Santander Consumer USA Holdings Inc.
Q2 2019 Earnings Call Transcript

Published: 24 Jul 2019

[Operator:]

Good morning and welcome to the Santander Consumer USA Holdings Second Quarter 2019 Earnings Conference Call. At this time, all parties have been placed into a listen-only mode. And following today's presentation, the call will be opened for your questions. [Operator Instructions]It is now my pleasure to introduce your host Evan Black, Vice President of Investor Relations. Evan, the floor is yours.

[Evan Black:]

Thank you. Good morning, everyone, and thanks for joining the call today. On the call we have Scott Powell, President and CEO; and J.C. Alvarez, CFO.Certain statements made today on today's call maybe forward-looking. Please refer to our public SEC filings and Risk Factors with respect to these statements. We also may reference certain non-GAAP financial measures that we believe will be useful for our investors. A reconciliation of those measures to U.S. GAAP is included in the 8-K issued today, July 24, 2019.And now, I'll turn the call over to Scott Powell. Scott?

[Scott Powell:]

Thanks, Evan. Good morning, everybody. Thanks for joining the call. So let me start with a few positive announcements before we get into the second quarter results. So I'll start with the leadership changes that we announced this morning. So if you look at slide 3, you can see those laid out.So let me start with Juan Carlos Alvarez, our current CFO, sitting across the table with me this morning. Juan Carlos is being promoted. He's getting the bigger job. He's going to be the SHUSA SBNA's CFO effective September 16. So congratulations to Juan Carlos.We're going to replace Juan Carlos with Fahmi Karam, who is sitting next to me here. So Fahmi will be our new CFO effective September 16 as well. Fahmi has been with us since 2015. He's done a whole range of things here. He is currently responsible for our pricing function.Prior to that, he led our strategy and development team and he's been responsible for overseeing other things like asset acquisitions, sales and other strategic initiatives. Fahmi also played an important role in the amended MPLFA with FCA, which we'll talk about in a second. So it's great to have Fahmi moving into that new role.The other thing we're announcing is that Rich Morrin is leaving the company. Rich has been President of Chrysler Capital and the Head of Auto Relationships. We're sad to see Rich go. Rich has been an important part of our company for a long time. Rich is going off to do something completely different. He's got a great opportunity outside the auto finance space. So we wish Rich well in that new endeavor.So we're replacing Rich with Shawn Allgood. Shawn is currently the Head of Chrysler Capital. So he'll step into Rich's role and take responsibility for not only Chrysler Capital, but our other auto finance relationships as well. Shawn joined us in 2017, after spending nearly three decades at Ally Financial. So Shawn is well qualified to step into Rich's role.So I want to congratulate those three folks on their new roles, thank Rich Morrin for everything he's done for us here at Santander and I'll certainly miss Rich personally. So the good news about all this is these are internal promotions. We feel really good about the strength and depth and maturity of our organization.It's great to have well-qualified successors lined up to take these very important roles. And as I said, this is a sign of our maturity and we certainly wouldn't have this depth readily at hand couple of years ago, so happy for the promotions and we feel good about the depth and quality of the organization. So that news comes on the heel of our announcement with respect to Chrysler -- Fiat Chrysler that we announced a few weeks ago. And then we also made some announcement on capital distributions that I'll get to.So you'll recall that back in June 2018, FCA announced their intent to buy U.S. finance company. And so fast-forward to where we are today, it's great to be able to say we've reached a mutually beneficial agreement with FCA through the amended MPLFA. We're excited because it establishes an operating framework going forward for our two companies, that'll allow us to grow together and continue to work as partners. And when you look at our results over the last year with FCA, you can see clear evidence of that strengthening partnership.So in the second quarter of this year our penetration rate is 36% that's up from 32% last year and it's really the highest level of penetration we've achieved since 2014. You can also look at our growing originations with the FCA. That's a reflection of that strong relationship as well. You've heard me say on prior calls we are working really hard on improving the dealer experience and operations. And again, that's part of what you see in that improved penetration rate.The other big news for us is that we announced $1.1 billion share buyback couple of weeks ago and we're also announcing an increase in our dividend to $0.22 up from $0.20. And again, another demonstration of our continued maturity and progress towards the goal that we've talked about of having a more efficient capital base, which has been one of our long-term objectives.So if you look at page -- slide 4, I'll hit some of the quarterly financial highlights. So net income is $368 million, which is up 10% from the same quarter a year ago. Earnings per share during the quarter were $1.05, which is up 13% from a year ago and our ROA is 3.2%. It was another strong quarter on originations. We did $8.4 billion in total volume, which is up 5% from a year ago. Our core business at $2.6 billion was down 7% from a year ago. But just keep in mind that we had a really, really strong quarter a year ago.Chrysler loans. Here again, you can see the strength of the relationship, up 25% from a year ago. And the other thing is that reflects the strong partnership we now have in place with Santander Bank N.A. So in the quarter, you'll see that we originated -- or Santander Bank originated $1.9 billion of loans through Santander Consumer. And you'll recall that we rolled that program out a year ago and so a really strong quarter for Santander Bank and again that helps us support the prime portion of the business with the FCA.Leases were down a little bit, down 4%, but a strong quarter overall for originations. In funding, we continue to execute successfully in the securitization market. We did $3.4 billion of ABS. In July, we executed our second lease ABS transaction of the year.And credit performance, you'll see our credit performance remains stable and continue to reflect a pretty benign credit environment. So our 30 to 59-day delinquency ratio was down a little bit, 59-plus was up a little bit. Net charge-off ratio was up a little bit 30 basis points.Recoveries were really strong, especially when you look at the auction recovery rates, which Juan Carlos will take you through in detail.Also, another really positive sign is the decrease in TDR balances, down almost $400 million dollars from the prior quarter, which is a little more than we actually expected, which is positive. And that's really driven by the fact that we're doing fewer modifications and our net charge-off ratio was slightly higher.Just a couple of comments about the macro-environment. Obviously, as I've said before, the radar is fully switched on when it comes to tracking what's happening in the broader environment. Job creation and consumer confidence remains strong, which is obviously very, very important to our business. And then when you look at new car sales and used car sales numbers, they kind of up and down a little bit, but pretty consistent over time. And I'd say a slight positive is that used vehicle prices has not shown some year-over-year improvements kind of across the board, so including Sudan, so it's not just SUVs.I'll stop there. With that, I'll turn it over to Juan Carlos.

