Q3 2019 Earnings Call
Today's conference is being recorded at this time all parties have been placed into listen only mode. Following today's presentation. There will be open for your questions. Please dial I want to enter the Q on Q.
It's now my pleasure to introduce your host Adam Black Vice President Investor Relations Evan the floor is yours.
Thank you I'll draw.
Good morning, and thanks, everyone for joining todays call.
In the room, we have Scott Powell, President and Chief Executive Officer, and Fannie <unk> Chief Financial Officer.
As there were certain statements made today.
Maybe forward looking.
Please refer to our public that's easy filings and risk factors with respect to these statements.
Also reference non-GAAP financial measures that we believe will be useful for investors and a reconciliation of those measures to GAAP is included in the 8-K today October Thirtyth 2019.
And what that will turn around it's got though.
Thanks, Evan it's good morning, everybody. Thanks for.
Joining our call to discuss our third quarter results.
I do want to say, how pleased I am to be sitting here with Sammy cut them, our new CFO it sounds from their consumer.
As you all know Juan Carlos Alvarez is now the Sunderland CFO and continues to work with us.
I know you all miss him already but a family I know, we'll do a great job a in his current role you know families and working here for many years he's had a number of different roles, including strategy corporate development and most was most recently our head of pricing in analytics. So he knows the business inside and out he's absolutely the right person.
For the job that's great to have them here and I think you all world.
Like getting to know Sammy so great to have you hear family.
So, let's turn to slide three in the presentation and I'll give you a quick overview of our highlights.
Net income came in at 233 million earnings per share for the quarter totaled 67 cents per share.
Our after tax Aro eight was 2%.
We had a very strong quarter on originations originations came in at 8.4 billion in total volume, which is up 11% year over year.
We remain really focused on improving the dealer experience, especially.
In our origination operations and focusing on.
Process.
Our non F.C. a core business was Ah came in at 2.6 billion, which is up 11%.
Chrysler loans were 3.6 billion up 52% and that's really driven by the program we have with their bank.
Where our prime volume they did a prime volume of 2.1 billion during the third quarter.
Chrysler leases were 2.2 billion, which is down 23% year over year.
Were down year to date, 12%.
Can talk more about that in Q and aim for sure.
Total Chrysler originations, though were up 9% year over year.
And during the third quarter, our penetration rate with Chrysler came in at 36%, which is up from 31% a year ago.
Which again continues to reflect the strength of our relationship with FCTA.
In all the work, we're doing to help or help them be successful.
We're also pleased to report or.
The JD power <unk> results, which were recently released Chrysler capital increase nearly five percentage points versus the previous survey, which is a year ago and we were the second largest mover compared to peer group. So that demonstrates our continued progress because we continue to focus.
On this very important area of improving dealer satisfaction.
And improving our service to dealers.
On the funding side, we continue to execute successfully in the securitization market.
We did 3.5 billion of ABS from three transactions one from each of our active platforms.
And I think what's really interesting.
These are our portfolios credit performance remains very strong supported by benign credit environment and a very healthy consumer.
So I'm sure you've looked at this already but our our 30 59 day delinquency ratio decreased 100 basis points year over year.
What's interesting is kind of the quarter on quarter comparison to so in 2018 quarter on quarter. We were up 90 basis points. This year, we're pretty flat were up 10 basis points and if you look at the 59 day plus delinquency ratio year over year were down 80 basis points and quarter on quarter again.
Year ago were up 100 basis points, just because what you would expect seasonally.
This year were basically flat to the second quarter. So I think that reflects kind of the inherent credit quality, we have them in our portfolio.
Our gross charge off ratio is up 70 basis points to 18.3% very strong recoveries in the quarter at 55%.
Net charge off ratio is 8.1%, which is down 70 basis points.
Mostly driven by that very strong recovery rate.
And also another very positive signs are TDR balances are down 27% year over year.
We do remain very disciplined on expenses here.
See our expense ratio is up from 2.1% to 2.3%.
Excuse me, but all that increase is really driven by a series of one timers. So if you back those out our expense ratio would be flat.
And then on the macroeconomic environments.
During the Super focused on that you can track of all the trends.
Used car prices continued to exceed people's expectations at any of the year.
New car sales were down a little bit.
Compared to last year, but still at a very healthy level.
And just looking at the economy itself, obviously is very strong everybody understands.
In between consumer unemployment and.
Faults in this particular industry. So all that remains very strong consumer confidence remains strong. So we're feeling pretty good about the macroeconomic environment.
So with that I'll turn it over to Fannie any thanks, Scott and good morning, everyone turning to slide four for some key economic indicators the influence our originations and credit performance.
Building on what Scott just said at the macro economic environment remains supportive of our business consumer confidence is still high the labor market is strong and household balance sheets continued to improve saving rates increase.
Environment continues for a resilient consumer lending environment.
In regards to new vehicle sales industry experts are forecasting a moderate decrease and we've seen some of that play out in the third quarter, but we're still at historically high levels. The used car market continues to be stable as demand for consumers remains robust.
