10-Q 1 a2018q310-q.htm 10-Q Document



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

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




Class
 
Outstanding at November 5, 2018
Common Stock ($0.01 par value)
 
359,351,215 shares





INDEX
 

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


2



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

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

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

3



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

Glossary

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

4



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


5



PART I: FINANCIAL INFORMATION
Item 1.
Condensed Consolidated Financial Statements (Unaudited)
SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) (Dollars in thousands, except per share amounts)
 
September 30,
2018
 
December 31,
2017
Assets
 
 
(As Revised-Note 1)
Cash and cash equivalents - $18,909 and $106,295 held at affiliates, respectively
$
81,435

 
$
527,805

Finance receivables held for sale, net
933,380

 
2,210,421

Finance receivables held for investment, net
24,839,583

 
22,394,286

Restricted cash - $341 and $2,529 held at affiliates, respectively
2,130,130

 
2,553,902

Accrued interest receivable
304,538

 
340,618

Leased vehicles, net
13,183,793

 
10,160,327

Furniture and equipment, net of accumulated depreciation of $67,823 and $55,525, respectively
62,852

 
69,609

Federal, state and other income taxes receivable
99,308

 
95,060

Related party taxes receivable
467

 
467

Goodwill
74,056

 
74,056

Intangible assets, net of amortization of $43,906 and $36,616, respectively
32,177

 
29,734

Due from affiliates
9,814

 
33,270

Other assets
1,055,422

 
913,244

Total assets
$
42,806,955

 
$
39,402,799

Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Notes payable — credit facilities
$
5,632,053

 
$
4,848,316

Notes payable — secured structured financings
24,867,297

 
22,557,895

Notes payable — related party
3,003,529

 
3,754,223

Accrued interest payable
44,555

 
38,529

Accounts payable and accrued expenses
453,834

 
429,531

Deferred tax liabilities, net
1,138,088

 
892,415

Due to affiliates
69,804

 
82,382

Other liabilities
456,580

 
333,806

Total liabilities
35,665,740

 
32,937,097

Commitments and contingencies (Notes 5 and 10)

 

Equity:
 
 
 
Common stock, $0.01 par value — 1,100,000,000 shares authorized;
 
 
 
361,986,423 and 360,779,465 shares issued and 359,346,730 and 360,527,463 shares outstanding, respectively
3,593

 
3,605

Additional paid-in capital
1,647,738

 
1,681,558

Accumulated other comprehensive income, net
56,601

 
44,262

Retained earnings
5,433,283

 
4,736,277

Total stockholders’ equity
7,141,215

 
6,465,702

Total liabilities and equity
$
42,806,955

 
$
39,402,799


See notes to unaudited condensed consolidated financial statements.





6



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

The assets of consolidated VIEs, presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, that can be used only to settle obligations of the consolidated VIE and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to the Company's general credit were as follows:
 
September 30,
2018
 
December 31,
2017
Assets
 
 
As Revised (Note 1)
Restricted cash
$
1,570,773

 
$
1,995,557

Finance receivables held for sale, net

 
1,106,393

Finance receivables held for investment, net
23,948,565

 
21,681,882

Leased vehicles, net
13,183,793

 
10,160,327

Various other assets
721,765

 
747,101

Total assets
$
39,424,896

 
$
35,691,260

Liabilities
 
 
 
Notes payable
$
31,243,698

 
$
28,467,942

Various other liabilities
113,193

 
197,969

Total liabilities
$
31,356,891

 
$
28,665,911


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

See notes to unaudited condensed consolidated financial statements.


7



SANTANDER CONSUMER USA HOLDINGS INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) (Dollars in thousands, except per share amounts)
 
For the Three Months Ended 
 September 30,
 
For the Nine Months Ended 
 September 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(As Revised-Note 1)

 
 
 
(As Revised-Note 1)

Interest on finance receivables and loans
$
1,227,129

 
$
1,218,299

 
$
3,606,675

 
$
3,680,533

Leased vehicle income
583,097

 
457,932

 
1,625,272

 
1,305,429

Other finance and interest income
8,522

 
6,385

 
24,153

 
15,415

Total finance and other interest income
1,818,748

 
1,682,616

 
5,256,100

 
5,001,377

Interest expense — Including $40,868, $35,132, $126,541 and $109,648 to affiliates, respectively
285,583

