Santander Consumer USA Holdings Inc.
Q4 2016 Earnings Call Transcript

Published: 25 Jan 2017

[Operator:]

Good morning, and welcome to the Santander Consumer USA Holdings Fourth Quarter 2016 Earnings Conference Call. At this time, all parties have been placed into listen-only mode. Following today's presentation, the floor will be open for your questions. [Operator Instructions] Today’s conference is being recorded. It is now my pleasure to introduce your host, Evan Black, Vice President of Investor Relations. Evan, the floor is yours.

[Evan Black:]

Good morning, everyone and thanks for joining. On the call today, we have Jason Kulas, President and Chief Executive Officer; and Izzy Dawood, Chief Financial Officer. Before we begin, as you're aware, certain statements made today such as projections for SC's future performance are forward-looking statements. Actual results could materially different from those projected. SC has no obligation to update the information presented on this call. For further information concerning factors that could cause these results to differ, please refer to our public SEC filings. Also on the call today, our speakers may reference certain non-GAAP financial measures that we believe will provide useful information for investors. A reconciliation of those measures to U.S. GAAP is included in the release today issued, January 25, 2017. For those of you listening to the webcast, there are few user-controlled slides to review, as well as the full investor presentation on our Investor Relations website. I'll turn the call over to Jason.

[Jason Kulas:]

Thank you, and good morning, everyone. Today, I'll discuss our full-year highlights and provide an update on our key strategic priorities. I'll then turn the discussion over to Izzy for a detailed review of the quarter's results and then open the call for questions. Turning to Slide 3 to share some of the key highlights from the full-year 2016. Our strategy continued to produce strong profitability and returns during 2016. Our assets are producing solid risk adjusted cash flows. We have a robust capital position and our focus on applying the principles of simple, personal, fair to our business is positioning us for a long-term success. During the year, SC earned net income of $766 million or $2.13 per diluted common share. Return on assets and return on equity were 2% and 15.8% respectively. Full-year auto originations including loan and lease totaled $22 billion and $14 billion of these originations were generated from our Chrysler Capital platform. Originations were down from the prior year due to our disciplined underwriting standards in a competitive market, and increased competition with banks in the prime space. We continue to book assets across the credit spectrum at levels we feel are appropriate for the risk return trade-off and we are very pleased with the performance we are seeing in the 2016 vintage. The charge-off ratio on retail installment contracts was 7.9% in 2016, up 150 basis points from the prior year driven by slower portfolio growth. The aging of the 2015 deeper nonprime origination, and lower auction recovery rates. Slower portfolio growth due to lower originations decreases the denominator of this ratio and decreases the balance of loans that are newer and have not yet experienced delinquency or charge-off. The charge-off ratio increased versus the prior year, however, as I mentioned at an Investor conference this past November. Our 2016 vintage-level loss performance continues to come in better than 2015. Izzy will detail this performance further on a new slide we added this quarter. In 2016, SC continued to be the largest issue of retail auto ABS, issuing more than $8 billion in securitizations across our ABS platforms. During the year, our consistent track record of rating agency upgrades continued demonstrating the strength of our ABS platforms. In total, more than 180 ABS tranches were upgraded this year by Moody's, S&P and Fitch, positively impacting more than $14 billion in securities across multiple SC ABS platforms. Additionally, we originated more than $170 million in originations from our online direct-to-consumer platform, RoadLoans.com. We believe digital platforms will continue to play an increasing role in the consumer finance space. And finally, in 2016, we rolled out real-time call monitoring software to all our servicing centers as we continue to enhance our compliance efforts and overall customer experience. Turning to Page 4, here are some key economic indicators that influence our originations and credit performance. U.S. auto sales and consumer confidence remain high. U.S. GDP growth is in line with the recent historical range and employment levels continue to be favorable. These metrics are strong indicators of the health of the economy and the U.S. consumer. Wages are growing and gas prices remain low, helping the financial strength of the consumer. These factors combined with the strength in the liquidity markets and access to funding have driven continued competition and we remain disciplined in this environment. On Page 5, there are few key factors that can influence our loss severity and credit performance. SC auction-only recovery rates are trending down and in line with the NADA trends. Additionally, nonprime industry securitization data, including delinquency and loss show these trends are relatively stable to moderately higher. Turning to Page 7. Average managed assets for the full-year totaled $52.7 billion increasing 8% versus the prior year. Total auto originations during the year totaled $22 billion, down 20% from the prior year. Originations with FICO scores below 640 in our Core and Chrysler Capital channels decreased 24% and 32% respectively versus the prior year. Chrysler Capital loans above 640 decreased 26%, while leases increased 8%, versus the prior year. While 2016 originations were down versus the prior year, we are pleased with the quality of assets we have booked as indicated in my previous comments about early performance. Having said that, we are also focused on strategies in Chrysler Capital and across pockets of our Core business that we believe will positively impact our volume in 2017. We are committed to booking loans with attractive risk adjusted returns that will perform through cycles and create shareholder value. As we continue to find pockets of value, we've seen a moderate increase in market share in the nonprime space. Turning to Slide 8 and further drilling down into our auto originations mix. In the fourth quarter, our originations continued to move towards higher credit quality loans. Loans with FICO scores below 640 decreased $590 million to $2.4 billion from $3 billion in the prior year quarter. During the year the mix between new and used vehicles has been stable and the average loan balances decreased reflecting a larger percentage of used vehicles as well as our discipline on a key credit metric, loan to value. Now moving to Slide 9. The Chrysler Capital penetration rate as of December 31 was 17%, down from 19% in September. We remain the largest finance provider for the Fiat-Chrysler. Chrysler Capital is a focal point of our strategy and during the year we continue to implement strategies that we believe will enhance our relationship with FCA, including the Banco Santander flow agreements, our dealer VIP program and our dealer floorplan offering. Executing the Banco Santander agreement to flow retail loan assets is a top priority for us in the first quarter of 2017. Our plan to rollout the dealer VIP program nationwide in 2017 is on track and through Santander Bank N.A. we have increased our dealer receivables origination more than 60% versus 2015. We expect to become an even more valuable partner for FCA in the future due to these strategies. Turning to Slide 10. Our serviced for others platform balances have decreased year-over-year due to lower prime originations and lower asset sales. However, this strategy is one of the four pillars of our focus business model and we remain committed to delivering value to this capital efficient platform. Servicing fee income totaled $156 million this year an increase of 19% versus the prior year. In 2017, we expect to grow the serviced for others platforms by increasing our Chrysler Capital penetration and by executing the strategic agreement with Santander. Turning to Slide 11. During 2016 SC demonstrated its ability to access liquidity and also further diversify its funding sources. Over the year, we issued and sold more than $8 billion in bond across our three ABS platforms and remain the largest issuer of retail auto ABS. After recent rating agency upgrades, we sold more than $400 million in previously retained subordinate bonds to the market at pricing and economic that reflected those higher ratings. On third-party funding, we currently have 14 relationships with more than 18 billion in committed funding. This includes two new warehouse facilities and one new committed lender. We also increased our Intragroup funding capacity as the unsecured portion of SHUSA commitment liquidity facility increased to $3 billion from $1.5 billion. I would like to turn now to Izzy for review of our financial results. Izzy?

