Santander Consumer USA Holdings Inc.
Q4 2014 Earnings Call Transcript

Published: 3 Feb 2015

[Operator:]

Good morning and welcome to the Santander Consumer USA Holdings Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] It is now my pleasure to introduce your host, Evan Black, from the SCUSA Investor Relations team. Evan, the floor is yours.

[Evan Black:]

Good morning everyone, thank you for joining the call. On the call today we have Tom Dundon, Chairman and Chief Executive Officer; and Jason Kulas, President and Chief Financial Officer. Before we begin, as you are aware, certain statements today such as projections for SCUSA’s future performance are forward-looking statements. Actual results could be materially different from those projected. SCUSA has no obligation to update the information presented on the call. For further information concerning factors that could cause these results to differ, please refer to our public SEC filings. Also on today’s call, our speakers’ will reference certain non-GAAP financial measures which we believe will provide useful information for investors. A reconciliation of those measures to U.S. GAAP is included in the earnings release issued today, February 3rd, 2015. For those of you listening to the webcast, there are few user-controlled slides to review as well as a 4Q company update on the Investor Relations website. Now I will turn the call over to Tom Dundon. Tom?

[Thomas Dundon:]

Thank you and good morning everyone. I will discuss our fourth quarter highlights and ongoing strategic initiatives for 2015. Afterward I’ll turn the discussions over to Jason for a detailed review of the quarter’s results. We’ll then open the call for any questions you may have. Fourth quarter results are highlight by strong profitability, during the quarter SCUSA earned net income of $247 million or $0.69 per diluted common share compared to net income attributable to SCUSA’s shareholders for the fourth quarter of 2013 of $114 million or $0.33 per diluted common share. This represents net income growth of 117% from the prior year, driving a return on average equity of 29.1% and return on average assets of 3.1%. In the fourth quarter total originations were $6.1 billion including $565 million in facilitator originations. This compares to total originations of $7.4 billion in the third quarter including $604 million in facilitator origination. Volumes were seasonally lower in the fourth quarter and we expect ebbs and flows in volume as we constantly seek to optimize origination. While fourth quarter originations decreased, total originations were $27.5 billion up from $20.7 billion in 2013 representing growth of 33%. We also remained focused on our unsecured lending platform. Our unsecured portfolio balance as of yearend totaled $1.8 billion up from $1.3 billion in the prior quarter. Total originations of $562 million this quarter were approximately even between revolving and installment loans. As the revolving loan originations increased versus the prior quarter consistent with seasonal retailer patterns. We are excited about the opportunities in this space, as it aligns well with our core competencies and has attractive returns. During the fourth quarter used car prices were covered from the declines earlier in the year as the Manheim index finished the year 2% higher than its lowest point during 2014 and 1.8% higher than in December, 2013. We also view the continued decrease in gas prices is a net positive for our consumers. However as we stated during our recent Investor Day, we view both used car recoveries and gas prices as secondary factors to our business. While we monitor these trends closely we are focused on operating our business, originating attractive assets to enhance long-term profitability and optimizing the mix of retained assets versus assets sold in service for others. As we continue to properly execute our strategic objective, we believe these secondary factors will have less than impact on our business and its profitability. In this market we're finding that we're able to acquire loans and leases with attractive risk adjusted returns and indication that the market is behaving rationally. I’d like to now turn the call over to Jason to review our financial results. Jason?

[Jason Kulas:]