 
250,674

 
800,564

 
711,134

Leased vehicle expense
389,076

 
339,581

 
1,108,094

 
927,976

Net finance and other interest income
1,144,089

 
1,092,361

 
3,347,442

 
3,362,267

Provision for credit losses
597,914

 
571,012

 
1,514,799

 
1,765,518

Net finance and other interest income after provision for credit losses
546,175

 
521,349

 
1,832,643

 
1,596,749

Profit sharing
1,652

 
5,945

 
18,882

 
22,333

Net finance and other interest income after provision for credit losses and profit sharing
544,523

 
515,404

 
1,813,761

 
1,574,416

Investment losses, net — Including $4,218, $29,081, $24,298 and $22,900 from affiliates, respectively
(86,320
)
 
(52,592
)
 
(255,474
)
 
(228,513
)
Servicing fee income — Including $12,158, $2,739, $33,605 and $8,627 from affiliates, respectively
26,409

 
28,673

 
80,129

 
92,310

Fees, commissions, and other — Including $4,303, $225 and $5,072 and $830 from affiliates, respectively
84,552

 
82,866

 
247,423

 
275,025

Total other income
24,641

 
58,947

 
72,078

 
138,822

Compensation expense
119,722

 
134,169

 
360,325

 
398,325

Repossession expense
62,189

 
66,877

 
197,930

 
205,445

Other operating costs — Including $2,473, $1,037, $7,468 and $3,403 to affiliates, respectively
90,431

 
96,857

 
278,949

 
281,626

Total operating expenses
272,342

 
297,903

 
837,204

 
885,396

Income before income taxes
296,822

 
276,448

 
1,048,635

 
827,842

Income tax expense
64,874

 
77,879

 
237,047

 
232,484

Net income
$
231,948

 
$
198,569

 
$
811,588

 
$
595,358

 
 
 
 
 
 
 
 
Net income
$
231,948

 
$
198,569

 
$
811,588

 
$
595,358

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in unrealized gains (losses) on cash flow hedges, net of tax of ($2,078), $201, $903 and $297, respectively
(5,848
)
 
(379
)
 
6,190

 
(778
)
Comprehensive income
$
226,100

 
$
198,190

 
$
817,778

 
$
594,580

Net income per common share (basic)
$
0.64

 
$
0.55

 
$
2.25

 
$
1.66

Net income per common share (diluted)
$
0.64

 
$
0.55

 
$
2.24

 
$
1.65

Dividend declared per common share
$
0.20

 
$

 
$
0.30

 
$

Weighted average common shares (basic)
360,725,330

 
359,619,083

 
360,898,973

 
359,397,063

Weighted average common shares (diluted)
361,445,223

 
360,460,353

 
361,714,123

 
360,069,449


See notes to unaudited condensed consolidated financial statements.

8



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

 
$
3,589

 
$
1,657,611

 
$
28,259

 
$
3,549,160

 
$
5,238,619

Cumulative-effect adjustment upon adoption of ASU 2016-09

 

 
1,439

 

 
25,113

 
26,552

Stock issued in connection with employee incentive compensation plans
871

 
9

 
1,582

 

 

 
1,591

Stock-based compensation expense

 

 
12,166

 

 

 
12,166

Purchase of treasury stock
(29
)
 

 
(404
)
 

 

 
(404
)
 Tax sharing with affiliate

 

 
(2
)
 

 

 
(2
)
 Net income (As Revised-Note 1)

 

 

 

 
595,358

 
595,358

Other comprehensive income (loss), net of taxes

 

 

 
(778
)
 

 
(778
)
Balance — September 30, 2017
359,750

 
$
3,598

 
$
1,672,392

 
$
27,481

 
$
4,169,631

 
$
5,873,102

 
 
 
 
 
 
 
 
 
 
 
 
Balance — January 1, 2018
360,527

 
$
3,605

 
$
1,681,558

 
$
44,262

 
$
4,736,277

 
$
6,465,702

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

 

 

 
6,149

 
(6,149
)
 

Stock issued in connection with employee incentive compensation plans
1,208

 
12

 
5,712

 

 

 
5,724

 Stock-based compensation expense

 

 
6,892

 

 

 
6,892

 Stock repurchase/Treasury stock
(2,388
)
 
(24
)
 
(50,155
)
 

 

 
(50,179
)
Dividends

 

