Docoh
Loading...

SC Santander Consumer USA

Filed: 30 Oct 20, 7:05am




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2020
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 001-36270
SANTANDER CONSUMER USA HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter) 
Delaware 32-0414408
(State or other jurisdiction of
incorporation or organization)
 (I.R.S. Employer
Identification Number)

1601 Elm StreetSuite 800DallasTexas75201
(Address of principal executive offices)
Registrant’s telephone number, including area code (214) 634-1110
Not Applicable
(Former name, former address, and formal fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol (s)Name of each exchange on which registeredOutstanding shares at October 26, 2020
Common Stock ($0.01 par value)SCNew York Stock Exchange306,070,972

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  
 No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filerAccelerated filerEmerging growth company
Non-accelerated filerSmaller reporting company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes  
No  

1




INDEX


Cautionary Note Regarding Forward-Looking Information
PART I: FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Unaudited Condensed Consolidated Balance Sheets
Unaudited Condensed Consolidated Statements of Income and Comprehensive Income
Unaudited Condensed Consolidated Statements of Equity
Unaudited Condensed Consolidated Statements of Cash Flows
Note 1. Description of Business, Basis of Presentation, and Accounting Policies
Note 2. Finance Receivables
Note 3. Credit Loss Allowance and Credit Quality
Note 4. Leases
Note 5. Other Assets
Note 6. Variable Interest Entities
Note 7. Debt
Note 8. Shareholders' Equity
Note 9. Derivative Financial Instruments
Note 10. Fair Value of Financial Instruments
Note 11. Investment Losses, Net
Note 12. Income Taxes
Note 13. Computation of Basic and Diluted Earnings per Common Share
Note 14. Commitments and Contingencies
Note 15. Related-Party Transactions
Note 16. Employee Benefit Plans
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II: OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.Defaults upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6. Exhibits
SIGNATURES
    
2




Unless otherwise specified or the context otherwise requires, the use herein of the terms “we,” “our,” “us,” “SC,” and the “Company” refer to Santander Consumer USA Holdings Inc. and its consolidated subsidiaries.
Cautionary Note Regarding Forward-Looking Information
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Any statements about the Company’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions, or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipates,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends,” and similar words or phrases. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, these statements are not guarantees of future performance and involve risks and uncertainties which are subject to change based on various important factors, some of which are beyond the Company’s control. Among the factors that could cause the Company’s actual performance to differ materially from those suggested by the forward-looking statements are:

the adverse impact of COVID-19 on our business, financial condition, liquidity and results of operations;
our agreement with FCA (FCA US LLC, formerly Chrysler Group LLC) may not result in currently anticipated levels of growth and is subject to certain conditions that could result in termination of the agreement;
continually changing federal, state, and local laws and regulations could materially adversely affect our business;
adverse economic conditions in the United States and worldwide may negatively impact our results;
our business could suffer if our access to funding is reduced;
significant risks we face implementing our growth strategy, some of which are outside our control;
unexpected costs and delays in connection with exiting our personal lending business;
our business could suffer if we are unsuccessful in developing and maintaining relationships with automobile dealerships;
our financial condition, liquidity, and results of operations depend on the credit performance of our loans;
loss of our key management or other personnel, or an inability to attract such management and personnel;
certain regulations, including but not limited to oversight by the Office of the Comptroller of the Currency (OCC), the Consumer Financial Protection Bureau (CFPB), the European Central Bank (ECB), and the Federal Reserve Bank of Boston (FRBB), whose oversight and regulation may limit certain of our activities, including share repurchase programs, the timing and amount of dividends and other limitations on our business;
future changes in our relationship with SHUSA and Banco Santander that could adversely affect our operations; and
the other factors that are described in Part I, Item IA – Risk Factors of the 2019 Annual Report on Form 10-K, impacts of the COVID-19 outbreak on our business, financial condition, liquidity and results of operations, as noted in the Form 8-K filed with the SEC on April 10, 2020 and impacts of the new credit reserving framework, as noted in Part II, Item 1A of our Form 10-Q for the Quarter ended March 31, 2020 filed with the SEC on May 1, 2020.

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



3




Glossary

The following is a list of abbreviations, acronyms, and commonly used terms used in this Quarterly Report on Form 10-Q.
ABSAsset-backed securities
ACLAllowance for credit loss
Advance RateThe maximum percentage of collateral that a lender is willing to lend.
AffiliatesA party that, directly or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with an entity.
ALGAutomotive Lease Guide
AmendmentAmendment to the Chrysler Agreement with FCA, dated June 28, 2019
Amortized costsIncludes unpaid principal balance (UPB), net of discounts and premiums
APRAnnual Percentage Rate
ASCAccounting Standards Codification
ASUAccounting Standards Update
BluestemBluestem Brands, Inc., an online retailer for whose customers SC provides financing
BoardSC’s Board of Directors
CBPCitizens Bank of Pennsylvania
CCAPChrysler Capital
CCARTChrysler Capital Auto Receivables Trust, a securitization platform
CECLCurrent Expected Credit Loss, Amendments based on ASU 2016-13, ASU 2019-04, and ASU 2019-11
CEOChief Executive Officer
CFPBConsumer Financial Protection Bureau
CFOChief Financial Officer
Chrysler AgreementTen-year master private-label financing agreement with FCA
Clean-up CallThe early redemption of a debt instrument by the issuer, generally when the underlying portfolio has amortized to 5% or 10% of its original balance
CommissionU.S. Securities and Exchange Commission
COVID-19Coronavirus disease 2019
Credit EnhancementA method such as overcollateralization, insurance, or a third-party guarantee, whereby a borrower reduces default risk
DCFDiscounted Cash Flow Analysis
Dealer LoanA Floorplan Loan, real estate loan, working capital loan, or other credit extended to an automobile dealer
Dodd-Frank ActComprehensive financial regulatory reform legislation enacted by the U.S. Congress on July 21, 2010
DOJU.S. Department of Justice
DRIVEDrive Auto Receivables Trust, a securitization platform
EIREffective interest rate
ECLExpected credit losses
Exchange ActSecurities Exchange Act of 1934, as amended
FASBFinancial Accounting Standards Board
FCAFCA US LLC, formerly Chrysler Group LLC
FICO®A common credit score created by Fair Isaac Corporation that is used on the credit reports that lenders use to assess an applicant’s credit risk. FICO® is computed using mathematical models that take into account five factors: payment history, current level of indebtedness, types of credit used, length of credit history, and new credit
FIRREAFinancial Institutions Reform, Recovery and Enforcement Act of 1989
Floorplan LoanA revolving line of credit that finances dealer inventory until sold
Federal Reserve BoardBoard of Governors of the Federal Reserve System
FRBBFederal Reserve Bank of Boston
4




FTCFederal Trade Commission
GAPGuaranteed Auto Protection
GAAPU.S. Generally Accepted Accounting Principles
HPIHousing Price Index
IPOSC’s Initial Public Offering
ISDAInternational Swaps and Derivative Association
Managed AssetsManaged assets included assets (a) owned and serviced by the Company; (b) owned by the Company and serviced by others; and (c) serviced for others
Nonaccretable DifferenceThe difference between the undiscounted contractual cash flows and the undiscounted expected cash flows of a portfolio acquired with deteriorated credit quality
OCCOffice of the Comptroller of the Currency
OvercollateralizationA credit enhancement method whereby more collateral is posted than is required to obtain financing
OEMOriginal equipment manufacturer
PDProbability of default
Private-labelFinancing branded in the name of the product manufacturer rather than in the name of the finance provider
PSRTPrivate Santander Retail Auto Lease Trust, a lease securitization platform
RCThe Risk Committee of the Board
RemarketingThe controlled disposal of vehicles at the end of the lease term or upon early termination or of financed vehicles obtained through repossession and their subsequent sale
Residual ValueThe future value of a leased asset at the end of its lease term
Retail installment contractsIncludes retail installment contracts individually acquired or originated by the Company and purchased non-credit deteriorated finance receivables
RSURestricted stock unit
SAFSantander Auto Finance
SantanderBanco Santander, S.A.
SBNASantander Bank, N.A., a wholly-owned subsidiary of SHUSA. Formerly Sovereign Bank, N.A.
SCSantander Consumer USA Holdings Inc., a Delaware corporation, and its consolidated subsidiaries
SCARTSantander Consumer Auto Receivables Trust, a securitization platform
SCISantander Consumer International Puerto Rico, LLC, a wholly-owned subsidiary of SC Illinois
SC IllinoisSantander Consumer USA Inc., an Illinois corporation and wholly-owned subsidiary of SC
SCRAServicemembers Civil Relief Act
SDARTSantander Drive Auto Receivables Trust, a securitization platform
SECU.S. Securities and Exchange Commission
SHUSASantander Holdings USA, Inc., a wholly-owned subsidiary of Santander and the majority stockholder of SC
SPAINSantander Prime Auto Issuing Note Trust, a securitization platform
SRTSantander Retail Auto Lease Trust, a lease securitization platform
SREVSantander Revolving Auto Loan Trust, a securitization platform
SubventionReimbursement of the finance provider by a manufacturer for the difference between a market loan or lease rate and the below-market rate given to a customer
TDRTroubled Debt Restructuring
TrustsSpecial purpose entities utilized in SC’s financing transactions
VIEVariable Interest Entity
Warehouse LineA revolving line of credit generally used to fund finance receivable originations


5





Part I: FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited)
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands, except share amounts)
September 30, 2020December 31, 2019
ASSETS
Cash and cash equivalents - $26,920 and $41,785 held at affiliates, respectively$105,616 $81,848 
Finance receivables held for sale, net763,292 1,007,105 
Finance receivables held for investment, at amortized cost33,602,108 30,810,487 
Allowance for credit loss(6,152,378)(3,043,468)
Finance receivables held for investment, at amortized cost, net27,449,730 27,767,019 
Restricted cash - $27 and $27 held at affiliates, respectively2,267,154 2,079,239 
Accrued interest receivable428,586 288,615 
Leased vehicles, net16,195,376 16,461,982 
Furniture and equipment, net of accumulated depreciation of $99,382 and $85,347, respectively60,105 59,873 
Goodwill74,056 74,056 
Intangible assets, net of amortization of $60,395 and $52,665, respectively62,341 42,772 
Other assets - $5,878 and $30,841 held at affiliates, respectively1,042,665 1,071,020 
TOTAL ASSETS$48,448,921 $48,933,529 
LIABILITIES AND EQUITY
LIABILITIES
Borrowings and other debt obligations - $11,208,796 and $5,652,325 to/from affiliates, respectively$41,369,347 $39,194,141 
Deferred tax liabilities, net1,095,238 1,468,222 
Accounts payable and accrued expenses - $83,254 and $63,951 held at affiliates, respectively524,816 563,277 
Other liabilities - $816 and $24,730 held at affiliates, respectively364,708 389,269 
TOTAL LIABILITIES43,354,109 41,614,909 
Commitments and contingencies (Notes 7 and 14)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value — 1,100,000,000 shares authorized;
363,138,607 and 362,798,115 shares issued and 306,070,972 and 339,201,748 shares outstanding, respectively3,061 3,392 
Additional paid-in capital394,428 1,173,262 
Accumulated other comprehensive income (loss), net of taxes(56,882)(26,693)
Retained earnings4,754,205 6,168,659 
TOTAL STOCKHOLDERS' EQUITY5,094,812 7,318,620 
TOTAL LIABILITIES AND EQUITY$48,448,921 $48,933,529 

See notes to unaudited condensed consolidated financial statements.







6




SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) (Dollars in thousands, except per share amounts)
 For the Three Months EndedFor the Nine Months Ended
September 30,September 30,
 2020201920202019
Interest on finance receivables and loans$1,300,694 $1,273,022 $3,811,113 $3,787,700 
Leased vehicle income725,156 706,302 2,210,684 2,032,098 
Other finance and interest income2,146 9,926 12,354 31,610 
Total finance and other interest income2,027,996 1,989,250 6,034,151 5,851,408 
Interest expense — Including $87,851, $54,719 and $221,676 and $145,501 to affiliates, respectively292,118 335,212 929,934 999,633 
Leased vehicle expense467,172 456,193 1,630,945 1,344,654 
Net finance and other interest income1,268,706 1,197,845 3,473,272 3,507,121 
Credit loss expense340,548 566,849 2,110,331 1,548,404 
Net finance and other interest income after credit loss expense928,158 630,996 1,362,941 1,958,717 
Profit sharing30,414 18,125 56,239 38,438 
Net finance and other interest income after credit loss expense and profit sharing897,744 612,871 1,306,702 1,920,279 
Investment losses, net(68,989)(86,397)(279,997)(238,281)
Servicing fee income — Including $10,050, $13,117, $33,923 and $40,405 from affiliates, respectively18,574 21,447 56,797 70,255 
Fees, commissions, and other — Including $1,254, $13,465, $11,127 and $32,432 from affiliates, respectively78,924 96,243 256,123 280,815 
Total other income28,509 31,293 32,923 112,789 
Compensation and benefits127,991 132,271 388,960 382,843 
Repossession expense35,910 62,937 115,861 203,496 
Other expenses — Including $1,456, $1,222, $3,762 and $3,220 to affiliates, respectively99,761 134,262 308,193 314,737 
Total other expenses263,662 329,470 813,014 901,076 
Income (loss) before income taxes662,591 314,694 526,611 1,131,992 
Income tax expense172,476 82,156 137,161 283,684 
Net income (loss)$490,115 $232,538 $389,450 $848,308 
Net income (loss)$490,115 $232,538 $389,450 $848,308 
Other comprehensive income (loss): 
Unrealized gains (losses) on cash flow hedges, net of tax of $2,083, $(3,610), $(10,419) and $(21,275), respectively7,112 (11,158)(31,726)(66,241)
Unrealized gains (losses) on available-for-sale and held-to-maturity debt securities net of tax of $(88), $(35), $500 and $286, respectively(289)(111)1,537 890 
Comprehensive income (loss)$496,938 $221,269 $359,261 $782,957 
Net income per common share (basic)$1.58 $0.67 $1.21 $2.43 
Net income per common share (diluted)$1.58 $0.67 $1.21 $2.42 
Dividend declared per common share$0.22 $0.22 $0.66 $0.62 
Weighted average common shares (basic)310,150,293 345,469,657 321,275,907 349,341,627 
Weighted average common shares (diluted)310,307,265 345,956,043 321,492,331 349,855,822 


See notes to unaudited condensed consolidated financial statements.
7




SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) (In thousands except per share amounts)
Common StockAdditional
Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Retained EarningsTotal Stockholders' Equity
SharesAmount
Balance — July 1, 2020316,235 $3,162 $624,554 $(63,705)$4,331,454 $4,895,465 
Stock issued in connection with employee incentive compensation plans34 — 237 — — 237 
Stock-based compensation expense— — 1,010 — — 1,010 
Stock repurchase/Treasury stock(10,198)(101)(223,415)— — (223,516)
Dividends-Common stock, $0.22/share— — — — (67,364)(67,364)
Tax sharing with affiliate— — (7,958)— — (7,958)
Available-for-sale securities, net of taxes— — — (289)— (289)
Net income (loss)— — — — 490,115 490,115 
Other comprehensive income (loss), net of taxes— — — 7,112 — 7,112 
Balance — September 30, 2020306,071 $3,061 $394,428 $(56,882)$4,754,205 $5,094,812 
Balance — July 1, 2019348,130 $3,481 $1,413,461 $(20,567)$5,940,886 $7,337,261 
Stock issued in connection with employee incentive compensation plans214 2,886 — — 2,889 
Stock-based compensation expense— — 931 — — 931 
Stock repurchase/Treasury stock(5,480)(55)(140,964)— — (141,019)
Dividends-Common stock, $0.22/share— — — — (76,129)(76,129)
Available-for-sale securities, net of taxes— — — (111)— (111)
Net income— — — — 232,538 232,538 
Other comprehensive income (loss), net of taxes— — — (11,158)— (11,158)
Balance — September 30, 2019342,864 $3,429 $1,276,314 $(31,836)$6,097,295 $7,345,202 






See notes to unaudited condensed consolidated financial statements.







8




SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) (In thousands except per share amounts)

Common StockAdditional
Paid-In Capital
Accumulated
Other
Comprehensive Income (Loss)
Retained EarningsTotal Stockholders' Equity
SharesAmount
Balance — January 1, 2020339,202 $3,392 $1,173,262 $(26,693)$6,168,659 $7,318,620 
Cumulative-effect adjustment upon adoption of CECL standard (Note 1)
— — — — (1,590,885)(1,590,885)
Tax impact of adoption of ASU 2019-12— — — — (382)(382)
Stock issued in connection with employee incentive compensation plans340 (1,509)— — (1,506)
Stock-based compensation expense— — 6,161 — — 6,161 
Stock repurchase/Treasury stock(33,471)(334)(775,636)— — (775,970)
Dividends-Common stock, $0.66/share— — — — (212,637)(212,637)
Tax sharing with affiliate— — (7,850)— — (7,850)
Available-for-sale securities, net of taxes— — — 1,537 — 1,537 
Net income (loss)— — — — 389,450 389,450 
Other comprehensive income (Loss), net of taxes— — — (31,726)— (31,726)
Balance — September 30, 2020306,071 $3,061 $394,428 $(56,882)$4,754,205 $5,094,812 
Balance — January 1, 2019352,303 3,523 1,515,572 33,515 5,465,748 7,018,358 
Stock issued in connection with employee incentive compensation plans756 1,312 — — 1,320 
Stock-based compensation expense— — 7,973 — — 7,973 
Stock repurchase/Treasury stock(10,195)(102)(245,561)— — (245,663)
Dividends-Common stock, $0.62/share— — — — (216,761)(216,761)
Tax sharing with affiliate— — (2,982)— — (2,982)
Available-for-sale securities, net of taxes— — — 890 — 890 
Net income— — — — 848,308 848,308 
Other comprehensive income (loss), net of taxes— — — (66,241)— (66,241)
Balance — September 30, 2019342,864 $3,429 $1,276,314 $(31,836)$6,097,295 $7,345,202 



See notes to unaudited condensed consolidated financial statements.


9




SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Dollars in thousands)
 For the Nine Months Ended 
 
September 30,
20202019
Cash flows from operating activities:
Net income (loss)$389,450 $848,308 
Adjustments to reconcile net income to net cash provided by operating activities
Derivative mark to market10,022 14,027 
Credit loss expense2,110,331 1,548,404 
Depreciation and amortization1,726,356 1,439,818 
Accretion of discount(15,231)(59,793)
Originations and purchases of receivables held for sale(1,637,194)
Proceeds from sales of and collections on receivables held for sale545,293 101,914 
Change in revolving personal loans, net(59,096)(144,411)
Investment losses, net279,997 238,281 
Stock-based compensation6,161 7,973 
Deferred tax expense/(benefit)142,554 268,537 
Changes in assets and liabilities:
Accrued interest receivable(153,199)6,637 
Accounts receivable3,431 (1,425)
Federal income tax and other taxes(14,145)8,161 
Other assets(39,721)(12,792)
Accrued interest payable(13,237)(1,508)
Other liabilities(29,830)(46,675)
Net cash provided by operating activities3,251,942 4,215,456 
Cash flows from investing activities:  
Originations and purchases of portfolios, and disbursements on finance receivables held for investment(12,782,253)(12,193,605)
Collections on finance receivables held for investment9,223,448 9,207,346 
Proceeds from sale of loans held for investment803,614 
Leased vehicles purchased(4,891,504)(6,754,501)
Manufacturer incentives received339,717 643,552 
Proceeds from sale of leased vehicles3,094,294 2,733,172 
Change in revolving personal loans, net75,318 64,136 
Purchases of available-for-sale securities(85,098)
Proceeds from repayments and maturities of available-for-sale securities6,000 
Purchases of held-to-maturity investment securities(54,584)
Proceeds from repayments and maturities of held-to-maturity securities4,203 
Purchases of furniture and equipment(18,117)(8,503)
Sales of furniture and equipment334 
Upfront fee paid to FCA(60,000)
Net cash used in investing activities(4,205,861)(6,447,167)
Cash flows from financing activities:  
Proceeds from borrowings and other debt obligations, net of debt issuance costs - $11,545,000 and $6,515,000 from affiliates, respectively37,972,329 33,874,913 
Payments on borrowings and other debt obligations - $(5,995,000) and $(4,765,000) to affiliates, respectively
(35,818,793)(31,151,588)
Proceeds from stock option exercises, gross673 4,441 
Shares repurchased(775,970)(245,663)
Dividends paid(212,637)(216,761)
Net cash provided by (used in) financing activities1,165,602 2,265,342 


10






SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited) (Dollars in thousands)

 For the Nine Months Ended 
 
September 30,
 20202019
Net increase (decrease) in cash and cash equivalents and restricted cash211,683 33,631 
Cash and cash equivalents and restricted cash— Beginning of year2,161,087 2,250,484 
Cash and cash equivalents and restricted cash— End of year$2,372,770 $2,284,115 
Supplemental cash flow information:
      Cash and cash equivalents105,616 38,589 
      Restricted cash2,267,154 2,245,526 
     Total cash, cash equivalents and restricted cash$2,372,770 $2,284,115 







See notes to unaudited condensed consolidated financial statements.
11





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

1.Description of Business, Basis of Presentation, and Accounting Policies
The Company is the holding company for SC Illinois, and its subsidiaries, a specialized consumer finance company focused on vehicle finance and third-party servicing and delivering service to dealers and customers across the full credit spectrum. The Company’s primary business is the indirect origination and servicing of retail installment contracts and leases, principally, through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. Additionally, the Company sells consumer retail installment contracts through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer retail installment contracts. SAF is our primary vehicle financing brand, and is available as a finance option for automotive dealers across the United States.