On slide five there are few key factors that influence our loss severity and credit performance, our auction recovery rate, which represents all auto related recoveries from the auction ways.
Was 51.5% up from 50% during the prior year quarter, our recovery rate, which includes non metal proceeds bankruptcy inefficiency sales was 55.9% in the quarter also up versus the same quarter last year. While overall auction trends are positive we did begin to observe some softening in the off.
And lanes in September .
This is expected based on typical seasonal patterns, but we'll be watching for any trends very closely in the coming months.
Additionally, nonprime industry securitization data points, so relatively stable net loss in the delinquency trends compared to last year consistent with our overall portfolio.
Turning to slide six for origination trends overall, we had another healthy quarter over of originations across the board with more than 8 billion in total auto volume, that's an 11% growth from last year, driven by our Chrysler Prime loan business.
Core loan originations increased 11% in the quarter compared to the prior year quarter, Chrysler capital loan originations increased 52% similar to last quarter. The increase is coming from the greater than 640 segment, which is driven by Chrysler capital exclusive offers and RSP in a flow program.
Lease originations volume decreased 23% versus the third quarter last year due to competition in a strong quarter last year.
The growth in volume is due to our continued progress with FDA our dealers in origination processes Chrysler capital volumes are indicative of the strength of our partnership with FDA and our ability to execute we remain disciplined with respect to the risk return profile of our nonprime originations, while maintaining our competitive position.
We expect to continue to support FC a prime loans with RSP in a program, while continuing to maintain our strong market share and lease.
To that point you can see the results with FCTA on page seven which shows our average quarterly penetration rate in the third quarter at 36% up from 31% last year.
We continue to work together to fund mutually beneficial ways to increase our volume and drive sales for FCTA.
Turning to slide eight service for others platform generated 21 million in servicing fee income this quarter.
In addition to those servicing fees 13 million of SP in a origination fees are in our fees commissions and other line item.
During the quarter, we added 2.1 billion in originations to the CFO platform via our agreement with SDMA, which drove the Esa FFO balance increase as our previous flow programs continue to run off.
Moving to slide nine to review, our financial performance for the quarter versus the prior year quarter.
Net income for the quarter of $233 million flat versus the prior year quarter.
Interest on finance receivables and loans increased 4% driven by higher average loan balances.
At least vehicle income increased 29% due to continued growth in lease balances.
Interest expense increased 17% due to higher levels of outstanding debt relatively in line with the increase in our loan and lease receivables at a lower contribution from our derivatives portfolio.
Provision for credit losses decreased to 567 million in the quarter down 31 million driven by lower TDR balances.
Total other income was 31 million in the quarter and included 87 million of held for sale adjustments related to the personal lending portfolio, which is comprised of 102 million in customer charge offs offset by $15 million decrease in market discount.
Continuing to slide 10.
Versus the prior year quarter early stage delinquencies decreased a 100 basis points, while late stage delinquencies decreased 80 basis points.
As we have referenced in the past lower loan modifications have an impact on delinquencies charge offs and lower inflows into tdrs.
Our time as modification levels have normalized delinquencies have improved and a cleaner portfolio remains.
Regarding losses, the Rick gross charge off ratio of 18.3% increased 70 basis points from the third quarter last year.
The net charge off ratio of 8.1% decreased 70 basis points from the third quarter last year, driven by strong recovery rates.
Our credit metrics have been stable and are consistent with the mid 8% net charge off guidance, we provided at the beginning of 2019.
Turning to slide 11 to review the loss figures in dollars net charge offs for Ricks decreased 20 million versus prior year quarter to 593 million breaking down the change 29 million losses were due to a higher gross charge off rate. Another 35 million is attributable to higher average loan balances, which were up one per.
At 4 billion from last year.
These were more than offset by better recoveries and other items, which combined contributed 84 million.
Turning our attention to provisions in reserves on slide 12 at the end of Q3 2019, the allowance for credit losses totaled 3.1 billion decreasing 5 million from last quarter, which represents an allowance ratio of 10.5% at the end of this quarter.
In regards to the reserve walk the allowance increased a $188 million due to new originations in the quarter higher inflows into TDR migration, which increased the reserve by 8 million and 3 million increase due to unfavorable performance adjustments. These increases were more than offset by $204 million decrease due to pay offs and charge offs.
Yes.
Now, let's turn to slide 13 to discuss Tdrs in more detail.
TDR balances decreased 292 million versus the prior year quarter, continuing their downward trend due to lower TDR inflows given the strength of the consumer and lower modification levels as we mentioned in the past the slower generation of Tdrs could allow reserve balances to trend lower throughout the rest of the year.
Turning to slide 14, the expense ratio for the quarter totaled 2.3%.
From 2.1% the prior quarter driven by a onetime expense in our legal reserve. Excluding this expands our expense ratio would have been inline with prior year quarter.
Turning to slide 15, our liquidity position remains strong with total committed funding of nearly $49 billion.
