UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2014
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 001-36270
SANTANDER CONSUMER USA HOLDINGS INC.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
|
32-0414408 |
(State or other jurisdiction of incorporation or organization) |
|
(I.R.S. Employer Identification Number) |
1601 Elm Street, Suite 800, Dallas, Texas |
|
75201 |
(Address of principal executive offices) |
|
(Zip Code) |
Registrant’s telephone number, including area code (214) 634-1110
Not Applicable
(Former name, former address, and formal fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
|
¨ |
|
Accelerated filer |
|
¨ |
|
|
|
|
|||
Non-accelerated filer |
|
x |
|
Smaller reporting company |
|
¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ¨ No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
|
Outstanding at May 12, 2014 |
Common Stock ($0.01 par value) |
|
348,775,493 shares |
INDEX
3 |
||
|
4 |
|
Item 1. |
4 |
|
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
30 |
Item 3. |
57 |
|
Item 4. |
57 |
|
|
59 |
|
Item 1. |
59 |
|
Item 1A. |
59 |
|
Item 2. |
73 |
|
Item 3. |
73 |
|
Item 4. |
73 |
|
Item 5. |
73 |
|
Item 6. |
74 |
|
75 |
||
|
2
Unless otherwise specified or the context otherwise requires, the use herein of the terms “ we,” “our,” “us,” “SCUSA,” 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 our 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 we believe 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 our control. For additional discussion of these risks, refer to Part II, Item 1A—Risk Factors. Among the factors that could cause our financial performance to differ materially from that suggested by the forward-looking statements are:
| 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; |
| we face significant risks implementing our growth strategy, some of which are outside our control; |
| our agreement with Chrysler Group LLC (“Chrysler”) may not result in currently anticipated levels of growth and is subject to certain performance conditions that could result in termination of the agreement; |
| 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, could negatively impact our business; |
| future changes in our relationship with Banco Santander, S.A. (“Santander”) could adversely affect our operations; and |
| we operate in a highly regulated industry and continually changing federal, state, and local laws and regulations could materially adversely affect our business. |
If one or more of the factors affecting our forward-looking information and statements proves incorrect, its actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements. Therefore, we caution 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 our results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties. New factors emerge from time to time, and management cannot assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements only speak as of the date of this document, and we undertake 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 us are expressly qualified by these cautionary statements.
3
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Unaudited at March 31, 2014)
|
March 31, |
|
|
December 31, |
|
||
|
2014 |
|
|
2013 |
|
||
|
|
|
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
$ |
112,835 |
|
|
$ |
10,531 |
|
Receivables held for sale |
|
171,466 |
|
|
|
82,503 |
|
Retail installment contracts held for investment, net |
|
21,087,173 |
|
|
|
20,219,609 |
|
Unsecured consumer loans, net |
|
1,000,545 |
|
|