 

 

 
(108,433
)
 
(108,433
)
 Tax sharing with affiliate

 

 
3,731

 

 

 
3,731

 Net income

 

 

 

 
811,588

 
811,588

Other comprehensive income (loss), net of taxes

 

 

 
6,190

 

 
6,190

Balance — September 30, 2018
359,347

 
$
3,593

 
$
1,647,738

 
$
56,601

 
$
5,433,283

 
$
7,141,215

 
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,
 
2018
 
2017
Cash flows from operating activities:
 
 
As Revised-Note 1
Net income
$
811,588

 
$
595,358

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Derivative mark to market
(12,999
)
 
(7,694
)
Provision for credit losses
1,514,799

 
1,765,518

Depreciation and amortization
1,211,386

 
1,013,738

Accretion of discount
(127,238
)
 
(193,473
)
Originations and purchases of receivables held for sale
(1,790,552
)
 
(2,773,407
)
Proceeds from sales of and collections on receivables held for sale
3,043,148

 
3,032,688

Change in revolving personal loans, net
(147,976
)
 
(139,358
)
Investment losses, net
255,474

 
228,513

Stock-based compensation
6,892

 
12,166

Deferred tax expense
242,361

 
257,385

Changes in assets and liabilities:
 
 
 
Accrued interest receivable
22,599

 
11,986

Accounts receivable
9,828

 
(6,049
)
Federal income tax and other taxes
(4,257
)
 
(24,823
)
Other assets
(77,235
)
 
(61,765
)
Accrued interest payable
8,151

 
(86
)
Other liabilities
113,602

 
(28,176
)
Due to/from affiliates
6,062

 
27,858

Net cash provided by operating activities
5,085,633

 
3,710,379

Cash flows from investing activities:
 
 
 
Originations of and disbursements on finance receivables held for investment
(11,856,650
)
 
(8,448,231
)
Purchases of portfolios of finance receivables held for investment
(183,824
)
 
(228,843
)
Collections on finance receivables held for investment
8,035,336

 
7,700,586

Proceeds from sale of loans held for investment

 
135,577

Leased vehicles purchased
(7,678,161
)
 
(4,718,388
)
Manufacturer incentives received
785,499

 
787,093

Proceeds from sale of leased vehicles
2,722,688

 
1,807,729

Change in revolving personal loans, net
70,861

 
57,761

Purchases of furniture and equipment
(7,065
)
 
(15,113
)
Sales of furniture and equipment
95

 
747

Other investing activities
(10,070
)
 
(5,852
)
Net cash used in investing activities
(8,121,291
)
 
(2,926,934
)
Cash flows from financing activities:
 
 
 
Proceeds from notes payable related to secured structured financings — net of debt issuance costs
12,870,460

 
12,272,344

Payments on notes payable related to secured structured financings
(10,586,031
)
 
(10,638,153
)
Proceeds from unsecured notes payable

 
6,165,000

Payments on unsecured notes payable

 
(4,885,577
)
Proceeds from notes payable
20,179,195

 
15,466,611

Payments on notes payable
(20,145,458
)
 
(19,129,562
)
Proceeds from stock option exercises, gross
5,962

 
4,970

Dividends paid
(108,433
)
 

Shares repurchased
(50,179
)
 

Net cash provided by (used in) financing activities
2,165,516

 
(744,367
)
Net increase (decrease) in cash and cash equivalents and restricted cash
(870,142
)
 
39,078

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

 
2,917,479

Cash and cash equivalents and restricted cash — End of period
$
2,211,565

 
$
2,956,557

Supplemental cash flow information:
 
 
 
      Cash and cash equivalents
$
81,435

 
$
397,311

      Restricted cash
2,130,130

 
2,559,246

     Total cash and cash equivalents and restricted cash
$
2,211,565

 
$
2,956,557

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

 
$
495,991

See notes to unaudited condensed consolidated financial statements.