See continued to demonstrate consistent and deep access to the capital markets, our treasury and capital markets teams continue to be active issuing one transaction off each active ABS shelf in the quarter for a combined 3.5 billion.
We also continue to diversify our funding through private financings and lender commitments, which totaled 18.3 billion.
Subsequent to quarter end, we also closed at 1.2 billion lease ABS transaction SRT. This is the fourth transaction since inception of this new lease platform in late 2017, which is important for our funding diversification and leases.
Finally, turning to slide 16, RCT, one ratio for the quarter was 15.4% down from 16.4% versus prior year.
We continue to execute our previously announced 1.1 billion share repurchase plan purchasing approximately $141 million or 5.5 million shares during the quarter.
Before going into our Q4 2019 guidance I'll provide a brief update on Cecil.
As a reminder, our TDR portfolio is already reserved for lifetime losses in 2020 with the adoption of Cecil the non TDR portfolio also are reserved on a lifetime basis. Accordingly, we expect our allowance for credit loss to increase 55% to 70% at Cecil implementation.
We also expect to phase in the impacts with respect to regulatory capital amounts and ratios over four years on a straight line basis.
Given our strong capital base, we do not expect see sold to impact our previously announced capital distributions.
Now turning to our guidance for the fourth quarter.
Remember the fourth quarter seasonally the weakest performing quarter and is also the quarter that as most heavily impacted by the held for sale personal lending portfolio.
The balances of the personal lending portfolio seasonally increase from third quarter to the fourth quarter and we are required to mark the portfolio Accordingly.
Additionally, during Q4 2018 resolve some legacy legal matters that benefited the period, which we should all keep in mind when comparing to this quarter.
So my comments will be relative to Q3, unless otherwise noted and will include the impact of personal lending.
We expect net finance and other interest income to be down zero to 2% in the fourth quarter inline with last year's quarter on quarter trend.
Provision expense is expected to increase $90 million to $140 million in line with seasonal patterns.
We expect total other income to be 65 to 75 million worse, driven by normal seasonality of the bluestem held for sale portfolio.
Operating expenses were higher than anticipated this quarter due to some onetime expenses into period, we expect expenses in the fourth quarter to be 20 to 30 million better.
Regarding our full year guidance all the metrics. We previously guided to are relatively in line with our ranges. We provided on our Q1 2019 earnings call with the exception of our effective tax rate. So let's go through those points. Once again for the full year 2019, we expect mid single digit growth in net finance and other interest income versus 28.
Team, a mid 8% net charge off ratio for the full year.
Stable expense ratio around 2.1% and regarding the tax rate. We currently expect a tax rate to be in the 25% range due to higher state taxes, and lower electric vehicle tax credits.
Before we begin Q and they would like to turn the call back over to Scott.
Got it thanks.
Well I'd like to come back to four key points so they've made.
On prior calls number one we continue to.
Aggress, creating a better dealer experience.
Really by fine tuning, our pricing and credit risk management operations, and then making sure our operations on the funding side in servicing side work smoothly.
Not done we're constantly seeking to do better and improve what we do in pricing in risk as well and as our operations.
But we feel good about progress we've made because I think this quarter shows how those changes.
Has had a substantial impact on our results number two and Sami mentioned it as that I in my opening remarks, we remain very disciplined on expenses.
With a positive operating leverage.
Number three we spent a lot of time building and deepening our management team.
Having family here today is a great example of that.
Our results speak to the broader point that we continue to.
To run this business.
Large financial institutions standards.
As Weve built out our management team and improved our depth.
In another good example, that which we recently announced is Sandy Broderick, who has done the head of operations here at Santander consumer She's taking she has also taken on a broader role in running Sunderland theyre less operations.
It goes to the depth of the management team that she has built in operations and then number four is our relationship with Chrysler we continue to work really hard to support our partner.
Our originations performance reflects the strength of that partnership and we continue to work everyday to find new ways to create mutual value with them.
So with that we'll open it up the questions.
Operator, or do you change.
Thank you we will now open the call for questions as a reminder, press star one to enter the Q.
Limit yourself to one question and one follow up question.
We'll go first to Moshe Orenbuch at credit Suisse.
Good morning. This is actually James you went on for Moshe Thanks for taking my question.
First congrats Bobby.
Good to see there.
And I wanted to ask about capital.
You have the billion dollar buyback and you did about 140 million.
And repurchase just given what.
The market us allow you to repurchase.
20% outstanding float what do you think it's reasonable to do.
2020, as far as share repurchases.
Yes. Thanks for thanks for the question as you stated, we did purchase around $140 million or 5.5 million shares.
During the quarter.
As we did highlight last quarter. The previously announced 1.1 billion is in up to amount.
We continue to be very thoughtful in our approach as we continue to monitor the market conditions and all of the buyback execution strategies are available to us as well as we continue to look through other investment opportunities to deploy capital that's accretive to our shareholders so not going to.
Comment on what we're going to do in 2020, we are going to continue to very thoughtful in our approach and deploying capital to our shareholders.
Gotcha, Great Ken just a quick follow up that's related.