|
954,189 |
|
Restricted cash |
|
1,830,392 |
|
|
|
1,563,613 |
|
Receivables from dealers, held for investment, net |
|
108,200 |
|
|
|
94,745 |
|
Accrued interest receivable |
|
312,040 |
|
|
|
319,157 |
|
Leased vehicles, net |
|
2,956,910 |
|
|
|
2,023,433 |
|
Furniture and equipment, net of accumulated depreciation of $56,059 and $58,117, respectively |
|
30,315 |
|
|
|
25,712 |
|
Federal, state and other income taxes receivable |
|
304,032 |
|
|
|
372,338 |
|
Deferred tax asset |
|
232,185 |
|
|
|
197,041 |
|
Goodwill |
|
74,056 |
|
|
|
74,056 |
|
Intangible assets |
|
54,391 |
|
|
|
54,664 |
|
Other assets |
|
521,693 |
|
|
|
410,305 |
|
Total assets |
$ |
28,796,233 |
|
|
$ |
26,401,896 |
|
Liabilities and Equity |
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
Notes payable — credit facilities, $4,365,000 and $3,650,000 to affiliates, respectively |
$ |
9,573,726 |
|
|
$ |
8,099,773 |
|
Notes payable — secured structured financings |
|
15,783,587 |
|
|
|
15,195,887 |
|
Accrued interest payable — $10,457 and $11,563 to affiliates, respectively |
|
26,784 |
|
|
|
26,512 |
|
Accounts payable and accrued expenses — $41,788 and $39,772 to affiliates, respectively |
|
390,845 |
|
|
|
283,106 |
|
Federal, state and other income taxes payable |
|
15,502 |
|
|
|
7,623 |
|
Other liabilities |
|
97,771 |
|
|
|
102,163 |
|
Total liabilities |
|
25,888,215 |
|
|
|
23,715,064 |
|
Commitments and contingencies (Notes 5 and 10) |
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
Common stock, $0.01 par value — 1,100,000,000 shares authorized; |
|
|
|
|
|
|
|
348,770,333 and 346,763,261 shares issued and 348,767,179 and 346,760,107 shares outstanding, respectively |
|
3,488 |
|
|
|
3,468 |
|
Additional paid-in capital |
|
1,547,075 |
|
|
|
1,409,463 |
|
Accumulated other comprehensive loss |
|
(765 |
) |
|
|
(2,853 |
) |
Retained earnings |
|
1,358,220 |
|
|
|
1,276,754 |
|
Total stockholders’ equity |
|
2,908,018 |
|
|
|
2,686,832 |
|
Total liabilities and equity |
$ |
28,796,233 |
|
|
$ |
26,401,896 |
|
See notes to unaudited condensed consolidated financial statements.
4
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) (Dollars in thousands, except per share amounts)
|
For the Three Months Ended March 31, |
|
|||||
|
2014 |
|
|
2013 |
|
||
Interest on finance receivables and loans |
$ |
1,140,329 |
|
|
$ |
811,907 |
|
Leased vehicle income |
|
147,123 |
|
|
|
— |
|
Other finance and interest income |
|
250 |
|
|
|
2,685 |
|
Total finance and other interest income |
|
1,287,702 |
|
|
|
814,592 |
|
Interest expense — Including $34,243 and $11,512 to affiliates, respectively |
|
124,446 |
|
|
|
82,997 |
|
Leased vehicle expense |
|
120,069 |
|
|
|
— |
|
Net finance and other interest income |
|
1,043,187 |
|
|
|
731,595 |
|
Provision for loan losses |
|
698,594 |
|
|
|
217,193 |
|
Net finance and other interest income after provision for loan losses |
|
344,593 |
|
|
|
514,402 |
|
Profit sharing |
|
32,161 |
|
|
|
— |
|
Net finance and other interest income after provision for loan losses and profit sharing |
|
312,432 |
|
|
|
514,402 |
|
|
|
|
|
|
|
|
|
Gain on sale of receivables |
|
35,814 |
|
|
|
— |
|
Servicing fee income |
|
10,405 |
|
|
|
7,271 |
|
Fees, commissions, and other |
|
89,304 |
|
|
|
68,858 |
|
Total other income |
|
135,523 |
|
|
|
76,129 |
|
|
|
|
|
|
|
|
|
Salary and benefits expense |
|
201,915 |
|
|
|
62,547 |
|
Repossession expense |
|
48,431 |
|
|
|
36,158 |
|
Other operating costs |
|
68,102 |
|
|
|
50,169 |
|
Total operating expenses |
|
318,448 |
|
|