Since May 2013, under the Chrysler Agreement with FCA, the Company has operated as FCA’s preferred provider for consumer loans, leases and dealer loans and provides services to FCA customers and dealers under the CCAP brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. In 2019, the Company entered into an Amendment to the Chrysler Agreement with FCA, which modified that Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.
The Company also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has other relationships through which it provides other consumer finance products.
As of September 30, 2020, the Company was owned approximately 80.2% by SHUSA, a subsidiary of Santander, and approximately 19.8% by other shareholders.
The Company is taking numerous proactive steps to mitigate the negative financial and operational impacts of COVID-19. Business contingency plans have been implemented and will continue to be adjusted in response to the evolving global situation.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its consolidated subsidiaries, including certain Trust that are considered VIEs. The Company also consolidates other VIEs for which it is deemed to be the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying condensed consolidated financial statements as of September 30, 2020 and December 31, 2019,
and for the three and nine months ended September 30, 2020 and 2019, have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal and recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the periods indicated and contain adequate disclosure for the fair statement of this interim financial information. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. These financial statements should be read in conjunction with the Annual Report on Form 10-K for the year ended December 31, 2019.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates and those differences may be material. The most significant estimates include the determination of credit loss allowance, accretion of discounts and subvention, impairment, fair value
12




measurements, expected end-of-term lease residual values, values of repossessed assets, and income taxes. These estimates, although based on actual historical trends and modeling, may show significant variances over time.

Business Segment Information
The Company has 1 reportable segment, Consumer Finance, which includes the Company’s vehicle financial products and services, including retail installment contracts, vehicle leases, and Dealer Loans, as well as financial products and services related to recreational vehicles and marine vehicles. It also includes the Company’s personal loan and point-of-sale financing operations.

Recently Adopted Accounting Standards
Since January 1, 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 and certain other instruments that are measured at amortized cost. The amendment introduced a new credit reserving framework known as "Current Expected Credit Loss" (“CECL”), which replaced the incurred loss impairment framework 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 changed the accounting framework for purchased credit deteriorated held-to-maturity ("HTM") debt securities and loans, and dictates measurement of available-for-sale ("AFS") debt securities using an allowance instead of reducing the carrying amount as it is under the prior 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 $2.1 billion, a decrease to opening retained earnings of approximately $1.6 billion and a decrease in deferred tax liabilities, net of approximately $0.5 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 lifetime credit losses of the loan portfolios. The standard did not have a material impact on the Company's other financial instruments.

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 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 months ended March 31, 2020, and will elect the practical expedients relative to the Company’s contracts and hedging relationships modified as a result of reference rate reform through December 31, 2022. 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, 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 early adopted this update as of January 1, 2020, and it did not have any material impact to the Company’s business, financial position, results of operations, or disclosures.
The adoption of the following ASUs did not have a material impact on the Company’s business, financial position or results of operations.
ASU 2018-17, Consolidation (Topic 10): Targeted Improvements to Related Party Guidance for Variable Interest Entities
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement

Accounting Policies
There have been no material changes (except as disclosed below) in the Company's accounting policies from those disclosed in Part II, Item 8 - Financial Statements and Supplementary Data in the 2019 Annual Report on Form 10-K.
13




The change in the following policy is as a result of the Company's adoption of CECL standard, on January 1, 2020.
Investment securities
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 the ACL for debt securities, 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 ACL for debt securities. 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.
The Company conducts an impairment assessment quarterly on all AFS securities with a fair value that is less than their amortized cost basis to determine whether the loss is due to credit factors. Securities for which management expects risk of nonpayment of the amortized cost 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, because these 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 AOCI.
Purchased Credit Deteriorated or PCD loans
Loans that the Company deems at acquisition to have more than insignificant deterioration in credit quality since origination (i.e., Purchased Credit Deteriorated or PCD loans) require the recognition of an allowance for credit losses 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 PCD loan. The allowance for credit losses 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 an FVO.
Credit Loss Expense and Allowance for Credit losses
General
Credit loss expenses are charged to operations in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Company’s retail installment contracts. The allowance for expected credit losses on retail installment contracts is measured based on a lifetime 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 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. Management's evaluation takes into consideration the risks in the portfolio, past loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts 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 Company measures expected losses of all components on an amortized cost basis. For all loans except TDRs, 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 accrued interest. For loans on nonaccrual status, interest income is recognized on a cash basis, and the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due.
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 ACL for TDRs and other individually assessed loans, and a non-DCF approach for other loans. 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 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. This method results in a single, quantitatively consistent credit model across the
14




entire projection period as the macroeconomic effects in the historical data are controlled for the estimate of the long-run loss level.

Models
The Company uses a statistical methodology based on an ECL approach that focuses on forecasting the ECL components (i.e., probability of default, payoff, loss given default and exposure at default) on a loan level basis to estimate the expected future life time losses. The individual loan balances used in the models are measured on an amortized cost basis.
In calculating the probability of default and payoff, the Company developed model forecasts, which consider variables such as delinquency status, loan tenor and other credit quality indicators.
The loss given default component forecasts the extent of losses given that a default has occurred and considers variables such as collateral, loan-to-value and other credit quality indicators.
The exposure at default component captures the effects of expected partial prepayments and underpayments that are expected to occur during the forecast period and considers variable such as loan-to-value, collateral and other credit quality indicators.

The above ECL components are used to compute an ACL based on the weighted average of the results of the 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 TDR and individually assessed loans and non-DCF approach for other loans.

When using a non-DCF method to measure the ACL, the Company measures ECL 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 entity.
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 (including accrued interest) 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.
Collateral - Dependent Assets
A loan is considered a Collateral Dependent Financial Asset when (a) the Company determines foreclosure is probable or (b) the borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral. For all collateral dependent loans such as certain bankruptcy modifications, the Company measures the ACL as the difference between the loan’s amortized cost basis and the fair value of the underlying collateral as of the reporting date, adjusted for expected 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. The 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 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 negative allowance. Negative allowance reduces the ACL.
Qualitative Reserve
15




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 a qualitative reserve as a component of the ACL to recognize the existence of these exposures. Imprecisions include loss factors inherent in 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.

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 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.
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, 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 SHUSA'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 ACL Committee. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

Changes in the assumptions used in these estimates could have a direct material impact on the credit loss expense in the Consolidated Statements of Operations and in the allowance for credit losses. The loan portfolio represents the largest asset on the Consolidated Balance Sheets. 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 change to the ACL might be necessary if prevailing conditions differ materially from the assumptions and estimates utilized in calculating the ACL.
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.

2.    Finance Receivables
Held for Investment
Finance receivables held for investment, net is comprised of the following at September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
Retail installment contracts, net (a)$27,415,437 $27,719,221 
Purchased receivables - credit deteriorated7,438 12,177 
Receivables from dealers3,668 12,536 
Finance lease receivables (Note 4)23,187 23,085 
Finance receivables held for investment, net$27,449,730 $27,767,019 
(a) The Company has elected the fair value option for certain retail installment contracts reported in finance receivables held for investment, net.
As of September 30, 2020 and December 31, 2019, $8,248 and $22,353 of loans were recorded at fair value, respectively (Note 10).
16




The Company’s held for investment portfolio of retail installment contracts is comprised of the following at September 30, 2020 and December 31, 2019:
September 30, 2020
Retail Installment Contracts
Non-TDRTDR
Unpaid principal balance$29,667,444$3,801,948
ACL(4,900,132)(1,248,522)
Discount (net of subvention and participation)1,004(10,583)
Capitalized origination costs and fees100,7503,528
Net carrying balance$24,869,066$2,546,371
ACL as a percentage of unpaid principal balance16.5 %32.8 %
ACL and discount as a percentage of unpaid principal balance16.5 %33.1 %

December 31, 2019
Retail Installment Contracts
Non-TDRTDR
Unpaid principal balance$26,895,551$3,859,040
Credit loss allowance - specific(914,718)
Credit loss allowance - collective(2,123,878)
Discount (net of subvention and participation)(67,484)(17,167)
Capitalized origination costs and fees84,9612,916
Net carrying balance$24,789,150$2,930,071
Allowance as a percentage of unpaid principal balance7.9 %23.7 %
Allowance and discount as a percentage of unpaid principal balance8.1 %24.1 %

Retail installment contracts
Retail installment contracts are collateralized by vehicle titles, and the Company has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company’s retail installment contracts held for investment are pledged against warehouse lines or securitization bonds (Note 7). Most of the borrowers on the Company’s retail installment contracts held for investment are retail consumers; however, $823,955 and $741,592 of the unpaid principal balance represented fleet contracts with commercial borrowers as of September 30, 2020 and December 31, 2019, respectively.
During the nine months ended September 30, 2020 and 2019, the Company originated (including through the SBNA originations program) $11,145,890 and $9,514,939, respectively, in CCAP loans which represented 61% and 56%, respectively, of the total retail installment contract originations (including the SBNA originations program).
As of September 30, 2020, borrowers on the Company’s retail installment contracts held for investment are located in Texas (16%), Florida (10%), California (8%), Georgia (5%) and other states each individually representing less than 5% of the Company’s total portfolio.
Purchased receivables

During the three and nine months ended September 30, 2020 and 2019, the Company did not acquire any vehicle loan portfolios from third party lenders.

For the nine months ended September 30, 2020 and 2019, the Company recognized certain retail installment contracts with an unpaid principal balance of $76,878 and $74,718 respectively. For the three months ended September 30, 2020 and 2019, there were 0 retail installment contracts with an unpaid principal balance. held by non-consolidated securitization Trusts, under optional clean-up calls (Note 6). Following the initial recognition of these loans at fair value, the performing loans in the portfolio are carried at amortized cost, net of allowance for credit losses. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of the
17




re-recognition date), for which it was probable that not all contractually required payments would be collected (Note 10).
Receivable from Dealers
The receivables from dealers held for investment are all Chrysler Agreement-related. As of September 30, 2020, borrowers on these dealer receivables are located in New York.
Held for Sale
The carrying value of the Company’s finance receivables held for sale, net is comprised of the following at September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
Personal loans$763,292 $1,007,105 
Sales of retail installment contracts to third parties and proceeds from sales of charged-off assets for the three and nine months ended September 30, 2020 and 2019 were as follows:
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Sales of retail installment contracts to third parties$636,301 $$1,148,587 $
Proceeds from sales of charged-off assets to third parties$9,144 $28,847 $30,019 $55,220 

18




3.    Credit Loss Allowance and Credit Quality
Credit Loss Allowance
During the first quarter of 2020, the Company changed the model used for estimating the ACL on retail installment contracts from incurred loss model to an expected lifetime loss model, as a result of the Company's adoption of the CECL standard on January 1, 2020.
The Company maintains an ACL on the retail installment contracts held for investment, which excludes those loans measured at fair value in accordance with applicable accounting standards. The Company maintains an expected ACL for receivables from dealers based on risk ratings and individually evaluates loans for specific impairment as necessary. As of September 30, 2020 and 2019, the ACL for receivables from dealers is comprised entirely of general allowance as none of these receivables have been determined to be individually impaired. The Company estimates losses on the finance lease receivable portfolio based on delinquency status, loss experience to date, future expectation of losses as well as various economic factors.
Retail installment contracts
The activity in the ACL for the retail installment contracts for the three and nine months ended September 30, 2020 and 2019 was as follows:
Three Months Ended September 30, 2020Three Months Ended September 30, 2019
Retail Installment ContractsRetail Installment Contracts
Non-TDRTDRNon-TDRTDR
Balance — beginning of period$4,818,187 $1,037,628 $1,961,893 $1,156,303 
Credit loss expense (a)24,841 314,075 484,626 102,494 
Charge-offs (b)(334,938)(200,352)(962,573)(381,490)
Recoveries392,042 97,171 567,846 183,305 
Balance — end of period$4,900,132 $1,248,522 $2,051,792 $1,060,612 

Nine Months Ended September 30, 2020Nine Months Ended September 30, 2019
Retail Installment ContractsRetail Installment Contracts
Non-TDRTDRNon-TDRTDR
Balance — beginning of period$2,123,878 $914,718 $1,819,360 $1,416,743 
Day 1 - Adjustment to allowance for adoption of CECL standard2,030,473 71,833 
Credit loss expense (a)1,526,545 581,344 1,279,931 266,913 
Charge-offs (b)(1,955,706)(617,536)(2,685,931)(1,217,650)
Recoveries1,174,942 298,163 1,638,432 594,606 
Balance — end of period$4,900,132 $1,248,522 $2,051,792 $1,060,612 
(a) Excluded from the credit loss expense is $13 million and $52 million related to retail installment contracts sold in an off-balance sheet securitization during the three and nine months ended September 30, 2020, respectively. In addition, credit loss expense includes a net of $72 million and $60 million in the credit loss expense related to retail installment contracts transferred to held for sale and returned to held for investment during the three and nine months ended September 30, 2020, respectively. Furthermore, credit loss expense includes $0 million and $20 million related to retail installment contracts transferred to held for sale during the three and nine months ended September 30, 2019, respectively.
(b) Charge-offs for retail installment contracts includes partial write-down of loans to the collateral value less estimated costs to sell, for which a bankruptcy notice was received. There is no additional ACL on these loans.

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 credit quality of loans 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 application of geographic and other concentration limits.

The Company estimates lifetime expected losses based on prospective information as well as account level models based on historical data. Unemployment, HPI, and used vehicle index growth rates, along with loan level
19




characteristics, are the key inputs used in the models for prediction of the likelihood that the borrower will default in the forecasted period (the probability of default). The used vehicle index is also used to estimate the loss in the event of default. The historic volume of loan deferrals provided to customers impacted by COVID-19 has driven positive trends in delinquencies and severity (charge-offs) in the quarter, 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.

The Company has determined the reasonable and supportable period to be three years at which time 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 current levels of delinquency, charge-offs and used vehicle prices. 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 adjustment for macroeconomic uncertainty, and may consider adjustments to macroeconomic inputs based on market volatility. The baseline scenario was based on the latest consensus forecasts available which show an improvement in key variables in this quarter, including a sharp decrease in unemployment rates (which are a key driver to losses). The scenarios are periodically updated over a reasonable and supportable time horizon with weightings assigned by management and approved through established committee governance.

The Company’s ACL increased $0.3 billion and $3.1 billion for the three and nine months ended September 30, 2020. For the three months ended September 30, 2020, the increase was primarily due to portfolio growth. For the nine months ended September 30, 2020, the primary drivers were a $2.1 billion increase at CECL adoption on January 1, 2020, driven mainly by the addition of lifetime expected credit losses for non-TDR loans, and additional reserves specific to COVID-19 risk.

Other portfolios

The ACL for the period end and its activity for Dealer Loans, Finance Lease receivable portfolio, and Purchased receivable portfolio-credit deteriorated, for the three and nine months ended September 30, 2020 and 2019, is insignificant.

Delinquencies

Retail installment contracts and personal amortizing term loans are generally classified as non-performing (or nonaccrual) when they are greater than 60 days past due as to contractual principal or interest payments. Dealer receivables are classified as non-performing when they are greater than 90 days past due. At the time a loan is placed in non-performing (nonaccrual) status, previously accrued and uncollected interest is reversed against interest income. If an account is returned to a performing (accrual) status, the Company returns to accruing interest on the loan. 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 Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date. In each case, the period of delinquency is based on the number of days payments are contractually past due.

A summary of delinquencies as of September 30, 2020, and December 31, 2019 is as follows:
 September 30, 2020
 Finance Receivables Held for Investment
 Retail Installment Contract LoansPurchased Receivables Portfolios - credit deterioratedTotalPercent
Amortized cost, 30-59 days past due$1,673,713 $887 $1,674,600 5.0 %
Amortized cost over 59 days817,577 334 817,911 2.4 %
Total delinquent balance at amortized cost (a)$2,491,290 $1,221 $2,492,511 7.4 %
(a) The amount of accrued interest excluded from the disclosed amortized cost table is $64,970.
20




 December 31, 2019
 Finance Receivables Held for Investment
 Retail Installment Contract LoansPurchased Receivables Portfolios - credit impairedTotalPercent
Principal, 30-59 days past due$2,972,495 $1,930 $2,974,425 9.7 %
Delinquent principal over 59 days1,578,452 1,596 1,580,048 5.1 %
Total delinquent principal (a)$4,550,947 $3,526 $4,554,473 14.8 %
(a) The table includes balances based on UPB. Difference between amortized cost and UPB was not material.

As of September 30, 2020 and December 31, 2019, there were 0 receivables from dealers that were 30 days or more delinquent. The accrual of interest on revolving personal loans continues until the loan is charged off. The unpaid principal balance on revolving personal loans 90 days past due and still accruing totaled $64,358 and $128,872 as of September 30, 2020 and December 31, 2019, respectively.

Non-Accrual Loans for Retail Installment Contracts

The amortized cost basis of financial instruments that are either non-accrual with related expected credit loss or non-accrual without related expected credit loss for retail installment contracts is as follows:

September 30, 2020
Non-accrual loansNon-accrual loans with no allowance (a)Interest income recognized on nonaccrual loans (YTD)Non-accrual loans as a percent of total amortized cost
Non-TDR$623,428 $141,269 $57,275 1.9 %
TDR301,647 46,956 27,128 0.9 %
Total non-accrual loans$925,075 $188,225 $84,403 2.8 %
(a) These represent loans for which a bankruptcy notice was received, and have been partially write-down to the collateral value less estimated costs to sell. Accordingly, there is no additional ACL on these loans.

December 31, 2019
AmountPercent
Non-TDR$1,099,462 3.6 %
TDR516,119 1.7 %
Total nonaccrual principal (a)$1,615,581 5.3 %
(a) The table includes balances based on UPB. Difference between amortized cost and UPB was not material.

Delinquent balances and nonaccrual balances are lower as of September 30, 2020 primarily due to a significant increase in deferrals granted to borrowers impacted by COVID-19.