10



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

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

In June 2018, the Company announced that it was in exploratory discussions with FCA regarding the future of FCA’s U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. The likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined. In July 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018.
The Company also originates vehicle loans through a web-based direct lending program, purchases vehicle retail installment contracts from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, the Company has other relationships through which it provides personal loans, private-label revolving lines of credit and other consumer finance products.
As of September 30, 2018, the Company was owned approximately 68.3% by SHUSA, a subsidiary of Santander, and approximately 31.7% by other shareholders.
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries, including certain Trusts, which are considered VIEs. The Company also consolidates other VIEs for which it was deemed to be the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
The accompanying condensed consolidated financial statements as of September 30, 2018 and December 31, 2017, and for the three and nine months ended September 30, 2018 and 2017, have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, these financial statements contain all adjustments, consisting of normal recurring adjustments, necessary for the fair statement of the financial position, results of operations and cash flows for the periods indicated. Results of operations for the periods presented herein are not necessarily indicative of results of operations for the entire year. These financial statements should be read in conjunction with the 2017 Annual Report on Form 10-K.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, as of the date of the financial statements and the amount of revenue and expenses during the reporting

11



periods. Actual results could differ from those estimates and those differences may be material. These estimates include the determination of credit loss allowance, discount accretion, impairment, fair value, expected end-of-term lease residual values, values of repossessed assets, and income taxes. These estimates, although based on actual historical trends and modeling, may potentially show significant variances over time.
Corrections to Previously Reported Amounts
In connection with preparing its financial statements for the quarter ended September 30, 2018, the Company identified and corrected two immaterial errors. To correct the errors, the Company has prepared its consolidated financial statement as of and for the period ended September 30, 2018 on a corrected basis and revised its comparative consolidated financial statements included within. The matters giving rise to the corrections are summarized below:
For core retail auto loans originated after January 1, 2017, as previously disclosed, the Company had determined past due status using a 90% required minimum payment threshold, while continuing to use a 50% threshold to report past due status on core retail auto loans originated prior to that date. The Company treated the change as a change in estimate. In Q3 2018, the Company determined that a borrower's payment of 50% of the contractual amount was not sufficient to qualify as substantially all of the contractual payments due, and historically a 90% required minimum payment threshold should be used for all loans and our prior reporting was in error. Therefore, the consolidated financial statements and related delinquency disclosures have been corrected to be on that basis. 
On January 1, 2017, as previously disclosed, the Company prospectively began classifying as non-accrual loans (1) any loans designated as TDRs and 60+ days past due at the time of TDR and (2) any loans less than 60 days past due at the time of TDR that had a third instance of deferral. These TDR loans were also placed on a cost recovery basis from that time forward and not returned to accrual status until there was sustained evidence of collectability. The Company treated the change as a change in estimate. In Q3 2018, the Company determined the changes in both nonaccrual designation and cost recovery basis were in error and, in turn, has corrected the error by reverting to its accounting policy at December 31, 2016 whereby loans are placed on non-accrual when they are 60+ days past due status, and reversing the impacts of the change going back to January 1, 2017.

The following tables summarize the impacts of the corrections on the Company’s Consolidated Balance Sheet:
 
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivable held for investment, net
 
24,096,770

 
(39,606
)
 
24,057,164

 
22,587,358

 
(35,712
)
 
22,551,646

 
22,427,769

 
(33,483
)
 
22,394,286

Accrued interest receivable
 
286,164

 
23,658

 
309,822

 
269,258

 
19,264

 
288,522

 
326,640

 
13,978

 
340,618

  Total assets
 
$
41,173,136

 
$
(15,948
)
 
$
41,157,188

 
$
40,045,188

 
$
(16,448
)
 
$
40,028,740

 
$
39,422,304

 
$
(19,505
)
 
$
39,402,799

Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred tax liabilities, net
 
1,079,557

 
(3,849
)
 
1,075,708

 
966,444

 
(3,965
)
 
962,479

 
897,121

 
(4,706
)
 
892,415

  Total liabilities
 
$
34,127,402

 
$
(3,849
)
 
$
34,123,553

 
$
33,319,173

 
$
(3,965
)
 
$
33,315,208

 
$
32,941,803

 
$
(4,706
)
 
$
32,937,097

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Total stockholders'
   equity
 
7,045,734

 
(12,099
)
 
7,033,635

 
6,726,015

 
(12,483
)
 
6,713,532

 
6,480,501

 
(14,799
)
 
6,465,702

Total liabilities and equity
 
$
41,173,136

 
$
(15,948
)
 
$
41,157,188

 
$
40,045,188

 
$
(16,448
)
 
$
40,028,740

 
$
39,422,304

 
$
(19,505
)
 
$
39,402,799


12



 
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance receivable held for investment, net
 