[J.C. Alvarez:]

Thanks, Scott, and good morning everyone. We'll start with slide 5 for some key economic indicators that influence our originations and credit performance. As mentioned earlier, the overall macroeconomic environment remains supportive of our business. Consumer confidence is high and job creation remains robust.Environment continues to support the resilient consumer-lending environment. And with Q2 now behind us, industry experts are forecasting only a moderate decrease in new vehicle sales for 2019, which is still indicative of a stable market.If we look at the slide 6, there are a few key factors that influence our low severity and credit performance. Our auction recovery rate, which represents all auto-related recoveries from the auction lanes is 50.8%, up from 46.5% during the prior year quarter.Our recovery rate, which includes non-metal proceeds, bankruptcy and deficiency sales were 60.3% in the quarter, which is stable versus the same quarter last year. Additionally, non-prime industry securitization data points to relatively a stable net loss and delinquency trends compared to last year.Turning to slide 7 for origination trends. Overall, we saw a healthy level of originations across the board more than $8 billion in total volume. Core loan originations decreased 7% in the quarter compared to the prior year quarter. However, the first half of the year volume is up 3% year-on-year.Chrysler Capital originations did increase 25% and the SBNA program combined with our FCA partnership drove strong growth in prime loans. This was a particularly strong quarter for that SBNA platform in which we expect volume to be closer to be one billion per quarter level for the remainder of the year.Switching to lease originations, volume decreased 4% versus Q2 last year. Looking ahead, we remained disciplined with respect to the risk-return profile of our non-prime originations. We also expect to continue to support FCA prime loans with our SBNA program, while maintaining a strong presence in lease.Turning now to slide 8. Again, we are pleased to reach a mutually beneficial agreement that strengthens our partnership with FCA going forward. The amendment sets us up well for the remainder of the contract and positions us to continue to help FCA succeed. As part of the announcement, we announced that we made a one-time payment of $60 million to FCA and the amendment also terminates the tolling agreement.Moving to our performance in the quarter, our average quarterly FCA penetration rate in Q2 was 36%, up from 32% last year. We continued to optimize our full expect lending and servicing platform across loans, leases, floor plan and third-party services. We're really excited about our new agreement. During the coming quarters, we aim to build on the progress made by remaining focused on optimizing the relationship, continue to drive improvement in dealer satisfaction scores in collaborating under our updated agreement. This will bring renew bigger to a relationship going forward.Looking to slide 9. The service for others platform generated $25 million in servicing fee income this quarter. Now in addition to those servicing fees, $12 million of SBNA origination fees are in our fees commissions and other line item. During the quarter, we added $1.9 billion in originations to the SFO platform via our agreement with Santander Bank, which drove these SFO balance increase as our previous flow programs assets runoff.Moving to slide 10 to review our financial performance for the quarter versus the prior year quarter. Net income for the quarter of $368 million, up for -- up from $335 million. Interest on finance receivables and loans increased 4% driven by higher average loan balances. Net lease vehicle income increased 31% due to continued growth in lease balances. Interest expense increased 20% due to the increase in benchmark ranks compared to Q2 of 2018 and by a lower contribution from our derivative portfolio.Provision for credit losses increased to $431 million in the quarter, up $24 million, driven by a combination of higher balances and lower modification levels offset by the lower TDR balances. Total other income was $30 million in the quarter and included $85 million of held-for-sale adjustments related to the personal lending portfolio, which is comprised of $97 million in customer charge-offs offset by a $12 million decrease in market discount.Continuing to slide 11 versus the prior year quarter, early state delinquency is decreased 20 basis points while late state delinquency increased 20 basis points.Moving now to the bottom portion of the slide on losses. The RIC gross charge-off ratio of 16.1% in the quarter increased 90 basis points from Q2 last year. The RIC net charge-off ratio of 6.4% increased 30 basis points from Q2 last year. And as we referenced last quarter, loan modification levels are lower relative to prior years. And again, less modifications impact delinquencies, charge-offs and lower inflows into TDRs.Turning to slide 12 now to review the loss figures in dollars. Net charge-offs for RIC increased $56 million versus prior year quarter to $462 million. $45 million of losses were due to a higher gross charge-off rate another $20 million is attributable to higher average loan balances, which were up more than $2 billion from last year. These were slightly offset by better recoveries and other items.Turning our attention to provisions and reserves on slide 13. At the end of Q2 2019, the allowance for credit losses totaled $3.1 billion decreasing $54 million from last quarter, which represents an allowance ratio of 10.8% at the end of this quarter. Going over the components of our reserve work, the allowance increased $234 million due to new originations in the quarter $61 million increase was due to unfavorable performance adjustments. And these increases were more than offset by fewer inflows into TDR migration, which drove a benefit of $10 million and $339 million decrease due to TDR and non-TDR payoffs and charge-offs.Let's now turn to slide 14 to discuss TDRs in more detail. This quarter TDR balances decreased nearly $400 million versus the prior year quarter continuing their downward trend, due to the lower TDR inflows given the strength of the consumer and the lower modification levels. As we mentioned last quarter, this slower generation of TDRs to allow reserve balances to trend lower through the rest of the year.Turning to slide 15, the expense ratio for the quarter totaled 2% down from 2.2%, the prior year quarter which is important as expense – dollars are relatively flat compared to last year with a strong growth in average balances.Turning to slide 16, our liquidity position remains very strong with total committed funding of more than $46 billion. SC continued to demonstrate consistent and deep access to the capital markets. Our treasurer in capital markets teams got busy. He is doing one transaction of each active ABS shelf in the quarter for a combined $3.4 billion. We also continued to diversify our funding through private financings and lender commitments, which totaled $17.3 billion.Subsequent to quarter-end, we also closed a $1.2 billion lease ABS transaction SRT and this is the fourth transaction since the inception of this new lease platform in late 2017 which is important for funding diversification.Finally, turning to slide 17, our CET1 ratio for the quarter was 15.7% down from 16.9% versus prior year. As Scott mentioned earlier, we are excited to have the opportunity to return more capital in this cycle with the announcement of our increased dividend of $1.1 billion repurchase program.Now turning to our guidance for the third quarter. My comments will be relative to Q2 unless otherwise noted and will include the impact of personal lending. We expect net finance and other interest income to be up 0% to 2% in the second quarter, primarily driven by higher loan balances and lower swap rates.Provision expense is expected to increase $185 million to $235 million in line with seasonal patterns. We expect total other income to be flat to $10 million worse driven by normal seasonality of the Bluestem held-for-sale portfolio. And operating expenses are expected to be flat to $10 million better in line with seasonal patterns. Regarding our full year guidance, this quarter we have no changes to 2019 guidance ranges that we provided on our last earnings call.And before we begin Q&A, I'd like to turn the call back to – over to you Scott.

