Santander Consumer USA Holdings' (SC) CEO Jason Kulas on Q1 2016 Results - Earnings Call Transcript

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Santander Consumer USA Holdings Inc. (NYSE:SC) Q1 2016 Earnings Conference Call April 27, 2016 9:00 AM ET

Executives

Evan Black - Investor Relations

Jason Kulas - President and Chief Executive Officer

Izzy Dawood - Chief Financial Officer

Analysts

Cheryl Pate - Morgan Stanley

John Rowan - Janney Montgomery

Mark DeVries - Barclays

Moshe Orenbuch - Credit Suisse

David Ho - Deutsche Bank

Eric Wasserstrom - Guggenheim Securities

Donald Fandetti - Citi

Eric Beardsley - Goldman Sachs

Steven Kwok - KBW

Christopher Donat - Sandler O’Neill

Charles Nabon - Wells Fargo

Richard Shane - J.P. Morgan

J.R. Bizzell - Stephens Inc.

Operator

Good morning and welcome to the Santander Consumer USA Holdings First Quarter 2016 Earnings Conference Call. At this time, all parties have been placed into a listen-only mode. Following today's presentation, the floor will be opened for your questions. [Operator Instructions]

It is now my pleasure to introduce your host, Evan Black from the SC Investor Relations Team. Evan, the floor is yours.

Evan Black

Good morning, everyone, and thank you for joining the call. We look forward to going through our first quarter results review. On the call today, we have Jason Kulas, Chief Executive Officer; and Izzy Dawood, Chief Financial Officer.

Before we begin, as you are aware, certain statements made today such as projections for SC's future performance are forward-looking statements. Actual results could be materially different from those projected. SC 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 may reference certain non-GAAP financial measures that we believe will be useful information for investors. A reconciliation of those measures to U.S. GAAP is included in the earnings release issued today, April 27, 2016. For those of you listening to the webcast, there are few user-controlled slides to review, as well as a full investor presentation on the Investor Relations website.

Now, I will turn the call over to Jason Kulas. Jason?

Jason Kulas

Thank you and good morning, everyone. Today I will discuss our first quarter highlights and provide an update on our key strategic priorities. I’ll then turn the discussion over to Izzy, for a detailed review on the quarter’s results and then open up the call for questions.

Turning to Page 3 to share some of the key highlights from the first quarter of 2016. During the quarter, SC earned net income of 201 million or $0.56 per diluted common share driven by an 11% increase in net interest income year-over-year and a stable expense ratio. Excluding an intangible asset impairment, adjusted net income totaled 213 million or $0.59 per share

Total auto originations were robust totaling 6.8 billion. And year-over-year Chrysler Capital retail loan and lease originations increased, which was offset by a decrease in core non-prime originations as we remained disciplined in our core competitive markets.

We continue to execute efficiently in the capital markets evidenced by two securitizations executed during the first quarter from SDART and Drive as well as a CCART transaction in April.

Turning to Page 4, here are some key economic indicators that influence our originations and credit performance. U.S. auto sales remained strong and consumer confidence remained high. U.S. GDP growth is in line with prior levels and employment levels remained robust. These metrics are strong indicators of the health of the economy and U.S. consumer.

On Page 5 there are few key factors that can influence our severity and credit performance. As anticipated, the Manheim index as well as our recovery rates are down year-over-year but both remained elevated. Industry securitization data including delinquencies and loss show these trends are relatively stable to moderately higher.

Turning to Page 7, average managed assets and our serviced for other portfolio increased 19% and 27% respectively versus the prior year quarter. Originations during the quarter totaled 6.8 billion, a decrease of 8% from the prior year quarter. Chrysler Capital retail loans were flat versus the prior year quarter totaling 2.5 billion, 1.3 billion of which were prime loans and the remaining 1.2 billion non-prime.

Leases which last year included leases facilitate for an affiliate increased 2% to 1.6 billion. However, growth in leasing and prime were offset by lower volumes and capture rates in our core non-prime originations.

Core non-prime retail auto originations decreased 15% to 2.6 billion, down from 3 billion during the same period last year as we continue to maintain discipline underwriting standards.

Turning to Slide 8 and further drilling down into our retail installment contract originations mix, since the first quarter of 2015, our originations mix has moved toward higher credit quality loans as the mix of loans were sub 600 FICO scores has decreased. As we mentioned last quarter, we have seen a gradual decline in our retail loan market share since the first quarter of 2015, due to our disciplined pricing strategy and that trend is continued in 2016.

In the bottom section of the slide, we’ve also added some information about the mix of vehicles new versus used. Our mix has remained relatively stable with a slight year-over-year increase in new vehicles which is driven by our higher credit quality originations and the growth in our relationship with Fiat Chrysler or FCA. We plan to provide this level of transparency in future periods as well.

Moving to Slide 9, during the first quarter, we experienced incremental success in our dealer VIP pilot program whereby the dealer can earn addition rewards based upon achieving certain volume thresholds. We continue to have success in our lease program and are refining our lease end of term process as we expect more leases to be in maturing this summer since the launch of Chrysler Capital three years ago.