22,667,203

 
(29,211
)
 
22,637,992

 
23,634,914

 
(21,165
)
 
23,613,749

 
23,444,625

 
(9,373
)
 
23,435,252

Accrued interest receivable
 
330,554

 
9,744

 
340,298

 
330,710

 
3,023

 
333,733

 
306,742

 
2,123

 
308,865

  Total assets
 
$
38,765,557

 
$
(19,467
)
 
$
38,746,090

 
$
39,507,482

 
$
(18,142
)
 
$
39,489,340

 
$
39,061,940

 
$
(7,250
)
 
$
39,054,690

Liabilities and Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred tax liabilities, net
 
1,515,932

 
(7,335
)
 
1,508,597

 
1,419,820

 
(6,829
)
 
1,412,991

 
1,342,055

 
(2,714
)
 
1,339,341

  Total liabilities
 
$
32,880,323

 
$
(7,335
)
 
$
32,872,988

 
$
33,828,749

 
$
(6,829
)
 
$
33,821,920

 
$
33,642,942

 
$
(2,714
)
 
$
33,640,228

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  Total stockholders'
   equity
 
5,885,234

 
(12,132
)
 
5,873,102

 
5,678,733

 
(11,313
)
 
5,667,420

 
5,418,998

 
(4,536
)
 
5,414,462

Total liabilities and equity
 
$
38,765,557

 
$
(19,467
)
 
$
38,746,090

 
$
39,507,482

 
$
(18,142
)
 
$
39,489,340

 
$
39,061,940

 
$
(7,250
)
 
$
39,054,690


The following tables summarize the impacts of the corrections on the Consolidated Statements of Income and Comprehensive Income:
 
 
Six months ended June 30, 2018
 
Three months ended June 30, 2018
 
Three months ended March 31, 2018
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
Interest on finance receivable and loans
 
2,270,673

 
108,873

 
2,379,546

 
1,156,536

 
54,470

 
1,211,006

 
1,114,137

 
54,403

 
1,168,540

Provision for credit losses
 
811,570

 
105,315

 
916,885

 
352,575

 
53,969

 
406,544

 
458,995

 
51,346

 
510,341

Income (loss) before income taxes
 
748,255

 
3,558

 
751,813

 
448,645

 
501

 
449,146

 
299,610

 
3,057

 
302,667

Income tax expense
 
171,315

 
857

 
172,172

 
114,004

 
116

 
114,120

 
57,311

 
741

 
58,052

Net income (loss)
 
576,940

 
2,700

 
579,640

 
334,641

 
385

 
335,026

 
242,299

 
2,315

 
244,614

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share (basic)
 
$
1.60

 
$
0.01

 
$
1.61

 
$
0.93

 
$

 
$
0.93

 
$
0.67

 
$
0.01

 
$
0.68

Net income (loss) per common share (diluted)
 
$
1.59

 
$
0.01

 
$
1.60

 
$
0.92

 
$
0.01

 
$
0.93

 
$
0.67

 
$
0.01

 
$
0.68


 
 
For the year ended December 31, 2017
 
Nine months ended September 30, 2017
 
Three months ended September 30, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
Interest on finance receivable and loans
 
4,755,678

 
89,945

 
4,845,623

 
3,626,497

 
54,036

 
3,680,533

 
1,185,059

 
33,240

 
1,218,299

Provision for credit losses
 
2,254,361

 
109,450

 
2,363,811

 
1,692,015

 
73,503

 
1,765,518

 
536,447

 
34,565

 
571,012

Income (loss) before income taxes
 
823,514

 
(19,505
)
 
804,009

 
847,309

 
(19,467
)
 
827,842

 
277,773

 
(1,325
)
 
276,448

Income tax expense
 
(364,092
)
 
(4,706
)
 
(368,798
)
 
239,819

 
(7,335
)
 
232,484

 
78,385

 
(506
)
 
77,879

Net income (loss)
 
1,187,606

 
(14,799
)
 
1,172,807

 
607,490

 
(12,132
)
 
595,358

 
199,388

 
(819
)
 
198,569

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share (basic)
 
$
3.30

 
$
(0.04
)
 
$
3.26

 
$
1.69

 
$
(0.03
)
 
$
1.66

 
$
0.55

 
$

 
$
0.55

Net income (loss) per common share (diluted)
 