Thank you Tom and good morning everyone. Let’s go to the fourth quarter results in more detail. As Tom mentioned net income for the quarter were strong at $247 million, this was driven by net finance and other interest income growth of 13% to $1.1 billion up from $953 million during the same period last year. Of this interest income from individually acquired retail installment contracts increased 14% to $1 billion up from $894 million during the same period last year due to significant growth in the portfolio. Interest income from unsecured consumer loans grew 36% to $96 million this quarter up from $71 million during the same period last year. Net leased vehicle income increased to $60 million this quarter up from $22 million in the fourth quarter of 2013, as we continue to originate more lease volume as Chrysler's preferred lender. Moving to originations. . As Tom mentioned, we originated $6.1 billion in loans and leases this quarter. During the quarter we originated approximately $2.4 billion in Chrysler retail loans, $1.4 billion of which were prime loans and the remaining $1 billion non-prime. We also originated $1.3 billion in Chrysler leases which includes $565 million in leases originated for an affiliate. The Chrysler penetration rate at the end of the fourth quarter was 27%, this is slightly below the prior quarter but in line with the same period last year. We remain confident about the ongoing success of our agreement with Chrysler as we strive to support Chrysler’s sales growth by originating attractive assets consistent with our strategy. The provision for loan losses decreased to $560 million this quarter down from $770 million last quarter and down from $629 million in the fourth quarter of 2013. The decrease from prior quarter was driven by positive provision model impacts as the forward looking model is no longer capturing two seasonally worse fourth quarter’s. The provision decrease was also impacted by reduction in allowance for loan loss month’s coverage. The overall provision decrease was partially offset by seasonal higher charge-offs as performance deteriorates in the fourth quarter in a pattern consistent with our normal seasonal expectations. The net effect of these factors resulted in a decrease in the allowance to loans ration to 11.5% this quarter from 12.1% last quarter. The decrease in months coverage also resulted in a positive EPS impact of approximately 11%, however excluding the change in months coverage we are still ahead of our objective for the year. Turning to credit performance SCUSA’s quarterly net charge-off ratio increased to 8.6% from 8.4% last quarter. And from 8.1% during the same quarter last year. The fourth quarter delinquency ratio increased to 4.5% from 4.1% last quarter and remained flat over the same quarter last year, the increase in both ratios quarter-over-quarter follows normal seasonal patterns. Moving onto expenses during the fourth quarter operating expenses increased 14% to 230 million from 203 million during the fourth quarter of 2013, as we continue to grow our asset base and increased headcount to dedicate additional resources to our regulatory and compliance teams. Despite these increased cost we continue to demonstrate industry leading efficiency as our efficiency ratio decreased slightly to 19.1% from 19.2% during the same period last year. This is further evidenced by revenue versus expense growth for the full year of 2014 versus 2013. On a GAAP basis revenue growth lagged expense growth due to one-time IPO cost however excluding costs revenue growth outpaced expense growth. It is important to note as we've discussed in prior quarters, as we continue to focus on growing the capital-light higher ROE serviced for others platform. We will see an increase in the efficiency ratio. While the ratio will increase overtime we remain very positive about the service for this platform because it drives higher ROE’s despite lower margins due to limited credit exposure. We believe this is a business that will enhance our ability to create shareholder value. Turning now to liquidity, SCUSA demonstrated consistent access to liquidity during the fourth quarter, the execution of $1 billion securitization from our core non prime securitization platform SDOT and a $700 million, also $700 million of additional liquidity from private term amortizing for facilities and an incremental 500 million in warehouse borrowing capacity. During the quarter asset sales total $1.1 billion down from $2.4 billion last quarter driven by the timing of asset sales. And as previously mentioned we continue to focus on balance sheet management and growth in our serviced for others portfolio going forward. The portfolio of loans and leases serviced for others totaled $10.3 billion at year-end up from $4.5 billion at prior year-end representing growth of 126%. Investment gains for the quarter which primarily comprise of gains on sale totaled $21 million down from $32 million in the same quarter last year as we did not execute the SDART securitization in the fourth quarter of 2014. Servicing fee income totaled $20 million for the quarter an increase from $4 million in the fourth quarter last year. Before we begin Q&A i would like to turn the call back over to Tom. Tom?

[Thomas Dundon:]

Thanks. Looking back over our first year as a public company in consistent with historical performance, we were able to originate attractive assets and produce strong net income in a competitive environment with increasing regulatory scrutiny. As this regulatory environment becomes more challenging we believe this will continue to brighten a line between us and our competition, as we continue to leverage our compliance D&A at approximately 14 years of big bank ownership to further enhance processes related to risk management, governance and internal control. Core net income for the full year totaled $842 million representing growth of 21% from the prior year. We also exceeded our financial objective for the year as core EPS growth totaled 18%. Total 2014 originations were $27.5 billion representing 33% growth from 2013. Consistent with our strategy to service more assets for others we were able to generate a $189 million of gain on sale and servicing income from this platform, representing growth of 186% versus the prior year. Managed assets including our serviced for others portfolio totaled $41.2 billion at year-end an increase of 37% from prior year. Looking ahead to 2015 we remain focused on delivering attractive risk adjusted returns. We're excited about the continued opportunities across our franchise including our core nonprime platform, Chrysler relationship, servicing business and unsecured lending platform. We are determined to make the best use of our capital, allocating resources towards the greatest ROA opportunities or generating recurring fee income via our serviced for others platform. We are in active discussions with various entities that have expressed interest in our assets and based on this demand we're optimistic regarding our serviced for others platform. With that I’d like to open the call for questions. Operator?