You've got Cecil stays again first for us.
A couple of months any thoughts on.
How you think that would impact.
Proven is on capital returns or just your ability to do capital return.
Yeah, and I think we said during our prepared.
Remarks that we do expect a seasonal impact to impact any of the previously announced share buybacks.
We have a very strong capital base, we're confident that we can absorb the impact of.
Cecil still execute on our strategic part priorities, including the accretive growth opportunities and deploying capital.
To shareholders.
The ultimate impact.
On Cecil will be a function of our portfolio credit mix and trends that we're seeing in the portfolio at that time and our forward looking view on the macro environment. So we have a little bit of work to do before day one implementation.
As we get closer to implementation date.
We will also be able to give you a little bit more details as we give 2020.
2020 guidance.
I also think is worth mentioning on Cecil that we do not have we do not believe the Cecil will fundamentally change the way, we price or under underwrite our deals.
Underlying risk and lifetime economics of the loans are not changed so it's more of a timing things and they thing.
Great. Thank you.
Thanks James.
We'll go next to check with Banco at this.
Hey, good morning.
Looking at the NIM thinking about some of the inputs there.
Historically thought of you guys is somewhat liability sensitive obviously rates have come down, but you're also remixing the portfolio a little higher quality, just thinking through where rates have gone maybe we get something this week does the NIM begin to inflect in 2020.
And if it were or were not to sort of what are what are some of the drivers today versus historically that may change that.
Yeah. Thanks for thanks for the question part of the NIM story is as you mentioned the mix of the portfolio as leases continuing to grow as being a bigger part of our balance sheet leases as a relatively primarily to the prime product and therefore lower yield than our typical nonprime assets.
The cost of debt has ticked down throughout the year believe were about 20 basis points better than we were in Q1.
We will be able to see some of the impact further as we reprice our credit facilities and we continue to do new Securitizations. So I do think that trend will continue to improve as we get through the ended the year end 2020.
On the new origination front as interest rates fall, we generally are able to hold the yield obviously in some segments, we may choose to take share.
And reduce price of course, we have to be mindful of where the competition is would be competitively price, but generally speaking as rates come down were able to generate higher margins.
Okay, that's up so directionally still pretty much the same.
And then on the recovery rate.
Really impressive increase year to year.
How much of that is.
Used prices holding and better than people think and how much of it is the way you've changed.
The modification to the Tdrs I think your move.
Moving to doing less Tdrs, which was I would assume would give you better.
Recovery rate at auction because of the timeframe as youll compressed and when you when you're taking the car back with curious if you could parse out that 600 basis points. So much has just straight pricing and how much is changed methodology.
It's a part of all the above to be honest with you.
The big increase in our overall recovery rate has as a little bit of timing impact on deficiency sales quarter over quarter. So I would point you to just the auction only growth and that's pretty consistent with what the industry is seeing.
As far as specific to us because we had we do have a new or.
Newer vehicles in the portfolio as far as mix goes you do see a little bit of a benefit to the rate recovery rate.
But I think our portfolio is very reflective of what the industry is seeing.
Okay, Alright, thanks, guys.
Next the mark to freeze at Barclays.
Yes. Thanks.
I was hoping to get a little more color on.
Kind of what's driving the decline in the servicing fee income as you go to service for others portfolio. Thank you indicate the press release, it's it's mix could you give us a little more sense of why that is and what kind of impact maybe that declining.
He is having on the overall profitability that business.
Yes, I think.
The service for others platform as it is a mix of several different partners as as we get further along with SDMA.
You will definitely see the portfolio grow as our volume grows just want to remind you that as part of the fees and commissions line item. There is a $13 million origination fee, which based on our other flow programs, we havent haven't charge and origination.
But due to the nature of the flow agreement with Sps today, we do have the benefit of of the origination fee.
Okay got it and then.
You know to extend to what you're willing to be really useful to give some color on on your thoughts on what we can expect on charge offs is as we looked at a 2020.
Yeah, I mean gross charge offs are a little bit higher year over year, but in line with our expectations.
As we've communicated the past lower modifications that we've talked about over several quarters does have an impact on charge offs.
I would say if you look at some of our.
More recent vintages in our more recent monthly vintages really across all of our channels and across most of our segments. Some of the month to month vintages in 2019, our some of the best performing early performance indicators that we've seen in quite some time over the last four or five years.
So we're not seeing any red flags.
That would give us any pause or be less optimistic on the opportunities. We have in the market will be focused on pricing for the risk that we put on our balance sheet, but as we sit here today were very positive on the assets that were booking yes, Mark I would just add to it Sammy just said the I think we feel per.
The positive about what next year looks like given what Sammy side, which is.
The quality of originations this year event really good from Sam you seen from a credit perspective based on early delinquency reads.
And we also feel good.
Vintage so yes, we we are pretty positive as we look to next year in terms of overall credit trends and including the the gross loss.
Gross loss rate, obviously that subject to what happens in the broader environment, but.