[Ismail Dawood:]

Thank you, Jason, and good morning, everyone. Let’s turn to Slide 12 to review this quarter's highlights. Net income for the fourth quarter was $61 million or $0.17 per diluted common share. The results include a non-recurring expense of $13 million or $0.03. Auto originations for the quarter totaled $4.5 billion. Total finance and other interest income was $1.6 billion up 4% versus prior year quarter. During the quarter, we issued $3.3 billion in securitization. Turn to Slide 13. I will highlight a few additional items. Net leased vehicle income increased 41% as we continue to see growth in our leasing portfolio with FCA. Total other income this quarter was a loss of $48 million, which includes approximately $146 million of lower of cost or market adjustments related to personal lending and $23 million in other losses that I will detail on the subsequent slide. Operating expenses for the fourth quarter were $296 million, an increase of 15% versus the same quarter last year. Excluding the impact of non-recurring expense items the increase was driven by compensation expenses as we continue to invest in enhancing our control and compliance functions and higher repossession expense during the higher growth losses in the quarter. Moving onto Slide 14, which highlights our performance excluding the impact of personal lending. Further details can also be found in the appendix of the presentation. Interest on finance receivables and loans decreased year-over-year and quarter-over-quarter, due to a mix shift towards higher credit quality assets with lower APRs. The quarter-over-quarter decline was also driven by lower assets. Interest expense increased 45% versus the prior year quarter, driven by the increase in benchmark rates and spreads. One-month LIBOR increased approximately 45 basis points from Q4 2015 to Q4 2016. Cost of funds on ABS was 45 basis points and third-party amortizes and warehouses increased approximately 85 basis points versus the fourth quarter 2015. These increases are partially offset by interest rate derivatives. Servicing fee income is down 24% due to decrease in the serviced for others portfolio. Fees commissions and other down 5% is primarily driven by improving credit mix of assets. Finally, average balances on retail installment contracts and leases were also up year-over-year. Turning now to Slide 15. We will further drill down into total other income. Reported total other income was a loss of $48 million in the fourth quarter 2016. The impact of lower of cost or market adjustments of personal lending of $146 million include, $116 million in customer defaults and market discounts of $30 million as balances increased versus the prior quarter. Normalized investment losses for the quarter were $23 million, driven by losses related to a fourth quarter off-balance sheet securitization and a lower of cost or market adjustments on certain auto assets classified as held for sale. After including servicing fee income and fees, commission and other, normalized total other income was approximately $98 million. Turning to Slide 15, which is a new slide we have added the quarter. The left hand side of the slide shows growth losses of the 2016, 2015 and 2014 vintages originated from January to June of each year and the performance of those vintages through December of that same year. The right hand side of the slide shows the same data net of recoveries. On a comparable basis, you will see that both growth and net losses are outperforming the 2015 vintage and consistent with our expectations based on the changes we made earlier in 2015. We will continue to monitor the performance of these vintages and we remained upbeat about the early indicators of this 2016 vintage and its potential impact on losses going forward. Turning to Page 17 for provision and reserve. At the end of the fourth quarter 2016, the allowance figure totaled $3.4 billion up $9 million from the end of the prior period. Drivers of the increase include