[Operator:]

We will now open up the call for questions. [Operator Instructions]. Our first question comes from the line of Cheryl Pate with Morgan Stanley.

[Cheryl Pate:]

I was just wondering if we could maybe spend a couple minutes, on some more detail maybe on the 2015 outlook. Specifically on the credit side, I’m wondering if you could give some thoughts around the impact of improving consumer financial balance sheet and lower gas prices and in terms of your credit expectations over the coming year perhaps in addition to sort of outlook on recoveries and lower used car pricing as well?

[Thomas Dundon:]

I think consistent to what we've been saying is we've, our opinion has been that the loss rates and the credit performance in 2014 started to stabilize. And we’ve seen that trend continue. So it’s a combination of what’s happening in the economy and things we do in our underwriting, but everything we see now makes us feel like we’re in a relatively stable part of the credit cycle.

[Cheryl Pate:]

Okay, and maybe just a little bit on the competitive environment. I know we spoke at the Investor Day a couple of months ago, on ability to price for certain risk adjusted margins and targeted ROA’s sort of new vintage versus 2013 in particular. Can you speak to sort of the origination trends?

[Thomas Dundon:]

Sure, I think the market has adjusted pretty well in terms of getting price for the risk as risk increases. Sometimes the market lags behind in terms of getting the correct risk adjusted yield. And it feels stable right now, and the loans were originating, we’re happy with the price and the risk that we’re taking.

[Cheryl Pate:]

Great, thanks very much.

[Operator:]

And your next question comes from the line of Mark DeVries with Barclays.

[Mark DeVries:]

I had a follow-up question on credit, just let me get a better sense of what’s changed in the few months since Investor Day, when I think Jason you indicated provision should remain elevated, reserves if anything would be headed higher. What really changed in the intervening period that caused you to take provisions down to fair amount sequentially?

[Jason Kulas:]

Yeah, so what we do obviously every quarter, every month really, is we go through a process of looking at the end of line metrics and trends. And for that point, whether it’s any given month end or quarter end, we feel like we’re adequately provisioned for what we see going forward. When we went through that process for year-end, we came to the conclusion that we could release some of the coverage we had. And that was the determination at year-end, I think that’s reflective of our confidence in kind of what we see as we look forward. And the data support at the decrease in a month’s coverage. So it’s a real analytical process for us that we go through and we were able to support it. So we released, again, a small amount of the coverage.

[Mark DeVries:]

Was that process compared to all that affected you didn’t do a CCART deal from the day and had more presumably kind of prime unseasoned loans on your books?

[Jason Kulas:]

No, that’s a good question. When we look forward, we assume that we are going to do those transactions. The fact that we didn’t do one in Q4 will impact things like the yield and those kinds of things. But as we look forward, we’re looking forward to what we expect to be on the balance sheet.

[Mark DeVries:]

Great, and then can you just give us a little more color on - I think you guys have indicated in the past that the requirement to hit the penetration targets in the first agreement contingent on them, treating you like other captives. Can you just give us a sense on what more you think they need to be doing to treat you as such, and some comfort that despite the fact that we’re below the target, that they are in fact happy with kind of where you are at this point?

[Jason Kulas:]

Sure, I don’t know that they need to do anything, their job is to sell as many cars as they can, and I think they do a great job of that. And we help where appropriate, and the choice between on how they decide to sell a car, whether it’s an incentive APR offer or not, it’s their choice and depending on their choice relative to market - to the market impact, our rates of closure. So I think right now, we’re both happy and it’s our job to provide them products that, incentivize them to use them, and if they do, we’ll get higher penetration rates, and if they don’t, we’ll do what we’re doing now. But I don’t think it’s a, it’s not a big issue for the company that seems to come up a lot. There’s not a huge margin in those incentivized rate deals anyway. So you’re really helping to facilitate a car sale and that’s just a choice they make as they look at how to allocate their dollars.

