N/A(2) | | 0 | | 0 | | 0 | | 0 | | 0 | | 51 | | 51 | | 29 | |
| | | | | | | | | |
640-679 | | | | | | | | | |
LTV <= 70% | | $ | 4,983 | | $ | 15,432 | | $ | 23,718 | | $ | 26,211 | | $ | 19,167 | | $ | 152,823 | | $ | 242,334 | | $ | 231,152 | |
70.01-90% | | 2,166 | | 8,599 | | 10,455 | | 5,391 | | 1,377 | | 17,425 | | 45,413 | | 44,187 | |
90.01-110% | | 0 | | 53 | | 0 | | 0 | | 0 | | 6,279 | | 6,332 | | 5,784 | |
LTV>110% | | 48 | | 0 | | 0 | | 0 | | 0 | | 723 | | 771 | | 533 | |
LTV - N/A(2) | | 95 | | 0 | | 0 | | 100 | | 0 | | 70 | | 265 | | 265 | |
| | | | | | | | | |
680-719 | | | | | | | | | |
LTV <= 70% | | $ | 26,177 | | $ | 31,112 | | $ | 49,618 | | $ | 53,778 | | $ | 49,893 | | $ | 249,565 | | $ | 460,143 | | $ | 444,254 | |
70.01-90% | | 8,483 | | 17,515 | | 19,442 | | 11,250 | | 2,996 | | 24,541 | | 84,227 | | 82,534 | |
90.01-110% | | 90 | | 0 | | 0 | | 0 | | 0 | | 7,810 | | 7,900 | | 7,128 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 5,756 | | 5,756 | | 5,477 | |
LTV - N/A(2) | | 0 | | 144 | | 0 | | 63 | | 0 | | 149 | | 356 | | 351 | |
| | | | | | | | | |
720-759 | | | | | | | | | |
LTV <= 70% | | $ | 39,927 | | $ | 49,716 | | $ | 62,795 | | $ | 79,821 | | $ | 68,503 | | $ | 348,679 | | $ | 649,441 | | $ | 634,206 | |
70.01-90% | | 14,064 | | 28,552 | | 30,553 | | 15,094 | | 5,386 | | 35,066 | | 128,715 | | 126,755 | |
90.01-110% | | 0 | | 69 | | 0 | | 0 | | 0 | | 8,270 | | 8,339 | | 7,128 | |
LTV>110% | | 0 | | 0 | | 0 | | 0 | | 0 | | 7,611 | | 7,611 | | 7,313 | |
LTV - N/A(2) | | 35 | | 56 | | 0 | | 253 | | 0 | | 122 | | 466 | | 466 | |
| | | | | | | | | |
>=760 | | | | | | | | | |
LTV <= 70% | | $ | 112,532 | | $ | 149,381 | | $ | 178,602 | | $ | 188,693 | | $ | 156,633 | | $ | 896,901 | | $ | 1,682,742 | | $ | 1,646,127 | |
70.01-90% | | 30,306 | | 61,647 | | 60,023 | | 34,640 | | 11,120 | | 86,265 | | 284,001 | | 280,811 | |
90.01-110% | | 396 | | 21 | | 0 | | 0 | | 0 | | 22,839 | | 23,256 | | 22,252 | |
LTV>110% | | 710 | | 62 | | 0 | | 0 | | 0 | | 9,700 | | 10,472 | | 9,899 | |
LTV - N/A(2) | | 185 | | 554 | | 129 | | 68 | | 0 | | 359 | | 1,295 | | 1,284 | |
| | | | | | | | | |
Total - All FICO Bands | | | | | | | | | |
LTV <= 70% | | $ | 185,611 | | $ | 251,619 | | $ | 330,909 | | $ | 372,523 | | $ | 321,712 | | $ | 1,869,887 | | $ | 3,332,261 | | $ | 3,222,783 | |
LTV 70.01 - 90% | | 55,993 | | 121,363 | | 130,120 | | 71,593 | | 23,010 | | 185,492 | | 587,571 | | 575,563 | |
LTV 90.01 - 110% | | 486 | | 143 | | 0 | | 0 | | 0 | | 49,390 | | 50,019 | | 46,015 | |
LTV>110% | | 758 | | 62 | | 0 | | 0 | | 0 | | 29,416 | | 30,236 | | 28,449 | |
LTV - N/A(2) | | 3,155 | | 5,161 | | 5,633 | | 6,013 | | 4,083 | | 84,373 | | 108,418 | | 56,604 | |
Grand Total | | $ | 246,003 | | $ | 378,348 | | $ | 466,662 | | $ | 450,129 | | $ | 348,805 | | $ | 2,218,558 | | $ | 4,108,505 | | $ | 3,929,414 | |
(1) - (4) Refer to corresponding notes above.
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Mortgages(1)(3) |
December 31, 2019 | | N/A(2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total |
FICO Score | | (dollars in thousands) |
N/A(2) | | $ | 92,052 | | | $ | 4,654 | | | $ | 534 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 97,240 | |
<600 | | 33 | | | 180,465 | | | 48,344 | | | 36,401 | | | 27,262 | | | 1,518 | | | 2,325 | | | 296,348 | |
600-639 | | 31 | | | 122,675 | | | 45,189 | | | 34,690 | | | 37,358 | | | 636 | | | 1,108 | | | 241,687 | |
640-679 | | 1,176 | | | 263,781 | | | 89,179 | | | 78,215 | | | 87,067 | | | 946 | | | 1,089 | | | 521,453 | |
680-719 | | 7,557 | | | 511,018 | | | 219,766 | | | 132,076 | | | 155,857 | | | 1,583 | | | 2,508 | | | 1,030,365 | |
720-759 | | 14,427 | | | 960,290 | | | 413,532 | | | 195,335 | | | 191,850 | | | 1,959 | | | 3,334 | | | 1,780,727 | |
>=760 | | 36,621 | | | 3,324,285 | | | 938,368 | | | 353,989 | | | 203,665 | | | 3,673 | | | 7,281 | | | 4,867,882 | |
Grand Total | | $ | 151,897 | | | $ | 5,367,168 | | | $ | 1,754,912 | | | $ | 830,706 | | | $ | 703,059 | | | $ | 10,315 | | | $ | 17,645 | | | $ | 8,835,702 | |
(1) Excludes LHFS.
(2) Residential mortgages in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) The ALLL model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Home Equity Loans and Lines of Credit(2) |
December 31, 2019 | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total |
FICO Score | | |
N/A(1) | | $ | 176,138 | | | $ | 189 | | | $ | 153 | | | $ | 0 | | | $ | 0 | | | $ | 176,480 | |
<600 | | 824 | | | 215,977 | | | 66,675 | | | 11,467 | | | 4,459 | | | 299,402 | |
600-639 | | 1,602 | | | 147,089 | | | 34,624 | | | 4,306 | | | 3,926 | | | 191,547 | |
640-679 | | 9,964 | | | 264,021 | | | 78,645 | | | 8,079 | | | 3,626 | | | 364,335 | |
680-719 | | 17,120 | | | 478,817 | | | 146,529 | | | 12,558 | | | 9,425 | | | 664,449 | |
720-759 | | 25,547 | | | 665,647 | | | 204,104 | | | 12,606 | | | 10,857 | | | 918,761 | |
>=760 | | 61,411 | | | 1,639,702 | | | 408,812 | | | 30,259 | | | 15,186 | | | 2,155,370 | |
Grand Total | | $ | 292,606 | | | $ | 3,411,442 | | | $ | 939,542 | | | $ | 79,275 | | | $ | 47,479 | | | $ | 4,770,344 | |
(1) Excludes LHFS.
(2) Home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) The ALLL model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.