[Scott Powell:]

Thanks, Juan Carlos. I would just come back to four key points. So Santander Consumer has made significant progress over the last few years creating the better dealer experience fine-tuning our pricing engine and making sure our risk management and operations are running smoothly. Number two, we've remained disciplined on expenses with positive operating leverage. Number three, we spent a lot of time building and deepening our management team and you see that reflected in the management announcements that we've made this morning, and we continue to focus on running Santander Consumer at large U.S. Financial Institution Standards.And then number 4 FCA, we continue to work very hard to support our partner. I think our results reflect progress we've made. We're very happy to announce the amended MPLFA, and we really look forward to continuing to do a better job for FCA over the remaining life of the contract, and we look forward to the opportunity to kind of win the opportunity to have a longer relationship with FCA past the end of the contract.So with that, I'll stop there and we'll go to questions. Over to you, operator.

[Operator:]

[Operator Instructions] And we'll take our first question from Jack Micenko with SIG.

[Jack Micenko:]

Hi. Good morning. Congratulations JC on the new role. Scott, looking at the penetration rate obviously a big jump. You're running 36% into the SBNA flow is helping that. The move this quarter was that the new contract agreement? Did something specific changed there, or is it just really more of the harvesting of the ongoing efforts? I know you had Rich focused on this for a long time prior to this just try to understand, the step-up here in the big origination number. And what's incremental versus what's sort of been in process internally?

[Scott Powell:]

Yeah. Jack, there wasn't any particular thing that happened. Yes, SBNA had a particularly good quarter driving the prime originations, but no it's really – it's the byproduct of a whole bunch of different things that we've been working on to kind of on the pricing and execution side that I touched on with respect to dealers. And then just kind of improving the relationship that we have kind of at the operating level and the senior levels in the company and obviously sales incentives that they put in the market are an important part of that volume, but it also reflects the confidence that they have in us the growing confidence they have in us to deliver for them. So it's a reflection of all those things together. And you're right having SBNA, Santander Bank N.A. in the game with a different funding structure is really helpful with the FCA relationship.