[Mark DeVries:]

Okay, and they’re still indicating to you that they are happy with the partnership?

[Jason Kulas:]

Absolutely.

[Mark DeVries:]

Okay great, thanks

[Operator:]

And your next question comes from the line of J.R Bizzell from Stephen’s Inc.

[J.R. Bizzell:]

From a great quarter I want to switch gears here to the consumer lending, I know that picked up pretty well in the fourth quarter. Wondering if you can kind of walk us through where you saw this, what you attributed this to, and kind of how you’re thinking about this business as we move forward into ‘15?

[Thomas Dundon:]

Sure, I think it’s just following our plan that we laid out a couple of years ago internally, and then obviously we talked about during the IPO process, if there’s a lot of synergies on the unsecured side. It works very similar to what we do, it’s the most similar thing we can do to leverage what we’ve built here. And obviously the market is getting a lot of attention right now, and we think it’s the way to generate quite a bit of value for our shareholders.

[J.R. Bizzell:]

Great. And on, - talking about that trend that you’re seeing, the markets paying attention to it. From a competitive standpoint, are you seeing more opportunities, or are you seeing you’re having to compete a little bit more for that paper?

[Thomas Dundon:]

I’m not sure where - we’re probably not big enough in that space to feel the competitive tension, the same way we would in the auto space where our market share is much higher. I think it seems to me that the risk adjusted return in the unsecured installment space, given what we’re seeing in the market could come under some pressure a little bit. But because financing that asset is less efficient than it is in finance and auto asset that will leave quite a bit of margin and yield for the originators. And on the unsecured space, on the revolving side, I think those margins are pretty stable and you can expect to see those maintained or increased.

[J.R. Bizzell:]

Okay, and last one from me, switching gears and somebody’s got to ask about it. Kind of the regulatory incompliance, any update that you can provide there. And kind of, I know speaking about your last quarter and then at the Analyst Day. It feels like you’re taking it very seriously and as if you’re partly under regulatory scrutiny. So just kind of walk us through that process and how you’re thinking about it?

[Thomas Dundon:]

Sure, so obviously it’s a big focus for us, even though we’ve been owned by a bank for a long time. I think the regulatory expectations changed or our understanding of them, I would say the regulatory expectation changed, our understanding changed. And what we’ve tried to do is incorporate those expectations into our risk management and governance processes. And that’s clearly a transition that costs you time and money, but ultimately we find some areas which has strengthened our risk management. So we’re going to continue along those lines and try to find a way to make this enhanced process work for our business. On the consumer protection side of the regulatory question, we moved our max part the most, the largest amount of dealer can mark up the interest rate to the consumer from 2% down to 1.75%. So I think we’re one of the most restrictive in the industry on that piece. And I think that’s clearly a way to de-risk the business when it comes to the spared impact. So we’ll probably continue to make decisions that make us more compliant with regulatory expectations and de-risk the business. I think there’s a way to do it and still maintain sort of who you are. And you could still make money and follow regulatory expectations, and it’s just a little harder and we’re prepared to do it.

[Jason Kulas:]

As we’ve discussed in prior calls, we’ve added headcount, like that commitment that Tom’s talking about. So in 2015 we already had a good base of first, second, third line of defense-type over sighting compliance people, but we added significantly to that and got close to 400 total headcount and all of those areas combined in 2015. And we expect to ‘14, and we expect to see continued growth in those areas into 2015.

[J.R. Bizzell:]

Thanks for the detail, thanks guys I appreciate it.

[Operator:]

And your next question comes from the line of John Hecht with Jefferies.

[John Hecht:]

The first question is, do you have handy, the delinquencies in the auto segment, just defer my model is helpful?

[Jason Kulas:]

Hi yes, if you look at the - if you look at delinquency for the total business, so if you look at the 31 plus delinquency in fourth quarter it was 2.5%, that’s 61 plus yeah, 61 plus of 4.2%, and that’s fairly stable. I mean obviously, what we’re looking at when we look at year-over-year trends we are seeing lot of stability there. We don’t see big movements in those trends so it’s actually slightly better than it was same period last year. So nothing concerning in that obviously if you’re looking at that longer term of delinquency it tends to be a sign for losses being higher going forward. And we are just not seeing any really negative trend Q4 over Q4.