[Jason Kulas:]

Thanks, Izzy. In summary, during 2016, we continued to improve our funding profile. We invested in enhancing our compliance and control environment and generated strong earnings. Our disciplined approach to the market has led to year-over-year declines in origination, but has allowed us to build capital and it's positioned us favorably for future opportunities. In 2017, we are very enthusiastic about our ability to both maintain credit discipline and increase volume. As we begin the year, our work in nonprime is resulting in increased volumes. The Santander flow agreements and continued progress on dealer floorplan and dealer rewards programs will give us additional momentum. And finally, as we have discussed in the past rising rate environment should benefit our submitted FCA business. This volume will also feed our service for other business. Our commitment to building a culture of compliance and putting customers at the center of everything we do is the foundation of our continued success. As highlighted on Slide 6 of our investor presentation, this is a core component of our strategy, along with a continued focus on vehicle finance, service for others, and liquidity and funding. We remain confident in our ability to execute on our business plan and deliver value for all our stakeholders and customers through market cycles. We believe the key is to creating future shareholder value and long-term sustainable differentiated success lie in continuing to approach credit with disciplined, capitalizing on the volume opportunities mentioned earlier, and identifying new and better ways to be simple, personal and fair with our customers, employees in all constituencies. With that, I'd like to open the call for questions. Operator?

[Operator:]

We will now open the call for questions. [Operator Instructions] Thank you. We’ll take our first question from John Hecht with Jefferies.

[John Hecht:]

Thanks very much guys. A real quick I think Izzy mentioned this, but it sounds like you're going to give more guidance factors for 2017 at the Analyst Day or is there anything, any color you can give on margin trends, earnings trends, loss trends at this point in time?

[Ismail Dawood:]

Yes. John, I think we're going to continue our practice, recently adopted practice of giving you more outlooks on the quarter and the following quarter. As we get more comfortable and the market becomes bit more stable we will think about it if we want to go out further.

[Jason Kulas:]

John, that the new slide on the comparison of vintage performance for the first half of 2014, 2015, 2016 we also provide some insight into that along with our comments about how much of the overall book and losses 2015 makes up. We really think that what’s line below, the portfolio results is a really good trend in recently originated vintages and their performance. So we think that should bode well for the future, but the paper that exceeded that has to work its way through first.

[John Hecht:]

Okay. And then I guess just another high level question and you refer to some of the elements of this, but what's your opinion and what's going on in the competitive markets now? Is there a session of capital deployment to where you can increase, you can tighten the loan terms and gain market share or we - where are we in that cycle and what's your outlook for the next few months there?

[Jason Kulas:]

Yes. I’ll cover that. The market is still very competitive because we still have market that has very good access to liquidity and we also have a consumer who's on a pretty solid footing, so the combination of those two things is driving competition, but let me answer that question in the context that’s kind of what we've seen for our own business in the last quarter or so. Compared to where we were at the end of the third quarter, if you look at the end of the fourth quarter. Our overall market share went up slightly only slightly, but it did go up, but it's kind of a tale of two stories. If you look at prime or greater than 640 FICO, it was slightly down and if you look at nonprime, we had some gains based on some decisions we made and some pockets of opportunity we found. So what I'd say is given what we see that we really have to just react to what we see - given what we see, I'd say the prime market driven by deposit funded institutions continuing to be very competitive in the space is extremely competitive and that was reflected in a slight loss of share. On the nonprime side, we've seen things maybe rationalize a little bit, but I think if you look across all of the top names, there's probably an equal number of names that have picked up share in nonprime versus given up share. And so we think that's rationalize a little bit and what we - the reason we can make a statement like that is that if you just look at what we think is the right price and right structure for a given loan, the market gave us a slightly higher percentage of those in the fourth quarter and so we would view that as a little bit of a rationalization of competition. So those are all general comments, we don't see anything out of control happening in the industry right now. We think competition is relatively stable, but it is still heated given the factors I started with.