$
3.30

 
$
(0.04
)
 
$
3.26

 
$
1.69

 
$
(0.04
)
 
$
1.65

 
$
0.55

 
$

 
$
0.55


 
 
Six months ended June 30, 2017
 
Three months ended June 30, 2017
 
Three months ended March 31, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
Interest on finance receivable and loans
 
2,441,438

 
20,796

 
2,462,234

 
1,232,252

 
(8,167
)
 
1,224,085

 
1,209,186

 
28,963

 
1,238,149

Provision for credit losses
 
1,155,568

 
38,938

 
1,194,506

 
520,555

 
2,725

 
523,280

 
635,013

 
36,213

 
671,226

Income (loss) before income taxes
 
569,536

 
(18,142
)
 
551,394

 
348,108

 
(10,892
)
 
337,216

 
221,428

 
(7,250
)
 
214,178

Income tax expense
 
161,434

 
(6,829
)
 
154,605

 
83,433

 
(4,115
)
 
79,318

 
78,001

 
(2,714
)
 
75,287

Net income (loss)
 
408,102

 
(11,314
)
 
396,788

 
264,675

 
(6,777
)
 
257,898

 
143,427

 
(4,536
)
 
138,891

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss) per common share (basic)
 
$
1.14

 
$
(0.04
)
 
$
1.10

 
$
0.74

 
$
(0.02
)
 
$
0.72

 
$
0.40

 
$
(0.01
)
 
$
0.39

Net income (loss) per common share (diluted)
 
$
1.13

 
$
(0.03
)
 
$
1.10

 
$
0.74

 
$
(0.02
)
 
$
0.72

 
$
0.40

 
$
(0.01
)
 
$
0.39





13



The following tables summarize the impacts of the corrections on the Consolidated Statement of Cash Flows:
 
 
Six months ended June 30, 2018
 
Three months ended March 31, 2018
 
For the year ended December 31, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
Net cash provided by operating activities
 
3,413,047

 
99,192

 
3,512,239

 
1,835,235

 
49,117

 
1,884,352

 
3,766,605

 
75,968

 
3,842,573

Net cash used in investing activities
 
(4,773,776
)
 
(99,192
)
 
(4,872,968
)
 
(1,528,057
)
 
(49,117
)
 
(1,577,174
)
 
(3,415,591
)
 
(75,968
)
 
(3,491,559
)

 
 
Nine months ended September 30, 2017
 
Six months ended June 30, 2017
 
Three months ended March 31, 2017
 
 
Reported (a)
 
Corrections
 
Revised
 
Reported (a)
 
Corrections
 
Revised
 
Reported (a)
 
Corrections
 
Revised
Net cash provided by operating activities
 
3,666,086

 
44,293

 
3,710,379

 
2,215,804

 
17,773

 
2,233,577

 
1,464,010

 
26,840

 
1,490,850

Net cash used in investing activities
 
(2,882,641
)
 
(44,293
)
 
(2,926,934
)
 
(2,352,925
)
 
(17,773
)
 
(2,370,698
)
 
(1,165,288
)
 
(26,840
)
 
(1,192,128
)
(a) Adjusted for ASU 2016-18 Statement of Cash Flows (Topic 230) for periods ended September 30, 2017, June 30, 2017, and March 31, 2017
In addition to the revision of the Company’s consolidated financial statements, information within the footnotes to the consolidated statements has been revised to reflect the correction of the errors discussed above. The following table summarizes the impacts of the corrections of those items, including table disclosures in Note 4 Credit Loss Allowance and Credit Quality:
 
 
June 30, 2018
 
March 31, 2018
 
December 31, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
TDR - Unpaid principal balance
 
$
5,958,564

 
$
139,716

 
$
6,098,280

 
$
5,998,768

 
$
97,110

 
$
6,095,878

 
$
6,261,894

 
$
52,141

 
$
6,314,035

TDR - Impairment
 
1,496,580

 
167,642

 
1,664,222

 
1,595,465

 
120,667

 
1,716,132

 
1,731,320

 
72,812

 
1,804,132

TDR allowance ratio
 
25.1
%
 
2.2
%
 
27.3
%
 
26.6
%
 
1.6
%
 
28.2
%
 
27.6
%
 
1.0
%
 
28.6
%
 
 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

Nonaccrual loans TDRs
 
1,554,860

 
(957,705
)
 