[Jack Micenko:]

Okay. Thanks. And then my follow-up on the balance sheet, I think you historically run some of the liability-sensitive position on the balance sheet and with the fed contemplating going in the direction here. I guess, a, is that still true; and then b, is there a way to sort of come up with the sensitivity around 25 bps per and sort of the lag effect that could be on the funding costs?

[J.C. Alvarez:]

Yes, the -- so yes, we're still liability sensitive. I mean, over the years we've neutralized that position somewhat. It's disclosed in our filings, but disclosure is always references to parallel movements that's how you tend to measure it. I think what will be particularly important for us is up until now we have -- we're already seeing the benefit, gradual benefit of lower swap rates, right, which help us every time we do a securitization. We're doing the FCA rate cut right starting to finally push down like one month LIBOR and that benefits us on warehouse lines for example, okay? So we will get some additional help if that materializes, okay? What you'll see for the quarter or NII sensitivity to a 100 basis points parallel move downward is $35 million in a year, but again that will be a for a parallel move, right? And that's not exactly what we're seeing.

[Jack Micenko:]

Okay. All right. Thanks for taking the questions.

[Scott Powell:]

Thanks.

[Operator:]

And we'll take our next question from John Hecht with Jefferies.

[Scott Powell:]

Hi, John.

[John Hecht:]

Thanks very much guys and JC congratulations. A little bit of a follow-up from the step-up from the Chrysler partnership. If these trends with volumes persist, what is that due to kind of base rate NIM and loss rates? Is there any effect over time in those?

[J.C. Alvarez:]

No. Not necessarily. I would say, the new agreement as we described earlier gives us the ability to solidify our relationship going forward. It will give us ability to do better business together, okay? But it doesn't necessarily represent a drastic change in strategy, so bigger and better.

[John Hecht:]

Okay. And then second question pertains to the allowance level. Number one is, do you have any comments on CECL; and number two, should we expect the -- for CECL aside should we expect the ALLL to continue to decline at the similar pace as a percentage of loans given what's going on with the TDRs? And thank you very much.

[J.C. Alvarez:]

Thanks. So in terms of CECL, we are running the parallels, so exactly in line with the guidance that or the discussions we've had the last several quarters. Those parallel runs are going now. We expect to be able to come back with better guidance of the impact in the Q3 earnings call. So all of that is going according to plans. Your other question was related to the allowance ratio. I think right now the downward trend sort of as you highlight is impacted mostly by the lower TDR balances, right? Because if you look at the non-TDR allowance ratio, it has actually been very steady, okay? So yes, I think it would be the same answer we've provided in the past. The allowance ratio should stabilize -- apples-to-apples should stabilize once the TDR balances stabilize.

[Scott Powell:]

Thanks, John.

[J.C. Alvarez:]

Thank you, John.

[John Hecht:]

Thank you, guys.

[Scott Powell:]

Operator?

[Operator:]

We will take our next question from Mark DeVries with Barclays.

[Mark DeVries:]

Hi. So the $1 billion repurchase authorization is obviously quite large relative to the current flow. Is there anything you can share with us around, how you might look to go about repurchasing those shares, if you're considering anything on an accelerated basis?

[J.C. Alvarez:]

Yes. We're very pleased about having announced the both increasing dividends as well as the -- up to $1.1 billion repurchase program is -- as you all know has been able to distribute more capital is something that we've been pursuing for quite a while, so this is a very positive step. In terms of how we'll go about it as we move forward, we're going to evaluate -- as we have in the past evaluate market conditions and consider all execution strategies as we move forward, okay? We'll also consider any other potential alternatives for capital deployment always to make sure that we're generating value, okay? So I think right now what we are looking at is flexibility in terms of how we execute our repurchase program over the next 12 months really.

[Mark DeVries:]

Okay. Got it. And then, is there anything you can share with us about just kind of specific substantive changes that were made to the Chrysler agreement and whether you considered extending that?

[J.C. Alvarez:]

Yes. The FCA agreement you have a redacted contract is out there. And you'll see looking at it that there is a update certain performance metrics sharing practices that sort of thing. So that's again the importance about the agreement is that it will solidifies our partnership going forward and gives us the ability to do better business, right? And better partnership.

[Scott Powell:]

Yes, and Mark the only thing I would add to what Juan Carlos said is it was important for both sides that we have an operating framework that works given the current relationship. So obviously, the tolling agreement they put in place at the end of the year froze their ability to essentially continue to dispute some elements of the contract. And so I would just tell you the new contract we're happy with it the amendment -- sorry the amendment of the contract, they're happy with it, we're happy with it. It frames up the relationship in a way that both sites can operate for the future without concern about creating the default situation. So it's -- that's one of the reasons we're very excited about it, because it creates a framework that really works for us and lets FCA do what they need to do as well.