[John Hecht:]

Okay. That's all very helpful. Thanks guys.

[Operator:]

We’ll take our next question from Vincent Caintic with Stephens.

[Vincent Caintic:]

Hey. Good morning, guys. Thanks very much. Appreciate you putting Slide 16 in the deck. I think that's really helpful and so had my question on that. So when you talk about the 2016 vintages being better and you've got 2015 vintages going up. Do you have a sense of the cadence of the duration of your 2015 vintages and so how that mix of 2016 increases over time? And then when we think about reserving, so you've been disciplined in your loan growth and your portfolio has been kind of the growth has been slowing and typically what that drives is - your reserves starts to stabilize to maybe even having a reserve release if you don't have the growth that’s going on. So just wondering how you think about that going into 2017 as well? Thanks.

[Jason Kulas:]

So starting with - maybe I'll start with the first part of your question on 2015 and I'll let Izzy speak to the TDR influence on the ongoing reserves. In terms of 2015, what we're seeing is the average balance in the fourth quarter of 2016 was 34% of our overall portfolio and while it does drive a significantly higher percentage of our losses because of the factors we've discussed, it’s going down. So as we go through our 2017 that number will continue to fall and it will become less and less of an influence on the overall losses and provisions of the Company and so then we turn to the TDR impact on our reserves, because that’s driving some of the discussion.

[Ismail Dawood:]

And before going to the reserve question, the one thing you noted I think of as we get better credit quality by definition due to lower charge-offs, the duration should be better potentially, obviously, if you are the lower which offset, but you would see a small increase in duration as the credit get improved. In terms of your thoughts on reserve over time, yes, if the credit mix continues to improve on our retained portfolios, you would see our reserve model start picking that up and effectively we would be in a position to lower our overall [triple of] balance. The timing of it will again depend on the cadence of the balance is coming in and also the TDR migration that will likely continue to occur. However, if you go and look at our TDR balance growth over the last three or four quarters, you will see that growth was coming down, but the overall balance is still increasing.

[Vincent Caintic:]

Okay. Got it. That makes sense. And just one quick second question. The $22 million losses on the securitization and the auto loan adjustment, I’m just wondering if that's just a one-time thing if there are any specific trends to that. Thanks.

[Jason Kulas:]

Vincent, good question. I'm glad you brought it up. The losses you’ve had is primarily related to our CCART platforms and a market around CCART, one is they are relatively new platform for us as well as we drive in SDART. And the investor appetite for it has also kind of waned then 2014 early 2015 when we were selling the residuals at a gain. That market volatility, we anticipate that we will reduce and that’s way the group flow agreement is so important because A) it’s a broader set of broader by box, and second it won’t be subject to the market variances that we experienced in CCART. Again back to CCART platform. Hopefully, [it substitute] our group flow agreement and our CCART issuances in future if we have any are likely to be less - get less of a loss or gain.

[Ismail Dawood:]

And Vincent as we've discussed in the past in a perfect world those gains would be zero, right, because we want to optimize the originations and maximize the servicing fee income, but you can't perfectly saw for that. I think it’s important to remember when you see a loss that’s offset, as we discussed it’s offset by servicing fee income you get going forward. So we're not doing uneconomic transactions, it's just that you see on upfront loss on some of the deals.

[Vincent Caintic:]

Very helpful. Thanks so much guys.

[Operator:]

We’ll go next to Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

Great. Thanks. I guess given how important that Santander agreement is, you said some time in Q1, obviously we're in Q1. I mean could you talk in a little more detail about what that's likely to be - when that's likely to be approved and then what actually happens after that?

[Jason Kulas:]

Sure. So it's going along very well and we're very confident that it will be finalized and emplaced and active in the first quarter. Part of the reason that the process takes some time is because there's an extensive effort internally to make sure that everything we do is done on an arm's length basis and can be justified on both their books and our books, but those discussions are proceeding. They're going very well and we expect to have no issues getting that in place. What happens after it is emplaced is that we're more competitive than we would be on our own for the upper tier of the market. We're a wholesale funded institution competing in those upper tier markets with deposit funded institutions and what a flow agreement with the bank and more importantly a bank we consolidate into would give us is the ability to compete much more effectively. So there are many factors leading to why we think we'll have a pickup in share with FCA, but obviously that's one of the drivers as you said.

[Moshe Orenbuch:]

Okay. And just your originations under 640 were actually down pretty sharply year-over-year also, but then you said that you've got a higher percentage of the loans that you essentially want it, you're able to get. Can you kind of reconcile that and kind of maybe to extent how that's going to look in 2017 or things getting better in the core nonprime market?