133
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Home Equity Loans and Lines of Credit(2) |
December 31, 2019 | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total |
FICO Score | | (dollars in thousands) |
N/A(1) | | $ | 176,138 |
| | $ | 189 |
| | $ | 153 |
| | $ | — |
| | $ | — |
| | $ | 176,480 |
|
<600 | | 824 |
| | 215,977 |
| | 66,675 |
| | 11,467 |
| | 4,459 |
| | 299,402 |
|
600-639 | | 1,602 |
| | 147,089 |
| | 34,624 |
| | 4,306 |
| | 3,926 |
| | 191,547 |
|
640-679 | | 9,964 |
| | 264,021 |
| | 78,645 |
| | 8,079 |
| | 3,626 |
| | 364,335 |
|
680-719 | | 17,120 |
| | 478,817 |
| | 146,529 |
| | 12,558 |
| | 9,425 |
| | 664,449 |
|
720-759 | | 25,547 |
| | 665,647 |
| | 204,104 |
| | 12,606 |
| | 10,857 |
| | 918,761 |
|
>=760 | | 61,411 |
| | 1,639,702 |
| | 408,812 |
| | 30,259 |
| | 15,186 |
| | 2,155,370 |
|
Grand Total | | $ | 292,606 |
| | $ | 3,411,442 |
| | $ | 939,542 |
| | $ | 79,275 |
| | $ | 47,479 |
| | $ | 4,770,344 |
|
(1) Excludes LHFS.
| |
(2) | Home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable. |
| |
(3) | ALLL model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Residential Mortgages(1)(3) |
December 31, 2018 | | N/A (2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total |
FICO Score | | (dollars in thousands) |
N/A(2) | | $ | 87,808 |
| | $ | 4,465 |
| | $ | — |
| | $ | — |
| | $ | 423 |
| | $ | — |
| | $ | — |
| | $ | 92,696 |
|
<600 | | 69 |
| | 225,647 |
| | 54,101 |
| | 35,625 |
| | 26,863 |
| | 2,450 |
| | 4,604 |
| | 349,359 |
|
600-639 | | 35 |
| | 157,281 |
| | 47,712 |
| | 34,124 |
| | 37,901 |
| | 943 |
| | 1,544 |
| | 279,540 |
|
640-679 | | — |
| | 308,780 |
| | 112,811 |
| | 76,512 |
| | 101,057 |
| | 1,934 |
| | 1,767 |
| | 602,861 |
|
680-719 | | — |
| | 560,920 |
| | 266,877 |
| | 148,283 |
| | 175,889 |
| | 3,630 |
| | 3,593 |
| | 1,159,192 |
|
720-759 | | 50 |
| | 1,061,969 |
| | 535,840 |
| | 210,046 |
| | 218,177 |
| | 4,263 |
| | 6,704 |
| | 2,037,049 |
|
>=760 | | 213 |
| | 3,518,916 |
| | 1,253,733 |
| | 354,629 |
| | 220,695 |
| | 6,477 |
| | 9,102 |
| | 5,363,765 |
|
Grand Total | | $ | 88,175 |
| | $ | 5,837,978 |
| | $ | 2,271,074 |
| | $ | 859,219 |
| | $ | 781,005 |
| | $ | 19,697 |
| | $ | 27,314 |
| | $ | 9,884,462 |
|
| |
(2) | Residential mortgages in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable. |
| |
(3) | ALLL model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company. |
NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Home Equity Loans and Lines of Credit(2) |
December 31, 2018 | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total |
FICO Score | | (dollars in thousands) |
N/A(1) | | $ | 133,436 |
| | $ | 841 |
| | $ | 197 |
| | $ | — |
| | $ | 5 |
| | $ | 134,479 |
|
<600 | | 1,130 |
| | 209,536 |
| | 64,202 |
| | 14,948 |
| | 5,988 |
| | 295,804 |
|
600-639 | | 398 |
| | 166,384 |
| | 48,543 |
| | 7,932 |
| | 2,780 |
| | 226,037 |
|
640-679 | | 919 |
| | 305,642 |
| | 112,937 |
| | 10,311 |
| | 6,887 |
| | 436,696 |
|
680-719 | | 869 |
| | 527,374 |
| | 215,824 |
| | 17,231 |
| | 13,482 |
| | 774,780 |
|
720-759 | | 1,139 |
| | 732,467 |
| | 292,516 |
| | 20,812 |
| | 14,677 |
| | 1,061,611 |
|
>=760 | | 2,280 |
| | 1,844,830 |
| | 614,221 |
| | 46,993 |
| | 27,939 |
| | 2,536,263 |
|
Grand Total | | $ | 140,171 |
| | $ | 3,787,074 |
| | $ | 1,348,440 |
| | $ | 118,227 |
| | $ | 71,758 |
| | $ | 5,465,670 |
|
| |
(1) | Home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable. |
| |
(2) | Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company. |
TDR Loans
The following table summarizes the Company’s performing and non-performing TDRs at the dates indicated:
| | (in thousands) | | December 31, 2019 | | December 31, 2018(2) | (in thousands) | | December 31, 2020 | | December 31, 2019 |
| | | | | | | | | |
Performing | | $ | 3,646,354 |
| | $ | 5,069,879 |
| Performing | | $ | 3,850,622 | | | $ | 3,646,354 | |
Non-performing | | 673,777 |
| | 908,490 |
| Non-performing | | 473,507 | | | 673,777 | |
Total (1) | | $ | 4,320,131 |
| | $ | 5,978,369 |
| Total (1) | | $ | 4,324,129 | | | $ | 4,320,131 | |
(1) Excludes LHFS.
(2)Balances at
The decrease in total non-performing TDRs is primarily due to the significant increase in deferrals granted to borrowers impacted by COVID-19. The additional risk of these deferrals is captured in the ACL for the year ended December 31, 2018 have been updated to include RV/marine TDRs in the amount2020.
TDR Activity by Class of $56.0 million ($55.7 million performing, $0.4 million non-performing) that were not identified at that date.
Financial Impact and TDRs by Concession TypeFinancing Receivable
The Company's modifications consist primarily of term extensions. The following tables detail the activity of TDRs for the years ended December 31, 2020, 2019 2018 and 2017:2018:
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | |
| |
| |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| Year Ended December 31, 2020 |
| Number of Contracts | | Pre-TDR Amortized Cost(1) | | | | | | | | | Post-TDR Amortized Cost(2) |
| (dollars in thousands) |
Commercial: | | | | | | | | | | | | |
CRE | 42 | | | $ | 59,989 | | | | | | | | | | $ | 59,989 | |
C&I | 727 | | | 63,250 | | | | | | | | | | 63,402 | |
Multi-family | 7 | | | 63,003 | | | | | | | | | | 63,003 | |
Other commercial | 11 | | | 1,108 | | | | | | | | | | 1,108 | |
Consumer: | | | | | | | | | | | | |
Residential mortgages(3) | 192 | | | 16,836 | | | | | | | | | | 16,975 | |
Home equity loans and lines of credit | 80 | | | 7,490 | | | | | | | | | | 7,863 | |
RICs and auto loans | 102,486 | | | 2,118,125 | | | | | | | | | | 2,140,179 | |
Personal unsecured loans | 5 | | | 7 | | | | | | | | | | 0 | |
Other consumer | 15 | | | 1,389 | | | | | | | | | | 1,826 | |
Total | 103,565 | | | $ | 2,331,197 | | | | | | | | | | $ | 2,354,345 | |
|
| | | | | | | | | | | |
| Year Ended December 31, 2019 |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | | Post-TDR Recorded Investment(2) |
| (dollars in thousands) |
Commercial: | | | | | | |
CRE | 57 |
| | $ | 101,885 |
| | | $ | 98,984 |
|
C&I | 91 |
| | 2,591 |
| | | 2,601 |
|
Consumer: | | | | | | |
Residential mortgages(3) | 112 |
| | 15,232 |
| | | 15,498 |
|
Home equity loans and lines of credit | 148 |
| | 14,671 |
| | | 15,795 |
|
RICs and auto loans | 74,458 |
| | 1,274,067 |
| | | 1,277,756 |
|
Personal unsecured loans | 211 |
| | 2,543 |
| | | 2,572 |
|
Other consumer | 72 |
| | 2,572 |
| | | 2,556 |
|
Total | 75,149 |
| | $ | 1,413,561 |
| | | $ | 1,415,762 |
|
(1) Pre-TDR modification amount is the month-end balance prior to the month in which the modification occurred.(2) Post-TDR modification amount is the month-end balance for the month in which the modification occurred.