All things being equal there and there wasn't any reason to believe yet the all things equal there that we feel pretty positive next year.
Got it thank you.
Yes.
Well go next to John Hecht at Jefferies.
Hey, guys and thanks for taking my questions.
First first question is can you quantify that onetime legal expense just so we know what kind of core run rate earnings were in the quarter.
We're not going to comment on the legal reserve.
I will point, you to our disclosure coming up.
10-Q.
What I will say John is that we it is a legacy matter it is not a new better.
I'd also point you to as we as we take that one time expense off.
You know our ratio is consistent with our guidance and the prior quarter.
Okay and.
And then.
There was it.
Looking at your origination trends, it's down year over year leases, but very strong and other factors, particularly the Chrysler partnership maybe can you talk about that what's going on in the end markets, that's driving that change or is that more based.
Focus on return on.
And the capital and where the best margins lie.
Yes, no I think it's a it's an indication of where we are with our FC a partnership coming off the amendment that we had last quarter that we allowed announced last quarter, you've seen strong originations really all year long. So it's a function of our relationship with FDA, but also a big part of it has also.
So.
Good day flow program, which we've touched on.
Over the last several several quarters.
The SP. They flow program. Obviously, we're very pleased with that helps US helps the bank helps us it helps.
Support RF CA.
Partnership and it helps us be more competitive really across the full credit spectrum.
So as I look at originations growth, it's really a good story of Christ Cross Chrysler and our core core channel.
Okay, and then last questions. It just seemed used car volumes.
Sustain modest growth this year.
Scott you commented on this in the past relative value, where do we where do you think we are that cycle. What do you think there so persistence in this.
Constant growth coming into next year.
Yes, I think it's just we said which is I think it's a continuation of that same theme.
And I don't think we see much changing there in especially given the strong consumer and strong demand and.
Relative value to new cars.
Got it are hanging in there pretty well despite all the all people out there telling a significant downturn.
New car sales are down a little bit.
But still a very healthy level and and used cars.
For used cars you see it no recovery rate.
You can see in the demand for used cars site I think it will continue again barring some change in the.
Macroeconomic situation.
Continue.
I think theres any reason to see big change there.
Hi, guys, thanks very much.
Thanks, John .
Next to David Scharf JMP Securities.
Hi, Good morning, Thanks for taking my question I wanted to.
She has returned to a.
The.
Recovery rate and sort of expectations going forward because.
Obviously, given gross charge off trends you won't want to get a better sense for sort of the sustainability of of the recoveries and I'm wondering.
The gap between just sort of the pure auction to to your total is there an increasing market are you finding yourself increasingly going to market to sell deficiency paper in sort of other non auction recoveries just trying to get a sense for whether they're more purchase is out there whether this quarter's recovery represent.
Good.
Maybe a bit of an anomaly in terms of how much.
Deficiency paper and otherwise you may have sold.
Oh I think the answer is no I mean, it's.
And we're consistently doing those kind of things or any change in strategy with respect to.
Deficiency balance sales or other other other items that drive that number. So I think it's again that those things will happen periodically in the underlying recovery is.
Should hang in there used car prices prices will hang in there I think and.
So I think it'll continue to hang in there and family was making this point about delinquency rates and the connection to gross loss rates.
As.
Delinquency rates continue to fall essentially you'd expect to see that flow through to our overall gross charge off rate too so.
Got it no understood that it's helpful. And then just as a follow up.
You know it's interesting it's got regarding your your comments about the mix into service for other portfolio.
Notwithstanding the.
Impressive SP in a volumes.
Now that program is performed.
It's been a well since we've kind of heard much about whether they're you know we're kind of.
Broader longer term plans for growing that service for others portfolio.
In the sense.
Is there a pipeline being developed of other lenders.
The that may be coming onto that platform or should we be viewing this pretty much as a proxy for us be any volume.
It's a great question very timely David because it is an area where we are in the process of adding staff that can be focused on.
More service for others business outside of the SP in a program.
The spending program as you said has been a penny huge success for us for a whole bunch of reasons.
And a successful that for Santander Bank and it's important as family said for Chrysler relationship, but yes, we will be looking for we are in process of building out the team and looking for other opportunities in that space because really good at it we're efficient and we think.
We think there'll be opportunities in the future to do more of that.
Got it thank you very much.
Yes.
Well go next day Arren Cyganovich at Citi.
Hi, Thanks.
Hi.
On this on the Cecil side.
Have you thought about the potential for volatility and how that's going to change the provisioning each quarter and whether you might consider some non-GAAP measures and consumer finance companies.
Highlighting some potential changes to how they might report.
Going forward.
Yeah on an ongoing.
Base is kind of post day, one implementation the impacts will be really determined by or the volatility will really be determined by how fast are how slowly grow a the portfolio as well as any shifts in our and our kind of macro macro view.
So that will dictate the volatility going forward if the market. If we were stable as we grow and the market is stable it won't have as big of a as big of an impact as far as any new metrics that we will we will consider really haven't gotten that far behind the process.
To be able to comment.
Okay.