[J.C. Alvarez:]

I think specifically to your question about an extension, okay. The contract -- the amendment does not extend the contract, but I think as we said earlier, it gives us the ability to have this enhance relationship and gives us the opportunity to fight for the opportunity to do more business even beyond that, Santander will have to work.

[Mark DeVries:]

Okay, got it. Thank you.

[J.C. Alvarez:]

Thanks.

[Operator:]

And we'll take our next question from Steven Kwok with KBW.

[Steven Kwok:]

Hi, thanks for taking my questions. Just the first one is around the originations. It seems to be strong year-over-year, but just wondering if you could touch upon the competitive landscape. And then also, can you provide some color around your outlook for used-car prices that's been holding up really well.

[Scott Powell:]

Yeah. I mean, the competitive landscape hasn't changed. Its super competitive, continues to be super competitive. Yeah, it's -- I do think it's one of the most competitive lending spaces out there in the U.S. market. So yeah there's no let off in the competitive framework going on there.And the outlook for used car prices I think is actually pretty good. Obviously there are people who say it's going to go down, and -- but it's obviously strong in the quarter. The outlook for the consumer and the economy remains good.One other thing that's interesting is as I mentioned I think that strength in used car prices isn't just trucks and SUVs, Sedans were strong as well, which to me says it's a bit of an across the board kind of phenomenon driving that. So we're not changing our strategy because we think used car prices are going to continue to rise. But I don't have any -- I don't think we have any reason to believe that decline in used car prices, a significant decline is on the horizon.

[Steven Kwok:]

Yeah. And just given your ability to increase the origination year-over-year, are you guys taking share from others and then it sell like who are the ones that you are taking share from?

[Scott Powell:]

Our market share is up a little bit year-over-year, but it's -- I don't think we can see where that's coming from and we're up a few percentage points on our market share I think. No, it's just kind of grinding that out application-by-application on the non-Chrysler side and then working hard on the Chrysler relationship and improving our service to dealers, which is very big.I mean we haven't really talked about the specifics, but we've invested a lot in delivering better for dealer’s, things like putting better staffing in place, which drives down our contract inventories, which means we're finding deals faster. And when I say faster, we're significantly improved from where we were last year. We set up things like regional credit teams and we're increasing our auto-decision rate and we're not done.I mean that's -- those are all we made progress across all those issues. But we'll continue to focus on how Santander works inside the dealer because that's critical for continuing to get good volume from dealers, and so it's just a combination of all those things and like -- and also optimize our credit and pricing engine. No magic it's just a combination of all those things together.

[Steven Kwok:]

Got it. That’s helpful. Thank you.

[Scott Powell:]

Yeah. You're welcome.

[Operator:]

And we'll take our next question from Moshe Orenbuch with Credit Suisse.

[Scott Powell:]

Hi, Moshe.

[Moshe Orenbuch:]

Great, thanks. And congratulations J.C. on this jump as well. And maybe talk a little bit about the better integration with that -- with your parent with respect to the funding transactions that you've done this quarter? And whether that has an impact on how you think about where your volumes going to be in the next few quarters?

[J.C. Alvarez:]

The funding, you mean the SBNA platform?

[Moshe Orenbuch:]

Yeah, sorry.

[J.C. Alvarez:]

Yeah. Yeah, so it's almost like the previous one it's not new. I remember we fully launched -- last year we talked about how we were working on it and we worked on it for a number of months to make sure that this platform wasn't like the previous flow agreements where we would originate warehouse and then pass on the -- or sale the loans to our partners.This case with FCA we have a platform that not only meets their buy box, their credit box, but also allows us to originate directly onto SBNA's balance sheet, okay? And in return we get origination fees and servicing fees. So this was fully launched exactly a year ago, okay? And we have seen the gradual improvement there with really a very strong quarter this year as was discussed earlier. As I change our strategy, I think it's your question. That was your question, right Moshe, because you were fading out a little bit.

[Moshe Orenbuch:]

Well I guess what I saw is that they -- Santander sold some credit with noted that maybe makes their appetite a little bit larger for the product.

[J.C. Alvarez:]

Okay. No, no, no. Totally -- I got you. I got you. Okay. No, totally unrelated. Those notes that you're -- credit-linked notes that you're referring to, they are part of the old flow program that we had with the group with head office basically. Remember we use that as a bridge until SBNA came on board. We originate and sell those loans to head office. Recently the transaction that you're talking about, the group decided to securitize them and basically distribute some of the trenches. So that's entirely unrelated to an ongoing -- to our ongoing platform with SBNA and not recurring from the SC standpoint.

[Moshe Orenbuch:]

Got it.

[J.C. Alvarez:]

Thanks for the clarification.

[Moshe Orenbuch:]

Just separately. Thanks. Separately, any kind of update on the written agreement where I guess past the two-year point since that is -- was since you've been working with.

[Scott Powell:]

Are we past the two-year point? It was from 2017. I guess we're in the second year maybe.

[J.C. Alvarez:]

It was in the spring.