[John Hecht:]

Okay and the second question pertains to yields, obviously the competitive environment’s been driving yields lower but looking at some of your securitization that also looks like a there’s a little bit of a new car shift relative to the where you where say a year ago? I am wondering how much at this point in time do you attribute to competition and versus mix shift and what would you expect in the coming quarters?

[Jason Kulas:]

Yeah the growth in our originations in 2014 was driven by lease and prime, if you look at just the overall origination growth from 2013 versus 2014, so clearly that’s going to have a higher mix of new. And while we are up flowing a lot of that prime business to third parties, some of it ends up in the system. And so we have seen some increase in the overall percentage of new cars. As we look at the margins going forward we really see them being fairly stable depending on the mix of what’s on the balance sheet. We are not projecting any significant changes in our net interest margin.

[John Hecht:]

I appreciate that thanks.

[Operator:]

And our next question comes from Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

Great thanks I was just wondering if you could may be talk a little bit about what you would expect at what rate you would expect the balance sheet to grow in 2015. We talked about it being relatively flat but you’ve had some growth and then you probably sell some of the prime stuff in 2015 but just talk a little bit about that?

[Thomas Dundon:]

Yeah the focus for us continues to be what we've been saying which is the balance sheet itself we don’t expect a lot of growth. Any growth on the balance sheet would be marginal because we're really focused on the benefits of the serviced for others business. And we have a platform that’s an attractive platform for third parties and lot of different types of third parties to buy assets and have our service those assets for them. We've got an originations engine that will allow us to continue to drive growth in those originations. So that’s where we’ll see growth is in the managed assets. And that’s kind of a developing story right now but we expect to see growth in those managed assets over what we saw in 2014.

[Moshe Orenbuch:]

Does that mean that you would expect to announce deals which you’d just be servicing I suppose to actually to originate the assets

[Thomas Dundon:]

Yes I think we’ll always make a good decision, we have an asset, we can originate assets we know that, when we originate an asset we have a choice to hold it or sell it, and it depends on the price for both of the, obviously we have to analyze the transaction. But we are putting a lot of time and energy to be more sophisticated in determining what we want to hold on our balance sheet and what we want to sell and serviced for others. And building out that market place is a big focus of ours. And because we have prime loan, prime lease and subprime loan in pretty big volume in each of those areas. It takes a fair bit of work to make the right decision and decision will change based on market conditions. But we're not, we're okay holding assets. It’s not that, it’s not if whether we want to hold an asset or don’t want to hold an asset. We just want to make the best decision based on different constraints. And we will continue to drive the efficiency of being able to serviced for others.

[Moshe Orenbuch:]

Great, thank you.

[Operator:]

And our next question comes from David Scharf of JMP Securities

[David Scharf:]

Just following up on little more on the credit outlook this year, I know you mentioned the impact of gas prices being a secondary factor and arguably not sustainable. Are any of the payment collection patterns you’re experiencing now potentially from that, impacting the near-term outlook on losses and the change in provisioning methodology?

[Thomas Dundon:]

Clearly any time the customer has more money to spend, it should lead to better performance just like in the first quarter when get tax returns we get better performance. And their models and therefore when data goes into our model, you get a result that is rational, having said that I don’t think as we look at what we're originating today. We are counting on some improvement because of gas prices, so the back book is going to be a loan you’ve already originated, that price is set, lower gas prices will probably give you little better performance on that loan, but it would take a long time and lot of performance to impact or adjust our pricing on the next loan we do, so these gas prices won’t impact what we think of margins of next loan we are going to book.

[David Scharf:]

Got it and that partially answers, just a follow up question on the same topic, we've been hearing from a number of vendors about little bit of competitive easing but is there any sense that some lenders out there looking at may be the near term improvement in payment patterns from things like gas prices, may be either extending loan terms or decreasing down payments or would you generally say that the competitive environment in terms of loan terms is relatively stable.

[Thomas Dundon:]

I am not sure easing down payments and extending terms, I am sure that those are not major drivers of risk. The customer’s credit, the advance, the payment income or loan income ratios and the margins those are the big drivers. The drivers you mentioned are most secondary but if you take all of the factors that affect loan performance and size of origination. I would hope that the rational competitors wouldn’t see couple months of cheap gas and change their outlook on how credit performs. But they’ll get a benefit in their back book but we haven’t seen it yet. And we once again we think the world realizes that losses were little higher the last couple of years and adjusted and now it feels reasonably stable, the risk adjusted margin on car loans.