The Chrysler Capital penetration rate as of March 31st was 27%, down slightly from 29% in December. We continue to be the largest provider of both prime and non-prime for FCA. Chrysler Capital is a focal point of our strategy and we are dedicated to continuing to enhance our relationship with FCA.

Turning to Slide 10, our serviced for others strategy continue to generate strong results while the balance is down quarter-over-quarter as a result of our continued success in selling assets, this portfolio increased to 14.2 billion at quarter end, up from a 11.2 billion at the end of the first quarter 2015. Servicing fee income increased 79% to 44 million, up from 25 million during the same period last year as we continue to deliver value through this capital efficient platform.

I would like to turn now to Izzy, for a review of our financial results. Izzy?

Izzy Dawood

Thank you, Jason, and good morning, everyone. Let’s begin on Slide 11 to review this quarter’s results. Net income for the first quarter was 201million or $0.56 per diluted common share. After adjustments on intangible asset impairment of 20 million related to a trademark of a prior acquisition, earnings per share for the quarter totaled $0.59. Net lease vehicle income increased 85% as we continued to see strong growth in our leasing originations with FCA. Total other income this quarter was 73 million, which is net of approximately 68 million of lower cost to market adjustment that I will detail on the subsequent slide.

Operating expenses for the first quarter were 310 million. Excluding the impairment, operating expenses totaled 290 million, an increase of 18% versus the same quarter last year which is in line with the 19% growth in average managed assets.

Slide 12 highlights our performance excluding the impact of personal lending. Further details can also be found in the appendix of the presentation.

Staying Page 12, interest on finance receivables and loans increased at 11% to1.2 billion this quarter, up from 1.1 billion during the same period last year as a result of higher earning assets. Quarter-over-quarter interest on financial receivables and loans decreased slightly. However, excluding a discount accretion adjustment in the fourth quarter of 2015, which positively impacted the prior quarter, interest income increased approximately 3%.

Interest expense increased 28% and was driven primarily by the increase in our market cost of funds. The increase was approximately 30 basis points in both comparison periods.

Servicing fee income increased 79% to 44 million, up from 25 million during the same period last year as we continue to deliver value through this capital efficient platform.

Fees, commissions and other were flat versus prior year quarter and assets grew by 13% versus prior year quarter.

Turning now to Slide 13, you’ll further drive down into total other income. Reported total other income was 73 million in the first quarter of 2016. The impact of lower of cost of market adjustments for personal lending of 68 million include 101 million in customer defaults offset by a reversal of 33 million of prior market discounts due to a decrease in the overall offsetting balance on the personal lending assets.

Thus, normalized investment gains for the quarter were approximately $2 million. Including service and fee income and fees, commissions and other, normalized total other income was approximately 147 million, an increase of 1% from the same period last year. Driven by our strategy to increase servicing fee income over the loan and loss of upfront gains as well as the increased volatility in the capital markets, we do not anticipate material future gains or losses on assets sales or securitizations consistent with this quarter.

Now we turn to cash and credit beginning on Page 14. The allowance for loans ratio increased slightly to 12.4% as of the end of this quarter, up from 12.3% at the end of the fourth quarter 2015. In the bottom portion of the slide, we have prepared a new graph to walk through variance in dollars versus prior quarter end.

At the end of the first quarter 2016, the allowance figure totaled 3.4 billion, up from 3.3 billion as of the end of the prior period. The drives of the increase include 151 million associated with new originations, 88 million due to trouble debt restructuring or TDR migration meaning the additional allowance coverage required for loans that not qualified for TDR treatment for our definition which were not classified as TDRs during the prior period and 27 million due to additional qualitative reserves and other items. This was offset by $150 million in liquidations which includes pay down and charge-offs.

Continue to Slide 15. Delinquency rates are up only slightly year-over-year including to 31-60 and 61 plus pockets both increasing 20 basis point from the same period last year to 6.9% and 3.1% respectively. Regarding credit performance for retain installment contracts only, growth charge-offs as expected a high year-over-year by 220 basis points. Net charge-offs are higher by 210 basis points and up to 8.2% for this quarter. Our recovery rates as expected have declined year-over-year as the increasing supply of used vehicles continues to pressure used care values.

Our growth losses are driven by the higher concentration of deeper subprime assets that we originated in early to mid-2015. Based on our analysis and historical experience, we anticipate the deeper subprime assets will have this deeper loss curve earlier in the last cycle of the loan and then transition to follow a normal loss curve over the full life.

We continue to originate deeper subprime credit, but as you saw in Slide 8, our concentration on that segment has recently decreased and we have also seen a corresponding decrease in yields reflect its higher growth quality.

Turing to Page 16 to review the loss figure in dollars. In the bottom portion of slide, net charge-off increased by 199 million to 582 million. Approximately 112 million of the overall increase is due a combination of portfolio growth, portfolio aging and mix shift. With approximately 60% of this impact attributable to aging and mix shift.