[Scott Powell:]

In the spring, yeah. So, yeah, I mean it sounds like you read it. I mean it's a pretty wide ranging for everybody's benefit 2017 written agreement Fed Reserve is on compliance issues at the holding company level and then into Santander Consumer here. And I would tell you that like the other written agreements that we closed out and you recall that we closed out one from 2014 on paying of dividends and then we closed out a very comprehensive one from 2015 on overall risk management framework.And so just like those two we're heads down. We've committed significant resources and management effort to address those issues raised by the Federal Reserve, which we don't agree with by the way. It's all when I say, operating at large U.S. financial institution standards, that's exactly what I'm talking about. And so I can't really tell you when we closed out, otherwise again big trouble Moshe. But – just, we are working super hard on it and we have good plans and we know our plans are good. It's just a matter of following through and executing those plans and then we'll get closed out.

[Moshe Orenbuch:]

Great but certainly I don't want you get in trouble. Thanks Scott.

[Scott Powell:]

Sometimes it's fun to get in trouble, but not with the Federal Reserve.

[Operator:]

And we'll take our next question from David Scharf with JMP Securities.

[David Scharf:]

Good morning, thanks for taking my questions. First, I wanted to maybe just clarify or make sure I heard correctly. Regarding the SBNA origination volume, did you suggest that in the second half we should be thinking about a level closer to $1 billion down from the close to $2 billion in Q2?

[J.C. Alvarez:]

Yes I mean -- we've talked about it in the past that for this year a more normal cadence would be about $1 billion a quarter, okay. So this quarter was particularly strong, okay. Some of -- because of some of the drivers we talked about earlier, right. So we're not expecting the platform to keep originating close to $2 billion every quarter. It should be somewhere between that and $1 billion a quarter.

[David Scharf:]

Got it. And J.C. when I look at the -- both the FICO and the new versus used mix on slide 19, I'm assuming that the material shift to greater than 640 FICO and the big increase in the new vehicle mix what was driven primarily by the SBNA volumes. If that were back at the $1 billion level in the quarter, would these relative mixes look pretty consistent with the last couple of quarters?

[J.C. Alvarez:]

Yes. It's definitely. So the answer to the first question is, yes. The mix in the FICO's are -- shifts are largely driven by the increase originations of the SBNA platform. So if we were to have a more normal quarter still strong, but somewhat off the level we've seen you would see these percentages shift downward as well.

[David Scharf:]

Okay. Thank you.

[Operator:]

And we'll take our next question from Rick Shane with JP Morgan.

[Rick Shane:]

Hey guys, thanks for taking my questions through this morning. And J.C. thank you for all your hard work over the last several years, really appreciate the conversations. Scott, I think this is really a question for you. When we look at things one of the factors that's contributed to the strength across the sector is strong used car prices and I think the thesis has been that off-lease was going to create supply/demand pressure. As we look forward can you talk about what you see as the sort of supply/demand for used cars in the context of off-lease tariffs and also the ongoing UAW negotiations?

[Scott Powell:]

Yes. Maybe, I'll take a shot. Yes I mean certainly – yes, I don't think it was just you guys. I don't think I'll get myself in trouble on this one. I think it's the relative value between used cars and new cars.And yes, there's been comments made about increasing volumes of off-lease cars and what impact that might have. I mean again, I think, I'm not smart enough so I don't get into the details in a way because I just think the overall kind of what's happened in the economy the strength of the consumer, the demand for cars, the relative attractiveness of used car prices is still there.And again I -- when we look at what happened in the second quarter, I think it reflects that because it's not just people who like SUVs buying SUVs and driving up SUV used car prices. So I think there is an underlying macroeconomic effect here that has a big impact on it and the trade-off versus new car prices is real.So I think that will continue that's my best view of it. And yes, I mean I had a lot of the conversation about increasing volumes of off-lease hasn't really had that big of an impact. So...

[J.C. Alvarez:]

We've had those sort of tsunamis, right, almost every year in the spring and at the end of the month have dealt with it very well.

[Scott Powell:]

Yes it's a very efficient system. It probably wasn't very helpful.

[Rick Shane:]

No it is. I mean look it's obviously -- one of the things where eventually everybody will be right about declines in used car prices timing is a little bit trickier. You alluded to something I find interesting which is the commentary on SUVs and that ties into something we've considered as well.Do you think some of this is really been a function of U.S. consumers becoming pretty complacent about low gas prices and their increased penetration of SUVs as a result.

[Scott Powell:]

Yes. I mean I think that has an effect sure. Yes I think again I can't -- I would give a try to say how big of an effect it has, but sure it does. But again there's so much going on in the market that has an -- just can get old fashion consumer preference it has a big influence.And so -- and like I've said in this call many times, I think the forecasts to your point are not usually accurate and my forecasts are not usually accurate. So it's somewhere down in the middle.

[J.C. Alvarez:]

I think probably the thing to highlight more recently the SUV trend was the driver for quite a while, right? And we benefited from having the mix of very good SUVs and trucks in our portfolio. But more recently sedans are also doing very well. So it's not just the complacency on cash prices, right? It's probably wider than that -- broader than that.