[David Scharf:]

Got it was very helpful, thank you.

[Operator:]

And our next question comes from Charles Nabhan with Wells Fargo.

[Charles Nabhan:]

When we think about the decrease in months coverage into 2015, should we think about that as an ongoing migration all things equal or are we at a level that’s sustainable heading into next year in terms of the methodology?

[Thomas Dundon:]

Yeah I think the way we have to look at that is that where we are now reflects our current view and our current outlook and we assess that every quarter. When we look really long-term it’s just really difficult to know because again it is an analytical process. There’s very little judgment involved in it as far as we are looking at models and we have inputs and judgment inputs in the models, but the models sort of dictate how we feel based on what those inputs are. And so I’d say where we sit today we feel like it’s very appropriate, and we’ll have to reassess that in each successive quarter.

[Charles Nabhan:]

And switching gears a bit could you comment on what you’re seeing in the used car market and your outlook for residual values in 2015?

[Thomas Dundon:]

Sure used car prices are, we don’t do a lot of predicting, the future as we keep talking about, obviously right now they seem to be stable. And ALG that we used to forecast our lease residuals, we spend a lot of time, our model and people spend lot of time with their group. And we're quite impressed with their level of detail and sophistication around capturing or predicting the used car prices. I think it’s vastly improved from years ago, which probably speaks to just the way the world has evolved in terms of the world’s ability and the talent available to analyze data. So I think all we could say is we're comfortable that we are using the best tools possible to predict those prices but I don’t think we have a, we don’t have a take different than the industry, as far as the future.

[Charles Nabhan:]

Okay great. I appreciate the color.

[Operator:]

And our next question comes from Chris Donat with Sandler O'Neill.

[Chris Donat:]

Jason I had one question on expenses as we think about where you are with some of the staff you had on the regulatory base for some regulatory reasons. And potential additions later and some of the comments you made about the servicing for other business, should we think of the efficiency ratio is likely to continue on an upward trajectory here or should we think about your expenses not so much on an efficiency ratio but just on having absolute dollar value likely to rise. I just want - trying to get some sense upon how to think about 2015?

[Jason Kulas:]

Yeah. First of all I think the percentage increase in those regulatory related costs is going to be pretty small because we already have such a big base. And doesn’t really impact things, so I’ll answer the question in two different ways, if you look at efficiency ratio, yes, if you just look at expenses versus revenue, as the servicing business grows we would expect to see some expansion in that efficiency ratio. We're actually thinking, we're going to start reporting this ratio, that probably a more effective way to look at that in the way that we're operating and how efficiently we're operating, is looking at expenses over managed assets. And if you look at that number, it’s been steadily declining and we expect that trend to continue, because we are seeing real efficiency as we grow.

[Chris Donat:]

Okay and then - but you still have some expectations of, I think you mentioned 400 people added for kind of regulatory issues. You’re still adding headcount there right, or are we sort of towards the end of that process or midway through?

[Thomas Dundon:]

Yeah, I mean we’ll continue to marginally add headcounts there, but again, I think the commentary is if you look at, if you look at the expenses related any incremental additions to those types of, again, first, second third line of events positions. As a percentage of the whole it almost doesn’t measure.

[Chris Donat:]

Okay, got it. Thanks very much.

[Operator:]

Your next question comes from the line of Eric Beardsley with Goldman Sachs.

[Eric Beardsley:]

Hi thank you. Just wanted to confirm where do you stand now on month’s coverage?

[Jason Kulas:]

We dropped about a half month from where we were before.

[Eric Beardsley:]

Okay, so it’s going from 17 to 16.5 then?

[Jason Kulas:]

Yeah, directionally that’s the movement.

[Eric Beardsley:]

Okay. And then the actual question’s around asset growth, I guess you’ve been saying for a while that you don’t plan to grow the balance sheet, but guess we're sitting here now and you’ve grown total assets by somewhere around 12% since the end of the first quarter. I guess how do we put that in context with that commentary and is it possible you could grow assets another 10% in 2015?