597,155

 
1,346,148

 
(781,215
)
 
564,933

 
1,390,373

 
(583,435
)
 
806,938

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Delinquencies for our retail installment contracts held for investment:
 
 
 
 
 

 
 
 
 
 

 
 
 
 
 

Principal, 30-59 days past due
 
2,535,166

 
116,651

 
2,651,817

 
2,238,425

 
95,020

 
2,333,445

 
2,827,678

 
130,517

 
2,958,195

Delinquent principal over 59 days
 
1,151,410

 
83,092

 
1,234,502

 
1,089,648

 
72,663

 
1,162,311

 
1,544,583

 
101,206

 
1,645,789

Total delinquent principal
 
3,686,576

 
199,743

 
3,886,319

 
3,328,073

 
167,683

 
3,495,756

 
4,372,261

 
231,723

 
4,603,984


 
 
September 30, 2017
 
June 30, 2017
 
March 31, 2017
 
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
 
Reported
 
Corrections
 
Revised
TDR - Unpaid principal balance
 
$
6,276,659

 
$
24,499

 
$
6,301,158

 
$
5,880,317

 
$
9,978

 
$
5,890,295

 
$
5,788,390

 
$
1,251

 
$
5,789,641

TDR - Impairment
 
1,782,114

 
40,400

 
1,822,514

 
1,686,159

 
18,337

 
1,704,496

 
1,604,489

 
8,033

 
1,612,522

TDR allowance ratio
 
28.4
%
 
0.5
%
 
28.9
%
 
28.7
%
 
0.3
%
 
29.0
%
 
27.7
%
 
0.1
%
 
27.8
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nonaccrual loans TDRs
 
Not applicable, since disclosure started in Q4'2017
 
Not applicable, since disclosure started in Q4'2017
 
Not applicable, since disclosure started in Q4'2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Delinquencies for our retail installment contracts held for investment:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Principal, 30-59 days past due
 
2,580,226

 
114,104

 
2,694,330

 
2,709,606

 
133,781

 
2,843,387

 
2,345,995

 
98,728

 
2,444,723

Delinquent principal over 59 days
 
1,464,543

 
76,580

 
1,541,123

 
1,417,461

 
92,946

 
1,510,407

 
1,153,369

 
72,318

 
1,225,687

Total delinquent principal
 
4,044,769

 
190,684

 
4,235,453

 
4,127,067

 
226,727

 
4,353,794

 
3,499,364

 
171,046

 
3,670,410



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

14



Accounting Policies
There have been no material changes in the Company's accounting policies from those disclosed in Part II, Item 8 - Financial Statements and Supplementary Data in the 2017 Annual Report on Form 10-K.
Recently Adopted Accounting Standards
Since January 1, 2018, the Company adopted the following Financial Accounting Standards Board (FASB) Accounting Standards Updates (ASUs):
ASU 2014-09, Revenue from Contracts with Customers (Topic 606) as amended. This ASU, requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It includes a five-step process to assist an entity in achieving the main principles of revenue recognition under ASC 606. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it did not have a material impact on the elements of the Company's Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and investment gains and losses). All other revenue streams in the scope of the new standard were not material. The Company adopted this standard as of January 1, 2018 using a modified retrospective approach. The adoption of this standard did not require any adjustments to the opening balance of retained earnings as of January 1, 2018.
ASU 2016-18, Statement of Cash Flows (Topic 230). Restricted Cash (A consensus of the FASB Emerging Issues Task Force), which requires that the statement of cash flows include restricted cash in the beginning and end-of-period total amounts shown on the statement of cash flows and that the statement of cash flows explain changes in restricted cash during the period. The Company adopted this standard as of January 1, 2018 using retrospective approach. The impact of this adoption was disclosure only for periods presented on the Company's Statements of Cash Flows.
ASU 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The new guidance amends the hedge accounting model to enable entities to more accurately reflect their risk management activities in the financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line in which the earnings effect of the hedged item is reported. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company elected to early adopt this standard as of January 1, 2018 using modified retrospective approach. The adoption of this standard did not require any adjustments to the opening balance of retained earnings for cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness.
ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The new guidance is effective for public business entities for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company elected to early adopt this standard as of January 1, 2018 and reclassified $6,149 stranded income tax effects from accumulated other comprehensive income to retained earnings.