Credit Quality Indicators
FICO® Distribution (determined at origination) — Amortized Cost Basis (in millions) by Origination Year for Retail Installment Contacts
Total
September 30, 20202020 (a)20192018201720162015PriorAmount%
No-FICO®s
1,395 1,318 608 595 305 174 40 4,435 13.2%
<5401,444 1,517 1,022 516 305 223 116 5,143 15.3%
540-5993,307 3,345 1,960 768 495 322 127 10,324 30.7%
600-6392,101 2,059 1,120 384 272 158 65 6,159 18.4%
>6404,226 1,592 922 308 244 163 48 7,503 22.4%
Total (b)$12,473 $9,831 $5,632 $2,571 $1,621 $1,040 $396 $33,564 100.0%
21




(a) Represents nine months ended September 30, 2020
(b) The amount of accrued interest excluded from the disclosed amortized cost table is $428 million.


FICO® BandDecember 31, 2019 (a)
No-FICO®s12.4%
<54016.9%
540-59931.9%
600-63919.0%
>64019.8%

(a) Percentages are based on UPB. Difference between amortized cost and UPB was not material.

Commercial Lending — The Company’s risk department performs a credit analysis and classifies certain loans over an internal threshold based on the commercial lending classifications. All the receivables from dealers, as of September 30, 2020 and December 31, 2019 were classified as “Pass.”
Troubled Debt Restructurings
In certain circumstances, the Company modifies the terms of its finance receivables to troubled borrowers. Modifications may include a temporary reduction in monthly payment, reduction in interest rate, an extension of the maturity date, rescheduling of future cash flows, or a combination thereof. A modification of finance receivable terms is considered a TDR if the Company grants a concession to a borrower for economic or legal reasons related to the debtor’s financial difficulties that would not otherwise have been considered. The purchased receivables portfolio - credit deteriorated, operating and finance leases, and loans held for sale, including personal loans, are excluded from the scope of the applicable guidance. The Company’s TDR balance as of September 30, 2020 and December 31, 2019 primarily consisted of loans that had been deferred or modified to receive a temporary reduction in monthly payment. As of September 30, 2020 and December 31, 2019, there were 0 receivables from dealers classified as a TDR.
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. The recognition of interest income on TDR loans reflects management’s best estimate of the amount that is reasonably assured of collection and is consistent with the estimate of future cash flows used in the impairment measurement. Any accrued but unpaid interest is fully reserved for through the recognition of additional impairment, if not expected to be collected.
The table below presents the Company’s amortized cost (including accrued interest) of TDRs as of September 30, 2020 and December 31, 2019:
 September 30, 2020December 31, 2019
Retail Installment Contracts (a)
Amortized Cost including accrued interest (b)$3,843,470 $3,828,892 
Impairment(1,248,522)(914,718)
Amortized cost including accrued interest, net of impairment$2,594,948 $2,914,174 
(a) The December 31, 2019 balances were based on unpaid principal balance. Difference between amortized cost and UPB was not material.
(b) As of September 30, 2020, these balances excludes $74.0 million of collateral-dependent bankruptcy TDRs that have been written down by $27.1 million to fair value less cost to sell. As of December 31, 2019, this balance excludes $94.9 million of collateral-dependent bankruptcy TDRs that have been written down by $36.4 million to fair value less cost to sell.
A summary of the amortized cost (including accrued interest) of the Company’s delinquent TDRs at September 30, 2020 and December 31, 2019 is as follows:
 September 30, 2020December 31, 2019
Retail Installment Contracts (a)
30-59 days past due$564,838 $927,952 
Delinquent balance over 59 days287,289 521,709 
Total delinquent TDRs$852,127 $1,449,661 
(a) The December 31, 2019 balances were based on unpaid principal balance. Difference between amortized cost and UPB was not material.
22





The decrease in total delinquent 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 retail installment contracts for the three and nine months ended September 30, 2020.

Average amortized cost (including accrued interest) and interest income recognized on TDR loans are as follows:
Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
 Retail Installment ContractsRetail Installment Contracts
Average amortized cost (including accrued interest)$3,960,119 $4,399,099 $3,802,823 $4,790,378 
Interest income recognized165,637 188,331 457,642 623,324 
The following table summarizes the financial effects, excluding impacts related to credit loss allowance and impairment, of TDRs (including collateral-dependent bankruptcy TDRs) that occurred for the three and nine months ended September 30, 2020 and 2019:
Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
 Retail Installment ContractsRetail Installment Contracts
Amortized cost (including accrued interest) before TDR$317,455 $376,206 $1,399,813 $1,003,755 
Amortized cost (including accrued interest) after TDR319,027 377,750 1,417,480 1,006,637 
Number of contracts (not in thousands)14,620 21,575 69,786 58,783 
A TDR is considered to be in default at charge off. For retail installment contracts, charge off is at the earlier of the date of repossession or 120 days past due and, for revolving personal loans, is generally the month in which the receivable becomes 180 days past due. Loan restructurings accounted for as TDRs within the previous twelve months that subsequently defaulted during the three and nine months ended September 30, 2020 and 2019 are summarized in the following table:
Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
 Retail Installment ContractsRetail Installment Contracts
Amortized cost (including accrued interest) in TDRs that subsequently defaulted (a)$83,002 $83,254 $183,871 $299,619 
Number of contracts (not in thousands)4,379 5,190 10,467 18,097 
(a) For TDR modifications and TDR modifications that subsequently default, the allowance methodology remains unchanged; however, the transition rates of the TDR loans are adjusted to reflect the respective risks.


23




4.    Leases (SC as Lessor)
The Company originates operating and finance leases, which are separately accounted for and recorded on the Company’s condensed consolidated balance sheets. Operating leases are reported as leased vehicles, net, while finance leases are included in finance receivables held for investment, net.
Lease extensions granted by the Company 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 Leases
Leased vehicles, net, which is comprised of leases originated under the Chrysler Agreement, consisted of the following as of September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
Leased vehicles$21,795,939 $21,722,726 
Less: accumulated depreciation(4,694,217)(4,159,944)
Depreciated net capitalized cost17,101,722 17,562,782 
Manufacturer subvention payments, net of accretion(972,778)(1,177,342)
Origination fees and other costs66,432 76,542 
Net book value$16,195,376 $16,461,982 

The following summarizes the maturity analysis of lease payments due to the Company as lessor under operating leases as of September 30, 2020:
 
Remainder of 2020$745,650 
20212,304,011 
20221,218,588 
2023428,287 
20247,852 
Thereafter
Total$4,704,388 

Finance Leases

Certain leases originated by the Company are accounted for as direct financing leases, as the contractual residual values are nominal amounts. Finance lease receivables, net consisted of the following as of September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
Gross investment in finance leases$34,290 $34,443 
Origination fees and other288 241 
Less: unearned income(7,673)(6,859)
Net investment in finance leases before allowance26,905 27,825 
Less: allowance for lease losses (a)(3,718)(4,740)
Net investment in finance leases$23,187 $23,085 
(a) The impact of day 1 - Adjustment to allowance for adoption of CECL standard was insignificant.

The following summarizes the maturity analysis of lease payments due to the Company, as lessor, under finance leases as of September 30, 2020:
24




  
Remainder of 2020$2,685 
202110,066 
20228,793 
20236,780 
20244,262 
Thereafter1,704 
Total$34,290 

5.    Other Assets
Other assets were comprised as follows:
September 30, 2020December 31, 2019
Vehicles (a)$370,678 $341,465 
Manufacturer subvention payments receivable (b)38,414 74,738 
Upfront fee (b)76,709 98,980 
Derivative assets at fair value (c)5,999 65,358 
Derivative - collateral104,435 147,914 
Operating leases (Right-of-use-assets)49,443 57,508 
Available-for-sale debt securities95,666 92,246 
Held-to-maturity debt securities (d)50,417 
Equity securities not held for trading1,430 
Prepaids44,458 45,644 
Accounts receivable34,898 24,103 
Federal and State tax receivable104,667 82,945 
Other65,451 40,119 
Other assets$1,042,665 $1,071,020 
 
(a)Includes vehicles recovered through repossession as well as vehicles recovered due to lease terminations.
(b)These amounts relate to the Chrysler Agreement. The Company paid a $150,000 upfront fee upon the May 2013 inception of the Chrysler Agreement. The fee is being amortized into finance and other interest income over a ten-year term. In addition, in June 2019, in connection with the execution of the Amendment to the Chrysler Agreement, the Company paid $60,000 upfront fee to FCA. This fee is being amortized into finance and other interest income over the remaining term of the Chrysler Agreement.
(c)Derivative assets at fair value represent the gross amount of derivatives presented in the condensed consolidated financial statements. Refer to Note 9 - "Derivative Financial Instruments" to these condensed Consolidated Financial Statements for the detail of these amounts.
(d)Held-to-maturity debt securities includes accrued interest as of September 30, 2020.

Operating Leases (SC as Lessee)

The Company has entered into various operating leases, primarily for office space. Operating leases are included within other assets as operating lease ROU assets and other liabilities within our consolidated balance sheets. 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.

Most of our real estate leases include one or more options to renew, with renewal terms that can extend the lease term from one year to 15 years or more. The exercise of lease renewal options is at our sole discretion. The Company does not include any of the renewal options in the lease term as it is not reasonably certain that these options will be exercised.





25




Supplemental information relating to these operating leases is as follows:
September 30, 2020
Operating leases-right of use assets$49,443
Other liabilities68,545
Weighted average lease term5.6
Weighted average discount rate3.4 %

Lease expense incurred totaled $3,479 and $3,402 for the three months ended September 30, 2020 and 2019, respectively, and $10,586 and $10,316 for the nine months ended September 30, 2020 and 2019, and is included within “other operating costs” in the income statement. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. Cash paid for amounts included in the measurement of operating lease liabilities was $12,947 during the nine months ended September 30, 2020.    

The maturity of lease liabilities at September 30, 2020 are as follows:
September 30, 2020
2020$4,175 
202113,343 
202212,639 
202312,762 
202412,701 
Thereafter19,691 
Total$75,311 
Less: Interest(6,766)
Present value of lease liabilities$68,545 

Available-for-sale and Held-to-maturity debt securities

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. All of these securities are used to satisfy collateral requirements for our derivative financial instruments.

Debt securities that 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.

Realized gains and losses on sales of investment securities are recognized on the trade date and are determined using specific identification method and are included in earnings within Investment gain (losses) on sale of securities. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities available-for-sale and held-to-maturity debt securities as of September 30, 2020:        
 September 30, 2020
Amortized cost (before unrealized gains / losses)Gross Unrealized gainGross Unrealized lossFair value
Available-for-sale debt securities (US Treasury securities)$92,621 $3,045 $$95,666 
Held-to-maturity debt securities (Asset-Backed Notes)$50,381 $561 $$50,942 




26




Contractual Maturities

The contractual maturities of available-for-sale and held-to-maturity debt instruments are summarized in the                                          following table:

September 30, 2020
Available-for-sale debt securitiesHeld-to-maturity debt securities
Amortized costFair valueAmortized costFair value
Due within one year$4,978 $5,096 $3,416 $3,416 
Due after one year but within 5 years87,643 90,570 34,178 34,320 
Due after 5 year but within 10 years12,787 13,206 
Total$92,621 $95,666 $50,381 $50,942 

There were no transfers of securities between available-for-sale and held-to-maturity during the periods ended September 30, 2020 or December 31, 2019.

Other Investments

Other investments includes the equity securities not held for trading as 5% of certificate related to the off-balance sheet     
securitization. Equity securities are measured at fair value as of September 30, 2020 for $1,430, with changes in fair value recognized in net income.

6.    Variable Interest Entities

The Company transfers retail installment contracts and vehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under GAAP and the Company may or may not consolidate these VIEs on the condensed consolidated balance sheets.
For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Part II, Item 8 - Financial Statements and Supplementary Data (Note 7) in the 2019 Annual Report on Form 10-K.

On-balance sheet variable interest entities

The assets of consolidated VIEs, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used only to settle obligations of the consolidated VIE and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to the Company’s general credit were as follows:
 September 30, 2020December 31, 2019
Assets
Restricted cash$1,763,252 $1,629,870 
Finance receivables held for investment, net22,711,254 26,532,328 
Leased vehicles, net16,195,376 16,461,982 
Various other assets870,229 625,359 
Total assets$41,540,111 $45,249,539 
Liabilities
Notes payable$31,265,215 $34,249,851 
Various other liabilities117,997 188,093 
Total liabilities$31,383,212 $34,437,944 

27




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

As of September 30, 2020 and December 31, 2019, the Company was servicing $27,688,633 and $27,253,573, respectively, of gross retail installment contracts that have been transferred to consolidated Trusts. The remainder of the Company’s retail installment contracts remain unpledged.
A summary of the cash flows received from consolidated securitization trusts during the three and nine months ended September 30, 2020 and 2019, is as follows:
 Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Assets securitized$5,282,901 $5,498,705 $15,845,707 $15,340,428 
Net proceeds from new securitizations (a)$4,662,211 $4,475,722 $11,470,857 $12,232,777 
Net proceeds from retained bonds1,293 2,414 57,286 119,719 
Cash received for servicing fees (b)242,245 242,801 735,533 740,760 
Net distributions from Trusts (b)1,173,276 1,018,301 2,730,657 2,689,735 
Total cash received from Trusts$6,079,025 $5,739,238 $14,994,333 $15,782,991 
(a)Includes additional advances on existing securitizations.
(b)These amounts are not reflected in the accompanying condensed consolidated statements of cash flows because these cash flows are intra-company and eliminated in consolidation.
Off-balance sheet variable interest entities
During the three and nine months ended September 30, 2020 the Company sold $636,301 and $1,148,587, respectively, of gross retail installment contracts to third party investors in off-balance sheet securitizations for a loss of $13,669 and $40,553, respectively. The losses were recorded in investment losses, net, in the accompanying condensed consolidated statements of income. There were 0 sales for the three and nine months ended September 30, 2019.
As of September 30, 2020 and December 31, 2019, the Company was servicing $2,554,564 and $2,408,205, respectively, of gross retail installment contracts that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:
 September 30, 2020December 31, 2019
Related party SPAIN serviced securitizations$1,418,346 $2,149,008 
Third party SCART serviced securitizations1,032,639 
Third party CCAP serviced securitizations103,579 259,197 
Total serviced for others portfolio$2,554,564 $2,408,205 
Other than repurchases of sold assets due to standard representations and warranties, the Company has 0 exposure to loss as a result of its involvement with these VIEs.
A summary of the cash flows received from off-balance sheet securitization trusts for the three and nine months ended September 30, 2020 and 2019 is as follows:
28




Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Receivables securitized (a)$636,301 $$1,148,587 $
Net proceeds from new securitizations592,455 1,052,541 
Cash received for servicing fees6,598 7,859 17,856 27,467 
Total cash received from securitization trusts599,053 7,859 1,070,397 27,467 
(a) Represents the unpaid principal balance at the time of original securitization.

29




7.    Debt
Total borrowings and other debt obligations as of September 30, 2020 and December 31, 2019 consists of:
September 30, 2020December 31, 2019
Notes Payable — Facilities with Third Parties$2,803,684 $5,399,931 
Notes Payable — Secured Structured Financings27,356,867 28,141,885 
Notes Payable — Secured Structured Financing with Santander7,222 
Notes Payable — Facilities with Santander and Related Subsidiaries11,201,574 5,652,325 
$41,369,347 $39,194,141 
Notes Payable - Credit Facilities
The following table presents information regarding the Company’s credit facilities as of September 30, 2020 and December 31, 2019:
 September 30, 2020
Maturity Date(s)Utilized BalanceCommitted AmountEffective RateAssets PledgedRestricted Cash Pledged
Facilities with third parties:
Warehouse lineAugust 2022$166,000 $500,000 2.54%$267,776 $
Warehouse lineMarch 2021500,445 1,250,000 1.27%1,151,745 
Warehouse line (a)October 202192,800 1,500,000 2.69%819,518 
Warehouse line (b)October 20211,165,943 3,500,000 3.27%1,272,926 
Warehouse lineJuly 2021500,000 1.53%497,994 
Warehouse lineOctober 20212,100,000 4.18%
Warehouse lineJanuary 2022400,000 1,000,000 1.43%572,755 
Warehouse lineNovember 2021166,600 500,000 1.04%495,011 
Warehouse lineJuly 2022900,000 3.10%1,684 
Repurchase facility (c)January 2021263,272 263,272 1.66%377,550 
Repurchase facility (c)November 202048,624 48,624 1.79%69,945 
Total facilities with third parties2,803,684 12,061,896 5,525,220 1,685 
Facilities with Santander and related subsidiaries:
Promissory NoteDecember 2021250,000 250,000 3.70%
Promissory NoteDecember 2022250,000 250,000 3.95%
Promissory NoteDecember 2023250,000 250,000 5.25%
Promissory NoteDecember 2022250,000 250,000 5.00%
Promissory NoteMay 2021250,000 250,000 2.25%
Promissory NoteMarch 2021300,000 300,000 3.95%
Promissory NoteMay 2023350,000 350,000 3.80%
Promissory NoteOctober 2020400,000 400,000 4.03%
Promissory NoteNovember 2022400,000 400,000 3.00%
Promissory NoteApril 2023450,000 450,000 6.13%
Promissory NoteJune 2022500,000 500,000 3.30%
Promissory NoteJuly 2024500,000 500,000 3.90%
Promissory NoteMarch 2022650,000 650,000 4.20%
Promissory NoteAugust 2021650,000 650,000 3.44%
Promissory NoteSeptember 2023750,000 750,000 3.38%
Promissory NoteJune 20251,000,000 1,000,000 3.99%
Promissory NoteJune 20222,000,000 2,000,000 1.40%
Promissory NoteSeptember 20222,000,000 2,000,000 1.04%
Line of creditJuly 2021500,000 2.18%
Line of creditMarch 20222,500,000 3.35%
Total facilities with Santander and related subsidiaries11,200,000 14,200,000 
Total revolving credit facilities$14,003,684 $26,261,896 $5,525,220 $1,685 

30




(a) During the three months ended March 31, 2020, Chrysler Finance Loan credit facility was reactivated with a $1 billion commitment. In April 2020, the commitment amount was increased by $500 million.
(b) This line is held exclusively for financing of Chrysler Finance leases. In April 2020, the commitment amount was reduced by $500 million.
(c) The repurchase facilities are collateralized by securitization notes payable retained by the Company. As the borrower, we are exposed to liquidity risk due to changes in the market value of the retained securities pledged. In some instances, we place or receive cash collateral with counterparties under collateral arrangements associated with our repurchase agreements.

 December 31, 2019
 Maturity Date(s)Utilized BalanceCommitted AmountEffective RateAssets PledgedRestricted Cash Pledged
Facilities with third parties:
Warehouse lineJune 2021$471,284 $500,000 3.32%$675,426 $
Warehouse lineMarch 2021516,045 1,250,000 3.10%734,640 
Warehouse lineOctober 20211,098,443 5,000,000 4.43%1,898,365 1,756 
Warehouse lineJuly 2021500,000 500,000 3.64%761,690 302 
Warehouse lineOctober 2021896,077 2,100,000 3.44%1,748,325 
Repurchase facilityJanuary 2020273,655 273,655 3.80%377,550 
Repurchase facilityMarch 2020100,756 100,756 3.04%151,710 
Repurchase facilityMarch 202047,851 47,851 3.15%69,945 
Warehouse lineNovember 2020970,600 1,000,000 2.57%1,353,305 
Warehouse lineNovember 2020471,320 500,000 2.69%505,502 186 
Warehouse lineJune 202153,900 600,000 7.02%62,601 94 
Total facilities with third parties5,399,931 11,872,262  8,339,059 2,346 
Facilities with Santander and related subsidiaries:      
Promissory NoteDecember 2021250,000 250,000 3.70%
Promissory NoteDecember 2022250,000 250,000 3.95%
Promissory NoteDecember 2023250,000 250,000 5.25%
Promissory NoteDecember 2022250,000 250,000 5.00%
Promissory NoteMarch 2021300,000 300,000 3.95%
Promissory NoteOctober 2020400,000 400,000 3.10%
Promissory NoteNovember 2022400,000 400,000 3.00%
Promissory NoteMay 2020500,000 500,000 3.49%
Promissory NoteJune 2022500,000 500,000 3.30%
Promissory NoteJuly 2024500,000 500,000 3.90%
Promissory NoteMarch 2022650,000 650,000 4.20%
Promissory NoteAugust 2021650,000 650,000 3.44%
Promissory NoteSeptember 2023750,000 750,000 3.27%
Line of creditJuly 2021500,000 3.86%
Line of creditMarch 20223,000,000 4.96%
Total facilities with Santander and related subsidiaries 5,650,000 9,150,000  
Total revolving credit facilities $11,049,931 $21,022,262  $8,339,059 $2,346 
Notes Payable - Facilities with Third Parties
The warehouse lines and repurchase facilities are fully collateralized by a designated portion of the Company’s retail installment contracts (Note 2), leased vehicles (Note 4), securitization notes payables and residuals retained by the Company.
Facilities with Santander and Related Subsidiaries
Lines of Credit
SHUSA provides the Company with $3,000,000 of committed revolving credit that can be drawn on an unsecured basis.