As Jason noted earlier, the mix of originations over the past year had shifted towards higher credit quality loans. However, some of the lower credit quality and higher margin paper originating early to mid-2015 is going through its higher loss stage. Originations are also down as our market share has decreased over the past few quarters, increasing the average age of the portfolio. This means a higher percentage of the portfolio has experienced losses versus newly originated loans which have not yet begun to experience loss.

The second driven of the increasing net charge-off is lower recovery rates which experience another 53 million. Recoveries are softening industry-wide and this has impacted our recoveries as well. However, we do model low recovery rates and current actual in our allowance for loan loss methodology.

Finally about 26 million is attributable to lower bankruptcy and deficiency sales this quarter versus the prior year quarter. In the first half of 2015, we sold a backlog of bankrupt and deficient assets. We are now selling these assets in a more regular basis.

Turing to Slide 17. Adjusted operating expenses this quarter excluding the intangible impairment totaled 290 million, leading to an adjusted expense ratio of 2.2% in line with the prior year quarter. Quarter-over-quarter on adjusted basis, operating expenses increased 15%. Sequentially, several items drove this increase including higher repossession expense, investment acquired to capital VIP program, additional staffing to support growth and investments in risk management activities. In line with our prior comments, we are focused on maintaining a stable expense ratio for the reminder of the year.

Turing to Slide 18. Our total committed liquidity position remains strong at 36 billion at the end of the quarter. While there has been some lightening in the capital markets recently, our three distinct ABS platforms remain competitive. We demonstrated our ability to place assets across the broad investor base evidencing consistent and diversified access in liquidity during the first quarter. We are the execution of 1.6 billion of securitizations from the SDART and Drive platforms.

Recently Moody’s upgraded 27 tranches and affirm [ph] 53 tranches of our SDART securities from 2011 to 2015 positively impacting approximately 7.8 billion of securities. Also in the April, we have closed our first CCART transaction of 2016 and despite completing supply we were able to price all classes within guidance. The transaction was also upsized to 944 million due to strong demand.

Historically CCART transactions have been sold through the residual and deconsolidated from the balance sheet. For this transaction making more economic to retain the residual for the time being give market pricing. We are in a unique position to determine which securities we retained and which we sell and this flexibility provides a competitive funding vantages relative to other ABS issuers. We retain the assets in our balance sheet and may sell the residual at the later date depending upon market pricing.

Asset sales for the quarter totaled 1.7 billion including 869 million in personal loan sales and 860 million in marketing flow program sales.

Looking ahead to the end of 2016, we expect the allowance to loans ratio to remain relatively in line with prior year level of 12.3%. Specifically for the second quarter of 2016 relative to the first quarter of 2016, we expect net finance and other interest income to be flat or slightly lower. Also for the second quarter, total other income is expected to be slightly lower but offset by lower operating expenses.

Net charge-offs for the second quarter are expected to be seasonally lower versus the current quarter. However, relative to the second quarter of 2015, charge-offs will be higher.

Before we begin Q&A, I would like to turn the call back over to Jason. Jason?

Jason Kulas

As demonstrated by our first quarter results, we continue to drive SC’s success by executing our strategy including progress toward exiting the personal lending business and leveraging our core competencies in auto finance.

In February, we announced the sale of 869 million in personal installment loans. We continue to go through the sale process for the revolving assets. As expected, this quarter the lower of cost for market adjustments related to these remaining assets had a more moderate impact due to balance decreases.

Our service for other strategy remains key to our future objectives. We are focused on building a strong pipeline of potential buyers interested in our assets as we intend to future leverage our scalable servicing business.

We also remained focused on realizing the full value of our relationship with FCAs we work on strategies to increase capture.

Overall, our performance this quarter demonstrates our ability to earn strong income while maintaining stable expense and allowance ratios. Markets remain competitive for assets and our core retain non-prime business. However, we believe there are pockets where we can capitalize on opportunities to optimize capture rates while balancing risk and return.

We leverage our data every day to put pricing in structure in place that we expect will lead the assets that will perform through cycles. This approach along with ongoing investment and compliance risk and controls will position us to enhance shareholder value for many years to come.

And with that I would like to open the call for questions. Operator?

Question-and-Answer Session

Operator

Hello, we will now open the call for questions. Please limit yourself to one question and one follow-up question. Thank you. Our first question comes from Cheryl Pate at Morgan Stanley.

Cheryl Pate

Hi, good morning. I just wanted to start off on the origination outlook front and if we could post it into Chrysler and the core non-prime, just wondering in the core non-prime business, you know pulling back and losing a bit of shares, is that more a function of change in your pricing strategy or increased aggressiveness from some competitors? And then on the Chrysler side, just wondering if you could give us a little bit more color on some of the early success in the VIP dealer program and soft of outlook for penetration rates?

Jason Kulas

Okay, sure, I’ll start with the non-prime market share trends and capture rates. So I think it’s a little bit above, I mean I think what we constantly do is we look back to prior vantages and leverage the performance that we are seeing into how we price instruction new originations to make sure where we’re doing everything we can to maximize the value going forward of those new originations. And so that process of optimizing the risk return happens right now to the impacting our subprime capture but it’s not an effort to reduce our exposure to subprime, it’s again a result of this optimization process that we go through constantly.