(3) The post-TDR modification amounts for residential mortgages exclude interest reserves.
| | | | | | | | | | | | | | | | | | | | | | | | |
| |
| | | | | | | | | | | | |
| |
| |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| |
| Year Ended December 31, 2019 |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | | | | | | | | Post-TDR Recorded Investment(2) |
| (dollars in thousands) |
Commercial: | | | | | | | | | | | | |
CRE | 57 | | | $ | 101,885 | | | | | | | | | | $ | 98,984 | |
C&I | 91 | | | 2,591 | | | | | | | | | | 2,601 | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Consumer: | | | | | | | | | | | | |
Residential mortgages(3) | 112 | | | 15,232 | | | | | | | | | | 15,498 | |
Home equity loans and lines of credit | 148 | | | 14,671 | | | | | | | | | | 15,795 | |
RICs and auto loans | 74,528 | | | 1,276,639 | | | | | | | | | | 1,280,312 | |
Personal unsecured loans | 211 | | | 2,543 | | | | | | | | | | 2,572 | |
Other consumer | 2 | | | 0 | | | | | | | | | | 0 | |
Total | 75,149 | | | $ | 1,413,561 | | | | | | | | | | $ | 1,415,762 | |
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.
(2)Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred.
(3)The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.
NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2018 |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | | | | | | | Post-TDR Recorded Investment(2) |
| (dollars in thousands) |
Commercial: | | | | | | | | | | | |
CRE | 99 | | | $ | 145,214 | | | | | | | | | $ | 140,153 | |
C&I | 247 | | | 9,932 | | | | | | | | | 9,515 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Consumer: | | | | | | | | | | | |
Residential mortgages(3) | 189 | | | 32,606 | | | | | | | | | 31,770 | |
Home equity loans and lines of credit | 159 | | | 10,629 | | | | | | | | | 10,545 | |
RICs and auto loans | 132,408 | | | 2,204,895 | | | | | | | | | 2,216,157 | |
Personal unsecured loans | 363 | | | 4,650 | | | | | | | | | 4,589 | |
Other consumer | 11 | | | 308 | | | | | | | | | 228 | |
Total | 133,476 | | | $ | 2,408,234 | | | | | | | | | $ | 2,412,957 | |
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.
| |
(2) | (2)Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred. |
| |
(3) | The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves. |
|
| | | | | | | | | | |
| Year Ended December 31, 2017 |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | Post-TDR Recorded Investment(2) |
| (dollars in thousands) |
Commercial: | | | | | |
CRE | 75 |
| | $ | 152,550 |
| | $ | 124,710 |
|
C&I | 790 |
| | 24,915 |
| | 24,862 |
|
Multi-family | — |
| | — |
| | — |
|
Other commercial | — |
| | — |
| | — |
|
Consumer: | | | | | |
Residential mortgages(3) | 212 |
| | 40,578 |
| | 40,834 |
|
Home equity loans and lines of credit | 70 |
| | 5,554 |
| | 6,568 |
|
RICs and auto loans | 206,963 |
| | 3,498,518 |
| | 3,493,806 |
|
Personal unsecured loans | 391 |
| | 4,678 |
| | 4,548 |
|
Other consumer | 109 |
| | 3,055 |
| | 3,079 |
|
Total | 208,610 |
| | $ | 3,729,848 |
| | $ | 3,698,407 |
|
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior tofor the month in which the modification occurred.
| |
(2) | Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred. |
| |
(3) | The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves. |
(3)The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.
TDRs Which Have Subsequently Defaulted
A TDR is generally considered to have subsequently defaulted if, after modification, the loan becomes 90 DPD. For RICs, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 DPD. The following table details period-end recorded investmentamortized cost balances of TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the years ended December 31, 2020, 2019 2018, and 2017,2018, respectively.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, | | | | |
| | | | | 2020 | | 2019 | | 2018 | | |
| | | | | | | | | Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) | | | | |
| | | (dollars in thousands) |
Commercial | | | | | | | | | | | | | | | | | | | | | | | |
CRE | | | | | | | | | 35 | | | $ | 17,168 | | | 10 | | | $ | 6,020 | | | 7 | | | $ | 21,654 | | | | | |
C&I | | | | | | | | | 57 | | | 11,043 | | | 122 | | | 37,433 | | | 155 | | | 20,920 | | | | | |
Multifamily | | | | | | | | | 3 | | | 41,629 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | |
Other commercial | | | | | | | | | 2 | | | 625 | | | 5 | | | 35 | | | 0 | | | 0 | | | | | |
Consumer: | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgages | | | | | | | | | 33 | | | 5,278 | | | 142 | | | 16,368 | | | 165 | | | 20,783 | | | | | |
Home equity loans and lines of credit | | | | | | | | | 24 | | | 3,783 | | | 25 | | | 1,867 | | | 43 | | | 2,609 | | | | | |
RICs and auto loans | | | | | | | | | 16,016 | | | 291,050 | | | 22,666 | | | 375,341 | | | 40,007 | | | 673,875 | | | | | |
Personal unsecured loans | | | | | | | | | 0 | | | 0 | | | 215 | | | 2,061 | | | 194 | | | 1,743 | | | | | |
Other consumer | | | | | | | | | 1 | | | 45 | | | 0 | | | 0 | | | 0 | | | 0 | | | | | |
Total | | | | | | | | | 16,171 | | | $ | 370,621 | | | 23,185 | | | $ | 439,125 | | | 40,571 | | | $ | 741,584 | | | | | |
(1)Represents the period-end balance. Does not include Chapter 7 bankruptcy TDRs.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
|
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2019 | | 2018 | | 2017 |
| Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) |
| (dollars in thousands) |
Commercial | | | | | | | | | | | |
CRE | 10 |
| | $ | 6,020 |
| | 7 |
| | $ | 21,654 |
| | 18 |
| | $ | 27,286 |
|
C&I | 122 |
| | 37,433 |
| | 155 |
| | 20,920 |
| | 205 |
| | 7,741 |
|
Other commercial | 5 |
| | 35 |
| | — |
| | — |
| | 2 |
| | 22 |
|
Consumer: | | | | | | | | | | | |
Residential mortgages | 142 |
| | 16,368 |
| | 165 |
| | 20,783 |
| | 302 |
| | 36,112 |
|
Home equity loans and lines of credit | 25 |
| | 1,867 |
| | 43 |
| | 2,609 |
| | 6 |
| | 257 |
|
RICs and auto loans | 22,663 |
| | 375,216 |
| | 40,007 |
| | 673,875 |
| | 47,789 |
| | 831,102 |
|
Personal unsecured loans | 215 |
| | 2,061 |
| | 194 |
| | 1,743 |
| | 320 |
| | 3,250 |
|
Other consumer | 3 |
| | 125 |
| | — |
| | — |
| | 35 |
| | 394 |
|
Total | 23,185 |
| | $ | 439,125 |
| | 40,571 |
| | $ | 741,584 |
| | 48,677 |
| | $ | 906,164 |
|
| |
(1) | The recorded investment represents the period-end balance. Does not include Chapter 7 bankruptcy TDRs. |
NOTE 5. OPERATING LEASE ASSETS, NET
The Company has operating leases, including leased vehicles and commercial equipment vehicles and aircraft which are included in the Company's Consolidated Balance Sheets as Operating lease assets, net. The leased vehicle portfolio consists primarily of leases originated under the Chrysler Agreement.