|
148,874 |
|
Income before income taxes |
|
129,507 |
|
|
|
441,657 |
|
Income tax expense |
|
48,041 |
|
|
|
152,798 |
|
Net income |
|
81,466 |
|
|
|
288,859 |
|
Noncontrolling interests |
|
— |
|
|
|
1,543 |
|
Net income attributable to Santander Consumer USA Holdings Inc. |
$ |
81,466 |
|
|
$ |
290,402 |
|
Net income |
$ |
81,466 |
|
|
$ |
288,859 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
Change in unrealized gains (losses) on cash flow hedges, net of tax of $1,230 and $1,706 |
|
2,088 |
|
|
|
2,834 |
|
Change in unrealized gains on investments available for sale, net of tax of zero and $943 |
|
— |
|
|
|
(1,456 |
) |
Other comprehensive income, net |
|
2,088 |
|
|
|
1,378 |
|
Comprehensive income |
$ |
83,554 |
|
|
$ |
290,237 |
|
Comprehensive loss attributable to noncontrolling interests |
|
— |
|
|
|
991 |
|
Comprehensive income attributable to Santander Consumer USA Holdings Inc. |
$ |
83,554 |
|
|
$ |
291,228 |
|
Net income per common share (basic and diluted) |
$ |
0.23 |
|
|
$ |
0.84 |
|
Dividends declared per common share |
$ |
— |
|
|
$ |
— |
|
Weighted average common shares (basic) |
|
348,101,891 |
|
|
|
346,164,763 |
|
Weighted average common shares (diluted) |
|
356,325,036 |
|
|
|
346,164,763 |
|
See notes to unaudited condensed consolidated financial statements.
5
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(Unaudited) (In thousands)
|
Common Stock |
|
|
Additional Paid-In |
|
|
Accumulated Other Comprehensive |
|
|
Retained |
|
|
Noncontrolling |
|
|
Total Stockholders’ |
|
||||||||||
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Loss |
|
|
Earnings |
|
|
Interests |
|
|
Equity |
|
|||||||
Balance — January 1, 2013 |
|
346,165 |
|
|
$ |
3,462 |
|
|
$ |
1,335,572 |
|
|
$ |
(9,164 |
) |
|
$ |
869,664 |
|
|
$ |
39,932 |
|
|
$ |
2,239,466 |
|
Repayment of employee loans |
|
— |
|
|
|
— |
|
|
|
519 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
519 |
|
Stock issued in connection with employee incentive compensation plans |
|
4 |
|
|
|
— |
|
|
|
69 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
69 |
|
Capital contribution received from shareholder |
|
— |
|
|
|
— |
|
|
|
48,275 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
48,275 |
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
290,402 |
|
|
|
(1,543 |
) |
|
|
288,859 |
|
Other comprehensive income, net of taxes |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,378 |
|
|
|
— |
|
|
|
— |
|
|
|
1,378 |
|
Balance — March 31, 2013 |
|
346,169 |
|
|
$ |
3,462 |
|
|
$ |
1,384,435 |
|
|
$ |
(7,786 |
) |
|
$ |
1,160,066 |
|
|
$ |
38,389 |
|
|
$ |
2,578,566 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — January 1, 2014 |
|
346,760 |
|
|
$ |
3,468 |
|
|
$ |
1,409,463 |
|
|
$ |
(2,853 |
) |
|
$ |
1,276,754 |
|
|
$ |
— |
|
|
$ |
2,686,832 |
|
Stock issued in connection with employee incentive compensation plans |
|
2,007 |
|
|
|
20 |
|
|
|
16,390 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,410 |
|
Stock based compensation expense |
|
— |
|
|
|
— |
|
|
|
121,222 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121,222 |
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
81,466 |
|
|
|
— |
|
|
|
81,466 |
|
Other comprehensive income, net of taxes |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,088 |
|
|
|
— |
|
|
|
— |
|
|
|
2,088 |
|
Balance — March 31, 2014 |
|
348,767 |
|
|
$ |
3,488 |
|
|
$ |
1,547,075 |
|
|
$ |
(765 |
) |
|
$ |
1,358,220 |
|
|
$ |
— |
|
|
$ |
2,908,018 |
|
See notes to unaudited condensed consolidated financial statements.