[Scott Powell:]

Yes.

[Rick Shane:]

Okay. Thank you for that clarification. Appreciate it guys.

[Scott Powell:]

I hope that helps through. You bet.

[Operator:]

And we'll take our next question from Chris Donat with Sandler O'Neill.

[Chris Donat:]

Good morning and thanks for taking my question. I have one about the FCA agreement because you mentioned the $60 million payout that you would make to FCA. I'm just curious, it doesn't seem like I saw it in the second quarter and I didn't hear J.C. mention it for the third quarter. So how does that show up? Is it onetime or is it an amortized or does it show up in a later date?

[J.C. Alvarez:]

It's amortized over the remaining life of the contract.

[Chris Donat:]

Okay. So, there will be some in the third quarter then?

[J.C. Alvarez:]

There's already some in the second quarter and you will see the same proportion over the remaining life of the contract.

[Chris Donat:]

Got it. Okay. And then just one more question on TDRs. I thought I heard you say that the reduction in TDR balances was partly a function of a decision on your part to do fewer modifications. Was that sort of strategy change? Is that driven by the economy or just it take on fewer TDRs? Just trying to understand why the balances are coming down or less is getting put on to replace what comes off?

[J.C. Alvarez:]

Yes. Remember this is something we've discussed in the last couple earnings calls and we highlighted at that time that we starting in the first quarter we were seeing less modifications and generating less inflows into TDRs. And that's a result of our continues continued process to evaluate servicing practices, okay.And that trend you can see I'll just point you to some of the information that we put on our cues where you have the trend of what has been never defer for once or twice. If you plot that out, you'll see that the trend for less deferrals has been pretty consistent since starting really after the big spike that we saw coinciding with the hurricane season, right in late 2017. And we're just seeing more of it now. I don't know Scott if you'd like to--

[Scott Powell:]

No, I think you said it right which is the governing principle here is consumers have to demonstrate ability and willingness to pay before we can do either short-term or long-term modifications and determining that is subtle and complex process and so we're always looking to optimize that our criteria for doing that to make sure we're applying those very important tools when it's appropriate.And as Juan Carlos said when there's a hurricane or flooding, we do a hardship modifications occasionally then. And so yes when you look at the combination of less hardship modifications and then a consistent refinement to improve what we're doing every day to help people is what's really driving it.

[Chris Donat:]

Got it. Thanks very much guys.

[Scott Powell:]

And the only other thing I was going to add is and I think there's less demand forward from consumers when the economy is good too. So, a combination of all those factors takes it down.

[Chris Donat:]

Okay.

[Operator:]

And we'll go to the next question from Vincent Caintic with Stephens.

[Vincent Caintic:]

Hey, thanks. Good morning, guys.

[Scott Powell:]

Good morning.

[J.C. Alvarez:]

Good morning.

[Vincent Caintic:]

Thanks for the color on the sensitivity to -- from rates to your funding costs. I was just wondering if you could also talk about the asset side. I just look this quarter a big yield didn't drop that much even though benchmark rates dropped significantly. I did see dealer receivable yields drop a bit.I was just wondering if you could talk maybe a bit about the sensitivity. It seems like you do have pricing power. If you can talk about what -- why that is and that maybe changes your appetite on different parts of the risks spectrum? Thanks.

[J.C. Alvarez:]

Yes. So, one thing to note you mentioned that dealer -- the yield on receivables from dealers that, right? And I think you're referring to dropping from 3.4 a year ago to 1.6. That yield right there from dealers is really just on a very, very small balance that you have down in the press release.At the bottom of Page 8, you'll see there is something like $30 million balance is -- that's a legacy loan really so that's really get baked into equation. But more to your point your question about pricing power. You're right, yields on the acquired RICs dropped 10 basis points only, right? Despite the move down in swaps.Really at this point, we do retain -- we talked about it already, it's still competitive out there, right? So, this has -- it's not like we've lost pricing power but it's not as if we've gained more of it either. It really has to do with the mix that we originate each particular quarter.If we have been to retain a little bit more of the near-prime or prime paper that doesn't quite go or fit into the SBNA buy box the yields for the originations that month will drop a little bit. All-in-all I would say our ability to pass higher rates to the consumers while rates were going up was evident we were able to do it.Now, swap rates come down, we'll also pass the loan to the consumer because we have to compete, okay? So, really our key driver in terms of pressuring NIM, right, which we've seen is how quickly we can benefit from the lower trend in rates that we've seen this year, right?So, to the earlier point, we're starting to see that benefit as we securitize, but to really turn the cost of debt around we'll also need a cut in the short-term that will help LIBOR go down and then as we reprice the entire stock of it that will help our income for it.

[Vincent Caintic:]

Okay, that's helpful. Is it not just necessarily for pricing but do you have any view on the change in sort of the risk you want to play with a notice that there's been more drive securitizations versus SDART. Any thought of change that you are kind of just following the market with that? Thank you.