[Jason Kulas:]

I think how we reconcile that is if you look year-over-year, our originations were down pretty significantly. And that's a result of some of the moves we made in 2016 to make sure that - what we always do, we sort of factor in the performance we're seeing and what we're seeing in the market in the new originations and then that combined with what the competitive forces in the market do is how we sort of get our share. So what we were seeing is relative to our view of the market there were some people who had a little bit more aggressive view on those lower subprime deals. What going through that process allows us to do always though is to continually reevaluate what we've done. And what we saw in the later part of 2016 is some pockets of nonprime where we were overpriced and so we went in and very surgically looked at pricing in those parts of the business and the result was we picked up some share. That's an ongoing process. What is a good price today relative to the market may not be the same tomorrow, but all us equal. We feel like we've got some really positive trends on the nonprime part of our business. Not trends to take us back to where we were necessarily and certainly as you look at the very deep subprime parts of the business. I think we'll continue to do a little bit less of that, but we are looking across the nonprime spectrums where we see those pockets of opportunity and at least in the last couple of months we've seen some of those and we've seen the business come in as a result of it.

[Moshe Orenbuch:]

Great. Thanks.

[Operator:]

We will go next to Chris Donat with Sandler O'Neill.

[Christopher Donat:]

Hi, thanks for taking my question. I want to ask one follow-up on the origination side, but looking at your - the Chrysler Capital loans that were down 55% year-on-year, the 640 and above and is that a function like we know that Chrysler has lost some market share in the new car market. But is there something going on either on the Chrysler side with incentive there or the supply of financing you have or just can you give us one - some sense of what’s going on with the originations there?

[Jason Kulas:]

That's a really great question. We kind of seen that across several of the manufacturers, where rebates had sort of - we've seen a pickup in rebate type approaches as opposed to maybe subvention dollars being put into the market and that that tends to drive business away from a captive when you see a pickup on that. The manufacturers do what they think is the thing that makes sense to sell cars and drive their businesses and so we wouldn't want to predict what that looks like going into 2017, but to the extent that continues to be the case. I think it will continue to be tougher for the pure captives to drive increases in share on their own. But I think what's important for us to talk about there is we really divide that into what’s controllable and what’s not controllable. So things we can’t control or things like interest rates and because we clearly as originator for Chrysler Capital with subvention dollars would benefit in a rising rate environment, so - but we can't control the pace we think rates are going higher, but we can control the pace of that. We also can’t control the incentives that the manufacturers put in the market and specifically FCA puts in the market. What we can control is some of the other things we talked about on the flow agreement that we're putting in place to do more prime. On the progress we continue to make with substantially higher originations in floorplan in 2016 or 2015 in our dealer rewards program, which is rolling out at a really high pace and we're seeing significant pickup in capture versus non-dealer rewards the IP program dealers. All those things are things that we can do to help ourselves. And so we're doing those regardless of what the answer is on incentives and rates.

[Christopher Donat:]

Okay. And then on the theme of what controllable and non-controllable, could you comment a little bit on the CCART process this year and Federal Reserves proposed rags to exempt certain institution from the qualitative review. Do you have any I guess legal clarity on what - where that’s going? Is it sounds like on a controllable side, you are making some accounting changes that should to be more favorably by regulators?

[Jason Kulas:]

Yes, we are - I think the best way to say it is we are cautiously optimistic in the CCART process for this year. But we don't want to - speculate on whether or not the institution will pass CCART or won't pass CCART. A lot of great work continues to be done and we feel like we're making good progress. In terms of qualitative versus quantitative, our view continues to be that we need to make sure as an institution, we need to make sure that we're focused on both. The quantitative side of the equation has been one that we've always passed. The qualitative has been one where the past two years we've struggled. And that's where we're making significant improvement. So regardless of the answer to that question, we remain cautiously optimistic that that will make progress this year.

[Christopher Donat:]

Okay. Thanks.

[Jason Kulas:]

Sure.

[Operator:]

We’ll take our next question from Mark DeVries with Barclays.

[Mark DeVries:]

Hey, thanks. I wanted to push a little bit further if I could on the whole insurance charge-offs. With the better performing 2016 book poised to become a bigger percentage of charge-offs going forward. Would you guys so far as to say that that charge-offs could be down year-over-year in 2017 relative to 2016?

[Ismail Dawood:]

Yes, so Mark I could say right now the early indications are 2016 obviously is performing better than 2015. The 2015 vintage was pretty sizable vintage, but there were some overhang at that worked through, its late stage losses. Having said early indications are the performance is better on a loss side and giving you updated outlook that has a quarter goes on. But overall as I mentioned earlier at the trend continue that would be our expectation.

[Mark DeVries:]

Okay, got it. And then just turning to share Chrysler, I mean any color as to where that continues to decline a little bit as you've been ramping, but things like the dealer VIP program? And is it your hope that would be use of the group flow agreement of the VIP program that you could get share of backup to a level where we start to see that service forever other portfolios start growing again?