31




Promissory Notes
SHUSA provides the Company with $7,200,000 of unsecured promissory notes.
Santander provides the Company with $4,000,000 of unsecured promissory notes.

Notes Payable - Secured Structured Financings
 
The following table presents information regarding secured structured financings as of September 30, 2020 and December 31, 2019:
 September 30, 2020
 Estimated Maturity Date(s) at IssuanceBalanceInitial Note Amounts Issued (d)Initial Weighted Average Interest RateCollateral (b)Restricted Cash
2016 SecuritizationsApril 2022 - March 2024$520,566 $4,878,390 1.63% - 2.46%$710,108 $165,372 
2017 SecuritizationsJuly 2022 - September 20241,252,708 8,262,940 1.35% - 2.52%1,921,996 228,862 
2018 SecuritizationsMay 2022 - April 20263,297,883 12,039,840 2.41% - 3.42%4,853,413 417,727 
2019 Securitizations (e)May 2024 - February 20277,365,406 11,924,720 2.08% - 3.34%8,999,694 503,999 
2020 Securitizations (e)November 2024 - May 20286,372,892 7,291,465 0.76% - 2.73%7,798,089 421,219 
Public Securitizations (a)18,809,455 44,397,355 24,283,300 1,737,179 
2013 Private issuancesJuly 2024 - September 20241,106,654 1,537,025 1.28%2,189,789 751 
2018 Private issuancesJune 2022 - April 20243,329,885 4,536,002 2.42% - 3.53%5,028,329 8,294 
2019 Private issuanceSeptember 2022 - November 20262,839,895 3,524,536 2.45% - 3.90%3,743,384 10,441 
2020 Private issuanceApril 2024 - December 20271,278,200 1,500,000 1.29% - 2.68%1,533,617 4,902 
Privately issued amortizing notes (c) 8,554,634 11,097,563 12,495,119 24,388 
Total secured structured financings $27,364,089 $55,494,918 $36,778,419 $1,761,567 
(a)Securitizations executed under Rule 144A of the Securities Act are included within this balance.
(b)Secured structured financings may be collateralized by the Company’s collateral overages of other issuances.
(c)All privately issued amortizing notes issued in 2014 through 2017 were paid in full.
(d)Excludes securitizations which no longer have outstanding debt and excludes any incremental borrowings.
(e)As of the September 30, 2020, $7.2 million in secured structured financing is held by Santander.


32




 December 31, 2019
 Estimated Maturity Date(s) at IssuanceBalanceInitial Note Amounts IssuedInitial Weighted Average Interest RateCollateralRestricted Cash
2015 SecuritizationsAugust 2021 - January 2023$334,916 $3,258,300 1.67% - 2.29%$411,310 $94,382 
2016 SecuritizationsApril 2022- March 20241,144,421 7,462,790 1.63% - 2.80%1,560,133 248,784 
2017 SecuritizationsJuly 2022 - September 20242,364,177 9,296,570 1.35% - 2.52%3,423,303 292,601 
2018 SecuritizationsMay 2022 - April 20265,376,231 12,039,840 2.41% - 3.42%7,240,151 466,069 
2019 SecuritizationsMay 2024 - February 20279,588,028 11,924,720 2.08% - 3.34%12,062,261 504,810 
Public Securitizations 18,807,773 43,982,220 24,697,158 1,606,646 
2013 Private issuancesJuly 2024- September 20242,252,616 1,537,025 1.28%2,143,065 303 
2015 Private issuancesJuly 201919,029 500,000 1.05%67,007 113 
2016 Private issuancesSeptember 202430,943 300,000 2.35%90,352 
2018 Private issuanceJune 2022-April 20243,742,509 4,536,002 2.42% - 3.53%5,292,020 10,114 
2019 Private issuanceSeptember 2022 - November 20263,289,015 3,524,536 2.45% - 3.90%4,455,773 10,348 
Privately issued amortizing notes 9,334,112 10,397,563  12,048,217 20,878 
Total secured structured financings $28,141,885 $54,379,783  $36,745,375 $1,627,524 

Most of the Company’s secured structured financings are in the form of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company’s securitizations and private issuances are collateralized by vehicle retail installment contracts and loans or leases. As of September 30, 2020 and December 31, 2019, the Company had private issuances of notes backed by vehicle leases totaling $10.0 billion and $10.2 billion, respectively.

Unamortized debt issuance costs are amortized as interest expense over the terms of the related notes payable using the effective interest method and are classified as a discount to the related recorded debt balance. Amortized debt issuance costs were $10,265 and $11,591 for the for the three months ended September 30, 2020 and 2019, respectively, and $28,301 and $29,361 for the nine months ended September 30, 2020 and 2019, respectively. For securitizations, the term takes into consideration the expected execution of the contractual call option, if applicable. Amortization of premium or accretion of discount on notes payable is also included in interest expense using the effective interest method over the estimated remaining life of the notes. Total interest expense on secured structured financings for the three months ended September 30, 2020 and 2019 was $150,734 and $217,544, respectively, and for the nine months ended September 30, 2020 and 2019 was $522,266 and $671,770, respectively.

8.    Shareholders’ Equity
Share Repurchases
During the three months ended March 31, 2020, the Company purchased shares of its common stock through a modified Dutch Auction Tender Offer.
In June 2019, the Company announced that the Board had authorized purchases by the Company of up to $1.1 billion, excluding commissions, of its outstanding common stock effective from the third quarter of 2019 through the end of the second quarter of 2020. The Company extended the share repurchase program through the end of the third quarter of 2020. On July 31, 2020, the Company announced that SHUSA’s request for certain exceptions to the Federal Reserve Board’s interim policy (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 Board to authorize to continue its share repurchase program through the end of the third quarter of 2020. On August 10, 2020, the Company announced that it had substantially exhausted the amount of shares the Company was permitted to
33




repurchase under the previously disclosed exception to the Interim Policy and that the Company expected to repurchase an immaterial number of shares remaining under the exception approval.

On September 30, 2020, the Federal Reserve Board extended the Interim Policy through the fourth quarter of 2020. As a result, SC does not currently expect to declare or pay a dividend in the fourth quarter of 2020.

Please find below the details of the Company's tender offer and other share repurchase programs for the three and nine months ended September 30, 2020 and 2019:
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Tender offer (a):
Number of shares purchased17,514,707 
Average price per share$$$26.00 $
Cost of shares purchased (b)$$$455,382 $
Other share repurchases:
Number of shares purchased10,198,800 5,479,650 15,956,561 10,194,772 
Average price per share$21.91 $25.71 $20.00 $24.08 
Cost of shares purchased (b)$223,485 $140,909 $319,075 $245,496 
Total number of shares purchased10,198,800 5,479,650 33,471,268 10,194,772 
Average price per share$21.91 $25.71 $23.14 $24.08 
Total cost of shares purchased (b)$223,485 $140,909 $774,457 $245,496 
(a) During the three months ended March 31, 2020, the Company purchased shares of its common stock through a modified Dutch Auction Tender Offer.
(b) Cost of shares exclude commissions

Refer to Part II Item 2 - "Unregistered Sales of Equity Securities and Use of Proceeds" section for additional details on share repurchases.

Treasury Stock

The Company
had 57,067,635 and 23,596,367 shares of treasury stock outstanding, with a cost of $1,301,864 and $525,897 as of September 30, 2020 and December 31, 2019, respectively. NaN shares were withheld to cover income taxes related to stock issued in connection with employee incentive compensation plans for the three months ended September 30, 2020. The value of the treasury stock is included within the additional paid-in-capital.
Accumulated Other Comprehensive Income (Loss)
A summary of changes in accumulated other comprehensive income (loss), net of tax, for the three and nine months ended September 30, 2020 and 2019 is as follows:
Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Beginning balance, unrealized gains (losses)$(63,705)$(20,567)$(26,693)$33,515 
Other comprehensive income (loss) before reclassifications (gross)94 (5,018)(43,212)(38,696)
Amounts (gross) reclassified out of accumulated other comprehensive income (loss)6,729 (6,251)13,023 (26,655)
Ending balance, unrealized gains (losses)$(56,882)$(31,836)$(56,882)$(31,836)

Amounts (gross) reclassified out of accumulated other comprehensive income (loss) during the three and nine months ended September 30, 2020 and 2019 consist of the following:
34




Three Months EndedNine Months EndedIncome statement line item
ReclassificationSeptember 30, 2020September 30, 2019September 30, 2020September 30, 2019
Cash flow hedges$8,939 $(8,283)$17,260 $(35,224)Interest expense
Available-for-saleInvestment gain/loss
Tax benefit(2,210)2,032 (4,237)8,569 
Net of tax$6,729 $(6,251)$13,023 $(26,655)

Dividends
The Company paid a cash dividend of $0.22 per share in August 2020.
On September 30, 2020, the FRB extended the interim policy prohibiting share repurchases and limiting dividends to all CCAR banks to the average trailing net income. Based on SHUSA’s expected average trailing four quarters of net income, SC is prohibited from paying a dividend in the fourth quarter of 2020. Although SC’s standalone income is sufficient to declare and a pay a dividend, SC is consolidated into SHUSA’s capital plan and therefore is subject to the FRB’s interim policy that utilizes SHUSA’s average trailing income to determine the cap on common stock dividends. SC does not currently expect to declare or pay a dividend in the fourth quarter of 2020.

9.    Derivative Financial Instruments
The Company uses derivative financial instruments such as interest rate swaps, interest rate caps and the corresponding options written in order to offset the interest rate caps to manage the Company’s exposure to changing interest rates. The Company uses both derivatives that qualify for hedge accounting treatment and economic hedges.
The underlying notional amounts of these derivative financial instruments at September 30, 2020 and December 31, 2019, are as follows:
 September 30, 2020December 31, 2019
 NotionalAssetLiabilityNotionalAssetLiability
Interest rate swap agreements designated as cash flow hedges$2,750,000 $$(79,350)$2,650,000 $2,807 $(39,128)
Interest rate swap agreements not designated as hedges250,000 (14,393)1,281,000 (10,267)
Interest rate cap agreements11,117,779 5,999 9,379,720 62,552 
Options for interest rate cap agreements11,117,779 (5,999)9,379,720 (62,552)

The aggregate fair value of the interest rate swap agreements was included on the Company’s condensed consolidated balance sheets in other assets and other liabilities, as appropriate. The interest rate cap agreements were included in other assets and the related options in other liabilities on the Company’s condensed consolidated balance sheets. See Note 10 - “Fair Value of Financial Instruments” in the accompanying condensed financial statements for additional disclosure of fair value and balance sheet location of the Company’s derivative financial instruments.
The Company enters into legally enforceable master netting agreements that reduce risk by permitting netting of transactions, such as derivatives and collateral posting, with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in ISDA master agreements. The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting (ISDA) agreement. Collateral that is received or pledged for these transactions is disclosed within the “Gross Amounts Not Offset in the condensed Consolidated Balance Sheet” section of the tables below. Information on the offsetting of derivative assets and derivative liabilities due to the right of offset was as follows, as of September 30, 2020 and December 31, 2019:
35




Gross Amounts Not Offset in the
condensed Consolidated Balance Sheet
Assets Presented
in the condensed
Consolidated
Balance Sheet
Collateral
Received (a)
Net
Amount
September 30, 2020
Interest rate caps - Santander and affiliates$815 $$815 
Interest rate caps - third party5,184 (5,184)
Total derivatives subject to a master netting arrangement or similar arrangement5,999 (5,184)815 
Total derivatives not subject to a master netting arrangement or similar arrangement
Total derivative assets$5,999 $(5,184)$815 
Total financial assets$5,999 $(5,184)$815 
December 31, 2019
Interest rate swaps - third party (b)$2,807 $(540)$2,267 
Interest rate caps - Santander and affiliates25,330 (14,930)10,400 
Interest rate caps - third party37,222 (26,199)11,023 
Total derivatives subject to a master netting arrangement or similar arrangement65,359 (41,669)23,690 
Total derivatives not subject to a master netting arrangement or similar arrangement
Total derivative assets$65,359 $(41,669)$23,690 
Total financial assets$65,359 $(41,669)$23,690 
(a) Collateral received includes cash, cash equivalents, initial margin and other financial instruments. Cash collateral received is reported in Other liabilities in the consolidated balance sheet. Financial instruments that are pledged to the Company are not reflected in the accompanying balance sheet since the Company does not control or have the ability of rehypothecation of these instruments. In certain instances, the counter party is over-collateralized since the actual amount of collateral received exceeds the associated financial asset. As a result, the actual amount of collateral received that is reported may be greater than the amount shown in the table above.
(b) Includes derivative instruments originally transacted with Santander and affiliates and subsequently amended to reflect clearing with central clearing counterparties.

Gross Amounts Not Offset in the condensed Consolidated Balance Sheet
Liabilities Presented
in the condensed
Consolidated
Balance Sheet
Collateral
Pledged (a)
Net
Amount
September 30, 2020
Interest rate swaps - third party (b)$93,743 $(93,743)$
Interest rate caps - Santander and affiliates815 (815)
Interest rate caps - third party5,184 (4,193)991 
Total derivatives subject to a master netting arrangement or similar arrangement99,742 (98,751)991 
Total derivatives not subject to a master netting arrangement or similar arrangement
Total derivative liabilities$99,742 $(98,751)$991 
Total financial liabilities$99,742 $(98,751)$991 
December 31, 2019
Interest rate swaps - third party$49,395 $(49,395)$
Interest rate caps - Santander and affiliates25,330 (25,330)
Interest rate caps - third party37,222 (37,222)
Total derivatives subject to a master netting arrangement or similar arrangement111,947 (111,947)
Total derivatives not subject to a master netting arrangement or similar arrangement
Total derivative liabilities$111,947 $(111,947)$
Total financial liabilities$111,947 $(111,947)$
(a) Collateral pledged includes cash, cash equivalents, initial margin and other financial instruments. These balances are reported in Other assets in the consolidated balance sheet. In certain instances, the Company is over-collateralized since the actual amount of collateral pledged exceeds the associated financial liability. As a result, the actual amount of collateral pledged that is reported in Other assets may be greater than the amount shown in the table above.
(b) Includes derivative instruments originally transacted with Santander and affiliates and subsequently amended to reflect clearing with central clearing counterparties.

36




The gross gains (losses) reclassified from accumulated other comprehensive income (loss) to net income, are included as components of interest expense. The impacts on the consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2020 and 2019 were as follows:
Three Months Ended September 30, 2020
Recognized in EarningsGross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges$$256 $(8,939)
Derivative instruments not designated as hedges
Losses (Gains) recognized in interest expenses$567 

Three Months Ended September 30, 2019
Recognized in EarningsGross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges$$(6,485)$8,283 
Derivative instruments not designated as hedges
Losses (Gains) recognized in interest expenses$903 


Nine Months Ended September 30, 2020
Recognized in EarningsGross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges$$(59,405)$(17,260)
Derivative instruments not designated as hedges
Losses (Gains) recognized in interest expenses$10,774 

Nine Months Ended September 30, 2019
Recognized in EarningsGross Gains (Loss) Recognized in Accumulated Other Comprehensive Income (Loss)Gross amount Reclassified From Accumulated Other Comprehensive 
Income to Interest Expense
Interest rate swap agreements designated as cash flow hedges$$(52,292)$35,224 
Derivative instruments not designated as hedges
Losses (Gains) recognized in interest expenses$14,750 

The Company estimates that approximately $31,118 of unrealized gains included in accumulated other comprehensive income (loss) will be reclassified to interest expense within the next twelve months.

10.    Fair Value of Financial Instruments
Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels as follows:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
37




Level 2 inputs are those other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
Level 3 inputs are those that are unobservable 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.
Financial Instruments Measured At Fair Value On A Recurring Basis
The following tables present the Company’s assets and liabilities that are measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019, and the level within the fair value hierarchy:
Level 1Level 2Level 3Balance at September 30, 2020Level 1Level 2Level 3Balance at December 31, 2019
Other assets:
Trading interest rate caps (a)$$5,999 $$5,999 $$62,552 $$62,552 
Cash flow hedging interest rate swaps (a)$2,807 $2,807 
Available-for-sale-debt securities (b)95,666 $95,666 92,246 $92,246 
Other liabilities:
Trading options for interest rate caps (a)5,999 $5,999 62,552 $62,552 
Cash flow hedging interest rate swaps (a)79,350 $79,350 39,128 $39,128 
Trading interest rate swaps (a)14,393 $14,393 10,267 $10,267 
Retail installment contracts (c)(d)8,248 $8,248 17,634 4,719 $22,353 

(a)The valuation is determined using widely accepted valuation techniques including a DCF on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivative, including the period to maturity, and uses observable market-based inputs. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement of its derivatives. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings and guarantees. The Company utilizes the exception in ASC 820-10-35-18D (commonly referred to as the “portfolio exception”) with respect to measuring counterparty credit risk for instruments (Note 9).
(b)The Company's AFS debt securities includes U.S. Treasury securities that are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers and its securities are therefore, classified as Level 2.
(c)For certain retail installment contracts reported in finance receivables held for investment, net, the Company has elected the fair value option. The fair values of the retail installment contracts are estimated using a DCF model are classified as Level 3. As of December 31, 2019, Company had used the most recent purchase price as the fair value for certain loans and hence classified those retail installment contracts as Level 2. Changes in the fair value are recorded in investment gains (losses), net in the condensed consolidated statement of income.
(d)The aggregate fair value of retail installment contracts in non-accrual status, as of September 30, 2020 and December 31, 2019, is $2,031 and $9,511, respectively.
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the changes in retail installment contracts held for investment balances classified as Level 3 balances for the three and nine months ended September 30, 2020 and 2019:
38




Three Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Balance — beginning of year$10,585 $8,832 $4,719 $13,509 
Additions / issuances2,512 2,079 
Transfer from level 2 (a)17,634 
Net collection activities(2,410)(3,176)(16,854)(10,242)
Gains recognized in earnings73 632 237 942 
Balance — end of year$8,248 $6,288 $8,248 $6,288 
(a) The Company transferred retail installment contracts from Level 2 to Level 3 during the three months ended March 31, 2020 because the fair value for these assets could not be determined by using readily observable inputs at March 31, 2020. There were no other material transfers in or out of Level 3 during the three and nine months ended September 30, 2020 and three and nine months ended September 30, 2019.
Financial Instruments Measured At Fair Value On A Nonrecurring Basis
The following table presents the Company’s assets and liabilities that are measured at fair value on a nonrecurring basis at September 30, 2020 and December 31, 2019, respectively:
Nine Months Ended September 30, 2020Year Ended December 31, 2019
TotalLower of cost or fair value expenseTotalLower of cost or fair value expense
Other assets — vehicles (a)$370,678 $$341,465 $
Personal loans held for sale (b)763,292 241,198 1,007,105 408,700 
Auto loans impaired due to bankruptcy (c)188,226 200,504 9,106 
(a) The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market levels of used car prices.
(b) The estimated fair value for personal loans held for sale is calculated based on the lower of market participant view and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions. The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.
(c) For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral, less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices. No additional lower of cost or fair value expense was recorded for the nine months ended September 30, 2020.