You mentioned that there were some softening of auction trends in September is that flowed through in.
Two birds it kind of stable at that point.
Yeah, No we've seen that recent trend in September into the first first part of of October .
As a reminder, it is kind of your head of we're heading into the fourth quarter, which is the c., we have some seasonal pressures.
Really across across the board.
So it's really just one data point at this point in time, it's not a trend it's not enough data to call. It a trend yet, but it's something that we're very mindful of and we continue you can see watch.
Okay, and then just lastly, the blue bluestem portfolio.
It seems like that's been in held for sale for very long time now is there any update in terms of potential to fulfill that.
Yeah, No no real update we're still exploring.
But still exploring alternatives there to find a clean exit for the portfolio and our personal lending.
Business.
In the meantime, I will point, though it is very profitable for us in the third quarter. We're in a 38 million kind of pre tax.
On the portfolio as we move forward, if we haven't updates.
We'll make sure we will give you that feedback.
Thank you.
Thanks, Eric.
Well go next or exchange JP Morgan.
Hey, guys. Thanks for taking my questions. This morning.
As we move into a seasonal environment.
The accounting distortion associated with Tdrs actually starts to narrow I am curious yes.
Strategically you will see an increase in TDR usage as that distortion starts to dissipate.
No.
Yes, I mean, the quick cancer has no just because those are those modifications are specific to consumers particular.
Payment challenges that they are having and it's an important way of helping consumers.
That deserve the health.
Get back on track and so yes, we wouldnt, we wouldn't view that kind of.
Activity in the context of accounting optimization, if you will.
Just two questions.
No. One is one of the reasons. The reason we ask the question is obviously historically so punitive from your perspective she.
Foot accounts into restructuring and I'm, just wondering what I'm trying to determine is historically, we're optimizing that and it gives you greater flexibility going forward.
Yeah, I mean, yeah.
The answer is.
I get your question Hell.
And the answer is still look.
We want to make sure we give every consumer the opportunity to restructure their loan nerves. It and we have we have talked about in prior calls how we've changed what we're doing to make it better.
And we'll precise and we're happy with.
How we're doing that for the consumer and also to make sure. We're doing the right thing for the company and so we're always tweaking it but we can change it because of.
Of the out year, right theres potential opportunity to diesel, but thats, we wouldn't think about it that way.
Great. Thank you guys.
Yes.
Kevin Barker at Piper Jaffray.
Okay. Thanks.
Morning.
So your guidance for the fourth quarter implies that operating expenses after normalizing for the legal recovery last year.
To grow at over 10% on a year over year basis.
Understand you're growing your portfolio.
Flying growth, but could you.
Give us a little bit more.
Understanding whats driving a lot of that Opex growth.
And just normal growth and the company.
Yeah I'll I.
I will come in a back on Q4 operating expenses for 2018 as well before I get to to your specific question, if you're comparing fourth quarter to fourth quarter remember last fourth quarter, we did have.
Hey.
Benefit to our legal reserve as we real that we closed out some that matters that were more beneficial than we had actually reserved for.
So if you normalize for front for that we are up.
Year over year really in line with our asset balance in our growth that we've seen in the portfolio.
Scott mentioned, we are very vigilant off.
Fence management expense control, if you looked at it on a unit basis, our unit cost to originate and service is down year over year I. Just a dollar is up because of our asset balances out.
Okay, and then to follow up on some of the comments around the recovery rates.
You mentioned in previous calls that you are you were adjusting some of your servicing practices as well.
Detail some of those changes that you may have.
Implementing it and then how your recovery rates match up against some of your peers. When you when you consider the mix.
Business that you're underwriting today.
Yes on on the on the servicing practices, we've talked about it over.
Time around just the lower level of modifications.
As we continue to.
Determine what are the customer really has the ability and willingness to pay offs, along we're making a decision whether to modify the alone.
I wouldn't necessarily draw the connection to recovery rates.
Necessarily because I think that they're kind of an industry trends that we're seeing with the used car pricing and demand that consumers have.
For for used cars.
So I think they're a little bit disconnected there, there's some tied to whether we have new heavier new mix versus use mix and how fast we do charge off the loans, but what you're seeing in our recovery rate is more driven by the used car market.
It is our servicing practices.
Okay. Thank you very much.
Our next to Betsy Graseck at Morgan Stanley .
Good morning Betsy.
Hey, good morning.
Couple of questions you know there's been some chatter recently about the S starts securitization in some of the.
You know early defaults loans, increasing you know, they're small still but you know still up a little bit and just wanted to get a sense as to what's going on there and is the underwriting changing a bit or is it different from how you're underwriting for your own portfolio can you give us some color on that.
Yeah. Thanks, Betsy for that for the question. So no we're not changing our underwriting practices and we haven't for quite some time, so I would say despite what you have read.
We do repurchase loans from RMBS platforms, the repurchases have been consistent overtime and consistent with what our transaction documents. It all goes back to what we've talked about with lower modifications, we do expect because of the lower modifications in earlier recognition of losses based on those so.