6
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Dollars in thousands)
|
For the Three Months Ended |
|
|||||
|
2014 |
|
|
2013 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
|
Net income |
$ |
81,466 |
|
|
$ |
288,859 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
Derivative mark to market |
|
(5,058 |
) |
|
|
(6,618 |
) |
Provision for credit losses |
|
698,594 |
|
|
|
217,193 |
|
Depreciation and amortization |
|
139,158 |
|
|
|
26,114 |
|
Accretion of discount and capitalized origination costs, net |
|
(197,943 |
) |
|
|
(97,249 |
) |
Originations and purchases of receivables held for sale |
|
(1,267,304 |
) |
|
|
— |
|
Proceeds from sales of and repayments on receivables held for sale |
|
1,187,745 |
|
|
|
— |
|
Gain on sale of receivables |
|
(35,814 |
) |
|
|
— |
|
Stock-based compensation |
|
121,222 |
|
|
|
231 |
|
Deferred tax benefit |
|
(27,128 |
) |
|
|
(32,041 |
) |
Changes in assets and liabilities: |
|
|
|
|
|
|
|
Accrued interest receivable |
|
2,176 |
|
|
|
10,609 |
|
Accounts receivable |
|
(22,193 |
) |
|
|
210 |
|
Federal income tax and other taxes |
|
76,185 |
|
|
|
153,587 |
|
Other assets |
|
(26,738 |
) |
|
|
(5,075 |
) |
Accrued interest payable |
|
272 |
|
|
|
839 |
|
Other liabilities |
|
126,702 |
|
|
|
69,051 |
|
Net cash provided by operating activities |
|
851,342 |
|
|
|
625,710 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
Retail installment contracts originated or purchased from dealers |
|
(4,239,359 |
) |
|
|
(2,541,431 |
) |
Collections on retail installment contracts |
|
2,246,851 |
|
|
|
2,019,293 |
|
Proceeds from sale of loans held for investment |
|
554,060 |
|
|
|
— |
|
Leased vehicles purchased |
|
(1,212,312 |
) |
|
|
— |
|
Manufacturer incentives received |
|
217,457 |
|
|
|
— |
|
Proceeds from termination of leased vehicles |
|
11,089 |
|
|
|
— |
|
Change in revolving unsecured consumer loans |
|
13,493 |
|
|
|
— |
|
Unsecured consumer term loans purchased |
|
(107,902 |
) |
|
|
— |
|
Collections on unsecured consumer term loans |
|
17,110 |
|
|
|
— |
|
Disbursements for receivables from lenders held for investment |
|
(14,288 |
) |
|
|
(83,080 |
) |
Collections on receivables from lenders held for investment |
|
887 |
|
|
|
— |
|
Collections on investments available for sale |
|
— |
|
|
|
17,872 |
|
Purchases of furniture and equipment |
|
(7,443 |
) |
|
|
(2,956 |
) |
Sales of furniture and equipment |
|
714 |
|
|
|
758 |
|
Change in restricted cash |
|
(266,779 |
) |
|
|
(446,938 |
) |
Other investing activities |
|
(4,391 |
) |
|
|
(1,859 |
) |
Net cash used in investing activities |
|
(2,790,813 |
) |
|
|
(1,038,341 |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
Proceeds from notes payable related to secured structured financings — net of debt issuance costs |
|
2,734,093 |
|
|
|
2,444,579 |
|
Payments on notes payable related to secured structured financings |
|
(2,149,907 |
) |
|
|
(1,863,146 |
) |
Proceeds from unsecured notes payable |
|
1,740,000 |
|
|
|
195,000 |
|
Payments on unsecured notes payable |
|
(1,325,000 |
) |
|
|
(188,302 |
) |
Proceeds from notes payable |
|
6,721,716 |
|
|
|
3,945,517 |
|
Payments on notes payable |
|
(5,662,762 |
) |
|
|
(4,236,675 |
) |
Proceeds from stock option exercises, gross |
|
13,071 |
|
|
|
— |
|
Repurchase of stock - employee tax withholding |
|
(5,908 |
) |
|
|
— |
|
Repayment of employee notes |
|
— |
|
|
|
519 |
|
Capital contribution from shareholder |
|
— |
|
|
|
48,275 |
|
Cash collateral posted on derivatives |
|
(23,528 |
) |
|
|
— |
|
Net cash provided by financing activities |
|
2,041,775 |
|
|
|
345,767 |
|
Net increase (decrease) in cash and cash equivalents |
|
102,304 |
|
|
|
(66,864 |
) |
Cash — Beginning of period |
|
10,531 |
|
|
|
70,887 |
|
Cash — End of period |
$ |
112,835 |
|
|
$ |
4,023 |
|
See notes to unaudited condensed consolidated financial statements.