So because of that I think yes, it is what we are doing relative to what the markets willing to do on these same subprime loans. And on a comparative basis, it seems that the markets willing to be a little bit more aggressive on certain pockets of those than we are right now. Look we don’t see any concerning overall trend in terms of individual players. But I will point out that we are seeing some of the same trends we mentioned in the last quarter, where in general, the larger players, the more sophisticated players with more data as a group have loss share to the smaller maybe less sophisticated in some cases less disciplined competitors.

And so I think it’s again to get back to your initial question, it’s a little bit above what we are doing and what the markets doing. And for us, we will continue to focus on maintaining the right risk we’re balanced and making sure we originate assets that come through cycles. And in future quarters, it could be a different result right, it’s booking less subprime loans as a result of that process not the overwriting goal.

In terms of what we’re seeing in the Chrysler business and success we are having there with that relationship, we are working very closely with Chrysler on many strategies that we think will allow us to continue to enhance our relationship and book more business. We are booking more Chrysler business but the markets grown and so our shares taking a little bit of step back and so a lot of our efforts are focused right now on the dealer, so we are focused on making sure we’re actively pursuing full time relationships. We are also - and going to your question, we are working on this pilot of dealer VIP program and we’re seeing some early really positive results. It’s a small sample of the overall dealer universe that it’s big enough versus see that we can put some real incentives in place that drive more business and also benefit the dealer and obviously Chrysler as well. So we expect to continue that pilot and into roll it out in a bigger way going forward.

Cheryl Pate

Okay, thanks, that’s helpful. And just as a follow-up on the allowance commentary, just want to clarify 12.3 is sort of a lever we should be around for the year. I think in the past, we’ve talked maybe like 10 or 20 basis points move either way, is that still a fair sort of range to think about and within that expectation sort of what sort of moderation in recovery rates you are looking for? Thanks.

Izzy Dawood

So, it’s Izzy. Answer to that two parts of that question. Yeah, the 12.3 for a year, 10 to 20 basis points about rate, we’ll have some seasonality but at the end of the year we’re about 12.3 related to our prior guidance as our expectation. In terms of recovery rates, for the last couple of months everybody seen Manheim index come down by couple of points. As used cars supply increases, we expected pressure of the used cars prices. And our allowance obviously we do assume a low recovery and it’s probably turning that way. But right now we see pockets where recovery rates are worse and pockets where it’s better. And we’ll continue to monitor Manheim and other index to ensure that you know we are pricing accordingly as we are making loans.

Cheryl Pate

Alright, thanks very much guys.

Izzy Dawood

Thanks.

Operator

Our next question comes from John Rowan at Janney.

John Rowan

Good morning, guys.

Jason Kulas

Good morning.

John Rowan

Can you maybe just drill down a little bit more into you said that your model is one thing of you get more cautious in the subprime space in that some of your competitors are doing things that you may not wanted to do. Can you just give us more detail what is it exactly that you are seeing, is it duration, is it loan to value ratio, I am just curious what the competitive landscape is telling you, you know is overly risky that maybe some of the smaller players are doing?

Jason Kulas

You know in general I think it is more price right now. You know what we are making sure that we optimize is that return for the risk that we are taking. We are very comfortable with the risk, we have more data than almost anyone else in the subprime space and so we feel very comfortable with the rest, but it have to appropriately priced. And as we see performance been for certain pockets of those vantages from the first half of 2015, we see opportunities to treat that price. Our lend vantages are performing well and have good profitability, but we can optimize certain pockets within those vantages and that’s what we’re doing.

So again it’s more about what we are doing on price, but clearly if we are losing share it means that the markets willing to do some things that we are not as a whole.

John Rowan

And then you know there is obviously been a lot of news about some of the smaller players and their troubles in the ABS markets and their cumulative net loss ratios, how do you see that if impacting your ability not access to market but your cost of funds going forward you know once we get layered you know into the back half of 2016 when seasonally loss trend tend to move up for the industry. I am just curious you know how you are budgeting for you know disruptions are increased cost of the ABS market? Thank you.

Izzy Dawood

Yeah, so specifically the ABS, you know as we’ve seen base rates go up and the market cost of funds also increase its spread that wide and especially in the subordinate trances. As I mentioned about let’s thing about 30 basis points increase in our cost of debt, any other major market moves and the likes , we anticipate that kind falling for the rest of the year. That being said, one of the rates were mitigating some other headwinds especially when it comes to spread winding over the CCART transaction where we have the flexible to obtain certain securities so that we are not paying a about market rate of interest on our debt.

Jason Kulas

And to add - I am sorry, go ahead.

John Rowan

I was just going to say thanks for the answer but if you want to do it, go on.