Lease extensions granted by the Company to customers impacted by COVID-19 are not treated as modifications.Income continues to accrue during the extension period and remaining lease payments are recorded on a straight-line basis over the modified lease term.
Operating lease assets, net consisted of the following as of December 31, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2020 | | December 31, 2019 |
| | | | |
Leased vehicles | | $ | 22,056,063 | | | $ | 21,722,726 | |
Less: accumulated depreciation | | (4,796,595) | | | (4,159,944) | |
Depreciated net capitalized cost | | 17,259,468 | | | 17,562,782 | |
Manufacturer subvention payments, net of accretion | | (934,381) | | | (1,177,342) | |
Origination fees and other costs | | 66,020 | | | 76,542 | |
Leased vehicles, net | | 16,391,107 | | | 16,461,982 | |
| | | | |
Commercial equipment vehicles and aircraft, gross | | 28,661 | | | 41,154 | |
Less: accumulated depreciation | | (6,839) | | | (7,397) | |
Commercial equipment vehicles and aircraft, net | | 21,822 | | | 33,757 | |
| | | | |
Total operating lease assets, net | | $ | 16,412,929 | | | $ | 16,495,739 | |
|
| | | | | | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
Leased vehicles | | $ | 21,722,726 |
| | $ | 18,737,338 |
|
Less: accumulated depreciation | | (4,159,944 | ) | | (3,518,025 | ) |
Depreciated net capitalized cost | | 17,562,782 |
| | 15,219,313 |
|
Origination fees and other costs | | 76,542 |
| | 66,967 |
|
Manufacturer subvention payments | | (1,177,342 | ) | | (1,307,424 | ) |
Leased vehicles, net | | 16,461,982 |
| | 13,978,856 |
|
| | | | |
Commercial equipment vehicles and aircraft, gross | | 41,154 |
| | 130,274 |
|
Less: accumulated depreciation | | (7,397 | ) | | (30,337 | ) |
Commercial equipment vehicles and aircraft, net | | 33,757 |
| | 99,937 |
|
| | | | |
Total operating lease assets, net(1) | | $ | 16,495,739 |
| | $ | 14,078,793 |
|
The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of December 31, 20192020 (in thousands):
| | | | | | | | |
2021 | | $ | 2,511,537 | |
2022 | | 1,469,337 | |
2023 | | 644,608 | |
2024 | | 47,744 | |
2025 | | 2,345 | |
Thereafter | | 5,472 | |
Total | | $ | 4,681,043 | |
|
| | | | |
2020 | | $ | 2,706,652 |
|
2021 | | 1,704,747 |
|
2022 | | 572,819 |
|
2023 | | 56,611 |
|
2024 | | 2,542 |
|
Thereafter | | 7,817 |
|
Total | | $ | 5,051,188 |
|
Lease income was $2.9 billion, $2.4 billion, and $2.0 billion for the years ended December 31, 2019, 2018, and 2017, respectively.
During the years ended December 31, 2020, 2019 2018,, and 20172018 the Company recognized $243.2 million, $135.9 million, $202.8 million, and $127.2$202.8 million, respectively, of net gains on the sale of operating lease assets that had been returned to the Company at the end of the lease term. These amounts are recorded within Miscellaneous income, net in the Company's Consolidated Statements of Operations.
Lease expense was $2.1 billion, $1.8 billion, and $1.6 billion for the years ended December 31, 2019, 2018, and 2017 respectively.
NOTE 6.5. PREMISES AND EQUIPMENT
A summary of premises and equipment, less accumulated depreciation, follows:
| | | | | | | | | | | | | | |
| | | | |
(in thousands) | | December 31, 2020 | | December 31, 2019 |
Land | | $ | 81,613 | | | $ | 84,194 | |
Office buildings | | 166,586 | | | 177,246 | |
Furniture, fixtures, and equipment | | 519,565 | | | 485,851 | |
Leasehold improvement | | 556,509 | | | 543,816 | |
Computer software | | 1,090,515 | | | 990,758 | |
Automobiles and other | | 1,696 | | | 1,532 | |
Total premise and equipment | | 2,416,484 | | | 2,283,397 | |
Less accumulated depreciation | | (1,629,143) | | | (1,485,275) | |
Total premises and equipment, net | | $ | 787,341 | | | $ | 798,122 | |
|
| | | | | | | | |
| | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
Land | | $ | 84,194 |
| | $ | 87,531 |
|
Office buildings | | 177,246 |
| | 185,218 |
|
Furniture, fixtures, and equipment | | 485,851 |
| | 427,245 |
|
Leasehold improvement | | 543,816 |
| | 509,314 |
|
Computer software | | 990,758 |
| | 990,429 |
|
Automobiles and other | | 1,532 |
| | 1,475 |
|
Total premise and equipment | | 2,283,397 |
| | 2,201,212 |
|
Less accumulated depreciation | | (1,485,275 | ) | | (1,395,272 | ) |
Total premises and equipment, net | | $ | 798,122 |
| | $ | 805,940 |
|
NOTE 5. PREMISES AND EQUIPMENT (continued)
Depreciation expense for premises and equipment, included in Occupancy and equipment expenses in the Consolidated Statements of Operations, was $209.4 million, $226.1 million, $268.0 million, and $300.0$268.0 million for the years ended December 31, 2020, 2019 2018 and 2017,2018, respectively.
During the year ended December 31, 2020 the Company sold 6 properties. The Company received net proceeds of $4.3 million from the sales, with a net gain of $2.0 million. The carrying value of these properties was $2.3 million. In addition to the 6 properties sold in 2020, the Company completed the sale of SBC, including its fixed assets, as discussed further in Note 1.
In 2019 the Company sold eight8 properties. The Company received net proceeds of $2.0 million from the sales, with a net gain of $350.0 thousand.$0.4 million. The carrying value of these properties was $1.7 million. Gain on sale of premises and equipment are included within Miscellaneous income in the Consolidated Statements of Operations.
In addition to the eight8 properties sold in 2019 the Company also completed the sale of 14 bank branches to First Commonwealth Bank as discussed further in Note 1 to these Consolidated Financial Statements.Bank. The gain on the sale of these branches was immaterial.
In 2018 the Company sold 13 properties. The Company received net proceeds of $5.8 million from the sales, with a net gain of $2.1 million. The carrying value of these properties was $3.6 million. Of the 13 properties sold, the Company leased back one1 property and accounted for the transaction as a sale-leaseback resulting in recognition of a $154.0 thousand gain on the date of the transaction, and deferral of the remaining $1.3 million gain. Gain on sale of premises and equipment are included within Miscellaneous income in the Consolidated Statements of Operations.
In 2017, the Company sold and leased back 10 properties. The Company received net proceeds of $58.0 million in connection with the sales. The carrying value of the properties sold was $15.3 million. The Company accounted for the transaction as a sale-leaseback resulting in recognition of a $31.2 million gain on the date of the transactions, and deferral of the remaining $11.5 million. The remaining deferral was recognized in equity upon the adoption of ASU 2016-02 on January 1, 2019.
During the years ended December 31, 2020, 2019, 2018, and 20172018 the Company recorded impairment of capitalized assets in the amount of $21.0 million, $23.4 million, $14.8 million, and $15.5$14.8 million, respectively. These were primarily related to capitalized software assets.
NOTE 6. GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill is assigned to reporting units, which are operating segments or one level below an operating segment, as of the acquisition date. The following table presents activity in the Company's goodwill by its reporting units for the year ended December 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | CBB | | C&I | | CRE & VF | | CIB | | SC | | | | | | Total |
Goodwill at December 31, 2019 | | $ | 1,880,304 | | | $ | 317,924 | | | $ | 1,095,071 | | | $ | 131,130 | | | $ | 1,019,960 | | | | | | | $ | 4,444,389 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Impairment of Goodwill(1) | | (1,557,384) | | | (290,844) | | | 0 | | | 0 | | | 0 | | | | | | | (1,848,228) | |
Re-allocation of Goodwill(2) | | (25,118) | | | 25,118 | | | 0 | | | 0 | | | 0 | | | | | | | 0 | |
Goodwill at December 31, 2020 | | $ | 297,802 | |
| $ | 52,198 | | | $ | 1,095,071 | |
| $ | 131,130 | |
| $ | 1,019,960 | |
| | | | | $ | 2,596,161 | |
(1) Represents impairment of goodwill during the second quarter of 2020.