7
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 Changes in Significant Accounting Policies and Practices |
Santander Consumer USA Holdings Inc., a Delaware Corporation (“SCUSA Delaware” or, together with its subsidiaries, “SCUSA” or “the Company”), is the holding company for Santander Consumer USA Inc., an Illinois corporation (“SCUSA Illinois”), and subsidiaries, a specialized consumer finance company focused on vehicle finance and unsecured consumer lending products.
The Company is owned approximately 60.5% by Santander Holdings USA, Inc. (“SHUSA”), a subsidiary of Banco Santander, S.A. (“Santander”), approximately 4.1% by Sponsor Auto Finance Holdings Series LP (“Auto Finance Holdings”), approximately 10.0% by DDFS LLC, an entity affiliated with Thomas G. Dundon, the Company’s Chairman and Chief Executive Officer (“CEO”), approximately 25.3% by public shareholders and approximately 0.1% by other holders, primarily members of senior management.
The Company’s primary business is the indirect origination of retail installment contracts principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers.
In conjunction with a ten-year private label financing agreement with Chrysler Group (the “Chrysler Agreement”) that became effective May 1, 2013, the Company offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand. These products and services include consumer retail installment contracts and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.
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, in 2013 the Company began originating and acquiring unsecured consumer loans.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including certain special purpose financing trusts utilized in financing transactions (“Trusts”), which are considered variable interest entities (“VIEs”). The Company consolidates other VIEs for which it was deemed the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements as of March 31, 2014 and December 31, 2013, and for the three months ended March 31, 2014 and 2013, have been prepared in accordance with United States (U.S.) generally accepted accounting principles 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 generally accepted accounting principles for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates and those differences may be material. These estimates include the determination of loan loss allowance, discount accretion, impairment, expected end-of-term lease residual values, values of repossessed assets, and income taxes. These estimates, although based on actual historical trends and modeling, may potentially show significant variances over time.
Business Segment Information
The Company has one reportable segment: Consumer Finance, which includes the Company’s vehicle financial products and services, including retail installment contracts, vehicle leases, and dealer loans, as well as financial products and services related to motorcycles, RVs, and watercraft. It also includes the Company’s unsecured personal loan and point-of-sale financing operations.
8
Accounting Policies
The Company has identified the following critical accounting policies and estimates used by management in the preparation of the Company’s financial statements: retail installment contracts, unsecured consumer loans, receivables from dealers, provision for loan losses, leased vehicles, income taxes, and earnings per share. As of March 31, 2014, there have been no significant changes to the Company's accounting policies as disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013.
Recent Accounting Pronouncements
In July 2013, the FASB issued ASU 2013-11, Income Taxes: Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU provides guidance on the presentation of unrecognized tax benefits, particularly the manner in which an entity would settle, at the reporting date, any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. This guidance became effective for the Company January 1, 2014 and implementation did not have a significant impact on the Company’s financial position, results of operations, or cash flows.