We're seeing practices. So performance of our Securitizations are in line with our expectation there very consistent with our overall portfolio. There was one or two transactions in 2018 that did experience. Some elevated repurchases. However, the more recent securitizations are really back in line with our historical.
Averages and our repurchase rates of I'll also add when you look at our Securitizations that you have to keep in mind that we have to retail securitization platforms and as starts and our drive to drive being our more deeper credit platform, so when you're comparing or some of those repurchase rates.
You can't really compare 2018 drive to a 2016 or 2017 estar.
Gay conclusion on the underlying performance of our portfolio or the state of the consumer So as I said you know the 2019 Securitizations are performing on average just like we expect a compared to historical averages and as I mentioned earlier in the call. When we look at the 2019.
A monthly vintages and we look at some of those early performance indicators as I said, they're flashing five your best and so we're really thought positive on what we're bringing in through the door currently.
So we're not seeing we're not seeing some of the overall.
Yes, and Betsy. Thank you for asking the question maybe add a few things, though that Sammy said because.
A number of people have already asked these questions.
You guys and rolled on this call kind of fall as all these trends like we do because it's important to understand is the environment changing is asset quality changing into families points. You know if you look broadly at the auto finance industry.
We've talked a lot about recoveries, we talked a lot about new car sales used car prices.
I look at you know the fed data they published data on industry delinquency rates and they showed over a long period of time.
We're nowhere near if you look at what percentage of loans, which are delinquent, we're nowhere near where we were at the peak in the last a recession.
The industry as a whole is performing well, we talked a lot about our own delinquency metrics year over year, we're seeing.
Significant improvement quarter on quarter, we didnt get the seasonal increase that we expected.
We mentioned earlier that we look at our vintage.
Delinquency.
Tricks for originations this year.
Those suggests that credit performance will be improved versus 2018.
So yeah, I mean, we feel pretty and then in addition to that.
Which we haven't talked about we are always looking for ways to do a better job.
Identifying fraud at the point of origin originations and we're doing a better job of that that we have in previous.
Previous years in previous time period so.
Again, we think the trends are all positive in the right direction stable performance.
And.
Yeah, there were a couple securitizations.
Last year that if you focus just on those Securitizations you might come to a different conclusion, but.
We all do you Gotta look at kind of kind of all the metrics and kind of what's happening with the industry. So.
Hopefully that answers the question, but thanks. Thank you for asking it's a good question yeah. Okay. Because you know you buy out if there's a non payment in the first or second and I think and I guess I was just wondering you know your comment on fraud does that is there anything that you're you're seeing in fraud, that's driving maybe in early.
You know buyback as well and maybe you could touch on just how you're underwriting the client today versus maybe last year. If last year was not a great E. Oh, yeah. If there was a couple of Securitizations last year. There wasn't great is there anything that you can point to that you tightened up.
And just wondering how you're thinking about things like income verification that kind of thing maybe could give us some color there.
Yeah.
Yeah, I was just gonna say part of it is the modification levels that we've discussed on the call out previously some of that earlier recognition of losses.
The 2018 vintage is reflective of those changes so I see nothing material that I would point to as far as changes in our underwriting practices they've been pretty.
Pretty consistent if anything we'd probably tightened up over the last couple of years.
Definitely compared to 2019.
The repurchase Ratestar, a handful of things that we would repurchase a loans from Securitizations I think you touched on probably the most impactful version. If you look at Estar, we've consistently been around three or 4% and drive somewhere in that 5.5% to 6% I can't point to anything material, that's really changed.
Thanks.
Thanks very much.
Well go next to Vincent.
Vince.
Hey, Thanks, good morning, guys.
My question on going back the credit.
So very good delinquency trends this quarter sort of wondering if you could describe.
Excuse me to maybe break down the components.
To what you're seeing there are you seeing is it your collections practices, maybe that's driving a lot of just like we'll see improvements or is it really.
Consumer being strong and then back too.
The question the vehicle recoveries, when we think about going forward is 55% a good run rate and then when you.
You mentioned I think there was September weakness.
Would you be able to share the recent recovery rates that you've been getting thanks.
I mean, maybe you want to take recovery, what covered right one and they'll do yeah. Sure. So you know I think the recovery rate when you factor in kinda deficiency sales does get a little lumpy quarter to quarter depends on when we do those we try to do one quarter, but it just kind of depends on.
The amount of efficiencies have and market conditions on the sale so.
I wouldn't I wouldn't stick to the 55% as a good as a good run rate.
As far as the trend over September as I mentioned it is one data point I also want to make sure that we say it is up year over year, even in the month of September and overall it is at historical high level. So we did see a little bit of softness it is entering into the fourth quarter, which we do have some seasonal pressures on.
But again, it's just one data point and I wouldn't call. It a trend just yet.
And to answer the first part of your question or your first question about.
The prudent and delinquency.
What's driving that.
We are always.
Looking for ways to make our collections.
More effective and efficient.