(2) Represents re-allocation of goodwill during the fourth quarter of 2020.
The Company evaluates goodwill for impairment at the reporting unit level. The Company completes its annual goodwill impairment test as of October 1 each year. The Company conducted its last annual goodwill impairment tests as of October 1, 2020 using generally accepted valuation methods. As a result of that impairment test, 0 goodwill impairment was identified.
The Company continually assesses whether or not there have been events requiring a review of goodwill. During the second quarter of 2020, primarily due to the ongoing economic impacts of the COVID-19 pandemic, the Company determined that a goodwill triggering event occurred for the CBB, C&I, and CRE & VF reporting units. These second quarter triggering events are in addition to the CBB triggering event during the first quarter of 2020, whereby the estimated fair value of CBB exceeded its carrying value by less than 5%.
NOTE 6. GOODWILL AND OTHER INTANGIBLES (continued)
Based on its goodwill impairment analysis performed as of June 30, 2020, the Company concluded that a goodwill impairment charge of $1.6 billion and $0.3 billion was required for the CBB and C&I reporting units, respectively. The CRE & VF reporting unit’s estimated fair value exceeded its carrying value by less than 5%. The goodwill allocated to these reporting units has become more sensitive to impairment as the valuation is highly correlated with forecasted interest rates, credit costs, and other factors. A risk of further impairment or impairment to additional reporting units exists in subsequent quarters if the reporting unit’s operating environment does not return to a more normalized status in the foreseeable future.
In prior annual goodwill impairment assessments, the Company determined that an equal weighting of the market and income approach valuation methods provided a reliable fair value estimate. In light of the significant market volatility arising from the continued impacts of the COVID-19 pandemic and the responses to the pandemic from multiple government agencies, the Company determined to give only a 25% weighting to the market approach in estimating the second quarter fair value of CBB, C&I, and CRE & VF, which is consistent with the approach used during the first quarter interim impairment assessment of CBB and the October 1, 2020 annual impairment test. The Company continued to analyze implied market multiples to support the valuation under the market approach.
During the fourth quarter of 2020, the Company implemented organizational changes which resulted in the transfer of Upper Business Banking customers into the C&I segment from the CBB segment. Refer to Note 22 to these Consolidated Financial Statements for additional details on the Company's reportable segments. As a result of the re-organization, the Company re-allocated approximately $25.1 million of goodwill from the CBB reporting unit to the C&I reporting unit. Upon re-allocation, the Company performed a post evaluation for impairment on the CBB and C&I reporting units utilizing assumptions consistent with our October 1, 2020 impairment test and noted no impairment.
The Company made a change in its commercial banking reportable segments beginning January 1, 2019 and, accordingly, re-allocated $1.1 billion of goodwill previously attributed to commercial banking to the related C&I and CRE&VF reporting units based on the estimated fair value of each reporting unit at January 1, 2019. Upon re-allocation, management tested the new reporting units for impairment using the same methodology and assumptions used in the October 1, 2018 goodwill impairment test, and noted that there was 0 impairment. There were no disposals, additions or impairments of goodwill for the years ended December 31, 2019 or 2018.
Other Intangible Assets
The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
(in thousands) | | Net Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Accumulated Amortization |
Intangibles subject to amortization: | | | | | | | | |
Dealer networks | | $ | 308,768 | | | $ | (271,232) | | | $ | 347,982 | | | $ | (232,018) | |
Chrysler relationship | | 35,000 | | | (103,750) | | | 50,000 | | | (88,750) | |
Trade name | | 12,300 | | | (5,700) | | | 13,500 | | | (4,500) | |
Other intangibles | | 1,479 | | | (55,694) | | | 4,722 | | | (52,450) | |
Total intangibles subject to amortization | | $ | 357,547 | | | $ | (436,376) | | | $ | 416,204 | | | $ | (377,718) | |
At December 31, 2020 and December 31, 2019, the Company did 0t have any intangibles, other than goodwill, that were not subject to amortization.
Amortization expense on intangible assets was $58.7 million, $59.0 million and $60.7 million for the years ended December 31, 2020, 2019, and 2018, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLES (continued)
The estimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the five succeeding calendar years ending December 31 is:
| | | | | | | | | | | | |
Year | | Calendar Year Amount | | | | |
| | (in thousands) | | | | |
2021 | | $ | 39,904 | | | | | |
2022 | | 39,901 | | | | | |
2023 | | 28,649 | | | | | |
2024 | | 24,792 | | | | | |
2025 | | 24,757 | | | | | |
Thereafter | | 199,544 | | | | | |
NOTE 7. OTHER ASSETS
The following is a detail of items that comprised Other assets at December 31, 2020 and December 31, 2019:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2020 | | December 31, 2019 |
Operating lease ROU assets | | $ | 540,222 | | | $ | 656,472 | |
Deferred tax assets | | 11,114 | | | 503,681 | |
Accrued interest receivable | | 634,509 | | | 545,148 | |
Derivative assets at fair value | | 1,219,090 | | | 555,880 | |
Other repossessed assets | | 207,900 | | | 217,184 | |
Equity method investments | | 272,633 | | | 271,656 | |
MSRs | | 77,545 | | | 132,683 | |
OREO | | 29,799 | | | 66,828 | |
Income tax receivables | | 225,736 | | | 272,699 | |
Prepaid expense | | 225,251 | | | 352,331 | |
Miscellaneous assets and receivables | | 608,431 | | | 629,654 | |
Total other assets | | $ | 4,052,230 | | | $ | 4,204,216 | |
Operating lease ROU assets
We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term generally from one to five years. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
For the years ended December 31, 2020 and 2019 operating lease expenses were $152.4 million and $145.5 million, respectively. Sublease income was $4.5 million and $4.1 million, respectively, for the years ended December 31, 2020, and 2019. These are reported within Occupancy and equipment expenses in the Company’s Consolidated Statements of Operations.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | |
Maturity of Lease Liabilities at December 31, 2020 | | Total Operating leases |
| | (in thousands) |
2021 | | $ | 132,331 | |
2022 | | 122,046 | |
2023 | | 108,542 | |
2024 | | 94,768 | |
2025 | | 69,938 | |
Thereafter | | 137,811 | |
Total lease liabilities | | $ | 665,436 | |
Less: Interest | | (59,436) | |
Present value of lease liabilities | | $ | 606,000 | |
NOTE 7. OTHER ASSETS (continued)
| | | | | | | | | | | | | | |
Supplemental Balance Sheet Information | | December 31, 2020 | | December 31, 2019 |
Operating lease ROU assets | | $540,222 | | $656,472 |
Other liabilities | | 606,000 | | 711,666 |
Weighted-average remaining lease term (years) | | 6.5 | | 7.1 |
Weighted-average discount rate | | 2.9% | | 3.1% |
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
Other Information | | 2020 | | 2019 |
| | (in thousands) |
Operating cash flows from operating leases(1) | | $ | (140,953) | | | $ | (136,510) | |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 33,930 | | | $ | 841,718 | |
(1) Activity is included within the net change in other liabilities on the Consolidated SCF.
The Company made approximately $4.5 million and $3.9 million in payments during the years ended December 31, 2020 and 2019, respectively, to Santander for rental of certain office space. The related ROU assets and lease liabilities were approximately $9.0 million and $13.3 million at December 31, 2020 and 2019, respectively.
The remainder of Other assets is comprised of:
•Deferred tax asset, net - Refer to Note 16 of these Consolidated Financial Statements for more information on tax-related activities.