2. | Finance Receivables |
Finance receivables held for investment at March 31, 2014 and December 31, 2013, were comprised as follows:
|
March 31, 2014 |
|
|||||||||||||||||
|
Retail Installment Contracts Held for Investment |
|
|
|
|
|
|
|
|
|
|||||||||
|
Loans |
|
|
Purchased |
|
|
Total |
|
|
Receivables from |
|
|
Unsecured |
|
|||||
Unpaid principal balance |
$ |
22,826,639 |
|
|
$ |
1,566,897 |
|
|
$ |
24,393,536 |
|
|
$ |
109,105 |
|
|
$ |
1,217,755 |
|
Loan loss allowance (Note 3) |
|
(2,444,552 |
) |
|
|
(206,170 |
) |
|
|
(2,650,722 |
) |
|
|
(1,035 |
) |
|
|
(203,190 |
) |
Discount |
|
(649,416 |
) |
|
|
(41,311 |
) |
|
|
(690,727 |
) |
|
|
— |
|
|
|
(14,866 |
) |
Capitalized origination costs and fees |
|
35,086 |
|
|
|
— |
|
|
|
35,086 |
|
|
|
130 |
|
|
|
846 |
|
Net carrying balance |
$ |
19,767,757 |
|
|
$ |
1,319,416 |
|
|
$ |
21,087,173 |
|
|
$ |
108,200 |
|
|
$ |
1,000,545 |
|
|
December 31, 2013 |
|
|||||||||||||||||
|
Retail Installment Contracts Held for Investment |
|
|
|
|
|
|
|
|
|
|||||||||
|
Loans |
|
|
Purchased |
|
|
Total |
|
|
Receivables from |
|
|
Unsecured |
|
|||||
Unpaid principal balance |
$ |
21,238,281 |
|
|
$ |
1,961,060 |
|
|
$ |
23,199,341 |
|
|
$ |
95,835 |
|
|
$ |
1,165,778 |
|
Loan loss allowance (Note 3) |
|
(2,132,634 |
) |
|
|
(226,356 |
) |
|
|
(2,358,990 |
) |
|
|
(1,090 |
) |
|
|
(179,350 |
) |
Discount |
|
(573,462 |
) |
|
|
(81,216 |
) |
|
|
(654,678 |
) |
|
|
— |
|
|
|
(32,831 |
) |
Capitalized origination costs |
|
33,936 |
|
|
|
— |
|
|
|
33,936 |
|
|
|
— |
|
|
|
592 |
|
Net carrying balance |
$ |
18,566,121 |
|
|
$ |
1,653,488 |
|
|
$ |
20,219,609 |
|
|
$ |
94,745 |
|
|
$ |
954,189 |
|
As of March 31, 2014, retail installment contracts and receivables from dealers held for sale totaled $144,772 and $26,694, respectively. As of December 31, 2013, retail installment contracts and receivables from dealers held for sale totaled $56,066 and $26,437, respectively. Sales of retail installment contracts for the three months ended March 31, 2014 included principal balance amounts of approximately $1,685,723. No receivables from dealers were sold during the three months ended March 31, 2014.
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 facilities or securitization bonds (Note 6). Most of the creditors on the Company’s retail installment contracts are retail consumers; however, approximately $477,062 and $345,177 of the unpaid principal balance represented fleet contracts with commercial consumers as of March 31, 2014 and December 31, 2013, respectively.
Borrowers on the Company’s retail installment contracts held for investment are located in Texas (17%), Florida (10%), California (8%), Georgia (5%), North Carolina (5%), and other states each individually representing less than 5% of the Company’s total.
9
Receivables from dealers held for investment includes a term loan, which was previously a residual warehouse credit facility, with a third-party vehicle dealer and lender that operates in multiple states. The loan allowed committed borrowings of $50,000 at March 31, 2014 and December 31, 2013, and the facility balance was $50,000 at each of those dates.