Got a whole series initiatives that we're always working on that and feel good about the progress, we're making there, but I would say the improvement in credit quality are seen as a reflection of what we're doing with pricing and credit at the point of origination.
That's a more significant that has more significant impact on the results you're seeing.
But I don't want to leave out our collections Dean will make sure I give them a shout out because they're always looking for ways to make the place better and they've made progress over the last year, so in doing that too.
Okay, Great very helpful, then and actually related lease. So on your prepared remarks, you also mentioned kind of how you think about capital usage, whether you're looking at buybacks or investments and sort of interested to hear about what sort of investments, you're thinking about whether its technology or or collections or something else and maybe.
If you could help us kind of size, what you're thinking about investments. So just a couple million here or are there some things that might be interesting that are large.
Yeah I think.
We're always looking for opportunistic opportunities too.
To deploy capital.
Whether its we mentioned the S. AFFO conversion that we had last year or whether its upgrading some of our infrastructure or whether it's deploying capital to our to our shareholders. So nothing to announce or kind of give you guidance on what you're going to be very thoughtful add opportunistic.
In our approach as we evaluate how to deploy our capital.
Yes, I would just add them in terms of investing in the business, we're doing that today and we'll continue to do that.
That will have a meaningful impact on results and.
I mentioned earlier in the call investing in the service for others business, we're doing that because we think there are opportunities there regard as family said, we're investing or structure.
To make a run better and make it more effective when dealing with.
Supers for dealers so have made.
The nation's process.
Talked a lot.
Lending, which is really important dealers.
We continue to make those kind of investments as well as investments in how we we serve.
Our consumer customers to.
Add onto that because of our capital base and work that we have the ability to kind of do all the above if you will so we've talked about being opportunistic as portfolio acquisitions come to market.
I haven't seen any to announce but as those come up we'll definitely take a look and if we can make the right return.
To execute.
Okay, great very helpful things are much less.
Hello.
And next.
At Sandler O'neill.
Good morning, Thanks for taking my questions.
Scott I wanted to ask on the the leases a and on the origination side that did decrease year on year in quarter on quarter and you mentioned at the beginning of the call that you wanted to question. So here we are.
[laughter].
Thank you for the question, Yeah leasing leasing is down year over year.
Leasing with Chrysler is down year over year, our total originations.
In the third quarter with Chrysler are actually up so.
There's.
Then you had a really strong third quarter last year and leasing so we're comparing to a high base, but yeah I mean, there there's.
More of Chrysler leasing went to our competitors in the third quarter.
In prior periods, we were always.
Adjusting what we're doing and looking at how what that means for Chrysler and for ourselves.
Yeah. It was down in the quarter, but again I I tend to look at how are we doing with overall relationship with FCTA.
And again, our total originations between loans and leases were up almost 10% year over year, which is good.
Penetration rate was up which is good.
Our satisfaction with dealers as measured by JD power was up which is good so.
We're making good progress there and if I didn't add on I think I think most people know that we are our competition and lease is very limited compared to retail. So if one party becomes more aggressive it actually impacts our share pretty greatly in the in the quarter. We also saw it not just from the.
Two national players that we did see some credit unions have become a little bit more aggressive in certain high lease volume regions of the country and that also impacted the the quarterly number.
Okay got it thanks on that and then taking.
Bigger picture view of the Chrysler relationship. So this morning, Fiat's Chrysler confirmed that there and talks with who show.
I guess my question I think you you might be able to answer is there anything in your amended agreement with F.C.A.
Anticipate some sort of changing control and fiat's, Chrysler and what that would mean for Chrysler capital or should we expect no change for the agreement through the 2024 exploration.
Ah, Yes, I think that's like I think that's a no comment from us.
But you know look.
If this has been often on a prior periods and we have great relationship with them and.
We worry about what we can control and that's all the things have been talking about with respect to improving our partnership and doing a better job with them and helping them sell more cars. So that's where we're focused.
Just take care of what we can take care and.
The World changes, then we'll deal with that.
All right I understood.
Thanks some questions.
Next well have kind of time its research.
Hey, Rob pointing guys.
Yes.
But I wanted to ask more conceptually about c., so on the ongoing impact.
What impact you can see still is going to have on the way you're thinking about growth given the higher level of upfront reserving.
Yeah, you know from.
The accounting treatment is not going to drive our strategy as far as our origination plans.
I mentioned I think earlier in the call that doesn't change the underlying risk of the loans that were booking I'm. So we'll continue to be very thoughtful and how it's all about.
Booking loans with the right risk adjusted returns.
For our balance sheet, so I don't think cecil's going to impact, how we underwrite or price our loans.
Or impact our growth.
Great. Thank you.
Okay.
Yes, no question at the question answer session I will now turn the call over to Scott.
Great. Thank you all for joining the call. Thanks. Thanks for your really good questions today, we appreciate that.
As always our Investor relations team here.
If you follow up questions.
And we'll look forward to speaking you again soon probably after the fourth quarter is finalized thanks everybody.
And that does conclude today's conference again, thank you for your participation.
HM.