[Jason Kulas:]

Well some of that’s timing. So I think you’ll see us sell some of the additional assets we had on the books on the fourth quarter in early 2015. And then some of that goes back to what Tom said earlier, we have to make the right decision with every single loan, every single day. And where we see efficient places for us to put higher tier assets with other, on other balance sheets with other buyers and retain servicing, we’ll continue to do that. And it’s become a real strategy for us, because we think that service for others business is a real value creator.

[Eric Beardsley:]

Got it, and in your SDART submission this year I guess at the apparent level, would you be able to discuss any capital churns you might have requested in that?

[Jason Kulas:]

Sorry what was the question again?

[Eric Beardsley:]

Just wondering if you would plan to request any capital dividend buybacks in 2015?

[Jason Kulas:]

Sure. Yeah so obviously all that’s tied with our parent company submission of CCAR, and while we can’t really comment on that because it’s been submitted and we’ll wait to hear how that process went. We would certainly hope that we would be in a position over time to be able to, to begin distributions again. And we would consider that to be part of our planned subject to those approvals. So we really won’t know until we know.

[Eric Beardsley:]

Got it. Okay, thank you.

[Operator:]

And your next question comes from the line of Vincent Caintic with Macquarie.

[Vincent Caintic:]

Good morning guys. Just a quick question on the Investor Day, you made a comment about 2015 EPS growth that’d be lower than in 2014 with 2014 EPS growth above your 10% guidance at 18% year-over-year. Would you be able to give us some updated thoughts on what you’re expecting for 2013 EPS?

[Jason Kulas:]

We haven’t done that at this point, I think that’s probably a developing story as we kind of talked about on some of the other metrics earlier. We do think that with the platform that we have and the opportunities we have in the market to focus on the other business, look for opportunities in unsecured and grow the service for others business that we're going to be able to continue to add to our earnings and create shareholder value, but we have not defined a number at this point.

[Vincent Caintic:]

Okay got it. And then on the - just taking a step back for the net charge-offs, would you be able to give us any guidance for that? And in particularly the unsecured portfolio charge-offs were 18% which was better than last quarter 20% I think, in the past you had mid-20% guidance range. Just kind of wondering if you have any thoughts on that too?

[Jason Kulas:]

I think the key comment we can make about net charge-offs is the fact that we're seeing performance in line with our expectations, if you recall when we talked about 2013. And we saw the performance coming in, and it was above our expectations. And then we talked about later in the year, about how we have been pricing 2014 with a set of expectations that benefited from that performance, the knowledge of that performance in 2013. And the update to that story, and I think we also said that the earlier returns on that were positive, meaning that it was coming in at or better than what we’d expected. And that continues to be the case as we see more aging in the 2014 ventures. So I think that’s a real positive for net charge-offs and the outlook going forward. The rest of the story is going to depend on mix, and so we will go through a period, for example, where maybe we're originating more up-market installment assets on the unsecured business than we are maybe down market revolving assets, but that could also shift from time to time. And so I think the key for us, the key message we want to send on that is provisions are tied to yield, and provisions in yield are tied to returns. And so we feel like we're pricing for wherever we are in that spectrum, we’re pricing appropriately and getting returns for the risk that we're taking. And so the level of provisions or the level of the yield, is kind of the result of where we are at any given time and what’s on the balance sheet.

[Vincent Caintic:]

Got it. Thanks very much.

[Operator:]

Your next question comes from the line of David Ho with Deutsche Bank.

[David Ho:]

Good morning. Just a quick follow-up on the servicing fees that, how do you plan to translate more of the asset growth in the servicing, service provider portfolio into servicing these as percentage it seemed to be turning down a bit. Does that mean that you are maybe deal little more nonprime and maybe, does that have to do some of the active discussions that you’d had for others that are interested in the portfolio?

[Thomas Dundon:]

Yeah, the returns we're seeing so far on the service for others business are really in line with what we expected, but clearly you’re right, if the mix changed and we were selling more nonprime assets, the fees would be different. The fee structure is different on those assets, but we, for what we're seeing so far and relative to what we have, we feel pretty good about the returns. And would expect those levels to continue or even if they fell slightly back, we’d pretty pleased with the returns.

[David Ho:]

Okay and how is the outlook on credit normalization impact the returns there?