Jason Kulas

Sure, I was just going to add a couple of comments. So we get a new chance every day surprising what we are seeing in the market. And so obviously as we see changes in the market in cost of funds and those kinds of things, we get a change on a very short less asset to price and we are trying to continue to do that. And what we are seeing in our new originations if you look at the past couple of months of originations, you know we are seeing some pockets where we can pass on some of that increase and cost of funds while also increasing the risk adjusted yield and obviously that will continue to be a goal going forward.

John Rowan

Okay, thanks.

Jason Kulas

Sure.

Operator

Our next question comes from Mark DeVries at Barclays.

Mark DeVries

Thanks. If you look year or so from now, given the recent mix that you’ve had towards higher cycle loans, should we expect charge-off to come down a little bit from the current run rate or would you expect to continue down where migration and recoveries to kind of offset that?

Jason Kulas

Our expectation is that as the 2015 vantages continue to roll through. We’ll continue to see losses that are higher in 2016 versus ‘15. But as we look beyond that and obviously as you mentioned, it’s subject to what happens in the market that will be different from the day in terms of any further declines and recoveries and those kinds of things. But apples-to-apples, we would expect going forward to see lower loss rates based on the vantages we’re booking more recently. So what we’re seeing is slightly probably you know again trending is slightly lower yields but loses dropping more than yields and even with the slightly higher cost of funds and possibly lower recoveries, you know seeing that a good risk return mix.

Again that’s what we see in the past couple of months. If that continue for the remainder of the year, then yes, we should see a decline. But post 2016 as everything rose its way through but in 2016, we are going to see losses across the board higher than ‘15 because of the mix and within expectations.

Mark DeVries

Got it, understood. And I think you guys have kind of consistently modeled in to reserves at lower recovery rates in which are actually experiencing, is that continuing to migrate down, is actual recoveries migrate down or it’s just the cushion between actual and what you are reserving for getting smaller?

Izzy Dawood

Yeah, we have it as we marked old facilities. We haven’t actually our allowance to recovery rate. And as market obviously evolve and what we see we’ll make that termination as we have better data.

Mark DeVries

Okay, and then can you expressly kind of what recovery rates are you assuming and reserves?

Izzy Dawood

Below 40s.

Mark DeVries

Okay, got it, thank you.

Izzy Dawood

Thanks.

Operator

Our next question comes from Moshe Orenbuch at Credit Suisse.

Moshe Orenbuch

Just following-up again on the market, I know that Jason you had said that what you are seeing is price, it was interesting that one of the formally large players capital one how had kind of been bad mouthing the competitive environment for pretty close to two years did say that you know after probably a 15% drop in originations in subprime in the fourth quarter they actually had an increase in the first quarter. And I don’t know if it’s someone you are seeing more is that part of the price competition because you kwon they are usually a pretty good, so just wondering if you had any thoughts?

Jason Kulas

Yeah, I think the way to look at that is the larger players, the more sophisticated larger players, I think you have to look at it over a longer period of time because we are all constantly looking for those swap ends right. I mean so we had a prop in our non-prime capture and that could sustain itself if the competitive environment doesn’t change but it also could change if we find pockets within our underwriting where we can take advantage of where we see dislocation. I would attribute for larger players and that’s being into an individual competitive but for a larger player, I would say that in the short run, I would attribute more of it to that and if there sophistication then an overall trend, we have not seen among the larger players have sustained trend in taking share consistent with what we’ve seen if you this small players as a group. But we’ll continue to watch that closely.

Moshe Orenbuch

Right, just as a follow-up and kind of also piggybacking up some of the other questions. You had kind of identified a pool of assets that it’s started out 6 million, at the end of year was 4.8 that were originated with I guess fewer trade line notices. I mean how and kind of alluded to the fact that part of the increase and the reserve was related to that portfolio, could you just give us an update on where that stands and maybe how that might evolve at least from a balance standpoint like how smaller that get by the end of the year?

Izzy Dawood

Sure. Hi Moshe, it’s Izzy. When we start our Q in a couple of days, I will be updating schedule that you are referencing. As we mentioned clearly the amount of loans that we are making for subprime credit has decreased but we still continue those assets. So when we disclose in Q, you’ll see that the asset - that asset base increase slightly and that’s what also contribute to our increasing reserves.

Moshe Orenbuch

Got it, okay. Thank you.

Operator

Our next question comes from David Ho at Deutsche Bank.

David Ho

Hi, good morning. This is more of an industry question, on credit you know we’ve seen the loss rates and delinquency rates, if we go back to 2009 levels and clearly and play net rates you know bankruptcy rates obviously very, very low versus 2009 levels, you had used care prices still really high on a relative basis. So does this mean in your view that if we do get some more deterioration in a labor market and a combination of used car prices coming down that losses could more higher than 2009 levels?

Jason Kulas

So it’s an interesting question. I think you touched on a couple of things there. But first is you are right, the consumer is really strong right now, I mean land is low, gas prices are low, if you look at credit card and mortgage debt, there has been regulation and restriction on that that has kept debt loads low for consumers. And so that it’s a really positive situation for a consumer. So to the extent that changes any major way going forward, we should expect obviously degradation and performance from current levels. And you know I think most people are pricing in, some continued drop in recovery rates just in line with if you wanted to pick up one things, off lease vehicles and the increasing supply, but any significant drop.