Borrowers on the Company’s remaining receivables from dealers held for investment, all of which are Chrysler-affiliated, are located in Texas (29%), Ohio (18%), New York (13%), New Jersey (12%), California (8%), Tennessee (8%), Louisiana (5%) and other states each individually representing less than 5% of the Company’s total.
Borrowers on the Company’s unsecured consumer loans are located in California (9%), New York (8%), Texas (8%), Florida (6%), Pennsylvania (5%) and other states each individually representing less than 5% of the Company’s total.
Changes in accretable yield on the Company’s purchased receivables portfolios for the periods indicated were as follows:
|
For the Three Months Ended |
|
|||||
|
March 31, 2014 |
|
|
March 31, 2013 |
|
||
Balance — beginning of period |
$ |
403,400 |
|
|
$ |
816,854 |
|
Additions (loans acquired during the period) |
|
— |
|
|
|
— |
|
Accretion of accretable yield |
|
(65,046 |
) |
|
|
(135,199 |
) |
Reclassifications from nonaccretable difference |
|
24,469 |
|
|
|
61,693 |
|
Balance — end of period |
$ |
362,823 |
|
|
$ |
743,348 |
|
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 during the three months ended March 31, 2014 and 2013. Interest receivable on purchased receivables portfolios totaled $12,446 and $16,950 at March 31, 2014 and December 31, 2013, respectively.
3. | Loan Loss Allowance and Credit Quality |
Loan Loss Allowance
The Company estimates loan losses on individually acquired retail installment contracts and unsecured consumer loans held for investment based on delinquency status, historical loss experience, estimated values of underlying collateral, when applicable, and various economic factors. The Company maintains a general loan loss allowance for receivables from dealers based on risk ratings, and individually evaluates the loans for specific impairment as necessary. The activity in the loan loss allowance for individually acquired loans for the three months ended March 31, 2014 and 2013 was as follows:
|
Three Months Ended March 31, 2014 |
|
|||||||||
|
Retail Installment |
|
|
Receivables |
|
|
Unsecured |
|
|||
Balance — beginning of period |
$ |
2,132,634 |
|
|
$ |
1,090 |
|
|
$ |
179,350 |
|
Provision for loan losses |
|
656,706 |
|
|
|
(55 |
) |
|
|
62,129 |
|
Charge-offs |
|
(752,565 |
) |
|
|
— |
|
|
|
(40,948 |
) |
Recoveries |
|
407,777 |
|
|
|
— |
|
|
|
2,659 |
|
Balance — end of period |
$ |
2,444,552 |
|
|
$ |
1,035 |
|
|
$ |
203,190 |
|
The loan loss allowance for receivables from dealers is comprised entirely of general allowances as none of these receivables have been determined to be individually impaired.