[Thomas Dundon:]

Yeah, what I’d say to that is - so obviously by mix obviously the higher credit assets are going to come with lower all in returns. And what we see is obviously as you go through a period where there’s stress in performance, you may have to have an increase in servicing fee income, but you’re probably going to see an offset in the price you get for the assets because that higher loss part profile would be reflected in the price. So not to say that’s a one for one, but we don’t see, for example, we don’t see a big gain if you see a real detriment in servicing because you're getting more fees. But we think the all in performance is still in that range that we've talked about longer term that kind of 50 basis points range.

[David Ho:]

Okay that’s helpful. And just one more on the lease side of the business, what’s your outlook on lease yield and kind of what drove the year-over-year decrease in volumes, is that something that which you expect going forward?

[Thomas Dundon:]

Yeah, we think there’s an opportunity for volumes and lease to go up. We really feel like the outlook, as we look forward into 2015 is positive for that. As far as yields, I mean we don’t see any big movement in that, we think the market is pretty stable there and wouldn’t expect any big changes. The profiled leases is also not going to change, it’s all pretty prime paper.

[David Ho:]

Got it, that’s helpful. Thank you.

[Operator:]

And your next question comes from the line of Rick Shane with JP Morgan.

[Rick Shane:]

Thanks’ guys for taking my questions this morning. One of the new launches here is that the accounting is a bit of an approximation along the life of the loan, you have an asset that actually has very finite and very definable profitability when it reaches the end of its life. But you’re approximating that along the way, when we think about the 2013 vintage in particular, you mentioned earlier guys at Investor Day, had said that the ROA on that was going to be below your historical hurdle rates. I’m wondering, the way I think of it is that ROA’s are artificially low in the first part of the life of the loans because of the accounting approximations. And then overtime actually in the back half exceed the lifetime average or the overall average for that loan. Where are we at this point in that seasoning process for the 2013 loan? Is it realistic to think that what they’re going to show in ‘15 is actually above the overall hurdle rate for that pool?

[Jason Kulas:]

No, that’s probably not the way we would look at is, the ‘13 vintages aged enough that the provision coverage probably equates the majority of the remaining cash flows. And I think we're pretty good at estimating these things. So I would expect that vintage to perform with the expectations that we sort of have baked in right now. I think your comment is right in the sense that if you have loan, big asset on the balance sheet growth, then that provision will hurt your day one. The look of your overall portfolio ROA, so when a finance company grows you take provision, it looks like your ROA at that point in time is lower, but I think we're always taking the position when we make a statement like we did on the ’13 about the lifetime return on that portfolio.

[Rick Shane:]

Got it, so realistically then it’s the ‘14 vintage that’s sort of in that seasoning period where it’s probably inflect upwards?

[Jason Kulas:]

Yeah, that’s exactly right and that’s why I think we cautiously said ‘14 was looking good at the Investor Day in November. And now we can say, continue obviously to speak cautiously about it, but continue to say as we see the aging, it continues to be the case that it’s within our expectations. And the reason why that’s such a key comment, is that obviously we're pricing for our target returns in the performance so far is telling us we're going to get there.

[Rick Shane:]

Got it. Thank you guys.

[Operator:]

And your final question comes from the line of Don Fandetti with Citi Group.

[Don Fandetti:]

Jason just wondering if you could talk a little bit about, I’m think of a partnership with LendingClub and just wanted to get a sense on how that might be shaping up. And are you working on additional partnerships to grow your consumer unsecured business?

[Jason Kulas:]

Yes, we're very focused on that and are actively involved in discussions with other companies. The way we - well I’ll say just generally, our relationship with LendingClub is a good one. We have other relationships as well and our focus on the unsecured business is that it will continue to come from more than just LendingClub or just Bluestem or any other parties that we're currently dealing with. And our outlook would be to see continued diversification there.

[Don Fandetti:]

So you’re still sort of hitting the minimums that you have, let’s say, with the LendingClub, are others still in place?

[Jason Kulas:]

So the relationship with LendingClub continues to be a strong one. And I think as we move forward when we speak of diversification, that’s probably diversification through growth in other areas.

[Thomas Dundon:]

Alright, thanks everyone for joining the call today, for your interest in SCUSA. Our IR team will be available for follow-up questions. We look forward to speaking with you again in the next quarter. Thanks.

[Operator:]

And this does conclude today's conference call. You may now disconnect.