So what I would say is if you saw a significant drop more than what people are expecting and recovery rates and then you saw something happen to the consumer that would be a hard way to left turn, you would expect higher losses in terms of comparing the 2009, it’s difficult to say exactly because for everyone it’s going to depend on what their mix is now versus what it was then. But I would - the trends we are seeing right now you know I think it would have to be a fairly big more to change things considerably.

David Ho

Okay. Yeah, I just deserve that the delinquency rates continue to rise year-over-year, you are saying a little bit of a mix shift potentially in the industry but you know given that you really not seeing a lot of increased inflows in terms of employment at this point you know from a frequency standpoint, worse, the jobless claims and then essentially worse unemployment drive losses, higher than kind of what people are expecting?

Jason Kulas

I think you have to look at the dynamics of the market right, because if you look at 2009, you’re so coming off of our period of stress and so working your way through that stress. And so you know it was different environment with a little bit less subprime being done but more stress generally in the performance you are seeing.

You know what we’ve been something is generally working our way toward higher subprime but still you know below kind of the peak levels you saw in 2007 and so more of a reversion back to the mean. So I think it would take a lot to get to that point in terms of the overall mix of the market percentage of subprime and then once you got there for that for there to be stress, right. So - but that’s a general comment, again I think everybody specific answer to that question on 2009 is going to mix related.

David Ho

Okay, thanks.

Jason Kulas

Sure.

Operator

Our next question comes from Eric Wasserstrom at Guggenheim Securities.

Eric Wasserstrom

Thanks very much. You know there is a number of dynamics that are moving through the income statement currently as they relate to into the shifts and perhaps the narrowing of business focus. So can you give us a sense of what it is you think all of them in terms of you know asset yield, in terms of cost of funds, in terms of provisioning, in terms of cost rationalization et cetera, you know when you think you are kind of through that process so we can get some sense of what the go forward run rates earnings power is? Is that a 2016 event?

Izzy Dawood

So - hey Eric, it’s Izzy. And Jason can jump on this as well. Clearly I think the market especially the capital markets are going through a transition phase as the fed raises rates and as investors evaluate the risk return thresholds. So I believe the 2016 will be transition year in terms of getting through what more I would say a stable environment they can figure out the run rate. Additionally I think as a prior question came up around the competitive environment, we still haven’t seen a small players or other players really kind of dive back on the subprime origination underwriting standards, also we are losing market share. Until we see some stability in there in those trends, it would be tough to say whether we run like ran rate which we feel is more - can be exasperated going forward.

Jason Kulas

You know as we mentioned, we are running the process for the revolving asset portion of the personal lending portfolio and so that would be another item that would cycle through this year depending on the outcome of that process. And so I think just echoing what Izzy said, as we move into 2017 we start to see again all equal with no other big changes in the market more of a normalization.

Eric Wasserstrom

Okay, thanks very much.

Jason Kulas

Sure.

Operator

Our next question comes from Don Fandetti at Citi.

Donald Fandetti

Yes, Jason. On used car prices, obviously we’ve seen you know Manheim tick down, I want to see if I could get your sense on do you expect a steady decline from here and then also clearly the used car supply has been a major factor but how worried are you around maybe just slower new car sales and discounting at the manufacturers putting pressure on used cars as well?

Jason Kulas

So I think the general view on new car sales is that we will continue to expand, it didn’t expand at the rate most recently but everyone expected, but it’s still generally strong. And so I think that’s the expectation for new cars.

You know in terms of supply in the auction market, we do expect it to continue to go up and so what we price in is a continued gradual decline in that rate. As Izzy mentioned earlier, we provision for a significantly lower rate but we price for a gradual decline just to make sure we are not surprised on the downside. But one thing you have to remember, the markets are very efficient and so if we prices to what we provision for, the capture rates would be too severely impacted. We have to be market focused for business that makes sense and that if we feel like the pricing structure we need for the risk is at a level that’s different in the market then we’ll gradually give up that share.

So in terms of what we expect in used care prices, what we expect is gradual but definitely a decline because you know where you can see the signs of more cost coming off lease. And we are seeing that in our business. We launched Chrysler Capital in 2013 and so the kind of large numbers of those leases began to roll off, we are going to see more supplies.

Izzy Dawood

And I’ll just echo as well. You’d mentioned about new car sales and like, so it’s really existing asset, it’s the second largest purchase an individual makes that straight to home. So it’s a brief large commitment. And Jason highlighted, unemployment rates, consumer confidence big divers of a long term commitment to buying a car. So those are definitely metrics we keep an eye and probably a very heavy influence on new car sales going forward as well.

Operator

We’ll take our next question from Eric Beardsley at Goldman Sachs.

Eric Beardsley

Hi, thank you. Just on the CCART assets that you plan to retain the residual. I guess how should we think about the ROA on those relative to the rest of the book? And I guess what kind of impact those have on your reserve to loan being in the 12.3-12.4 level, is there retention those embedded in that guidance?