|
Three Months Ended March 31, 2013 |
|
|||||||||
|
Retail Installment |
|
|
Receivables |
|
|
Unsecured |
|
|||
Balance — beginning of period |
$ |
1,555,362 |
|
|
$ |
— |
|
|
$ |
— |
|
Provision for loan losses |
|
251,641 |
|
|
|
— |
|
|
|
— |
|
Charge-offs |
|
(384,726 |
) |
|
|
— |
|
|
|
— |
|
Recoveries |
|
238,335 |
|
|
|
— |
|
|
|
— |
|
Balance — end of period |
$ |
1,660,612 |
|
|
$ |
— |
|
|
$ |
— |
|
10
The activity in the loan loss allowance related to purchased receivables portfolios for the three months ended March 31, 2014 and 2013 was as follows:
|
Three Months Ended |
|
|||||
|
March 31, |
|
|||||
|
2014 |
|
|
2013 |
|
||
Balance — beginning of period |
$ |
226,356 |
|
|
$ |
218,640 |
|
Incremental provisions for purchased receivable portfolios |
|
1,325 |
|
|
|
21,662 |
|
Incremental reversal of provisions for purchased receivable portfolios |
|
(21,511 |
) |
|
|
(56,110 |
) |
Balance — end of period |
$ |
206,170 |
|
|
$ |
184,192 |
|
Delinquencies
Retail installment contracts and unsecured consumer amortizing term loans are classified as non-performing when they are greater than 60 days past due as to principal or interest. At the time a loan is placed on non-accrual status, previously accrued and uncollected interest is reversed against interest income. When an account is returned to a performing status of 60 days or less past due, the Company returns to accruing interest on the contract. The accrual of interest on receivables from dealers and revolving unsecured consumer loans continues until the loan is charged off. A summary of delinquencies as of March 31, 2014 and December 31, 2013 is as follows:
|
March 31, 2014 |
|
|||||||||||||||||
|
Retail Installment Contracts Held for Investment |
|
|
Receivables |
|
|
Unsecured |
|
|||||||||||
|
Loans |
|
|
Purchased |
|
|
Total |
|
|
||||||||||
Principal, current |
$ |
20,933,262 |
|
|
$ |
1,247,506 |
|
|
$ |
22,180,768 |
|
|
$ |
109,105 |
|
|
$ |
1,088,013 |
|
Principal, 31-60 days past due |
|
1,290,394 |
|
|
|
210,344 |
|
|
|
1,500,738 |
|
|
|
— |
|
|
|
39,639 |
|
Delinquent principal over 60 days |
|
602,983 |
|
|
|
109,047 |
|
|
|
712,030 |
|
|
|
— |
|
|
|
90,103 |
|
Total principal |
$ |
22,826,639 |
|
|
$ |
1,566,897 |
|
|
$ |
24,393,536 |
|
|
$ |
109,105 |
|
|
$ |
1,217,755 |
|
|
December 31, 2013 |
|
|||||||||||||||||
|
Retail Installment Contracts Held for Investment |
|
|
Receivables |
|
|
Unsecured |
|
|||||||||||
|
Loans |
|
|
Purchased |
|
|
Total |
|
|
|
|||||||||
Principal, current |
$ |
18,653,827 |
|
|
$ |
1,457,813 |
|
|
$ |
20,111,640 |
|
|
$ |
95,835 |
|
|
$ |
1,072,316 |
|
Principal, 31-60 days past due |
|
1,729,139 |
|
|
|
321,549 |
|
|
|
2,050,688 |
|
|
|
— |
|
|
|
28,102 |
|
Delinquent principal over 60 days |
|
855,315 |
|
|
|
181,698 |
|
|
|
1,037,013 |
|
|
|
— |
|
|
|
65,360 |
|
Total principal |
$ |
21,238,281 |
|
|
$ |
1,961,060 |
|
|
$ |
23,199,341 |
|
|
$ |
95,835 |
|
|
$ |
1,165,778 |
|
As of March 31, 2014 and December 31, 2013, there were no receivables held for sale that were non-performing.
FICO® Distribution — A summary of the credit risk profile of the Company’s consumer loans by Fair Isaac Corporation (FICO®) distribution, determined at origination, as of March 31, 2014 and December 31, 2013 was as follows:
March 31, 2014 |
|
|||||||
|
|
Retail Installment |
|
|
Unsecured |
|
||
|
|
Contracts Held |
|
|
Consumer |
|
||
FICO Band |
|
for Investment |
|
|
Loans |
|
||
<540 |
|
|
27.0% |
|
|
|
3.6% |
|
540-599 |
|
|
32.2% |
|
|
|
27.7% |
|
600-659 |
|
|
26.2% |
|
|
|
43.8% |
|
>660 |
|
|
14.6% |
|
|
|
24.9% |
|
11
December 31, 2013 |
|
|||||||
|
|
Retail Installment |
|
|
Unsecured |
|
||
|
|
Contracts Held |
|
|
Consumer |
|
||
FICO Band |