[Jason Kulas:]

Yes, so the answer the last part of the question is, absolutely yes. We think that possible and that's what we're planning to achieve. When you look at the initiatives that we're talking about you see a 60% increase for example and dealer floorplan originations in 2016. You have to remember that’s growing up a fairly small base and that business is just over a couple of billion and so it's growing. It's got them size now, but I think it takes time for that to really be reflected in the overall capture and so that’s dealer floorplan. On the VIP, we're approaching I think by 500 dealers on the rollout of that VIP program. Our goal is in 2017 and really is close to the first half of 2017 as possible to get that out to all dealers. And as we see that rollout we'll see the positive impact of it. But we're not realizing that yet, by only realizing what we've rolled out so far and that's roughly if you look at what's in these numbers 10% or so of the overall system Chrysler dealer. So we've got significant upside on both of those as we continue the run rate. And then the reason we spend time talking about the flow agreement with Santander is that a lot of the share we've lost, we lost share across the board but obviously a big driver of the loss and prime share is our structure of versus some of the other competitors in that market and that's the reason why we - that deal positions us competitively in a much different way and we feel like it will help us. So I think the reason those three haven't been reflected yet as much as they will be and share is because there are various stages are being rolled out. In terms of why we've lost share just in general, I would say that, I would attribute that to some of the other competitive factors we talked about in the last few quarters. It's an extremely competitive market, FCA is a well-known large manufacturer and we're not the only lender out there who want to do FCA deal. So we think we've got a built in advantage and we think that we've got more upside than anyone else, but we've got to see that play out in 2017.

[Mark DeVries:]

Okay got it. Thanks.

[Operator:]

We’ll go next to Don Fandetti with Citi.

[Donald Fandetti:]

Yes, Jason, can you talk a little bit about the impact to used car pricing in Q4 versus Q3? I know it was very minimal Q3 and sort of what your outlook is for used car pricing?

[Jason Kulas:]

Yes, our outlook has pretty consistently been just driven by supply demand factors that recoveries are going lower. If you look at our all-in recovery rate, that’s what we call our auction plus recovery rate, it's around 48% as of the end of the year. And that's versus a recovery rate for provision as is lower than that. So we feel like the way we structure our business the way reserve in our business is setup well for what the environment is. If you look forward, it's difficult to know exactly what the pace of the climb will be, but what we see that the industry expectations are for kind of the mid - just above mid single-digit growth in supply, which translates into maybe a slightly lower percentage than that of decline in recoveries. If that's what happens I think that the way we structure our business price, our business reserve for our business is also still well positioned. But we'll continue to watch that very closely. Our goal is always to head of that and we haven't seen anything in terms of the pace that surprise us or shocked us in the fourth quarter relative to what we might have expected and we'll continue to watch it closely going forward.

[Donald Fandetti:]

Thanks.

[Operator:]

We’ll go next to Rick Shane with JPMorgan.

[Richard Shane:]

Hey, guys, thanks for taking my questions this morning. Jason, if you guys show some really interesting data about the trends in charge-offs. But one of the things that we've noticed is that when we look at the SDART data, it does look like the 2016-1 and 2016-2 pools on a static pool basis are tracking actually a little bit ahead of the 2015 vintage in terms of cumulative charge-offs. What’s the disconnect that we’re seeing there? And then the other question is that I believe in response to Mark's question, you alluded to the potential of lower charge-offs in 2017, but when we think about the - basically replacing the 2014 vintage with the 2016 vintage and even your numbers are showing roughly comparable, isn’t this impacted the 2015 vintage continue this season and lead to higher charge-offs modestly?

[Ismail Dawood:]

Yes. Rick, good questions on credit, and I think there are two aspects of it. First of all, the SDART 2016-1 and 2 are only a part of the overall portfolio. In 2015 what we did have is a much hard concentration of deeper subprime, which will end up in our drive securitization frankly. So SDART to SDART you may see things slightly worse, but if you look at our overall portfolio and that higher concentration of deeper subprime, you see that portfolio come - that come across on Page 16 as we showed. So that’s the first part of the question you asked. The second part, frankly it’s a function of timing. If 2015 vintage through the middle of 2017 will be around two years to two and a half years in. And at that point, the most of your early period losses have come through and what you’re left with is detail. So we believe that the impact 2016 vintage will start influencing the overall charge-off levels. Also in our prior calls, we indicated that 2015 vintage also charging-off higher, but it was really accelerated on the frontend. So the combination of those two dynamics gives us a little bit more perspective that 2016 charge-offs should be lower and then finally because 2015 was large, it is probably taking a little longer than a similar size vintage would do year-on-year. So the three elements to that and Rick, you and I can probably follow-up more on that later.