Izzy Dawood

Hey Eric, good question. It’s Izzy. Right now those assets held for sale, so they would not be provisions against it also the CCART securitization tend to be higher quality assets that we’re able to start to the residual as well.

Eric Beardsley

Okay, got it. And your commentary to non-expect and material gains on sales this year, I guess would identify the CCART as well?

Izzy Dawood

Yes.

Eric Beardsley

Okay, great. And just on the fees and commissions line this quarter, I guess what drove I guess that to be flat on a year-over-year basis, I guess we previously thought a lot of the fees were cash the unsecured consumer portfolio, where those less the LendingClub assets and more the Bluestem ones that you still have?

Jason Kulas

Yeah, so actually Eric I am going to take you to the page 22 of the presentation if you have it. We have broken some details in terms of what for the piece we earn our personal lending assets versus our non-personal lending. As you’ll notice since we still have the personal lending assets on our books, and primarily the fees are driven by our revolving portfolio and there growth slightly year-over-year and the rest of the business the auto business, the fees are relatively flat.

Eric Beardsley

Got it. And then just really quickly, in terms of you’re talking about I guess back last year about the funding cost going up due to impairment liquidity charges and other factors and just mentioned the potential to diversify your funding earlier. I guess is there any step up we should expect to see in the average funding cost excluding anything with interest rates as we go through the year?

Jason Kulas

Yeah, actually it’s a great question. So I indicated about 30 basis points increases are primarily driven by market funding costs. We maybe see another 10 maybe 15 basis points increase depending on how we structure our liabilities, whether we do unsecured issuance or relay on other parent company support as we go through the year. As you can imagine where they being a debut issuance, we are being very careful in terms of when we issue and under - in which environment we issue. And so that would continue to be evaluated at the year goes on.

Eric Beardsley

Okay, great, thank you.

Operator

Our next question comes from Steven Kwok at KBW.

Steven Kwok

Hi, thanks for taking my questions. Just I was wondering on the LendingClub sale, was there a gain that you guys have recorded for that?

Jason Kulas

It sounds again Steven, it’s a very sold.

Steven Kwok

Okay, got it. And then just wondering if it’s helpful, if you could provide just in the remainder of the personal lending business, should we expect it to be that you guys still have sold it by like the end of this year like what’s the best guess around timing of it?

Jason Kulas

We don’t want to speculate on the timing. We are running a very active process and it’s - you know we have a good dialog going but we don’t even have first round bids. And so I think we’ll have a better idea as we get to those stages of the process on what timing will be and economics will be and those kinds of things. But right now, we are encouraged by the interest that we are getting and we’ll continue to play that process out.

Izzy Dawood

And - Izzy again, and we’ll definitely be given you a much more update in the second quarter call because as Jason mentioned we have an active dialog, we expect this and once we evaluate it and the terms that we cannot give you much specific guidance on timing.

Steven Kwok

Great, thanks for taking my questions.

Izzy Dawood

Thank you.

Operator

Our next question comes from Christopher Donat at Sandler O’Neill.

Christopher Donat

Good morning, thanks for taking my questions. I wanted to just explore one thing on the originations where your mix is sort of 50-50 used versus new. As we think about what you retain on balance sheet, can you remind us where you are on on the mix there because seems like your exposure is much more on the used side as we think about really what’s on your books?

Jason Kulas

Yeah, that’s right. I mean historically, it’s been heavily weighted toward use. And as time goes on that’s migrating up. I don’t know if we disclosed the actual on balance sheet percentage.

Izzy Dawood

Yeah, it’s around 50%.

Jason Kulas

50%, so that number you know - that number is you know down from what have would have historically and that’s directly attributable to our relationship with FCA. But clearly the mix is different than what you see on the origination side, because the book of the higher two assets that we see to third parties would have a higher mix of used.

Christopher Donat

Got it, okay. And then just on the slide you had, slide 15 which shows the recovery rate, should we be thinking about seasonality there, I know the Manheim index what a great call but it strips out seasonality, so it’s kind of harder to assess but wasn’t it some other used car price indexes you see you know higher used car prices in the first quarter or second quarter which I imagine helps on the recovery rate, so just as we think the flow of recovery rates may be higher in the first half of the year and lower in the second half, is that a reasonable way to think about it?

Jason Kulas

That’s exactly right. Yeah, there is more than end for used cars in the first half of the year.

Christopher Donat

Okay, got it. Thanks very much.

Jason Kulas

Sure.

Operator

Our next question comes from Charles Nabon at Wells Fargo.

Charles Nabon

Hi, good morning. My question is, during 2015 you executed on four drive transactions and then you had another one in the first quarter of this year, as you shift up the credits back, could we expect any deviation from that pace?

Izzy Dawood

Hey, it’s Izzy. No, we still anticipate three to four transactions this year on a drive platform.