Quantitative Information about Level 3 Fair Value Measurements
The following table presents quantitative information about the significant unobservable inputs for assets and liabilities measured at fair value on a recurring and nonrecurring basis at September 30, 2020 and December 31, 2019, respectively:
Financial InstrumentsFair Value at September 30, 2020Valuation TechniqueUnobservable InputsRange (weighted average) (a)
Financial Assets:
Retail installment contracts held for investment$8,248 Discounted Cash FlowDiscount Rate8%-14% (9%)
Default Rate4%-20% (5%)
Prepayment Rate15%-25% (15%)
Loss Severity Rate50%-60% (56%)
Personal loans held for sale (b)$763,292 Lower of Market or Income ApproachMarket Approach
Market Participant View60%-70%
Income Approach
Discount Rate20%-30%
Default Rate40%-50%
Net Principal & Interest Payment Rate65%-75%
Loss Severity Rate90%-95%
39




(a) Weighted average was developed by weighting the associated relative unpaid principal balances.
(b) The estimated fair value for personal loans held for sale (Bluestem) is calculated based on the lower of market participant view, a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, and also considers the possible outcomes of the Bluestem bankruptcy process.
                        
Financial InstrumentsFair Value at December 31, 2019Valuation TechniqueUnobservable InputsRange
Financial Assets:
Retail installment contracts held for investment$4,719 Discounted Cash FlowDiscount Rate8%-10%
Default Rate15%-20%
Prepayment Rate6%-8%
Loss Severity Rate50%-60%
Personal loans held for sale$1,007,105 Lower of Market or Income ApproachMarket Approach
Market Participant View70%-80%
Income Approach
Discount Rate15%-25%
Default Rate30%-40%
Net Principal & Interest Payment Rate70%-85%
Loss Severity Rate90%-95%

Financial Instruments Disclosed, But Not Carried, At Fair Value
The following tables present the carrying value and estimated fair value of the Company’s financial assets and liabilities disclosed, but not carried, at fair value at September 30, 2020 and December 31, 2019, and the level within the fair value hierarchy:

 September 30, 2020December 31, 2019
Carrying
Value
Estimated
Fair Value
Level 1Level 2Level 3Carrying
Value
Estimated
Fair Value
Level 1Level 2Level 3
Assets:
Cash and cash equivalents (a)$105,616 $105,616 $105,616 $$$81,848 $81,848 $81,848 $$
Finance receivables held for investment, net (b)27,253,256 29,354,905 29,354,905 27,544,162 28,133,427 1,009,358 27,124,069 
Restricted cash (a)2,267,154 2,267,154 2,267,154 2,079,239 2,079,239 2,079,239 
Investments in debt securities held to maturity (c)50,381 50,942 50,942 
Total$29,676,407 $31,778,617 $2,372,770 $50,942 $29,354,905 $29,705,249 $30,294,514 $2,161,087 $1,009,358 $27,124,069 
Liabilities:
Notes Payable:
Facilities with third parties (d)$2,803,684 $2,803,684 $$$2,803,684 $5,399,931 $5,399,931 $$$5,399,931 
Secured structured financings (e)27,364,089 27,883,027 18,638,472 9,244,555 28,141,885 28,360,948 18,646,326 9,714,622 
Facilities with Santander and related subsidiaries (f)11,201,574 11,539,861 11,539,861 5,652,325 5,724,675 5,724,675 
Total$41,369,347 $42,226,572 $$18,638,472 $23,588,100 $39,194,141 $39,485,554 $$18,646,326 $20,839,228 

40





(a)Cash and cash equivalents and restricted cash — The carrying amount of cash and cash equivalents, including restricted cash, is at an approximated fair value as the instruments mature within 90 days or less and bear interest at market rates.
(b)Finance receivables held for investment, net — Finance receivables held for investment, net are carried at amortized cost, net of an allowance. These receivables exclude retail installment contracts that are measured at fair value on a recurring and nonrecurring basis. The estimated fair value for the underlying financial instruments is determined as follows:
Retail installment contracts held for investment and purchased receivables - credit deteriorated — As of December 31, 2019, the Company used the most recent purchase price as the fair value for certain loans and therefore, classified those retail installment contracts as Level 2. The estimated fair value of all finance receivables at September 30, 2020 is estimated using a DCF model, and such receivables are classified as Level 3.
Finance lease receivables — Finance lease receivables are carried at gross investments, net of unearned income and allowance for lease losses. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
Receivables from dealers and personal loans held for investment — Receivables from dealers and personal loans held for investment are carried at amortized cost, net of credit loss allowance. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements.
(c)Investments in debt securities held to maturity - Investments in debt securities held to maturity are recorded at amortized cost and are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.
(d)Notes payable — facilities with third parties — The carrying amount of notes payable related to revolving credit facilities is estimated to approximate fair value. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements as the facilities are subject to short-term floating interest rates that approximate rates available to the Company.
(e)Notes payable — secured structured financings — The estimated fair value of notes payable related to secured structured financings is calculated based on market observable prices and spreads for the Company’s publicly traded debt and market observed prices of similar notes issued by the Company, or recent market transactions involving similar debt with similar credit risks, which are considered Level 2 inputs. The estimated fair value of notes payable related to privately issued amortizing notes is calculated based on a combination of credit enhancement review, discounted cash flow analysis and review of market observable spreads for similar liabilities. In conducting this analysis, the Company uses significant unobservable inputs on key assumptions, which are considered Level 3 inputs.
(f)Notes payable — facilities with Santander and related subsidiaries — The carrying amount of floating rate notes payable to a related party is estimated to approximate fair value as the facilities are subject to short-term floating interest rates that approximate rates available to the Company. The fair value premium/discount of the fixed rate promissory notes are derived from changes in the Company’s unsecured cost of funds since the time of issuance and weighted average life of these notes.

11.    Investment Losses, Net
When the Company sells retail installment contracts, personal loans or leases to unrelated third parties or to VIEs and determines that such sale meets the applicable criteria for sale accounting, the Company recognizes a gain or loss for the difference between the cash proceeds and carrying value of the assets sold. The gain or loss is recorded in investment gains (losses), net. Lower of cost or market adjustments on the amortized cost of finance receivables held for sale are also recorded in investment gains (losses), net.

41




Investment gains (losses), net was comprised of the following for the three and nine months ended September 30, 2020 and 2019:
 Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Gain (loss) on sale of loans and leases$(13,669)$$(40,553)$
Lower of cost or market adjustments(56,598)(87,454)(241,198)(239,166)
Other gains, (losses and impairments), net1,278 1,057 1,754 885 
$(68,989)$(86,397)$(279,997)$(238,281)

The lower of cost or market adjustments for the three and nine months ended September 30, 2020 and 2019 included $81,247, $278,144, $102,478 and $308,899, respectively, in customer default activity, and favorable adjustments of $24,649, $36,946, $15,023 and $69,732, respectively, primarily related to net changes in the unpaid principal balance on the personal lending portfolio, all of which is classified as held for sale.


12.    Income Taxes
The Company recorded income tax expense of $172,476 (26.0% effective tax rate) and $82,156 (26.1% effective tax rate) during the three months ended September 30, 2020 and 2019, respectively. The Company recorded income tax of $137,161 (26.0% effective tax rate) and $283,684 (25.1% effective tax rate) during the nine months ended September 30, 2020 and 2019, respectively.
The Company is a party to a tax sharing agreement requiring that the unitary state tax liability among affiliates included in unitary state tax returns be allocated using the hypothetical separate company tax calculation method. The Company had a net receivable from affiliates under the tax sharing agreement of $1,003 and $11,010 at September 30, 2020 and December 31, 2019, respectively, which was included in related party taxes receivable in the condensed consolidated balance sheet.

The Company provides U.S. income taxes on earnings of foreign subsidiaries unless the subsidiaries’ earnings are considered indefinitely reinvested outside of the United States. As of September 30, 2020 and December 31, 2019, the Company has 0 earnings that are considered indefinitely reinvested.

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

13.    Computation of Basic and Diluted Earnings per Common Share

Earnings per common share (“EPS”) is computed using the two-class method required for participating securities.

The calculation of diluted EPS excludes the effect of exercise or settlement that would be anti-dilutive for employee stock options of 52,114, 52,114, 0 and 24,507 for the three and nine months ended September 30, 2020 and 2019, respectively.

The following table represents EPS numbers for the three and nine months ended September 30, 2020 and 2019:

42




Three Months Ended 
 
September 30,
Nine Months Ended 
 
September 30,
 2020201920202019
Earnings per common share 
Net income (loss)$490,115 $232,538 $389,450 $848,308 
Weighted average number of common shares outstanding before restricted participating shares (in thousands)310,150 345,470 321,276 349,342 
Weighted average number of common shares outstanding (in thousands)310,150 345,470 321,276 349,342 
Earnings per common share$1.58 $0.67 $1.21 $2.43 
Earnings per common share - assuming dilution
Net income (loss)$490,115 $232,538 $389,450 $848,308 
Weighted average number of common shares outstanding (in thousands)310,150 345,470 321,276 349,342 
Effect of employee stock-based awards (in thousands)157 486 216 514 
Weighted average number of common shares outstanding - assuming dilution (in thousands)310,307 345,956 321,492 349,856 
Earnings per common share - assuming dilution$1.58 $0.67 $1.21 $2.42 


14.    Commitments and Contingencies

The following table summarizes liabilities recorded for commitments and contingencies as of September 30, 2020 and December 31, 2019, all of which are included in accounts payable and accrued expenses in the accompanying condensed consolidated balance sheets:
Agreement or Legal MatterCommitment or ContingencySeptember 30, 2020December 31, 2019
Chrysler AgreementRevenue-sharing and gain/(loss), net-sharing payments$50,809 $12,132 
Agreement with Bank of AmericaServicer performance fee1,508 2,503 
Agreement with CBPLoss-sharing payments392 1,429 
Other ContingenciesConsumer arrangements25,099 1,991 
Legal and regulatory proceedingsAggregate legal and regulatory liabilities45,047 137,000 
Total commitments and contingencies$122,855 $155,055 

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

Chrysler Agreement

Under terms of the Chrysler Agreement, the Company must make revenue sharing payments to FCA and also must share with FCA when residual gains/(losses) on leased vehicles exceed a specified threshold. The Company had accrued $50,809 and $12,132 at September 30, 2020 and December 31, 2019, respectively, related to these obligations. The Chrysler Agreement also requires that the Company maintain at least $5.0 billion in funding available for Floorplan Loans and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to the Company.

Agreement with Bank of America
Until January 2017, the Company had a flow agreement with Bank of America whereby the Company was committed to selling up to $300,000 of eligible loans to the bank each month. The Company retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale. The Company had accrued $1,508 and $2,503 at September 30, 2020 and December 31, 2019, respectively, related to this obligation.
Agreement with CBP
43




Until May 2017, the Company sold loans to CBP under terms of a flow agreement and predecessor sale agreements. The Company retained servicing on the sold loans and owes CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. The Company had accrued $392 and $1,429 at September 30, 2020 and December 31, 2019, respectively, related to the loss-sharing obligation.
Other Contingencies
The Company is or may be subject to potential liability under various other contingent exposures. The Company had accrued $25,099 and $1,991 at September 30, 2020 and December 31, 2019, respectively, for other miscellaneous contingencies.
Legal and regulatory proceedings

Periodically, the Company, including its subsidiaries, is and in the future expects to be party to, or otherwise involved in, various claims, disputes, lawsuits, investigations, regulatory matters and other legal matters and proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such claims, disputes, lawsuit, investigations, regulatory matter or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter, if any. Accordingly, except as provided below, the company is unable to reasonably estimate a range of its potential exposure, if any, to these claims, disputes, lawsuits, investigations, regulatory matters, and other legal proceedings at this time. Further, it is reasonably possible that actual outcomes or losses may differ materially from the Company’s current assessments and estimates and any adverse resolution of any of these matters against it could materially and adversely affect the Company’s business, financial position, liquidity, and results of operation.

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

As of September 30, 2020 and December 31, 2019, the Company accrued aggregate legal and regulatory liabilities of $45 million and $137 million, respectively. Further, the Company estimates the aggregate range of reasonably possible losses for legal and regulatory proceedings, in excess of reserves established, is up to $11.5 million as of September 30, 2020. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject.

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: The Company is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 26, 2014, was brought against the Company, certain of its current and former directors and executive officers and certain institutions that served as underwriters in the Company’s IPO on behalf of a class consisting of those who purchased or otherwise acquired our securities between January 23, 2014 and June 12, 2014. The complaint alleges, among other things, that our IPO registration statement and prospectus and certain subsequent public disclosures violated federal securities laws by containing misleading statements concerning the Company’s ability to pay dividends and the adequacy of the Company’s compliance systems and oversight. In December 2015, the Company and the individual defendants moved to dismiss the lawsuit, which was denied. In December 2016, the plaintiffs moved to certify the proposed classes. In July 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017). In October 2018, the court vacated the order
44




staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification. On July 28, 2020, the Company executed a Stipulation of Settlement with the plaintiffs in the Deka Lawsuit that fully resolves all of the plaintiffs’ claims for a cash payment of $47 million. On August 13, 2020, the Court entered an Order Preliminarily Approving the Settlement and Providing For Notice, setting the Final Settlement Hearing for January 12, 2021.

In Re Santander Consumer USA Holdings, Inc. Derivative Litigation: In October 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614-VCG (the "Feldman Lawsuit"). The Feldman Lawsuit names as defendants certain current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing the Company’s nonprime vehicle lending practices, resulting in harm to the Company. The complaint seeks unspecified damages and equitable relief. In December 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit. In September 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. No. 12775-VCG (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of the Board, and names the Company as a nominal defendant. The complaint alleges, among other things, that the director defendants breached their fiduciary duties in connection with the Company’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. In April 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit. In March 2018, the Feldman Lawsuit and Jackie888 Lawsuit were consolidated under the caption In Re Santander Consumer USA Holdings, Inc. Derivative Litigation, Consol. C.A. No. 11614-VCG. In January 2020, the Company executed a Stipulation and Agreement of Settlement, Compromise and Release with the plaintiffs in the consolidated action that, subject to Court approval, fully resolves all of the plaintiffs’ claims in the Feldman Lawsuit and the Jackie888 Lawsuit. The Stipulation provides for the settlement of the consolidated action and, in return, the Company has enacted or will enact and implement certain corporate governance reforms and enhancements. The Settlement Hearing at which the Court would consider the settlement was scheduled for May 27, 2020, but a shareholder filed its notice of intent to object to the settlement and the parties agreed to postpone the Settlement Hearing to a later date.

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

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

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

The Company received a civil subpoena from the DOJ in 2014, under FIRREA, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. The Company has responded to these requests within the deadlines specified in the subpoena and has otherwise cooperated with the DOJ with respect to this matter.
In October 2014, May 2015, July 2015 and February 2017, the Company received subpoenas and/or Civil Investigative Demands (CIDs) from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state’s consumer protection statutes. On May 19, 2020, all of the Consortium members and the Company announced a settlement of the investigation requiring the Company to: (1) pay a total of $65 million to the states for consumer remediation; (2) pay $5 million to the states for investigation costs; (3) pay up to $2 million in settlement administration costs; (4) provide $45 million in prospective debt forgiveness; (5) provide deficiency waivers for a defined class of SC customers; and (6) implement certain enhancements to its loan underwriting process.

45




In August 2017, the Company received a CID from the CFPB. The stated purpose of the CID is to determine whether the Company has complied with the Fair Credit Reporting Act and related regulations. The Company has responded to these requests within the deadlines specified in the CIDs and has otherwise cooperated with the CFPB with respect to this matter. In February 2020, the Company received a communication from the CFPB inviting the Company to respond to the CFPB’s identified issues in the form of a Notice of Opportunity to Respond and Advise (“NORA”) during which the CFPB identified potential claims it might bring against the Company.

2017 Written Agreement with the Federal Reserve: In March 2017, the Company and SHUSA entered into a written agreement with the FRBB. Under the terms of the agreement, the Company is required to enhance its compliance risk management program, Board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of the Company’s management and operations.

Mississippi Attorney General Lawsuit: In January 2017, the Attorney General of Mississippi filed a lawsuit against the Company in the Chancery Court of the First Judicial District of Hinds County, Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that the Company engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the MCPA) and seeks unspecified civil penalties, equitable relief and other relief. In March 2017, the Company filed motions to dismiss the lawsuit and the parties are proceeding with discovery.

Agreements
Bluestem

The Company is party to agreements with Bluestem whereby the Company is committed to purchase certain new advances on personal revolving financings receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewable through April 2022 at Bluestem’s option. As of September 30, 2020 and December 31, 2019, the total unused credit available to customers was $2.8 billion and $3.0 billion, respectively. In 2020, the Company purchased $0.8 billion of receivables, out of the $3 billion unused credit available to customers as of December 31, 2019. In 2019, the Company purchased $1.2 billion of receivables, out of the $3.1 billion unused credit available to customers as of December 31, 2018. In addition, the Company purchased $151,163 and $137,821 of receivables related to newly opened customer accounts during the nine months ended September 30, 2020 and 2019 respectively.
Each customer account generated under the agreements, generally, is approved with a credit limit higher than the amount of the initial purchase with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of September 30, 2020 and December 31, 2019, the Company was obligated to purchase $13,281 and $10,628, respectively, in receivables that had been originated by Bluestem but not yet purchased by the Company. The Company also is required to make a profit-sharing payment to Bluestem each month if performance exceeds a specified return threshold. The agreement, among other provisions, gives Bluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and, provides that if the repurchase right is exercised, Bluestem has the right to retain up to 20% of new accounts subsequently originated.

On March 9, 2020, Bluestem and certain of its subsidiaries and affiliates filed Chapter 11 bankruptcy in the United States District Court for the District of Delaware. On August 28, 2020, BLST Operating Company LLC, purchased the Bluestem assets from bankruptcy and assumed Bluestem’s obligations under the parties’ agreements.

Others

Under terms of an application transfer agreement with Nissan, the Company has the first opportunity to review for its own portfolio any credit applications turned down by the Nissan’s captive finance company. The agreement does not require the Company to originate any loans, but for each loan originated the Company will pay Nissan a referral fee.
In connection with the sale of retail installment contracts through securitizations and other sales, the Company has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require the Company to repurchase loans previously sold to on- or off-balance
46




sheet Trusts or other third parties. As of September 30, 2020, there were 0 loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for the Company’s asset-backed securities or other sales. In the opinion of management, the potential exposure of other recourse obligations related to the Company’s retail installment contract sales agreements is not expected to have a material adverse effect on the Company’s business, financial position, results of operations, or cash flows.
Santander has provided guarantees on the covenants, agreements, and obligations of the Company under the governing documents of its warehouse lines and privately issued amortizing notes. These guarantees are limited to the obligations of the Company as servicer.
In November 2015, the Company executed a forward flow asset sale agreement with a third party under terms of which the Company committed to sell $350,000 in charged off loan receivables in bankruptcy status on a quarterly basis. However, any sale more than $275,000 is subject to a market price check. The remaining aggregate commitment as of September 30, 2020 and December 31, 2019, not subject to market price check was $27,702 and $39,787, respectively.

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

    
15.    Related-Party Transactions
Related-party transactions not otherwise disclosed in these footnotes to the condensed consolidated financial statements include the following:
Credit Facilities

Interest expense, including unused fees, for lines of credit from SHUSA (Note 7) totaled $79,854 and $54,963 for the three months ended September 30, 2020 and 2019, respectively, and $213,224 and $145,840 for the nine months ended September 30, 2020 and 2019, respectively. Accrued interest for lines of credit from SHUSA at September 30, 2020 and December 31, 2019 was $42,718 and $29,326, respectively.