The adoption of the following ASUs did not have an impact on the Company's business, financial position or results of operations.
ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

15



ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118
ASU 2018-06, Codification Improvements to Topic 942, Financial Services—Depository and Lending
Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases. The primary effect of the ASU is to replace the existing accounting requirements for operating leases for lessees. Lessee accounting requirements for finance leases and lessor accounting requirements for operating leases and sales type and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. The ASU is effective on January 1, 2019, with early adoption permitted. The Company is currently in the process of reviewing its lease contracts and examining the practical expedients and accounting policy elections provided in the ASU, as well as ensuring the Company's control environment and reporting processes reflect the requirements of the ASU. Upon adoption, for our operating leases where the Company is the lessee (primarily our facilities leases), the Company's balance sheet will include a right-of-use asset and lease liability that will be derecognized in a manner that effectively yields a straight-line lease expense over the lease term. In addition, the Company will no longer capitalize certain initial direct costs in connection with lease originations where it is the lessor. The ASU will be applied on a modified retrospective basis with a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Comparative periods presented in the financial statement and associated required disclosures will continue to be presented in accordance with Topic 840. The Company currently plans to adopt the ASU on January 1, 2019. The Company does not anticipate that the adoption of the ASU will have a material impact to our financial statements.

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

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework- Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. The ASU removes the requirement to disclose: the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The ASU requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new guidance will be effective for public companies for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect that the new guidance will have on its consolidated financial statements and related disclosures.


16



In addition to those described in detail above, the Company is also in the process of evaluating the following ASUs and does not expect them to have a material impact on the Company's business, financial position, results of operations or disclosures:
ASU 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force)
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting
ASU 2018-09, Codification Improvements

2.
Finance Receivables (As Revised)
Held For Investment
Finance receivables held for investment, net is comprised of the following at September 30, 2018 and December 31, 2017:
 
September 30,
2018
 
December 31, 2017
Retail installment contracts acquired individually (a) (b)
$
24,784,966

 
$
22,329,026

Purchased receivables-Credit Impaired
20,673

 
27,839

Receivables from dealers
14,787

 
15,623

Personal loans
2,507

 
4,459

Capital lease receivables (Note 3)
16,650

 
17,339

Finance receivables held for investment, net
$
24,839,583

 
$
22,394,286

(a) The Company has elected the fair value option for certain retail installment contracts reported in finance receivables held for investment, net. As at September 30, 2018 and December 31, 2017, $14,138 and $22,124 of loans were recorded at fair value (Note 13).
(b) During the three months ended September 30, 2018, the Company purchased finance receivables from a third party lender for $67,249. The unpaid principal balance of these loans as of the acquisition date was $74,086. The Company determined that the acquired loans were non-credit impaired loans because they either did not have evidence of credit quality deterioration or it was not probable that the Company would not collect all contractually required payments, which was evaluated using a number of factors including the loan’s delinquency status, borrower’s credit status, and roll rates. Accordingly, these loans are accounted for in accordance with ASC 310 - 20. Under ASC 310-20, the difference between the loan's principal balance, at the time of purchase, and the fair value is recognized as an adjustment of yield over the life of the loan. All other policies related to interest income, calculation of allowance for loan losses, and recognizing TDRs would be similar to retail installment contracts acquired individually and are originated by the Company.
The Company's held for investment portfolio of retail installment contracts acquired individually, receivables from dealers, and personal loans is comprised of the following at September 30, 2018 and December 31, 2017:

17




September 30, 2018

Retail Installment Contracts
Acquired
Individually

Receivables from
Dealers

Personal Loans

Non-TDR

TDR


Unpaid principal balance
$
22,483,913


$
5,759,094


$
14,942


$
3,266

Credit loss allowance - specific


(1,559,808
)




Credit loss allowance - collective
(1,740,862
)



(155
)

(897
)
Discount
(191,421
)

(48,787
)




Capitalized origination costs and fees
77,832


5,005




138

Net carrying balance
$
20,629,462


$
4,155,504


$
14,787


$
2,507


December 31, 2017

Retail Installment Contracts
Acquired
Individually

Receivables from
Dealers

Personal Loans

Non-TDR

TDR


Unpaid principal balance
$
19,679,082


$
6,314,035


$
15,787


$
6,887

Credit loss allowance - specific


(1,804,132
)