Charles Nabon

Okay. And as a follow-up, one of the trends that was noted during the quarter was that delay and tax refunds contributed to some delinquencies and in some cases defaults during February. My question is - and then I think the expectation was that would normalize overtime. My question is, did you start to see normalization in that trend during March or could we expect a potential tailwind in the second quarter as tax refunds are receives and that trend normalizes?

Jason Kulas

So in general, lower delinquencies in the first quarter result in better loss performance in the second. But the key is the guidance what we gave on, we do expect to continue to see that relationship between 2016 versus ‘15 that you saw on the first quarter. So for us we still higher losses versus Q2 2015.

Charles Nabon

Great, thank you.

Jason Kulas

Sure.

Operator

Our last question comes from Rick Shane at J.P. Morgan.

Richard Shane

Hey guys, thanks for taking my questions this morning. I have a couple. I’d love to get your thoughts in what you are seeing on a more targeted geographic basis, are you seeing pockets where frequency of losses and severity of losses are particularly high given what the concerns in the oil and gas?

Jason Kulas

Yeah, so we spend a lot of time Rick on exposure to oil and gas, we have analysis that our risk team does that gets updated very frequently. Just given all the pressure on that and what we are seeing with the price of oil, as much as a benefit that customers clearly where you have pockets of exposure to employment you want to watch it. And so if you look at you know toward the biggest areas of exposure in terms of sates you have Texas and California, what’s really interesting is we are seeing that not the MSA in California experience an increase in unemployment and only three of the MSA is Texas did and actually Huston and kind of very interesting is not one of them. I think what you seeing is that even a place like Texas which has a significant exposure of oil is very diversified. And but we drilled down and we look at specific MSAs. And when we do that we see that we’ve seen some increases and delinquency that are higher than the overall number not anything that sticks out as alarming.

If you look at some of the MSA and then you expand that to a state level for example. If you look at the delinquency increases in Texas and California, there is slightly higher than the overall delinquency increase we saw on our entire portfolio and that’s something we factor and watch very closely. But right now, we are not seeing anything significant but I think it’s a developing story depends I think on how long this continues and it’s something we’ll continue to watch very closely.

Richard Shane

Got it. Okay, that’s helpful. And second question is you’d mentioned the impact of moving increasing - moving deeper subprime on the potential share of the loss curves depend how they develop. That touches on something I’ve been wondering about for a while which is that with loan terms being extended, do we think that the loss curves that we looked at historically are still relevant because my assumption is that the point where the consumer actually had equity in the car is probably getting pushed out a year or two, so shouldn’t we continue to expect - sorry - shouldn’t we continue to expect to see losses ramp higher longer for all those curves?

Izzy Dawood

Actually Rick that’s a great question. So specifically on terms you are right, the industry is seeing term which stand out but looking over the last three years on our core non-prime portfolio, we are seeing our term increased by half a month. So as Jason mentioned, when it comes to core non-prime business, we look a lot of things like structure, payment, rent of value and term. And so what the term extension you are seeing is primarily occurring more on the prime or super prime side as opposed to what we are seeing in our book. So the timing on the loss curve is we expect very consistent with our expectations.

Richard Shane

Okay, great, thank you.

Izzy Dawood

Thanks Rick.

We’ll take our last question from J.R. Bizzell with Stephens Inc.

J.R. Bizzell

Yeah, good morning, thanks for taking my question. Most of mine have been asked but kind of building on the ABS market, I am wondering I know you spoke to an oversubscription on the round you saw on the first quarter and then in April. Just wondering if it’s - the demand is equal across all tranches or you seeing maybe a flat quality like some of the other players out there have been seeing any ABS market?

Izzy Dawood

Yeah, actually that’s a great question. It is the flat quality effectively the entire upsides was in the senior most tranche and also consistent where we held on residual where the higher risk tranches are being prior to the why are spread being, we think it’s economical.

Jason Kulas

There is differentiation by tranche within the deal. There is also differentiation by seasoning of issuer. And so I think we are benefiting from that on a relative basis.

J.R. Bizzell

Well kind of building on that and I know we’ve probably hit on this enough for the origination volume, but I am just wondering your all spots around with the smaller players if you will take some of that market share again this quarter. I am just wondering as all see it from the ABS market, did they continue to see that that risk in your opinion that coupon rate go up and maybe you all see an origination volume opportunity in the back half of the year as they can access the market as fluent as they have in the first half?

Jason Kulas

You can definitely paint that picture in certain scenarios. We wouldn’t want to speculate how everything sort of washes out but we’ve seen under certain circumstances in prior cycles and both economic cycles and liquidity cycles where situations like this if they continued resulted in big opportunities for us. But I wouldn’t want to speculate on how quickly that comes or if it comes.

J.R. Bizzell

Great, thanks for taking my questions.

Jason Kulas

Thank you.

Operator

There are no further questions at this time. I will now turn the call over to Jason Kulas for final comments.

Jason Kulas

Thank you every one for joining the call today and for interest in SC. Our investor relations team will be available for follow-up questions. And we look forward to speaking with you again next quarter. Thank you.

Operator

That does conclude today’s conference. Thank you for your participation. You may now disconnect.

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