[Richard Shane:]

Izzy that’s really interesting commentary related to SDART, so I think the way to interpret this is that on an apples-to-apples basis, 2016 is absolutely softer than 2015, but tactically through mix shift you have mitigated that?

[Ismail Dawood:]

No, I want to go that far because the SDART platforms in 2015 would have also had slightly more concentration on deeper subprime. It's not apples-to-apples loan view. When we look at the actual delinquency data, and I mentioned that the actual delinquency data of the vintages. We actually see a slight uptick.

[Richard Shane:]

Okay.

[Ismail Dawood:]

Slight improvement.

[Richard Shane:]

That’s interesting though because if you say 2015 has got more deep subprime in the SDART, but 2016 looks likes on an SDART basis is doing a little bit worse, I'm not sure I understand to have that?

[Ismail Dawood:]

So when you say the SDART data, this is just on the 2016-1 and 2. You have to also know at least 2016-1 will have origination that came in 2015.

[Richard Shane:]

Okay.

[Ismail Dawood:]

And also part of it is relatively larger, so it's not - the SDART is not vintage specific. It’s just issuance specific. Rick, is that makes sense?

[Richard Shane:]

It does. Okay. Thanks.

[Ismail Dawood:]

Yes, I agree. I’m glad you bring that and I think that’s something we’ll look forward to maybe highlighting little bit more on our Investor Day, so that’s could be back.

[Richard Shane:]

Thanks guys.

[Operator:]

We’ll go next to Charles Nabhan with Wells Fargo.

[Charles Nabhan:]

Good morning, guys. Most of my questions have been asked, but I just had a quick modeling question. The effective tax rate for the quarter was 32% and I think it's been in the low 30s for the past couple quarters. Just wanted to get a sense for how we should think about that going forward and if there is anything that would preclude you from fully benefiting from a reduction of the corporate tax rate other than 15%, 20% or 25%?

[Ismail Dawood:]

There are two parts. One, there was a small reduction - a one-time reduction in our - what you call tax expense. We anticipate our effective tax rate to be in the mid 30s going forward. So that answers the first question. Right now we do not see anything in the way we have structured our balance sheet on business that would preclude us from benefiting from any changes in the corporate tax rate being lower. That being said, if it goes lower, I'm sure everybody will be happy about that.

[Charles Nabhan:]

Okay, great. And just one quick follow-up on the regulatory front. I know it's early in the game, but in your conversations with your regulators, just wanted to get a sense for your outlook in terms of what we could potentially see under the Trump Administration from a regulatory standpoint, specifically with the CFPB?

[Jason Kulas:]

We haven't had those specific discussions at that level, so we haven't received any direct opinions from any of the regulatory contacts we have on what the impact of a Trump Administration might be, but I'll tell you how we're reacting to it internally. We continue to believe that the foundations of this thing you hear and say a lot about a culture of compliance and the focus we put on consumer practices and those kinds of things that no one’s ever going to decide, that's a bad idea. And so the investments we're making in those areas, we think are good investments, and investments that will pay-off over a long period of time and hopefully differentiate us. So that's the way we view it. If something comes about that changes the regulatory environment, we'll deal with those circumstances as they happen, but we really don't want to speculate.

[Charles Nabhan:]

Great. Thank you.

[Operator:]

We’ll take our next question from Jack Micenko with SIG.

[Jack Micenko:]

Hey, good morning. I may have missed it. Did you talk about what the $0.03 non-recurring number and what was behind that in the quarter?

[Ismail Dawood:]

No, I did not provide details. It’s related to certain legal matters and since the cases are ongoing, we cannot comment on the specifics.

[Jack Micenko:]

Okay. So it’s like a reserve - legal reserve build?

[Ismail Dawood:]

Yes.

[Jack Micenko:]

Okay. And then I guess big picture, in a perfect world, what’s the right level of capital to run the business? When you build capital over the past year, the portfolio is obviously got smaller, a lot of stuff stands between you and getting the right number. But in a perfect world, presuming growth going forward, I’d imagine and how do you think about that tier one common number longer-term?

[Jason Kulas:]

Sure. So I think the first part of that is - I think the fact that we've got more capital in both percentage terms and dollar terms than we've ever had in the history of our Company. I think it's a really positive credit point for the Company. I think it gives us a solid foundation that combined with ownership by a global bank gives us a really solid foundation and that's good. In terms of what the right number is that's really informed by the stress testing we go through. We consolidated into a U.S. bank holding company and as part of that we go through an extensive set of stress tests, idiosyncratic stress scenarios, those kinds of things to ensure that under different stress scenarios we've got plenty of capital. And so that's the process as you know we go through every year. We got an answer to that last year and it was around 11% and we were in the process of going through that again. So I wouldn’t want to speculate on what the outcome of that processes, but the answer to your question is really driven by that process. What I'd say in general is that regardless of what the answer to that is going forward whether it's higher or lower, the same. This is still a Company as we said in the past that they can generate excess capital above and beyond whatever the number is and I think that bodes well for future discussions about distributions and those kinds of things when we're able to add on.