•Derivative assets at fair value - Refer to the "Offsetting of Financial Assets" table in Note 13 to these Consolidated Financial Statements for the detail of these amounts.
•Equity method investments - The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and lend to qualified community development entities, such as renewable energy investments, through the NMTC and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has determined that it is not the primary beneficiary of the partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.
•MSRs - See further discussion on the valuation of the MSRs in Note 14.
•Income tax receivables - Refer to Note 16 of these Consolidated Financial Statements for more information on tax-related activities.
•Prepaid expenses decreased $127 million in 2020 compared to 2019, due to a $133 million decrease in prepaid state income tax, offset by small increases in other prepaids.
•OREO and other repossessed assets includes property and vehicles recovered through foreclosure and repossession.
•Miscellaneous assets and receivables includes subvention receivables in connection with the agreement with Chrysler Capital, investment and capital market receivables, derivatives trading receivables, and unapplied payments.
NOTE 8. VIEs
The Company transfers RICs 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 GAAP, and the Company may or may not consolidate these VIEs on its Consolidated Balance Sheets.
The collateral, borrowings under credit facilities and securitization notes payable of the Company’s consolidated VIEs remain on the Consolidated Financial Statements.Balance Sheets. The Company recognizes finance charges, fee income, and provisionsprovision for credit losses on the RICs, and leased vehicles and interest expense on the debt. Revolving credit facilities generally also utilize entities that are considered VIEs which are included on the Consolidated Balance Sheets.consolidated balance sheets.
NOTE 8. VIEs (continued)
The Company also uses a titling trustTrust to originate and hold its leased vehicles and the associated leases, in order to facilitate the pledging of leases to financing facilities or the sale of leases to other parties without incurring the costs and administrative burden of retitling the leased vehicles. This titling trustTrust is considered a VIE.
NOTE 7. VIEs (continued)
On-balance sheet VIEsOther Intangible Assets
The assets of consolidated VIEs that are included in the Company's Consolidated Financial Statements, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, and that can be used only to settle obligations of the consolidated VIEs and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recoursefollowing table details amounts related to the Company's general credit, were as follows(1):intangible assets subject to amortization for the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
(in thousands) | | Net Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Accumulated Amortization |
Intangibles subject to amortization: | | | | | | | | |
Dealer networks | | $ | 308,768 | | | $ | (271,232) | | | $ | 347,982 | | | $ | (232,018) | |
Chrysler relationship | | 35,000 | | | (103,750) | | | 50,000 | | | (88,750) | |
Trade name | | 12,300 | | | (5,700) | | | 13,500 | | | (4,500) | |
Other intangibles | | 1,479 | | | (55,694) | | | 4,722 | | | (52,450) | |
Total intangibles subject to amortization | | $ | 357,547 | | | $ | (436,376) | | | $ | 416,204 | | | $ | (377,718) | |
|
| | | | | | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
Assets | | | | |
Restricted cash | | $ | 1,629,870 |
| | $ | 1,582,158 |
|
Loans | | 26,532,328 |
| | 24,098,638 |
|
Operating lease assets, net | | 16,461,982 |
| | 13,978,855 |
|
Various other assets | | 625,359 |
| | 685,383 |
|
Total Assets | | $ | 45,249,539 |
| | $ | 40,345,034 |
|
Liabilities | | | | |
Notes payable | | $ | 34,249,851 |
| | $ | 31,949,839 |
|
Various other liabilities | | 188,093 |
| | 122,010 |
|
Total Liabilities | | $ | 34,437,944 |
| | $ | 32,071,849 |
|
(1) Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying Consolidated Balance Sheets due to intercompany eliminations between the VIEsAt December 31, 2020 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 GAAP.
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 Miscellaneous income, net. As of December 31, 2019, and December 31, 2018, the Company did 0t have any intangibles, other than goodwill, that were not subject to amortization.
Amortization expense on intangible assets was servicing $27.3 billion$58.7 million, $59.0 million and $27.1 billion, respectively, of gross RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.
A summary of the cash flows received from the consolidated Trusts$60.7 million for the years ended December 31, 2020, 2019, and 2018, and 2017 is as follows:respectively.
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2019 | | 2018 | | 2017 |
Assets securitized | | $ | 22,286,033 |
| | $ | 26,650,284 |
| | $ | 18,442,793 |
|
| | | | | | |
Net proceeds from new securitizations (1) | | $ | 17,199,821 |
| | $ | 17,338,880 |
| | $ | 14,126,211 |
|
Net proceeds from sale of retained bonds | | 251,602 |
| | 1,059,694 |
| | 499,354 |
|
Cash received for servicing fees (2) | | 990,612 |
| | 887,988 |
| | 866,210 |
|
Net distributions from Trusts (2) | | 3,615,461 |
| | 2,767,509 |
| | 2,613,032 |
|
Total cash received from Trusts | | $ | 22,057,496 |
| | $ | 22,054,071 |
| | $ | 18,104,807 |
|
NOTE 6. GOODWILL AND OTHER INTANGIBLES (continued)(1) Includes additional advances on existing securitizations.
(2) These amounts are not reflected inThe estimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the accompanying Consolidated SCF because the cash flows are between the VIEs and other entities included in the consolidation.
Off-balance sheet VIEs
During the year endedfive succeeding calendar years ending December 31 2019,is:
| | | | | | | | | | | | |
Year | | Calendar Year Amount | | | | |
| | (in thousands) | | | | |
2021 | | $ | 39,904 | | | | | |
2022 | | 39,901 | | | | | |
2023 | | 28,649 | | | | | |
2024 | | 24,792 | | | | | |
2025 | | 24,757 | | | | | |
Thereafter | | 199,544 | | | | | |
NOTE 7. OTHER ASSETS
The following is a detail of items that comprised Other assets at December 31, 2020 and December 31, 2019:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2020 | | December 31, 2019 |
Operating lease ROU assets | | $ | 540,222 | | | $ | 656,472 | |
Deferred tax assets | | 11,114 | | | 503,681 | |
Accrued interest receivable | | 634,509 | | | 545,148 | |
Derivative assets at fair value | | 1,219,090 | | | 555,880 | |
Other repossessed assets | | 207,900 | | | 217,184 | |
Equity method investments | | 272,633 | | | 271,656 | |
MSRs | | 77,545 | | | 132,683 | |
OREO | | 29,799 | | | 66,828 | |
Income tax receivables | | 225,736 | | | 272,699 | |
Prepaid expense | | 225,251 | | | 352,331 | |
Miscellaneous assets and receivables | | 608,431 | | | 629,654 | |
Total other assets | | $ | 4,052,230 | | | $ | 4,204,216 | |
Operating lease ROU assets
We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with renewal terms that can extend the Company sold no RICslease term generally from one to VIEs in off-balance sheet securitizations. Duringfive years. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
For the years ended December 31, 2018,2020 and 2017 the Company sold $2.9 billion and $2.6 billion, respectively, of gross RICs to VIEs in off- balance sheet securitizations for a loss of $20.72019 operating lease expenses were $152.4 million and $13.0$145.5 million, respectively. Beginning in 2017, the transactions were executed under the Company's securitization platforms with Santander. Santander holds eligible vertical interests in notes and certificates of not less than 5% to comply with the DFA's risk retention rules.