[J.C. Alvarez:]

No. No significant change in the strategy at all. This is more of the grand, you call it a grand, this is just single area. As we go along we revise our pricing. We look at the market where pricing models we look at the market where there are pockets of opportunities. And no drastic change in originations in other way.

[Vincent Caintic:]

Okay, got it. Thanks very much.

[J.C. Alvarez:]

One thing to keep in mind when you compare driving SDART remember that we used to fund drive through private deals, right? And the drive is a more recent -- we've brought it back more recently. So, that also might impact the number of one platform versus the other. But there's really no change in underlying strategy.

[Vincent Caintic:]

Great. Thank you.

[Operator:]

We'll take our next question from Arren Cyganovich with Citi.

[Arren Cyganovich:]

Thanks. Just kind of getting back to the TDR balances, I think last quarter you talked about that normalizing maybe at the end of this year, kind of continues to get better as the new formation is coming in, like as you talked about before, a bit slower than it had in the past. Do you still expect that to be kind of towards the end of the year, or when do we get more kind of a leveling off of that TDR balance?

[J.C. Alvarez:]

Yes. If you remember even a little bit further back, we used to expect it to level off earlier in the year and we said sometime in the early part of the year. As we sold a lower generation of TDRs -- lower TDR inflows, our updated expectation is exactly what you said we now expected to continue through the end of the year.

[Arren Cyganovich:]

Okay. Thank you.

[J.C. Alvarez:]

Thank you.

[Operator:]

And we'll take our next question from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

Hey, good morning.

[Scott Powell:]

Good morning.

[Betsy Graseck:]

A couple of questions. One, just a clarification on the NII outlook. I know you mentioned 100 bps, $35 million. Is that a spot move and is that an immediate $35 million or that's a spot move with the $35 million over the course of 12 months, right?

[J.C. Alvarez:]

Yeah. It's a parallel move of 100 basis points over the course of the year.

[Betsy Graseck:]

Yeah. So, you don't -- like it's not based on the forwards. And then, I guess, the other question is, it doesn't matter if it's a 50 bp cut all at once versus 25. Does that change the numbers materially at all to $35 million?

[J.C. Alvarez:]

Yeah. No, it does. The most -- be more upfront definitely would help, right? And it being whatever we do on the very short end, right? If one month LIBOR drops instead of 25 to 50, we get the benefit -- immediate benefit on the average balance for the period.

[Betsy Graseck:]

Yeah. Yeah. Okay. And then the flip side is, how do you expect lower rates are going to impact the consumer in your business. Do you think they are going to -- going out for bigger exposures? Do you think your loan growth will pick up? Do you think it's less probability of default, or something else?

[Scott Powell:]

Yes. I think it's all of those things. Certainly, it reduces -- the average American certainly reduces their monthly payments that they have to make on the same kind of debt. So, yeah, I think it will be good for the consumer. I think it will be good for the industry too.

[J.C. Alvarez:]

Just general …

[Betsy Graseck:]

Yeah. And I guess the question is like what have you been seeing in your probabilities assault over the past couple of quarters here? Has it changed that much given the length of time that we've been sitting here like 240 on the frontend or not really?

[Scott Powell:]

No.

[J.C. Alvarez:]

No. Not really.

[Scott Powell:]

No. And we do look at it. We try to isolate similar segments and settles and see if there's changes -- and no, we don't really see any plus or minus to the performance given what's happened so far.

[Betsy Graseck:]

Okay. And then just lastly separate topic, but the parent is obviously increasing their share of ownership and we know that it's a go over 80.1% that's a benefit for them from an accounting perspective. But I'm wondering does it impact at all how you operate or is there anything different that happens if -- when they go over an 80% ownership stake?

[J.C. Alvarez:]

So, I think the short answer is, no. We have -- I mean, first of all, the parent has increased their ownership and this closed just as a function of us having executed repurchases since last year, right?

[Betsy Graseck:]

Right.

[J.C. Alvarez:]

And …

[Scott Powell:]

Yeah.

[J.C. Alvarez:]

… so the 80% which we in Santander Holdings have disclosed that highlights that there are additional benefits to if and when the 80% ownership threshold were to be reached. But our planning -- the analysis that supports or our repurchase program is based on our benefits or the benefits for SC and its shareholders. So, there -- doesn't necessarily mean that there will be anything different going up to 80% or beyond 80% for us here in SC.

[Betsy Graseck:]

Okay. Yeah. I just wanted to make sure I understood like, operationally, was there anything that changed with that threshold getting crossed if one of that threshold got crossed. Really your answer is no.

[J.C. Alvarez:]

Not operationally.

[Betsy Graseck:]

All right. Thank you.

[Scott Powell:]

Not. Yeah. You are welcome.

[Operator:]

This will conclude our Q&A session. I will now turn the call over to Scott Powell for final comments.

[Scott Powell:]

Thanks everyone for joining the call. Thanks for your questions and your interest in our company. As always our investor team will be available for any follow-up questions you have and they look forward to speaking with you. And we will see you next quarter. Thanks very much.

[J.C. Alvarez:]

Thank you.