[Ismail Dawood:]

And Jack it’s Izzy. I’ll add on as well. First of all thanks for you picking up our coverage on asset, I appreciate that. I think the last point Jason made is real important. We’ve talked about origination being down and what have you, but effectively even on average, the Company makes closer to 50,000 loans a month. That’s what we are averaging in 2016. And as we’ve shown every vintage, every monthly vintage contribute to capital in a positive way. So based on the market provides with a different underwriting, we feel pretty confident that every month when we originate these loan, we’ll continue to add capital in a manner with our returns at a level that will allow us to balance out capital for growth as well as distribution.

[Jack Micenko:]

All right. Great. That’s helpful. I’ll talk to you bit later.

[Jason Kulas:]

Thanks.

[Operator:]

We’ll take our next question from David Ho with Deutsche Bank.

[David Ho:]

Hi, good morning. Just had a quick question on the timing in a mechanics of when you could potentially deploy capital under the assumption that your parent was able to do well or better this year in terms of like some of the restrictions that maybe on you specifically as relates to a dividend that would be helpful?

[Jason Kulas:]

Sure. So it's starts with the CCART process and as part of the ongoing discussions around that the entity is currently restricted from capital distributions, capital action those kinds of things. And as we go through the process this year, we will get with our board and with Santander and determine what capital actions we will propose as part of the capital plan that’s submitted. One time we made about that last quarter that I think we should reiterate is that if we get to the point let’s say later in 2017 if that's a possibility. We’ll address the matter with our board and assuming that conversation results in the decision to begin distributing capital again. Our expectation would be that it start small and grows from there, so we want to make sure we sort of managed down the expectation that there will be a big windfall dividend number. We think it would start small and grow from there and we think we'll be capable of growing it from wherever it starts. In terms of exactly when that will happen, it's really difficult to say because it's all tied with these other factors that don't have specific timeline.

[David Ho:]

Okay. That’s helpful. And then I realize that you are making a lot of potential improvements to potentially increase the serviced for others platform and Chrysler. It seems like the platform was designed since more obviously much higher penetration rates. What's plan B in terms of maybe rationalizing that platform and or if some of these initiatives don't work out or there are other deals or OEM that could potentially gain maybe offset some of that?

[Jason Kulas:]

That's a really good question. So the systems themselves are set up to be scalable. So it's not like we made a significant investments that if we don't grow serviced for others at the rate we projected. We will have is a sunk cost or something like that. The largest expense is people and we can flex our staffing as that number goes up. I think one of the interesting things about where we expect the growth and serviced for others to come from is that we expect it to be primarily driven by up market assets and the leverage you get in terms of people on those assets is very strong, right your accounts per collector, for prime assets is much higher than it would be for nonprime. And so I guess the real point is we don't have a lot of infrastructure we put in place that would be - that would need to be utilized in a different way and we'd have to account for the cost of. If it didn't grow to the extent, we were expecting FFO to grow. Having said that, we remain as I said earlier, we remain enthusiastic and that’s a part of our businesses over the long-term is going to grow. We may go through periods of time, quarters or six-month period of time where that's not the case, but long-term, it's a real differentiator for us and it's something we can do very effectively and it's something that our systems can scale easily to do, so we have to continue to take advantage of it.

[David Ho:]

Great. Thanks.

[Operator:]

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

[Steven Kwok:]

Great, thanks for taking my questions. Just around the Bluestem portfolio, you guys have given us the income piece of it. How much expense has to be allocated to that piece of the business?

[Ismail Dawood:]

Steven, it’s Izzy. Very little, unlike our auto business, we did not service the assets. We have certain expenses associated with data analysis as well as oversight in the stock. So it is part of the overall expenses of the Company and we don't break it out because it's not a very meaningful amount.

[Steven Kwok:]

Got it. And then just to the extent that there is a sale, does that release any capital to the Company?

[Ismail Dawood:]

If there is a sale, again if sold at a gain obviously there would be capital accretion if sold or with Mark, there wouldn't be. If it’s held for sale, it’s effectively mark-to-market and there's no - we will not reserve against it.

[Steven Kwok:]

Got it. Thanks for taking my questions.

[Operator:]

This will conclude today's question-and-answer session. I'd now like to turn the call back to Jason Kulas for final comments.

[Jason Kulas:]

So in closing, thank you everyone for joining the call today and for your interest in SC. Our Investor Relations team will be available for follow-up questions and we'll look forward to speaking with you again next quarter. Thanks.

[Operator:]

Ladies and gentlemen, this does conclude today's conference. We thank you for your participation. You may now disconnect.