Interest expense, including unused fees, for lines of credit from Santander (Note 7) totaled $7,997 and 0 for the three months ended September 30, 2020 and 2019 respectively, and $8,700 and 0 for the nine months ended September 30, 2020 and 2019 respectively. Accrued interest for lines of credit from Santander at September 30, 2020 and December 31, 2019 was $1,512 and 0, respectively.
In 2015, under an agreement with Santander, the Company agreed to begin incurring a fee of 12.5 basis points (per annum) on certain warehouse lines, as they renew, for which Santander provides a guarantee of the Company’s servicing obligations. The Company recognized guarantee fee expense of 0 for the three months ended September 30, 2020 and 2019, and 0 and $384 for the nine months ended September 30, 2020 and 2019, respectively. As of September 30, 2020 and December 31, 2019, the Company had 0 of related fees payable to Santander.

Derivatives
The Company has derivative financial instruments with Santander and affiliates with outstanding notional amounts of
$3,264,580 and $1,874,100 as of September 30, 2020 and December 31, 2019, respectively (Note 9). The Company had a collateral overage on derivative liabilities with Santander and affiliates of $554 and $2,220 as of September 30, 2020 and December 31, 2019, respectively.

Retail Installment Contracts and RV Marine
The Company also has agreements with SBNA to service auto retail installment contracts and recreational and marine vehicle portfolios.
Servicing fee income recognized under these agreements totaled $472 and $377 for the three months ended September 30, 2020 and 2019, respectively, and $1,566 and $1,154 for the nine months ended September 30, 2020 and 2019, respectively. Other information on the serviced auto loan and retail installment contract portfolios for SBNA as of September 30, 2020 and December 31, 2019 is as follows:
47




 September 30, 2020December 31, 2019
Total serviced portfolio$209,453 $277,669 
Cash collections due to owner17,793 14,908 
Servicing fees receivable1,938 738 
Dealer Lending
Under the Company’s agreement with SBNA, the Company is required to permit SBNA a first right to review and assess CCAP dealer lending opportunities, and SBNA is required to pay the Company an origination fee for each loan originated under the agreement. The agreement also transferred the servicing of all CCAP receivables from dealers, including receivables held by SBNA to the Company and from the Company to SBNA. The Company may provide advance funding for dealer loans originated by SBNA, which is reimbursed to the Company by SBNA. The Company had 0 outstanding receivable from SBNA as of September 30, 2020 or December 31, 2019 for such advances.
Other information related to the above transactions with SBNA is as follows:
Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Origination and renewal fee income from SBNA$451 $1,291 $2,473 $4,218 
Servicing fees expenses charged by SBNA(9)52 63 113 

Under the agreement with SBNA, the Company may originate retail consumer loans in connection with sales of vehicles that are collateral held against floorplan loans by SBNA. Upon origination, the Company remits payment to SBNA, which settles the transaction with the dealer. The Company owed SBNA $9,754 and $5,384 related to such originations as of September 30, 2020 and December 31, 2019, respectively.
The Company received a $9,000 referral fee in connection with a sourcing and servicing arrangement and is amortizing the fee into income over the ten-year term of the agreement through July 1, 2022, the termination date of the agreement. As of September 30, 2020 and December 31, 2019, the unamortized fee balance was $2,475 and $3,150, respectively. The Company recognized $225 and $675 of income related to the referral fee for the three and nine months ended September 30, 2020 and 2019, respectively.
Origination Support Services

Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail loans, primarily from FCA dealers. In addition, the Company agreed to perform the servicing for any loans originated on SBNA’s behalf. For the three and nine months ended September 30, 2020, the Company facilitated the purchase of $1.1 billion and $3.9 billion of retail installment contacts, respectively. For the three and nine months ended September 30, 2019, the Company facilitated the purchase of $2.1 billion and $5.0 billion of retail installment contacts, respectively. The Company recognized origination fee and servicing fee income of $7,902 and $29,457 for the three and nine months ended September 30, 2020, respectively, of which $4,089 is receivable as of September 30, 2020. The Company recognized origination fee and servicing fee income of $19,892 and $45,716 for the three and nine months ended September 30, 2019, respectively, of which $8,114 is receivable as of September 30, 2019.
Securitizations
The Company had a Master Securities Purchase Agreement (MSPA) with Santander, whereby the Company had the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term that ended in December 2018. The Company provides servicing on all loans originated under this arrangement.
Other information relating to SPAIN securitization platform for the three and nine months ended September 30, 2020 and 2019 is as follows:
48




Three Months EndedNine Months Ended
 September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Servicing fee income$4,488 $4,743 $15,680 $20,885 
Servicing fee receivable, as of September 30, 2020 and December 31, 2019, was $1,247 and $1,869, respectively. The Company had $6,879 and $8,180 of collections due to Santander, as of September 30, 2020 and December 31, 2019, respectively.

Santander Investment Securities Inc. (SIS), an affiliated entity, serves as joint book runner and co-manager on certain of the Company’s securitizations. Amounts paid to SIS for the three months ended September 30, 2020 and 2019, totaled $103 and $929, respectively, and totaled $1,625 and $1,894 for the nine months ended September 30, 2020 and 2019, respectively, and are included in debt issuance costs in the accompanying condensed consolidated financial statements.

Other employee compensation

Sandra Broderick is Head of Operations and Executive Vice President of the Company, and Head of Operations and Senior Executive Vice President of SHUSA. During the nine months ended September 30, 2020, SHUSA owed the Company $163 for the share of compensation expense based on time allocation between her services to the Company and SHUSA.

In addition, certain employees of the Company and SHUSA, provide services to each other. For the nine months ended September 30, 2020, the Company owed SHUSA approximately $9,221 and SHUSA owed the Company approximately $4,198 for such service.

Other related-party transactions

The Company subleases approximately 13,000 square feet of its corporate office space to SBNA. For the three months ended September 30, 2020 and 2019, the Company recorded $44 in sublease revenue on this property. For the nine months ended September 30, 2020 and 2019, the company recorded $132, in sublease revenue on this property.

The Company has certain deposit and checking accounts with SBNA, an affiliated entity. As of September 30, 2020 and December 31, 2019, the Company had a balance of $26,920 and $33,683, respectively, in these accounts.

The Company and SBNA have a Credit Card Agreement (Card Agreement) whereby SBNA provides credit card services for travel and related business expenses for vendor payments. This service is at zero cost but generates rebates based on purchases made. As of September 30, 2020, the activities associated with the program were insignificant.

The Company pays SBNA a market rate-based fee expense for payments made at SBNA retail branch locations for accounts originated or serviced by the Company and the costs associated with modifying the Advanced Teller platform to the payments. The Company incurred expenses of $39 and $49 for these services for the three months ended September 30, 2020 and 2019, respectively, and $140 and $182 for the nine months ended September 30, 2020 and 2019, respectively.

The Company has contracted Aquanima, a Santander affiliate, to provide procurement services. Expenses incurred totaled $785 and $765 for the three months ended September 30, 2020 and 2019, respectively, and $2,079 and $1,780 for the nine months ended September 30, 2020 and 2019, respectively.

Santander Global Tech (formerly known as Produban Servicios Informaticos Generales S.L.), a Santander affiliate, provides professional services, telecommunications, and internal and/or external applications to the Company. Expenses incurred, which are included as a component of other operating costs in the accompanying condensed consolidated statements of income, totaled $279 and $71 for the three months ended September 30, 2020 and 2019, respectively, and $350 and $300 for the nine months ended September 30, 2020 and 2019, respectively.

49




The Company partners with SHUSA to place Cyber Liability Insurance in which participating worldwide Santander entities share €270 million aggregate limits. The Company repays SHUSA for the Company’s equitably allocated portion of insurance premiums and fees. Expenses incurred totaled $97 and $108 for the three months ended September 30, 2020 and 2019, respectively, and totaled $313 and $324 for the nine months ended September 30, 2020 and 2019, respectively. In addition, the Company partners with SHUSA for various other insurance products. Expenses incurred totaled $416 and $183 for the three months ended September 30, 2020 and 2019, respectively, and $781 and $571 for the nine months ended September 30, 2020 and 2019, respectively.

16.    Employee Benefit Plans
The Company has granted stock options to certain executives, other employees, and independent directors under the Company’s 2011 Management Equity Plan (the MEP), which enabled the Company to grant stock option awards up to a total of approximately 29 million common shares (net of shares canceled and forfeited). The MEP expired in January 2015, and the Company will not grant any further awards under the MEP. The Company has granted stock options, restricted stock awards and restricted stock units (RSUs) under the Omnibus Incentive Plan (the Plan), which was established in 2013 and enables the Company to grant awards of cash and of non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, RSUs, and other awards that may be settled in or based upon the value of the Company’s common stock up to a total of 5,192,641 shares of common stock. The Plan was amended and restated as of June 16, 2016.
Stock options granted under the MEP and the Plan have an exercise price based on the estimated fair market value of the Company’s common stock on the grant date. The stock options expire ten years after grant date and include both time vesting options and performance vesting options. The fair value of the stock options is amortized into expense over the vesting period as time and performance vesting conditions are met.
In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the Capital Requirements Directive IV prudential rules, which require a portion of such officers’ and employees’ variable compensation to be paid in the form of equity, the Company periodically grants RSUs. Under the Plan, a portion of these RSUs vest immediately upon grant, and a portion vest annually over the following three or five years. Awards granted to certain participants may also be subject to the achievement of certain performance conditions. After the shares subject to the RSUs vest and are settled, they are subject to transfer and sale restrictions for one year. In addition, the Company grants RSUs to certain officers and employees as part of variable compensation, and these RSUs typically vest over three years. The Company also has granted certain independent directors RSUs that vest upon the earlier of the first anniversary of grant date or the first annual stockholder meeting following the grant date. RSUs are valued based upon the fair market value on the date of the grant.
Compensation expense related to the 583,890 shares of restricted stock that the Company has issued to certain executives is recognized over a five-year vesting period, with 0 recorded for the three and nine months ended September 30, 2020 and 2019. The Company recognized $6,161 and $7,973 related to stock options and restricted stock units within compensation expense for the nine months ended September 30, 2020 and 2019, respectively. In addition, the Company recognizes forfeitures of awards as they occur.
A summary of the Company’s stock options and related activity as of and for the nine months ended September 30, 2020 is as follows:
50




SharesWeighted
Average
Exercise
Price
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Options outstanding at January 1, 2020273,737 $13.09 3.1$2,867 
Granted— — 
Exercised(67,241)9.97 — 868 
Expired(15,440)25.89 — — 
Forfeited(13,460)17.25 — — 
Other (a)— — 
Options outstanding at September 30, 2020177,596 12.84 2.21,126 
Options exercisable at September 30, 2020177,596 $12.84 2.2$1,126 
Options expected to vest at September 30, 2020$— $
(a) Represents stock options that were reinstated.
A summary of the Company’s Restricted Stock Units and performance stock units and related activity as of and for the nine months ended September 30, 2020 is as follows:
SharesWeighted
Average
Grant Date Fair Value
Weighted
Average
Remaining
Contractual
Term (Years)
Aggregate
Intrinsic
Value
Outstanding as of January 1, 2020498,299 $17.41 0.9$11,645 
Granted268,438 24.02 — — 
Vested(365,740)19.64 — 8,557 
Forfeited/canceled(12,953)17.97 — — 
Non-vested at September 30, 2020388,044 $19.98 1.0$7,059 


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q should be read in conjunction with the 2019 Annual Report on Form 10-K and in conjunction with the condensed consolidated financial statements and the accompanying notes included elsewhere in this report. Additional information, not part of this filing, about the Company is available on the Company’s website at www.santanderconsumerusa.com. The Company’s recent Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, proxy statements, as well as other filings with the SEC, are available free of charge through the Company’s website by clicking on the “Investors” page and selecting “SEC Filings.” The Company’s filings with the SEC and other information may also be accessed at the SEC’s website at www.sec.gov.

Background and Overview

Santander Consumer USA Holdings Inc. was formed in 2013 as a corporation in the state of Delaware and is the holding company for Santander Consumer USA Inc., a full-service, technology-driven consumer finance company focused on vehicle finance and third-party servicing. The Company is majority-owned (as of September 30, 2020, approximately 80.2%) by SHUSA, a wholly-owned subsidiary of Santander.
The Company is managed through a single reporting segment, Consumer Finance, which includes vehicle financial products and services, including retail installment contracts, vehicle leases, and Dealer Loans, as well as financial products and services related to recreational and marine vehicles, and other consumer finance products.
CCAP continues to be a focal point of the Company’s strategy. In 2019, the Company entered into an Amendment to the Chrysler Agreement with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions. The Amendment also established an operating framework that was
51




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 2020 was 33%, a decrease from 36% for the same period in 2019.

The Company has dedicated financing facilities in place for its CCAP business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the CCAP program. During the nine months ended September 30, 2020, the Company originated $11.1 billion in CCAP loans which represented 61% of total retail installment contract originations (unpaid principal balance), as well as $4.9 billion in CCAP leases. Additionally, substantially all of the leases originated by the Company during the nine months ended September 30, 2020 were under the Chrysler Agreement.
Economic and Business Environment

Refer to Part I, Item 2. "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Recent Developments and Other Factors Affecting The Company’s Results of Operations" for additional details on the impact of the COVID-19 outbreak on Company's current financial and operating status, as well as its future operational and financial planning.

Additionally, the Company is exposed to geographic customer concentration risk, which could have an adverse effect on the Company’s business, financial position, results of operations or cash flow. Refer to Note 2 - "Finance Receivables" to the accompanying condensed consolidated financial statements for the details on the Company’s retail installment contracts by state concentration.
Regulatory Matters
The U.S. lending industry is highly regulated under various U.S. federal laws, including the Truth-in-Lending, Equal Credit Opportunity, Fair Credit Reporting, Fair Debt Collection Practices, SCRA, and Unfair, Deceptive, or Abusive Acts or Practices, Credit CARD, Bank Secrecy Act, Telephone Consumer Protection, FIRREA, and Gramm-Leach-Bliley Acts, as well as various state laws. The Company is subject to inspections, examinations, supervision, and regulation by the Commission, the CFPB, the FTC, and the DOJ and by regulatory agencies in each state in which the Company is licensed. In addition, the Company is directly and indirectly, through its relationship with SHUSA, subject to certain bank regulations, including oversight by the OCC, the European Central Bank, and the Federal Reserve, which have the ability to limit certain of the Company’s activities, such as share repurchase program, the timing and amount of dividends and certain transactions that the Company might otherwise desire to enter into, such as merger and acquisition opportunities, or to impose other limitations on the Company’s growth.
Additional legal and regulatory matters affecting the Company’s activities are further discussed in Part I, Item 1A - Risk Factors of the 2019 Annual Report on Form 10-K and this Quarterly Report on Form 10-Q.
How the Company Assesses its Business Performance

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

Net financing income — The Company tracks the spread between the interest and finance charge income earned on assets and the interest expense incurred on liabilities, and continually monitors the components of its yield and cost of funds. The Company’s effective interest rate on borrowing is driven by various items including, but not limited to, credit quality of the collateral assigned, used/unused portion of facilities, and reference rate for the credit spread. These drivers, as well as external rate trends, including the swap curve, spot and forward rates are monitored.

Net credit losses — The Company performs net credit loss analysis at the vintage level for retail installment contracts, loans and leases, and at the pool level for purchased portfolios-credit deteriorated, enabling it to pinpoint drivers of any unusual or unexpected trends. The Company also monitors its and industry-wide recovery rates. Additionally, because delinquencies are an early indicator of future net credit losses, the Company analyzes delinquency trends, adjusting for seasonality, to determine if the Company’s loans are performing in line with original estimations. The net credit loss analysis does not include considerations of the Company’s estimated ACL.

Other income — The Company’s flow agreements and third-party servicing agreements have resulted in a large portfolio of assets serviced for others. These assets provide a steady stream of servicing income and may provide a gain or loss on sale. The Company monitors the size of the portfolio and average servicing fee rate and gain.
52




Additionally, due to the classification of the Company’s personal lending portfolio as held for sale upon the decision to exit the personal lending line of business, adjustments to record this portfolio at the lower of cost or market are included in investment gains (losses), net, which is a component of other income (losses).

Operating expenses — The Company assesses its operational efficiency using the cost-to-managed assets ratio. The Company performs extensive analysis to determine whether observed fluctuations in operating expense levels indicate a trend or are the nonrecurring impact of large projects. The operating expense analysis also includes a loan- and portfolio-level review of origination and servicing costs to assist the Company in assessing profitability by pool and vintage.

Because volume and portfolio size determine the magnitude of the impact of each of the above factors on the Company’s earnings, the Company also closely monitors origination and sales volume along with APR and discounts (including subvention and net of dealer participation).
Recent Developments and Other Factors Affecting The Company’s Results of Operations
Outbreak of COVID-19
The current outbreak of a novel strain of coronavirus, or COVID-19, has materially impacted our business, and the continuance of this outbreak or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.

Due the unpredictable and rapidly changing nature of this outbreak and the resulting economic distress, it is not possible to determine with certainty the ultimate impact on our results of operations or whether other currently unanticipated consequences of the outbreak are reasonably likely to materially affect our results of operations; however, certain adverse effects have already occurred or are probable. The following sets forth our discussion of the impact of COVID-19 on Company's current financial and operating status, as well as its future operational and financial planning as of the date hereof:

Impact on workforce: The health and well-being of our colleagues and customers are a top priority for the Company. The Company has implemented business continuity plans and has followed guidelines issued by government authorities regarding social distancing and work-from-home arrangements. Currently, approximately 95%-97% of our workforce is working remotely. The Company has established a Temporary Emergency Paid Leave Program that provides employees with up to 120 hours of additional paid time off to use – either continuously or intermittently, and before exhausting other paid time off – to assist with dependent care needs related to COVID-19. Further, the Company provided $250 a week in pay premiums for frontline customer support workers to help defray additional costs incurred while working during the outbreak. While our business continuity plans are place, if significant portions of our or our vendors’ work forces are unable to work effectively as a result of the COVID-19 outbreak including because of illness, stay-at-home orders, facility closures reductions in services or hours of operation, or ineffective remote work arrangements, there may be disruptions to our origination and servicing operations, which could result in reduced originations and/or collection effectiveness and/or impair our ability to operate our business and satisfy our obligations under our third-party servicing agreements. Each of these scenarios could have materially adverse effects on our business, financial condition and results of operations.

Impact on customers and loans and lease performance: The COVID-19 outbreak and the associated economic crisis have led to negative effects on our customers. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak is impacting customers nationwide and is expected to have a materially more significant impact on the performance of our auto loan and auto lease portfolio than even the most severe historical natural disaster.

Similar to many other financial institutions, we have taken and will continue to take measures to mitigate our customers’ COVID-19 related economic challenges. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. These customer support programs, by their nature, are expected to negatively impact our financial performance and other results of operations in the near term. Our business, financial condition and results of operations may be materially and adversely affected in the longer term if the COVID-19 outbreak leads us to continue to conduct such programs for a significant period of time, if the number of customers experiencing hardship related directly or indirectly to the outbreak of COVID-19 increases or if our customer support programs are not effective in mitigating the effects of the pandemic and the recession on our customers' financial situations. Given the unpredictable nature of
53




this situation, the nature and extent of such effects cannot be predicted at this time, but such effects could be materially adverse effects to our business, financial condition and results of operations.

Further, government or regulatory authorities could also enact laws, regulations, executive orders or other guidance that allow customers to forgo making scheduled payments for some period of time, require modifications to receivables (e.g., waiving accrued interest), preclude creditors from exercising certain rights or taking certain actions with respect to collateral, including repossession or liquidation of the financed vehicles, or mandate limited operations or temporary closures of the Company or our vendors as “non-essential businesses” or otherwise. Such actions by government or regulatory authorities could have materially negative effects on our business, financial condition and results of operations.