NOTE 7. VIEs (continued)
As of December 31, 2019 and December 31, 2018, the CompanySublease income was servicing $2.4 billion$4.5 million and $4.1 billion,million, respectively, of gross RICs that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:
|
| | | | | | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
Related party SPAIN securitizations | | $ | 2,149,008 |
| | $ | 3,461,793 |
|
Third party Chrysler Capital securitizations | | 259,197 |
| | 611,050 |
|
Total serviced for other portfolio | | $ | 2,408,205 |
| | $ | 4,072,843 |
|
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 the Trusts for the years ended December 31, 2019, 20182020, and 2017 is2019. These are reported within Occupancy and equipment expenses in the Company’s Consolidated Statements of Operations.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | |
Maturity of Lease Liabilities at December 31, 2020 | | Total Operating leases |
| | (in thousands) |
2021 | | $ | 132,331 | |
2022 | | 122,046 | |
2023 | | 108,542 | |
2024 | | 94,768 | |
2025 | | 69,938 | |
Thereafter | | 137,811 | |
Total lease liabilities | | $ | 665,436 | |
Less: Interest | | (59,436) | |
Present value of lease liabilities | | $ | 606,000 | |
|
| | | | | | | | | | | | |
| | Year Ended December 31, |
(in thousands) | | 2019 | | 2018 | | 2017 |
Receivables securitized (1) | | $ | — |
| | $ | 2,905,922 |
| | $ | 2,583,341 |
|
| | | | | | |
Net proceeds from new securitizations | | $ | — |
| | $ | 2,909,794 |
| | $ | 2,588,227 |
|
Cash received for servicing fees | | 34,068 |
| | 43,859 |
| | 35,682 |
|
Total cash received from Trusts | | $ | 34,068 |
| | $ | 2,953,653 |
| | $ | 2,623,909 |
|
NOTE 7. OTHER ASSETS (continued)
| | | | | | | | | | | | | | |
Supplemental Balance Sheet Information | | December 31, 2020 | | December 31, 2019 |
Operating lease ROU assets | | $540,222 | | $656,472 |
Other liabilities | | 606,000 | | 711,666 |
Weighted-average remaining lease term (years) | | 6.5 | | 7.1 |
Weighted-average discount rate | | 2.9% | | 3.1% |
| | | | | | | | | | | | | | |
| | Year Ended December 31, |
Other Information | | 2020 | | 2019 |
| | (in thousands) |
Operating cash flows from operating leases(1) | | $ | (140,953) | | | $ | (136,510) | |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 33,930 | | | $ | 841,718 | |
(1) RepresentsActivity is included within the UPB atnet change in other liabilities on the time of original securitization.Consolidated SCF.
NOTE 8. GOODWILL AND OTHER INTANGIBLES
Goodwill
Goodwill is assigned to reporting units, which are operating segments or one level below an operating segment, as of the acquisition date. The following table presents the Company's goodwill by its reporting units at December 31, 2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Consumer and Business Banking | | C&I(1) | | CRE and Vehicle Finance | | CIB | | SC | | Total |
Goodwill at December 31, 2018 | | $ | 1,880,304 |
| | $ | 1,412,995 |
| | $ | — |
| | $ | 131,130 |
| | $ | 1,019,960 |
| | $ | 4,444,389 |
|
Re-allocations during the period | | — |
| | (1,095,071 | ) | | 1,095,071 |
| | — |
| | — |
| | — |
|
Goodwill at December 31, 2019 | | $ | 1,880,304 |
|
| $ | 317,924 |
| | $ | 1,095,071 |
|
| $ | 131,130 |
|
| $ | 1,019,960 |
|
| $ | 4,444,389 |
|
(1) Formerly Commercial Banking.
The Company made a changeapproximately $4.5 million and $3.9 million in its reportable segments beginning January 1,payments during the years ended December 31, 2020 and 2019, respectively, to Santander for rental of certain office space. The related ROU assets and accordingly, has re-allocated goodwilllease liabilities were approximately $9.0 million and $13.3 million at December 31, 2020 and 2019, respectively.
The remainder of Other assets is comprised of:
•Deferred tax asset, net - Refer to Note 16 of these Consolidated Financial Statements for more information on tax-related activities.
•Derivative assets at fair value - Refer to the related reporting units based on the estimated fair value"Offsetting of each reporting unit. Upon re-allocation, management tested the new reporting units for impairment, using the same methodology and assumptions as usedFinancial Assets" table in the October 1, 2018 goodwill impairment test, and noted that there was no impairment. See Note 2313 to these Consolidated Financial Statements for additional detailsthe detail of these amounts.
•Equity method investments - The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and lend to qualified community development entities, such as renewable energy investments, through the NMTC and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has determined that it is not the primary beneficiary of the partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.
•MSRs - See further discussion on the change in reportable segments.
During 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, were combined. This change in reportable segments was impacted by the 2019 change in reportable segments discussed above.
There were no disposals, additions or impairments of goodwill for the years ended December 31, 2019 or 2018. There were no disposals, additions or re-allocations of goodwill for 2017. After conducting an analysisvaluation of the fair valueMSRs in Note 14.
•Income tax receivables - Refer to Note 16 of each reporting unit as of October 1, 2017, the Company determined that the full amount of goodwill attributedthese Consolidated Financial Statements for more information on tax-related activities.
•Prepaid expenses decreased $127 million in 2020 compared to Santander BanCorp of $10.5 million was impaired and, as a result, it was written off, primarily2019, due to a $133 million decrease in prepaid state income tax, offset by small increases in other prepaids.
•OREO and other repossessed assets includes property and vehicles recovered through foreclosure and repossession.
•Miscellaneous assets and receivables includes subvention receivables in connection with the unfavorable economic environment in Puerto Ricoagreement with Chrysler Capital, investment and the additional adverse effects of Hurricane Maria. The Company evaluates goodwill for impairment at the reporting unit level. The Company completes its annual goodwill impairment test as of October 1 each year. The Company conducted its last annual goodwill impairment tests as of October 1, 2019 using generally accepted valuation methods.capital market receivables, derivatives trading receivables, and unapplied payments.
NOTE 8. GOODWILL AND OTHER INTANGIBLESVIEs
The Company transfers RICs 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 GAAP, and the Company may or may not consolidate these VIEs on its Consolidated Balance Sheets.
The collateral, borrowings under credit facilities and securitization notes payable of the Company’s consolidated VIEs remain on the Consolidated Balance Sheets. The Company recognizes finance charges, fee income, and provision for credit losses on the RICs, and leased vehicles and interest expense on the debt. Revolving credit facilities generally also utilize entities that are considered VIEs which are included on the consolidated balance sheets.
NOTE 8. VIEs (continued)
The Company also uses a titling Trust to originate and hold its leased vehicles and the associated leases, in order to facilitate the pledging of leases to financing facilities or the sale of leases to other parties without incurring the costs and administrative burden of retitling the leased vehicles. This titling Trust is considered a VIE.
Other Intangible Assets
The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 | | December 31, 2019 |
(in thousands) | | Net Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Accumulated Amortization |
Intangibles subject to amortization: | | | | | | | | |
Dealer networks | | $ | 308,768 | | | $ | (271,232) | | | $ | 347,982 | | | $ | (232,018) | |
Chrysler relationship | | 35,000 | | | (103,750) | | | 50,000 | | | (88,750) | |
Trade name | | 12,300 | | | (5,700) | | | 13,500 | | | (4,500) | |
Other intangibles | | 1,479 | | | (55,694) | | | 4,722 | | | (52,450) | |
Total intangibles subject to amortization | | $ | 357,547 | | | $ | (436,376) | | | $ | 416,204 | | | $ | (377,718) | |
|
| | | | | | | | | | | | | | | | |
| | December 31, 2019 | | December 31, 2018 |
(in thousands) | | Net Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Accumulated Amortization |
Intangibles subject to amortization: | | | | | | | | |
Dealer networks | | $ | 347,982 |
| | $ | (232,018 | ) | | $ | 387,196 |
| | $ | (192,804 | ) |
Chrysler relationship | | 50,000 |
| | (88,750 | ) | | 65,000 |
| | (73,750 | ) |
Trade name | | 13,500 |
| | (4,500 | ) | | 14,700 |
| | (3,300 | ) |
Other intangibles | | 4,722 |
| | (52,450 | ) | | 8,297 |
| | (46,894 | ) |
Total intangibles subject to amortization | | $ | 416,204 |
| | $ | (377,718 | ) | | $ | 475,193 |
| | $ | (316,748 | ) |
At December 31, 20192020 and December 31, 2018,2019, the Company did not0t have any intangibles, other than goodwill, that were not subject to amortization.