Impact on originations: Since COVID-19 outbreak, the Company has partnered with FCA to launch new incentive programs, including, 90-day first payment deferrals and 0% APR for 84 months on select 2019/2020 FCA models. Today, all dealers are open and operating at full capacity; however, many are operating with a different business model (e.g., appointments only, home delivery, etc.). Third party sources are reporting a new car SAAR 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.


Impact on Debt and Liquidity: We rely upon four primary sources to fund our operations, including private financing, warehouse lines of credit, the asset-backed securitization market, and support from Santander. As international trade and business activity has slowed and supply chains have been disrupted, global credit and financial markets have recently experienced, and may continue to experience, significant disruption and volatility. During the nine months ended September 30, 2020, financial markets experienced significant declines and volatility, and such market conditions may continue and/or precede recessionary conditions in the U.S. economy. Under these circumstances, we may experience some or all of the risks related to market volatility and recessionary conditions described in the Risk Factors section of our Form 10-K. These include reduced demand for our products and services and reduced access to capital markets funding. These risks could have materially adverse impacts on our liquidity, financial condition, results of operations and cash flows.

Governmental and regulatory authorities have recently implemented fiscal and monetary policies and initiatives to mitigate the effects of the outbreak on the economy and individual businesses and households, such as the reduction of the Federal Reserve’s benchmark interest rate to near zero in March 2020. Further, the FRB established the Term Asset Backed Securities Loan Facility ("TALF") to support the flow of credit to consumers and businesses, including the investment in certain eligible ABS bonds. While the Company currently does not intend to need to utilize TALF, given the current state of the capital markets and the recent tightening in ABS credit spreads, the Company may utilize TALF, if it becomes necessary to do so. These governmental and regulatory actions may not be successful in the long-term mitigating the adverse economic effects of COVID-19 and could affect our liquidity, access to funding and net interest income and reduce our profitability. Sustained adverse economic effects from the outbreak may also result in downgrades in our credit ratings or adversely affect the interest rate environment. If our access to funding is reduced or if our costs to obtain such funding significantly increases, our business, financial condition and results of operations could be materially and adversely affected.

In addition, the Company’s ability to make payments on the notes could be adversely affected if its customers were unable to make timely payments or if the Company elected to, or was required to, implement forbearance programs in connection with customers suffering a hardship (including hardships related to the outbreak of COVID-19).

The capital markets appear to have recovered in third quarter compared to the first half of the year, however, due to the rapidly evolving nature of the COVID-19 outbreak, it is not possible to predict whether unanticipated consequences of the outbreak are reasonably likely to affect materially our liquidity, access to funding and capital resources in the future.

Impact on impairment of goodwill, indefinite-lived and long-lived assets: In accordance with accounting policy, the Company has analyzed the impact of COVID-19 on its financial statements, including the potential for impairment. The analysis did not support any impairment of these assets, including Goodwill, Leased Vehicles and other non-financial assets such as Upfront fee and other Intangibles.

54




Impact on communities: The Company is committed to supporting our communities impacted by the COVID-19 outbreak, and the Company's non-profit foundation has begun responding to the COVID-19 crisis with $1.3 million in donations to a select group of organizations addressing community issues.

Volume

The Company’s originations of loans and leases, including revolving loans, average APR, and dealer discount (net of dealer participation) for the three and nine months ended September 30, 2020 and 2019 were as follows:
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
(Dollar amounts in thousands)
Retained Originations
Retail installment contracts$5,344,755$4,080,028$13,608,298$12,056,003
Average APR13.7 %16.0 %13.8 %16.5 %
Average FICO® (a)637599631598 
Discount(1.3)%(0.7)%(1.0)%(0.4)%
Personal loans (b)$305,039$322,335$923,112$954,105
Average APR29.4 %29.7 %29.4 %29.8 %
Leased vehicles$1,856,166$2,225,117$4,863,504$6,708,827
Finance lease$4,087$4,859$9,016$12,989
Total originations retained$7,510,047$6,632,339$19,403,930$19,731,924
Sold Originations
Retail installment contracts$80,144$$761,323$
Average APR5.2 %— %4.8 %— %
Average FICO® (c)738— 734— 
Total Originations Sold$80,144$— 761,323$— 
Total SC Originations7,590,1916,632,33920,165,25319,731,924
Total originations (excluding SBNA Originations Program)$7,590,191$6,632,339$20,165,253$19,731,924
(a)Unpaid principal balance excluded from the weighted average FICO score is $571 million and $440 million for the three months ended September 30, 2020 and 2019, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, $145 million and $154 million, respectively, were commercial loans. Unpaid principal balance excluded from the weighted average FICO score is $1.5 billion and $1.4 billion for the nine months ended September 30, 2020 and 2019, respectively, as the borrowers on these loans did not have FICO scores at origination. Of these amounts, $386 million and $401 million, respectively, were commercial loans.
(b)    Included in the total origination volume is $72 million and $62 million for the three months ended September 30, 2020 and 2019, respectively, and $151 million and $138 million for the nine months ended September 30, 2020, and 2019, respectively, related to newly opened accounts.
(c)    Unpaid principal balance excluded from the weighted average FICO score is $11 million and $80 million for the three and nine months ended September 30, 2020, respectively, as the borrowers on these loans did not have FICO scores at origination.


Total auto originations (excluding SBNA Origination Program) increased $0.5 billion, or 2.5%, from the nine months ended September 30, 2019 to the nine months ended September 30, 2020. The Company's initiatives to improve our pricing, as well as, our dealer and customer experience have increased our competitive position in the market. The Company continues to focus on optimizing the loan quality of its portfolio with an appropriate balance of volume and risk. CCAP volume and penetration rates are influenced by strategies implemented by FCA and the Company, including product mix and incentives.

Beginning in 2018, the Company agreed to provide SBNA with origination support services in connection with the processing, underwriting and purchase of retail auto loans, primarily from FCA dealers. In addition, the Company agreed to perform the
55




servicing for any loans originated on SBNA’s behalf. During the three and nine months ended September 30, 2020 and 2019 the Company facilitated the purchase of $1.1 billion, $3.9 billion, $2.1 billion and $5.0 billion of retail installment contacts, respectively.

The Company’s originations of retail installment contracts and leases by vehicle type during the nine months ended September 30, 2020 and 2019 were as follows:
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
(Dollar amounts in thousands)
Retail installment contracts
Car$1,516,163 27.9 %$1,424,419 34.9 %$3,926,126 27.3 %$4,376,512 36.3 %
Truck and utility3,686,966 68.0 %2,483,426 60.9 %9,872,900 68.7 %7,186,881 59.6 %
Van and other (a)221,770 4.1 %172,184 4.2 %570,595 4.0 %492,610 4.1 %
$5,424,899 100.0 %$4,080,029 100.0 %$14,369,621 100.0 %$12,056,003 100 %
Leased vehicles
Car$53,985 2.9 %$97,875 4.4 %$167,432 3.4 %$354,046 5.3 %
Truck and utility1,769,518 95.3 %2,016,964 90.6 %4,593,150 94.5 %6,104,722 91.0 %
Van and other (a)32,663 1.8 %110,278 5.0 %102,922 2.1 %250,059 3.7 %
$1,856,166 100.0 %$2,225,117 100.0 %$4,863,504 100.0 %$6,708,827 100.0 %
Total originations by vehicle type
Car$1,570,148 21.6 %$1,522,294 24.1 %$4,093,558 21.3 %$4,730,558 25.2 %
Truck and utility5,456,484 74.9 %4,500,390 71.4 %14,466,050 75.2 %13,291,603 70.8 %
Van and other (a)254,433 3.5 %282,462 4.5 %673,517 3.5 %742,669 4.0 %
$7,281,065 100.0 %$6,305,146 100.0 %$19,233,125 100.0 %$18,764,830 100.0 %
(a) Other primarily consists of commercial vehicles.

The Company’s portfolio of retail installment contracts held for investment and leases by vehicle type as of September 30, 2020 and December 31, 2019 are as follows:
September 30, 2020December 31, 2019
(Dollar amounts in thousands)
Retail installment contracts
Car$11,811,123 35.3 %$12,286,182 39.9 %
Truck and utility20,356,734 60.8 %17,238,406 56.0 %
Van and other (a)1,317,485 3.9 %1,251,450 4.1 %
$33,485,342 100.0 %$30,776,038 100.0 %
Leased vehicles
Car$844,999 4.9 %$1,237,803 7.1 %
Truck and utility15,814,866 92.5 %15,795,594 89.8 %
Van and other (a)441,857 2.6 %529,385 3.1 %
$17,101,722 100.0 %$17,562,782 100.0 %
Total by vehicle type
Car$12,656,122 25.0 %$13,523,985 28.0 %
Truck and utility36,171,600 71.5 %33,034,000 68.3 %
Van and other (a)1,759,342 3.5 %1,780,835 3.7 %
$50,587,064 100.0 %$48,338,820 100.0 %
(a) Other primarily consists of commercial vehicles.

The Company's asset sales for the three and nine months ended September 30, 2020 and 2019 were as follows:
56




Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
(Dollar amounts in thousands)
Retail installment contracts$636,301$$1,148,587$
Average APR4.9 %— %5.6 %— %
Average FICO®735 — 715 — 
The unpaid principal balance, average APR, and remaining unaccreted net discount of the Company’s held for investment portfolio as of September 30, 2020 and December 31, 2019 are as follows:
September 30, 2020December 31, 2019
(Dollar amounts in thousands)
Retail installment contracts$33,485,342 $30,776,038
Average APR15.2 %16.1 %
Discount0.05 %0.3 %
Receivables from dealers$3,675 $12,668
Average APR3.9 %4.0 %
Leased vehicles$17,101,722$17,562,782
Finance leases$26,617 $27,584

The Company records interest income from retail installment contracts and receivables from dealers in accordance with the terms of the loans, generally discontinuing and reversing accrued income once a loan becomes more than 60 days past due, except in the case of revolving personal loans, for which the Company continues to accrue interest until charge-off, in the month in which the loan becomes 180 days past due, and receivables from dealers, for which the Company continues to accrue interest until the loan becomes more than 90 days past due.

The Company generally does not acquire receivables from dealers at a discount. The Company amortizes discounts, subvention payments from manufacturers, and origination costs as adjustments to income from retail installment contracts using the effective yield method. The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans generally experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate, and the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience, and is used as an input in the calculation of the constant effective yield. Our estimated weighted average prepayment rates ranged from 5.1% to 10.7% as of September 30, 2020, and 5.2% to 11.0% as of September 30, 2019. The Company amortizes the discount, if applicable, on revolving personal loans straight-line over the estimated period over which the receivables are expected to be outstanding.

Historically, the Company’s primary means of acquiring retail installment contracts has been through individual acquisitions immediately after origination by a dealer. The Company also periodically purchases pools of receivables and had significant volumes of these purchases during the credit crisis. While the Company continues to pursue such opportunities when
available, during the nine months ended September 30, 2020, the Company did not acquire any vehicle loan portfolios for which there have been more than insignificant deterioration in credit quality since origination. In addition, during the nine months ended September 30, 2020 and 2019, the Company did not acquire any vehicle loan portfolios for which it was probable at acquisition that not all contractually required payments would be collected.

However, during the three months ended September 30, 2020 and 2019 the Company did recognize certain retail installment contracts with an unpaid principal balance of $0, and for the nine months ended September 30, 2020 and 2019 the Company did recognize certain retail installment contracts with an unpaid principal balance of $76,878 and $74,718, respectively, held by non-consolidated securitization Trusts under optional clean-up calls. Following the initial recognition of these loans at fair value, the performing loans in the portfolio will be carried at amortized cost, net of ACL. The Company elected the fair value option for all non-performing loans acquired (more than 60 days delinquent as of re-recognition date), for which it was probable that not all contractually required payments would be collected. For the Company’s existing purchased receivables portfolios - credit deteriorated, which were acquired at a discount partially attributable to credit deterioration since origination, the Company estimates the expected yield on each portfolio at acquisition and records monthly accretion income based on this expectation. The Company periodically re-evaluates performance expectations and may increase the accretion rate if a pool is
57




performing better than expected. If a pool is performing worse than expected, the Company is required to continue to record accretion income at the previously established rate and to record impairment to account for the worsening performance.

The Company classifies most of its vehicle leases as operating leases. The Company records the net capitalized cost of each lease as an asset, which is depreciated straight-line over the contractual term of the lease to the expected residual value. The Company records lease payments due from customers as income until and unless a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued and reversed. The Company resumes and reinstates the accrual of revenue if a delinquent account subsequently becomes 60 days or less past due. The Company amortizes subvention payments from the manufacturer, down payments from the customer, and initial direct costs incurred in connection with originating the lease straight-line over the contractual term of the lease.
58




Selected Financial Data
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Income Statement Data(Dollar amounts in thousands, except per share data)
Interest on retail installment contracts$1,220,703 $1,183,699 $3,552,193 3,509,507 
Interest on purchased receivables portfolios - credit deteriorated649 852 2,164 3,204 
Interest on receivables from dealers(17)23 48 196 
Interest on personal loans79,359 88,448 256,708 274,793 
Interest on finance receivables and loans1,300,694 1,273,022 3,811,113 3,787,700 
Net leased vehicle income257,984 250,109 579,739 687,444 
Other finance and interest income2,146 9,926 12,354 31,610 
Interest expense292,118 335,212 929,934 999,633 
Net finance and other interest income1,268,706 1,197,845 3,473,272 3,507,121 
Credit loss expense340,548 566,849 2,110,331 1,548,404 
Profit sharing30,414 18,125 56,239 38,438 
Other income28,509 31,293 32,923 112,789 
Operating expenses263,662 329,470 813,014 901,076 
Income before tax expense662,591 314,694 526,611 1,131,992 
Income tax (benefit) / expense172,476 82,156 137,161 283,684 
Net income$490,115 $232,538 $389,450 $848,308 
Share Data
Weighted-average common shares outstanding
Basic310,150,293 345,469,657 321,275,907 349,341,627 
Diluted310,307,265 345,956,043 321,492,331 349,855,822 
Earnings per share
Basic$1.58 $0.67 $1.21 $2.43 
Diluted$1.58 $0.67 $1.21 $2.42 
Dividend paid per share$0.22 $0.22 $0.66 $0.62 
Balance Sheet Data
Finance receivables held for investment, net$27,449,730 $26,500,359 $27,449,730 $26,500,359 
Finance receivables held for sale, net763,292 925,611 763,292 925,611 
Goodwill and intangible assets136,397 110,683 136,397 110,683 
Total assets48,448,921 47,279,015 48,448,921 47,279,015 
Total borrowings41,369,347 37,632,642 41,369,347 37,632,642 
Total liabilities43,354,109 39,933,813 43,354,109 39,933,813 
Total equity5,094,812 7,345,202 5,094,812 7,345,202 
Allowance for credit losses6,152,378 3,116,680 6,152,378 3,116,680 








59




Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Other Information(Dollar amounts in thousands)
Charge-offs, net of recoveries, on retail installment contracts$46,078 $592,912 $1,100,138 $1,670,543 
Total charge-offs, net of recoveries48,125 592,893 1,103,649 1,672,785 
End of period delinquent amortized cost over 59 days, retail installment contracts held for investment817,577 1,394,074 817,577 1,394,074 
End of period personal loans delinquent principal over 59 days, held for sale93,296 176,500 93,296 176,500 
End of period delinquent amortized cost over 59 days, loans held for investment817,911 1,394,074 817,911 1,394,074 
End of period assets covered by allowance for credit losses33,515,634 29,636,174 33,515,634 29,636,174 
End of period gross retail installment contracts held for investment33,485,342 29,597,897 33,485,342 29,597,897 
End of period gross personal loans held for sale1,211,575 1,322,301 1,211,575 1,322,301 
End of period gross finance receivables and loans held for investment33,489,017 29,633,950 33,489,017 29,633,950 
End of period gross finance receivables, loans, and leases50,617,356 46,874,858 50,617,356 46,874,858 
Average gross retail installment contracts held for investment31,462,524 29,316,997 30,946,321 28,998,827 
Average gross retail installment contracts held for investment and held for sale32,847,716 29,450,778 31,632,276 29,035,278 
Average gross purchased receivables portfolios- credit deteriorated16,901 24,297 18,718 26,781 
Average gross receivables from dealers3,675 12,924 8,120 13,226 
Average gross personal loans held for sale1,240,639 1,343,098 1,322,053 1,398,045 
Average gross finance leases26,325 23,977 27,171 21,960 
Average gross finance receivables, loans and finance leases34,135,256 30,855,074 33,008,338 30,495,290 
Average gross operating leases17,146,166 16,902,932 17,447,194 16,135,606 
Average gross finance receivables, loans, and leases51,281,422 47,758,006 50,455,532 46,630,896 
Average managed assets62,662,686 57,379,308 61,325,546 55,830,429 
Average total assets47,979,008 46,915,965 47,581,031 45,696,088 
Average debt41,064,441 37,276,505 40,262,948 36,234,826 
Average total equity5,044,976 7,335,898 5,429,924 7,215,250 
Ratios
Yield on retail installment contracts14.9 %16.1 %15.0 %16.1 %
Yield on leased vehicles6.0 %5.9 %4.4 %5.7 %
Yield on personal loans held for sale (1)25.6 %26.3 %25.9 %26.2 %
Yield on earning assets (2)12.2 %12.8 %11.6 %12.9 %
Cost of debt (3)2.8 %3.6 %3.1 %3.7 %
Net interest margin (4)9.9 %10.0 %9.2 %10.0 %
Expense ratio (5)1.7 %2.3 %1.8 %2.2 %
Return on average assets (6)4.1 %2.0 %1.1 %2.5 %
Return on average equity (7)38.9 %12.7 %9.6 %15.7 %
Net charge-off ratio on retail installment contracts (8)0.6 %8.1 %4.7 %7.7 %
Net charge-off ratio (8)0.6 %8.1 %4.7 %7.7 %
Delinquency ratio on retail installment contracts held for investment, end of period (9)2.4 %4.7 %2.4 %4.7 %
Delinquency ratio on loans held for investment, end of period (9)2.4 %4.7 %2.4 %4.7 %
Equity to assets ratio (10)10.5 %15.5 %10.5 %15.5 %
Tangible common equity to tangible assets (10)10.3 %15.3 %10.3 %15.3 %
Common stock dividend payout ratio (11)13.9 %32.7 %54.4 %25.5 %
Allowance ratio (12)18.4 %10.5 %18.4 %10.5 %
Common Equity Tier 1 capital ratio (13)13.7 %15.4 %13.7 %15.4 %

(1)Includes finance and other interest income; excludes fees.
(2)“Yield on earning assets” is defined as the ratio of annualized Total finance and other interest income, net of Leased vehicle expense, to Average gross finance receivables, loans and leases.
(3)“Cost of debt” is defined as the ratio of annualized Interest expense to Average debt.
(4)“Net interest margin” is defined as the ratio of annualized Net finance and other interest income to Average gross finance receivables, loans and leases.
(5)“Expense ratio” is defined as the ratio of annualized Operating expenses to Average managed assets.
(6)“Return on average assets” is defined as the ratio of annualized Net income to Average total assets.
(7)“Return on average equity” is defined as the ratio of annualized Net income to Average total equity.
(8)“Net charge-off ratio” is defined as the ratio of annualized Charge-offs on an amortized cost basis, net of recoveries, to average unpaid principal balance of the respective held-for-investment portfolio.
(9)“Delinquency ratio” is defined as the ratio of End of period Delinquent principal over 59 days to End of period gross balance of the respective portfolio, excludes finance leases.
60




(10)“Tangible common equity to tangible assets” is defined as the ratio of Total equity, excluding Goodwill and intangible assets, to Total assets, excluding Goodwill and intangible assets. Management believes this non-GAAP financial measure is useful to assess and monitor the adequacy of the Company’s capitalization. This additional information is not meant to be considered in isolation or as a substitute for the numbers prepared in accordance with GAAP and may not be comparable to similarly-titled measures used by other financial institutions. A reconciliation from GAAP to this non-GAAP measure for the periods ended September 30, 2020 and 2019 is as follows:
September 30, 2020September 30, 2019
(Dollar amounts in thousands)
Total equity$5,094,812 $7,345,202 
  Deduct: Goodwill and intangibles136,397 110,683 
Tangible common equity$4,958,415 $7,234,519 
Total assets$48,448,921 $47,279,015 
  Deduct: Goodwill and intangibles136,397 110,683 
Tangible assets$48,312,524 $47,168,332 
Equity to assets ratio10.5 %15.5 %
Tangible common equity to tangible assets10.3 %15.3 %

(11)    “Common stock dividend payout ratio” is defined as the ratio of Dividends declared per share of common stock to Earnings per share attributable to the Company’s shareholders.
(12)    “Allowance ratio” is defined as the ratio of Allowance for credit losses, which excludes impairment on purchased receivables portfolios-credit deteriorated/impaired, to End of period assets covered by allowance for credit losses.
(13)    “Common Equity Tier 1 Capital ratio” is defined as the ratio of Total Common Equity Tier 1 Capital (CET1) to Total risk-weighted assets.
September 30, 2020September 30, 2019
Total equity$5,094,812 $7,345,202 
Add: Adjustment due to CECL capital relief (c)1,842,536 — 
Deduct: Goodwill, intangibles, and other assets, net of deferred tax liabilities159,907 150,644 
Deduct: Accumulated other comprehensive income (loss), net(56,882)(31,836)
Tier 1 common capital$6,834,323 $7,226,394 
Risk weighted assets (a)(c)$49,882,540 $46,870,019 
Common Equity Tier 1 capital ratio (b)(c)13.7 %15.4 %

(a)Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company’s total Risk weighted assets.
(b)CET1 is calculated under Basel III regulations required since January 1, 2015. The fully phased-in capital ratios are non-GAAP financial measures.
(c)As described in our 2019 Annual Report on Form 10-K, on January 1, 2020, we adopted ASU 2016-13, Financial Instruments-Credit Losses (“CECL”), which, upon adoption, resulted in a reduction to our opening retained earnings balance, net of income tax, and increase to the allowance for credit losses of approximately $2 billion. As also described in our 2019 10-K, the U.S. banking agencies in December 2018 had approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations, including the Company, the option to phase in the day-one impact of CECL until the first quarter of 2023. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The Company is electing this alternative option instead of the one described in the December 2018 rule.




61




Three and Nine Months Ended September 30, 2020 Compared to Three and Nine Months Ended September 30, 2019
Interest on Finance Receivables and Loans
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Income from retail installment contracts$1,220,703 $1,183,699 $37,004 %$3,552,193 $3,509,507 $42,686 %
Income from purchased receivables portfolios - credit deteriorated649 852 (203)(24)%2,164 3,204 $(1,040)(32)%
Income from receivables from dealers(17)23 (40)(174)%48 196 $(148)(76)%
Income from personal loans79,359 88,448 (9,089)(10)%256,708 274,793 $(18,085)(7)%
Total interest on finance receivables and loans$1,300,694 $1,273,022 $27,672 %$3,811,113 $3,787,700 $23,413 0.6 %

Income from retail installment contracts remained flat from the third quarter of 2019 to the third quarter of 2020 and from the nine months ended September 30, 2019 to the nine months ended September 30, 2020.
Income from personal loans decreased $9 million, or 10%, from the third quarter of 2019 to the third quarter of 2020, and decreased $18 million or 7%, from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 primarily due to 8% and 5% decrease in average outstanding balance of the Company's portfolio, respectively.
Leased Vehicle Income and Expense
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Leased vehicle income$725,156 $706,302 $18,854 %$2,210,684 $2,032,098 $178,586 %
Leased vehicle expense467,172 456,193 10,979 %1,630,945 1,344,654 286,291 21 %
Leased vehicle income, net$257,984 $250,109 $7,875 %$579,739 $687,444 $(107,705)(16)%

Leased vehicle income, net remained flat from the third quarter of 2019 to the third quarter of 2020; the income decreased from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 due to depreciation on a larger lease portfolio and a decrease in liquidated units. Through the Chrysler Agreement, the Company receives manufacturer incentives on new leases originated under the program in the form of lease subvention payments, which are amortized over the term of the lease and reduce depreciation expense within leased vehicle expense.
Interest Expense
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Interest expense on notes payable$283,202 $342,336 $(59,134)(17)%$902,081 $1,022,461 $(120,380)(12)%
Interest expense on derivatives8,916 (7,124)16,040 (225)%27,853 (22,828)50,681 (222)%
Total interest expense$292,118 $335,212 $(43,094)(13)%$929,934 $999,633 $(69,699)(7)%
Total Interest expense decreased $43 million, or 13%, from the third quarter of 2019 to the third quarter of 2020, and decreased $70 million or 7% from the nine months ended September 30, 2019 to the nine months ended September 30, 2020, primarily due to lower interest rate environment partially offset by impact of declined forward curves on cash flow hedges.
62




Credit Loss Expense
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Credit loss expense$340,548 $566,849 $(226,301)(40)%$2,110,331 $1,548,404 $561,927 36 %
Credit loss expense decreased $226 million or 40% from the third quarter of 2019 to the third quarter of 2020 due to decrease in net charge off offset by higher allowance reserve, The expense increased $562 million or 36% from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 primarily driven by the adoption of the CECL standard in 2020, which replaced the incurred loss impairment framework with one that reflects expected credit losses over the full expected life of financial assets. In addition, the Company added a significant amount of additional reserve to address credit risk associated with the COVID-19 outbreak and associated economic recession during the first and second quarter of 2020.
Profit Sharing
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Profit sharing$30,414 $18,125 $12,289 68 %$56,239 $38,438 $17,801 46 %

Profit sharing expense consists of revenue sharing related to the Chrysler Agreement and profit sharing on personal loans originated pursuant to the agreements with Bluestem. Profit sharing expense increased from the third quarter of 2019 to the third quarter of 2020, and increased from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 primarily due to an increase in lease portfolio and liquidated units.

Other Income
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Investment losses, net$(68,989)$(86,397)$17,408 (20)%$(279,997)$(238,281)$(41,716)18 %
Servicing fee income18,574 21,447 (2,873)(13)%56,797 70,255 (13,458)(19)%
Fees, commissions, and other78,924 96,243 (17,319)(18)%256,123 280,815 (24,692)(9)%
Total other income$28,509 $31,293 $(2,784)(9)%$32,923 $112,789 $(79,866)(71)%
Average serviced for others portfolio$11,365,610 $8,996,182 $2,369,428 26 %$10,862,178 $8,970,346 $1,891,832 21 %
Investment losses, net, increased $17 million from the third quarter of 2019 to the third quarter of 2020 primarily due to an impairment release on an unsecured portfolio, offset by losses on certain asset sales. The investment losses decreased $42 million from the nine months ended September 30, 2019 to the nine months ended September 30, 2020, primarily due to the loss on asset sales.

Servicing fee income decreased $3 million from the third quarter of 2019 to the third quarter of 2020, and decreased $13 million from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 due to the runoff of serviced portfolio that had higher servicing fee rates. The Company records servicing fee income on loans that it services but does not own and does not report on its balance sheet. The serviced for others portfolio as of September 30, 2020 and 2019 was as follows:
63




September 30,
20202019
(Dollar amounts in thousands)
SBNA and Santander retail installment contracts$9,528,349 $7,989,931 
SBNA leases65 178 
Total serviced for related parties9,528,414 7,990,109 
CCAP securitizations103,579 310,126 
SCART securitizations1,032,639 — 
Other third parties846,178 1,678,556 
Total serviced for third parties1,982,396 1,988,682 
Total serviced for others portfolio$11,510,810 $9,978,791 

Fees, commissions, and other, primarily includes late fees, miscellaneous, and other income. This income decreased from the nine months ended September 30, 2019 to the nine months ended September 30, 2020 due to lower originations from SBNA and decrease in wear and tear income due to reserve recorded for possible customer refunds.
Total Operating Expenses
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Compensation expense$127,991 $132,271 $(4,280)(3)%$388,960 $382,843 $6,117 %
Repossession expense35,910 62,937 (27,027)(43)%115,861 203,496 (87,635)(43)%
Other operating costs99,761 134,262 (34,501)(26)%308,193 314,737 (6,544)(2)%
Total operating expenses$263,662 $329,470 $(65,808)(20)%$813,014 $901,076 $(88,062)(10)%
Compensation expenses remained flat during the three and nine months ended September 30, 2020 compared to the same period in 2019.
Repossession expense decreased during the three and nine months ended September 30, 2020 compared to the same period in 2019, primarily due to the lower volume of involuntary repossessions nationwide as a result of the COVID-19 outbreak.
Other operating costs decreased during the three and nine months ended September 30, 2020 compared to the same periods of 2019, primarily due to decrease in legal settlements and consulting services.
Income Tax Expense
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Income tax expense$172,476 $82,156$90,320 110 %$137,161 $283,684$(146,523)(52)%
Income before income taxes662,591 314,694347,897 111 %526,611 1,131,992(605,381)(53)%
Effective tax rate26.0 %26.1 %26.0 %25.1 %

The effective tax rate increased from 25.1% for the nine months ended September 30, 2019 to 26.0% for the nine months ended September 30, 2020, primarily due to an increase in the effective tax rate impact of discrete adjustments resulting from lower earnings in the current period and an increase in the blended statutory state tax rate.

Other Comprehensive Income (Loss)
Three Months EndedNine Months Ended
September 30,Increase (Decrease)September 30,Increase (Decrease)
20202019AmountPercent20202019AmountPercent
(Dollar amounts in thousands)
Change in unrealized gains (losses) on cash flow hedges and available-for-sale securities, net of tax$6,823 $(11,269)$18,092 (161)%$(30,189)$(65,351)$35,162 (54)%
64





The change in unrealized gains (losses) for the three and nine months ended September 30, 2020 as compared to three and nine months ended September 30, 2019, was primarily driven by, as shown in Note 9 “Derivative Financial Instruments”, increase in cash flow hedge portfolio related to mark to mark valuation.
Credit Quality
Loans and Other Finance Receivables
Allowance for Credit losses
Non-prime loans comprise 75% of the Company’s portfolio as of September 30, 2020. The Company records an ACL at a level considered adequate to cover lifetime expected credit losses in the Company’s retail installment contracts and other loans and receivables held for investment, based upon a holistic assessment including both quantitative and qualitative considerations. Refer to Note 2 - "Finance Receivables" and Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the Company’s held for investment portfolio of retail installment contracts and receivables from dealers, as of September 30, 2020 and December 31, 2019.
Credit risk profile

A summary of the credit risk profile of the Company’s retail installment contracts held for investment, by FICO® score, number of trade lines, and length of credit history, each as determined at origination, as of September 30, 2020 and December 31, 2019 was as follows (dollar amounts in billions, totals may not foot due to rounding):
September 30, 2020
Trade Lines1234+Total
FICOMonths History$%$%$%$%$%
No-FICO (a)<36$3.097 %$0.1%$0.0— %$0.0— %$3.1%
36+0.338 %0.225 %0.113 %0.225 %0.8%
<540<360.150 %0.0— %0.0— %0.150 %0.2%
36+0.1%0.2%0.2%4.490 %4.915 %
540-599<360.333 %0.222 %0.111 %0.333 %0.9%
36+0.2%0.3%0.3%8.892 %9.628 %
600-639<360.444 %0.222 %0.111 %0.222 %0.9%
36+0.1%0.1%0.1%4.994 %5.215 %
>640<361.063 %0.213 %0.213 %0.213 %1.6%
36+0.1%0.1%0.1%6.195 %6.419 %
Total (c)$5.617 %$1.65 %$1.24 %$25.275 %$33.6100 %

December 31, 2019 (b)
Trade Lines1234+Total
FICOMonths History$%$%$%$%$%
No-FICO (a)<36$2.8 97 %$0.1 %$0.0 $0.0 $0.0 $0.0 $2.9 %
36+0.3 38 %0.2 25 %0.1 13 %0.2 25 %0.8 %
<540<360.1 25 %0.1 25 %0.1 25 %0.1 25 %0.4 %
36+0.1 %0.2 %0.2 %4.4 90 %4.9 16 %
540-599<360.3 43 %0.2 29 %0.1 14 %0.1 14 %0.7 %
36+0.2 %0.3 %0.3 %8.3 91 %9.1 30 %
600-639<360.3 43 %0.2 29 %0.1 14 %0.1 14 %0.7 %
36+0.1 %0.1 %0.2 %4.7 92 %5.1 17 %
>640<360.5 45 %0.1 %0.1 %0.4 36 %1.1 %
36+0.1 %0.1 %0.1 %4.7 94 %5.0 16 %
Total$4.8 16 %$1.6 5 %$1.3 4 %$23.0 75 %$30.8 100 %
(a) Includes commercial loans
(b) The information as of December 31, 2019 includes balances based on UPB. Difference between amortized cost and UPB was not material.
65




(c)The amount of accrued interest excluded from the disclosed amortized cost as of September 30, 2020 is $428 million.
Delinquencies

The Company considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the scheduled payment by the due date.

In each case, the period of delinquency is based on the number of days payments are contractually past due. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, the Company’s delinquencies have been highest in the period from November through January due to consumers’ holiday spending. For the quarter ended September 30, 2020, delinquency rates have been positively impacted (lower) due to the historic volume of deferrals granted to borrowers impacted by COVID-19 and benefits of government stimulus.

Refer to Note 3 - "Credit Loss Allowance and Credit Quality" to the accompanying condensed consolidated financial statements for the details on the retail installment contracts held for investment that were placed on nonaccrual status, as of September 30, 2020 and December 31, 2019.
Credit Loss Experience
The following is a summary of net losses and repossession activity on retail installment contracts held for investment for the nine months ended September 30, 2020 and 2019.
 Nine Months Ended September 30,
 20202019
 (Dollar amounts in thousands)
Principal outstanding at period end$33,485,342$29,597,897
Average principal outstanding during the period$31,462,524$28,998,827
Number of receivables outstanding at period end1,971,9171,819,847
Average number of receivables outstanding during the period1,888,2601,814,427
Number of repossessions (a)131,522218,444
Number of repossessions as a percent of average number of receivables outstanding9.3 %16.1 %
Net losses$1,100,138$1,670,543
Net losses as a percent of average principal amount outstanding4.7 %7.7 %
(a) Repossessions are net of redemptions. The number of repossessions includes repossessions from the outstanding portfolio and from accounts already charged off. The Company temporarily suspended involuntary repossession activities nationwide during the onset of COVID-19 and recently restarted these activities.
There were no charge-offs on the Company’s receivables from dealers for the three and nine months ended September 30, 2020 and 2019. Net charge-offs on the finance lease receivables portfolio, totaled $3,588 and $362 for the nine months ended September 30, 2020 and 2019, respectively.
Deferrals and Troubled Debt Restructurings

In accordance with the Company’s policies and guidelines, the Company may offer extensions (deferrals) to customers on its retail installment contracts, whereby the customer is allowed to move a maximum of three payments per event to the end of the loan. Prior to March 2020, the Company’s policies and guidelines limited the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. Further, the maximum number of lifetime months extended for all automobile retail installment contracts was eight, while some marine and recreational vehicle contracts had a maximum of twelve months extended to reflect their longer term. Additionally, the Company generally limited the granting of deferrals on new accounts until a requisite number of months have passed since origination. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.
However, in March 2020, the Company began actively working with its borrowers impacted by COVID-19 and provided loan modification programs to mitigate the adverse effects of COVID-19. These programs temporarily revised the practices noted above by 1) increasing the maximum number of extensions from eight to twelve, 2) allowing more than one deferral every six months and 3) removing the requirement that a requisite number of months have passed since origination. The Company's predominant program offering is a two-month deferral of payments to the end of the loan term and waiver of late charges.

66




Since the implementation of the program in March 2020, we have experienced a sharp increase in requests for extensions related to COVID-19 and over 911,000 loan extensions have been granted. As of September 30, 2020, approximately one third (or $11 billion in balances) of our customers have received a COVID-19 deferral. The following table provides a summary of loan balances with active payment deferrals as of the end of each reporting period:
September 30, 2020June 30, 2020
(Dollar amounts in thousands)
Loan balance of active deferrals (a)% of portfolioLoan balance of active deferrals (a)% of portfolio
Retail installment contracts$959,236 2.9 %$3,753,717 12.3 %
(a) Excludes deferrals with payments due in September 2020
Through September 30, 2020, 645,000 unique accounts have received COVID-19 deferrals. Of these accounts, 86% have exited deferral status, 7% remain in active deferral, 5% have paid-off, and 2% have charged off. Of the loans that have exited deferral status, 85% are less than 30 days past due and 96% of these accounts have made at least one payment since their first COVID-19 extension.
The following is a summary of deferrals (amortized cost) on the Company’s retail installment contracts held for investment as of the dates indicated:
 September 30, 2020December 31, 2019 (a)
 (Dollar amounts in thousands)
Never deferred$20,762,398 61.8 %$23,830,368 77.3 %
Deferred once5,984,442 17.8 %3,499,477 11.4 %
Deferred twice3,323,367 9.9 %1,463,503 4.8 %
Deferred 3 - 4 times2,647,398 7.9 %1,867,546 6.1 %
Deferred greater than 4 times866,160 2.6 %115,144 0.4 %
Total (b)$33,583,765 $30,776,038 
(a) The information as of December 31, 2019 is based on UPB. Difference between amortized cost and UPB was not material.
(b) The amount of accrued interest excluded from the disclosed amortized cost as of September 30, 2020 is $428 million.

The historic volume of deferrals granted in response to COVID-19 impacts have caused the percentage of retail installment contracts that have never been deferred to decrease significantly year over year, and the percentage of retail installment contracts deferred more than four times to increase significantly.

At the time a deferral is granted, all delinquent amounts may be deferred or paid. This may result in the classification of the loan as current and therefore not considered a delinquent account. However, there are other instances when a deferral is granted but the loan is not brought completely current, such as when the account days past due is greater than the deferment period granted. Such accounts are aged based on the timely payment of future installments in the same manner as any other account. Historically, the majority of deferrals are approved for borrowers who are either 31-60 or 61-90 days delinquent and these borrowers are typically reported as current after deferral. If a customer receives two or more deferrals over the life of the loan, the loan would generally advance to a TDR designation.

However, in March 2020, the federal bank regulatory agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and concludes that short-term modifications (e.g. six months) made on a good faith basis to borrowers who were impacted by COVID-19 and who were less than 30 days past due as of the implementation date of a relief program are not TDRs. The Company applied this guidance to deferrals executed in response to COVID-19 and did not designate borrowers who were less than 30 days past due at the time of the COVID-19 extension program as TDR’s, even if they would have otherwise qualified. Upon exceeding six months of COVID-19 extensions, borrowers are designated as a TDR. This guidance (or exception) prevented approximately $3.4 billion in retail installment contract balances from being TDR designated as of the end of the quarter. Approximately 31% of all accounts that have received a COVID-19 deferral and are active as of September 30, 2020 are classified as TDR's.
The Company evaluates the results of deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred versus the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted
67




according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, expected life of the loan and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the Company’s ACL are also impacted.

The Company also may agree, or be required by operation of law or by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in loan principal balance, a temporary reduction of monthly payment, or an extension of the maturity date. The servicer of the Company’s revolving personal loans also may grant modifications in the form of principal or interest rate reductions or payment plans. Similar to deferrals, the Company believes modifications are an effective portfolio management technique. Not all modifications are classified as TDRs as the loan may not meet the scope of the applicable guidance or the modification may have been granted for a reason other than the borrower’s financial difficulties.
A loan that has been classified as a TDR remains so until the loan is liquidated through payoff or charge-off. TDRs are generally placed on nonaccrual status when the account becomes past due more than 60 days. For loans on nonaccrual status, interest income is recognized on a cash basis and the accrual of interest is resumed and reinstat