Amortization expense on intangible assets was $58.7 million, $59.0 million and $60.7 million, $61.5 million for the years ended December 31, 2020, 2019, 2018, and 2017,2018, respectively.
NOTE 6. GOODWILL AND OTHER INTANGIBLES (continued)
The estimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the five succeeding calendar years ending December 31 is:
| | | | | | | | | | | | |
Year | | Calendar Year Amount | | | | |
| | (in thousands) | | | | |
2021 | | $ | 39,904 | | | | | |
2022 | | 39,901 | | | | | |
2023 | | 28,649 | | | | | |
2024 | | 24,792 | | | | | |
2025 | | 24,757 | | | | | |
Thereafter | | 199,544 | | | | | |
|
| | | | |
Year | | Calendar Year Amount |
| | (in thousands) |
2020 | | $ | 58,658 |
|
2021 | | 39,903 |
|
2022 | | 39,901 |
|
2023 | | 28,649 |
|
2024 | | 24,792 |
|
Thereafter | | 224,301 |
|
NOTE 9.7. OTHER ASSETS
The following is a detail of items that comprised Other assets at December 31, 20192020 and December 31, 2018:2019:
| | | | | | | | | | | | | | |
(in thousands) | | December 31, 2020 | | December 31, 2019 |
Operating lease ROU assets | | $ | 540,222 | | | $ | 656,472 | |
Deferred tax assets | | 11,114 | | | 503,681 | |
Accrued interest receivable | | 634,509 | | | 545,148 | |
Derivative assets at fair value | | 1,219,090 | | | 555,880 | |
Other repossessed assets | | 207,900 | | | 217,184 | |
Equity method investments | | 272,633 | | | 271,656 | |
MSRs | | 77,545 | | | 132,683 | |
OREO | | 29,799 | | | 66,828 | |
Income tax receivables | | 225,736 | | | 272,699 | |
Prepaid expense | | 225,251 | | | 352,331 | |
Miscellaneous assets and receivables | | 608,431 | | | 629,654 | |
Total other assets | | $ | 4,052,230 | | | $ | 4,204,216 | |
|
| | | | | | | | |
(in thousands) | | December 31, 2019 | | December 31, 2018 |
Operating lease ROU assets | | $ | 656,472 |
| | $ | — |
|
Deferred tax assets | | 503,681 |
| | 625,087 |
|
Accrued interest receivable | | 545,148 |
| | 566,602 |
|
Derivative assets at fair value | | 555,880 |
| | 511,916 |
|
Other repossessed assets | | 217,184 |
| | 225,890 |
|
Equity method investments | | 271,656 |
| | 204,687 |
|
MSRs | | 132,683 |
| | 152,121 |
|
OREO | | 66,828 |
| | 107,868 |
|
Income tax receivables | | 272,699 |
| | 373,245 |
|
Prepaid expenses | | 352,331 |
| | 198,951 |
|
Miscellaneous assets and receivables | | 629,654 |
| | 686,969 |
|
Total other assets | | $ | 4,204,216 |
| | $ | 3,653,336 |
|
NOTE 9. OTHER ASSETS (continued)
Operating lease ROU assets
We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term generally from one to five years. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.
At December 31, 2019, operating lease ROU assets were $656.5 million and operating lease liabilities were $711.7 million. Operating lease ROU assets are included in Other assets in the Company’s Consolidated Balance Sheets. Lease liabilities are included in Accrued expenses and payables in the Company’s Consolidated Balance Sheets.
For the yearyears ended December 31, 2020 and 2019 operating lease expenses were $152.4 million and $145.5 million, and subleaserespectively. Sublease income was $4.5 million and $4.1 million, respectively, for the years ended December 31, 2020, and 2019. These are reported within Occupancy and equipment expenses in the Company’s Consolidated Statements of Operations.
Supplemental balance sheet information related to leases was as follows:
| | | | | | | | |
Maturity of Lease Liabilities at December 31, 2020 | | Total Operating leases |
| | (in thousands) |
2021 | | $ | 132,331 | |
2022 | | 122,046 | |
2023 | | 108,542 | |
2024 | | 94,768 | |
2025 | | 69,938 | |
Thereafter | | 137,811 | |
Total lease liabilities | | $ | 665,436 | |
Less: Interest | | (59,436) | |
Present value of lease liabilities | | $ | 606,000 | |
|
| | | | |
Maturity of Lease Liabilities at December 31, 2019 | | Total Operating leases |
| | (in thousands) |
2020 | | $ | 139,597 |
|
2021 | | 130,132 |
|
2022 | | 120,284 |
|
2023 | | 105,878 |
|
2024 | | 91,799 |
|
Thereafter | | 206,847 |
|
Total lease liabilities | | $ | 794,537 |
|
Less: Interest | | (82,871 | ) |
Present value of lease liabilities | | $ | 711,666 |
|
NOTE 7. OTHER ASSETS (continued)
| | | | | | | | | | | | | | |
Supplemental Balance Sheet Information | | December 31, 2020 | | December 31, 2019 |
Operating lease ROU assets | | $540,222 | | $656,472 |
Other liabilities | | 606,000 | | 711,666 |
Weighted-average remaining lease term (years) | | 6.5 | | 7.1 |
Weighted-average discount rate | | 2.9% | | 3.1% |
The remaining obligations under lease commitments required under operating leases as of December 31, 2018, prior to the date of adoption and as defined by the previous lease accounting guidance, with noncancellable lease terms at December 31, 2018 were as follows:
|
| | | | | | | | | | | | |
Maturity of Lease Liabilities at December 31, 2018 | | Total Operating leases | | Future Minimum Expected Sublease Income | | Net Payments |
2019 | | $ | 146,108 |
| | $ | (4,660 | ) | | $ | 141,448 |
|
2020 | | 116,871 |
| | (2,527 | ) | | 114,344 |
|
2021 | | 96,784 |
| | (675 | ) | | 96,109 |
|
2022 | | 83,028 |
| | (550 | ) | | 82,478 |
|
2023 | | 70,158 |
| | (562 | ) | | 69,596 |
|
Thereafter | | 169,046 |
| | (535 | ) | | 168,511 |
|
Total | | $ | 681,995 |
| | $ | (9,509 | ) | | $ | 672,486 |
|
|
| | | |
Operating Lease Term and Discount Rate | | December 31, 2019 |
Weighted-average remaining lease term (years) | | 7.1 |
|
Weighted-average discount rate | | 3.1 | % |
| | | | | | Year Ended December 31, |
Other Information | | December 31, 2019 | Other Information | | 2020 | | 2019 |
| | (in thousands) | | | (in thousands) |
Operating cash flows from operating leases(1) | | $ | (136,510 | ) | Operating cash flows from operating leases(1) | | $ | (140,953) | | | $ | (136,510) | |
Leased assets obtained in exchange for new operating lease liabilities | | $ | 841,718 |
| Leased assets obtained in exchange for new operating lease liabilities | | $ | 33,930 | | | $ | 841,718 | |
(1) Activity is included within the net change in other liabilities on the Consolidated SCF.
Deposits collateralized by investment securities, loans, and other financial instruments totaled $3.5$2.2 billion and $2.7$3.5 billion at December 31, 20192020 and December 31, 2018,2019, respectively.
The following table sets forth the maturity of the Company's CDs of $100,000 or more at December 31, 20192020 as scheduled to mature contractually:
Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations.
During the year ended December 31, 2019, the Bank repurchased the following borrowings and other debt obligations:
During the year ended December 31, 2019, the Company issued $3.8 billion of debt, consisting of:
During the year ended December 31, 2019, the Company repurchased the following borrowings and other debt obligations:
The following table presents information regarding the Parent Company and its subsidiaries' borrowings and other debt obligations at the dates indicated: