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Santander Consumer USA Holdings Inc (SC) Q4 2018 Earnings Conference Call Transcript

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Santander Consumer USA Holdings Inc  (NYSE: SC)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Santander Consumer USA Holdings Fourth Quarter 2018 Earnings Conference Call. At this time, all parties have been placed into listen-only mode. Following today's presentation, the floor will be open for your questions. (Operator Instructions) It is now my pleasure to introduce your host, Evan Black, Vice President of Investor Relations. Evan, the floor is yours.

Evan Black -- Vice President-Investor Relations

Thank you. Good morning and thank you for joining the call everyone. On the call today, we have Scott Powell, President and Chief Executive Officer; and Juan Carlos Alvarez, 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 today. For further information concerning factors that could cause these results to differ, please refer to our public SEC filings. On today's call, our speakers will reference certain non-GAAP financial measures that we believe will provide useful information for investors.

A reconciliation of these measures to US GAAP is included in the release issued today January 30, 2019. Please reference table nine for today's press release on the appendix for further details on the non-GAAP figures.

For those of you listening to the webcast, there are a few slides to review as well as a full investor presentation on the website.

And with that, I'll turn the call over to Scott Powell. Scott?

Scott Powell -- President and Chief Executive Officer

Thanks, Evan. Thanks everyone for joining the call. We start out with a recap of 2018 before turning it over to Juan Carlos for a more detailed review of our financial results.

If you look at Page 3 in the presentation, I think you'll see that 2018 was a year of strength and consistency for us at Santander Consumer. You can see that our net income was $916 million, which is $2.54 per diluted common share with an ROA of 2.2%. Last year was a really important year for us from a regulatory perspective. I'm sure you all know that the Federal Reserve terminated one of its enforcement actions against our parent, Santander Holdings USA, the 2015 Written Agreement. That written agreement was very comprehensive and covered things from governance to risk management and a variety of other oversight issues. Santander Consumer was an important part of that agreement and it just shows you the progress that we had continued to make addressing legacy regulatory issues.

And I would just say, again that, that comes -- that comes a year after the Fed terminated another one of its enforcement actions, the 2014, again, SHUSA Written Agreement and we're happy to close that out the year before. We still have one more written agreement like that outstanding related to compliance. We call it the 2017 Written Agreement and we've been very -- working very hard to address those issues. So come in net-net, a really positive step forward for us last year on the regulatory front.

From a capital perspective, we completed our inaugural $200 million share repurchase program shortly after the end of the quarter and we increased our quarterly dividend from $0.05 to $0.20. From an originations perspective, obviously a really strong year. Our total originations were about $29 billion, which is up 43% year-on-year and we had strong increases across our loan and lease products and importantly, we continue to maintain our pricing discipline across all those segments.

We kicked off a very important strategic component, which was SBNA, Santander Bank originating loans through Santander Consumer that started in July. We originated $1.9 billion of loans for Santander Bank and that's a great program, it's good for our Serviced for Others program, it's also good for our partner Chrysler. That program will replace the sale program we have with Group (ph). Last year, we did $2.9 billion of loan flow to the Group and like I said, that will be replaced by this new program -- this new flow program with SBNA. It does demonstrate -- both of those programs do demonstrate the value of collaboration across Santander entities.

From a funding perspective, we remain a leading ABS issuer. We did $13 billion of ABS last year, which demonstrates the strength of our ABS platforms. Credit performance, credit performance remains strong. When you look at our year-end delinquencies compared to a year ago, we're 30 basis points lower. Net charge-offs in 2018 came in at 8.5%, which is down 50 basis points from the prior year. Recoveries continue to be strong. Auction plus recovery rate was 47.3%, which is up 100 basis points from the prior year and then I will talk more about this on the call, but our TDR balances decreased $900 million year-over-year.

And last year was a really, really strong year for our partner Chrysler. They had a record sales year in the US. They were up almost 10% in terms of car sales, really strong performance. So we'll give them a big shout out for that. And then our partnership with them over the course of the year, you see continued progress. So our penetration rate was up from 21% in 2017 to 30% in 2018. We originated about $19 billion (ph) of loans and leases through Chrysler dealers and we grew our floorplan business at SBNA. 43% over the course of the year. So really strong results in supporting our partner Chrysler.

So in summary, 2018 was a really good year for Santander Consumer. Certainly there is a lot of discussion about market uncertainty, especially over the last few months, but we remain very confident in the US consumer and things like job creation remains strong. So we're pretty positive going into 2019.

And then just a word about the government shutdown. The recent shutdown was pretty minimal. We did help our customers that asked for a temporary relief. I would tell you those numbers weren't significant relative to the size of our business, so we're hopeful. Obviously, the (inaudible) temporary period where the government is open. We're hopeful it gets resolved. We think it's important that it get resolved. As we go into tax season, that's a really strong origination season for us, and it also, I think you all know, is a period where our delinquency goes down and our credit loss number goes down based on the strength of consumers' ability to pay. So hopefully, we won't go through another government shutdown.

So as we go into 2019, the initiatives that we put in place set us up well. We're going to continue to focus on operating at large financial institution standards. We're going to continue to focus on improving our service delivery for our dealers and for our consumer customers. Maintaining pricing discipline and ensuring that we get paid for the risk that we're taking is paramount and we'll continue to focus on that. And we're going to maximize our current relationships and continue to look for other opportunities that are out there in the market, which we think are out there and that includes building out parts of our digital strategy.

So with that, I will turn it over to Juan Carlos.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Thank you, Scott and good morning everyone. Let us turn to Slide 4 for some key economic indicators that influence originations and credit performance. So building on what Scott said, we feel that the overall macroeconomic environment remains stable. Consumer confidence remains high and unemployment levels continued to be very low. So we're observing a prolonged economic expansion as macroeconomic factors continue to point to a constructive consumer lending environment.

2018 US auto sales exceeded expectations -- the expectations that we had coming in to the year and industry experts are now forecasting a moderate -- only a moderate decrease in 2019, which is a level still indicative of a stable market for new vehicles. While we believe that economic conditions are more resilient than recent market volatility might indicate, we will remain vigilant throughout the -- throughout the year.

On Slide 5, there are a few key factors that can influence our loss severity and credit performance and we're pleased to see that our auction recovery rate, which represents all auto-related recoveries from the auction lanes increased to 47.6% from 43.4% in Q4 last year. Our recovery rate, which includes nominal (ph) related proceeds, bankruptcy and deficiency sales was 47.3% in the quarter compared to 46.3% the same quarter last year. Additionally, non-prime securitization data, including net loss and delinquency trends have remained stable compared to last year.

Turning to Slide 6, we'll cover originations. As Scott mentioned, 2018 has been a good year for originations. We had year-over-year increases in originations during each quarter of 2018, albeit working from a low 2017 base. Core loan originations increased 51% in the fourth quarter compared to Q4 last year. Chrysler loan originations increased 63% in Q4. Chrysler lease originations increased 64% during Q4. And all of these led to full-year originations of $28.8 billion, up 43% year-over-year. Looking at -- looking ahead to 2019, we expect application levels to grow again, building off the momentum in 2018. With this growth, we must remain disciplined with respect to the risk return profile of our non-prime originations. We also expect to continue to support FCA prime loans with our SBNA programs while maintaining a strong presence in lease. We are also monitoring the evolving government shutdown situation carefully as it could impact a tax refund season, limit applications and funding, and potentially impact delinquency.

Moving to Slide 7, the Chrysler Capital annual penetration rate for 2018 averaged 30%. This is an increase from 21% during 2017. Achieve the initiatives we set forth to support our FCA dealers and the SBNA program we put in place during 2018 as well as FCA's strong lineup leading to record sales as Scott mentioned.

Dealer floor plan balances also increased 43% year-over-year and 13% quarter-over-quarter. In addition to loan and lease, floor plan is another key pillar of our FCA offering and provides an opportunity to collaborate with Santander Bank. As we look ahead into 2019, we aim to build on the progress made in 2018 by remaining focused on optimizing our relationship, continuing to drive improvement in our FCA dealer satisfaction scores, and refocusing our efforts on loyalty programs collaborating with FCA to drive another strong year of sales.

Turning to Slide 8, the Serviced for Others platform generated $107 million in servicing fee income during 2018 and $27 million during the fourth quarter. During 2018, our broader Santander relationship generated almost $5 billion in assets for Serviced for Others platform, $2.9 million through the Santander flow sales and the $1.1 billion (ph) mentioned through our new SBNA agreement. We expect the SBNA agreement to drive the Serviced for Others platform moving forward in addition to any potential new relationships or opportunities similar to the $1 billion portfolio conversion secured during 2018.

Slide 9 contains some highlights from the quarter for your reference, but if we turn to Slide 10, we'll -- we can you review our financial performance for the quarter. Keep in mind, we're looking at year-over-year comparisons that last year our financials were impacted by tax reform and other significant items. Please refer to table 9 of this morning's press release for further details on these non-GAAP items.

Interest on finance receivables and loans increased 6% year-over-year, driven by higher average total loan balances and higher APR. Net leased vehicle income increased 82% due to continued growth in lease balances and good off-lease performance. Interest expense increased 32% versus the prior-year quarter primarily driven by the increase in benchmark (ph) rates over the period and by lower contribution from our derivatives portfolio.

Provision for credit losses increased to $691 million in Q4 2018 from $598 million in Q4 2017. This increase is driven by a combination of higher balances and lower modification levels during the quarter. This quarter, the other income lines had a loss of $33 million driven by $146 million of held-for-sale adjustments related to the personal lending portfolio, which is comprised of $109 million of customer charge-offs and $37 million increase in market discount due to seasonally higher originations. It's important to point out, you can see this in the appendix of the presentation, Slide 22, that the personal lending portfolio earned approximately $117 million before operating expenses and taxes for the full-year 2018.

Continuing to Slide 11, the fourth quarter early and late-stage delinquency buckets both decreased by 30 basis points or more compared to Q4 last year. On the bottom portion of the slide, RIC gross and net loss ratios increased 100 basis points and 30 basis points respectively in the quarter compared to Q4 last year. As a reminder, the prior year quarter was impacted by modification efforts that we provided to customers following the 2017 hurricanes, while the 28 -- 2018 storm season did not have a comparable impact to modifications.

Let's move to Slide 12 to review the loss figures in dollars. Net charge-offs for RICs increased compared to Q4 last year. I will briefly address the components of the walk. $81 million increase is driven by higher gross losses due to a higher gross charge-off rate, the average loan balances were up more than $2 billion year-over-year and this drove another $31 million increase, the $32 million decrease in the other category is driven by a few items including a positive mark in the value of our repossessed inventory.

Turning our attention to provisions and reserves on Slide 13, at the end of Q4 2018, the allowance for credit loss totaled $3.2 billion, a decrease of $65 million from last quarter, which represents an allowance to loans ratio of 11.4%. The allowance ratio is down 30 basis points from the end of the prior period and down 150 basis points versus the end of 2017. Let me address the components of the reserve walk. The allowance increased $293 million due to new originations in the quarter, $77 million increase due to unfavorable performance adjustments, $33 million increase to TDR migration, and $468 million decrease due to liquidations and other, which includes payoffs and charge-offs.

Let's move to Slide 14 and as you can see, TDRs have continued the downward trend we have seen throughout the year. TDR balances have decreased approximately $380 million versus last quarter and almost $1 billion versus the end of 2017. As we mentioned earlier, lower modifications this quarter compared to last year led to lower TDR balances and added to the sustained downward trend in balances.

Slide 15, we can cover operating expenses, which this quarter totaled $256 million for an expense ratio of 1.9% and keep in mind for comparisons that last year's figures were impacted by certain significant items. During Q4 2018, we also incurred lower operating expenses as we put some legacy legal matters behind us with a better-than-expected outcome. The full-year 2018 expense ratio totaled 2.1%, an improvement from 2017 as we maintained expense discipline throughout the year.

Turning to Slide 16 now, our liquidity remains robust with total funding of more than $45 billion. During the final quarter of the year, we sold an additional $2.2 billion in asset-backed securities and ended the year with a total of more than $13 billion in ABS issuance. This reflects the highest volume of securitization SC has ever executed in a single year and we remain the leading issuer of retail auto loan ABS in the market. Equally as important, during the year, we also renewed 100% of our $10 billion in committed revolving funding dedicated to fund newly originated loans and leases.

Finally turning to Slide 17, our CET1 ratio at the quarter-end was 15.7%, down from 16.4% at the end of last year. Subsequent to quarter-end, we completed our $200 million share repurchase program and we're also declaring a $0.20 dividend. As we head into 2019, we feel strong our liquidity and capital position will support continued progress toward a more efficient balance sheet while allowing us to take advantage of the opportunity the market offers.

In terms of guidance, looking ahead to Q1 2019, my comments will be first relative to Q4 of 2018. We expect net finance and other interest income to be 2% to 3% higher driven by higher balances and rates. Provision expense is expected to be $60 million to $110 million better due to normal seasonality. We expect total other income to be up $80 million to $90 million better, in line with seasonal patterns and lower Bluestem balances. Operating expenses are expected to be $10 million to $30 million (ph) worse. As I mentioned a moment ago, following the resolution of some legacy matters, we incurred lower operating expenses and we don't expect a similar benefit for Q1 of 2019.

Now as we look ahead to the full 2019, we also wanted to share with you what we're expecting for some key metrics in our financials versus full-year 2018 performance. So for the full 2019, we expect net finance and other interest income to be up in the mid-single digits benefiting from higher balances. Our net charge-off ratio should remain in the mid-8% assuming relatively stable used car prices. We expect our 2019 expense ratio to remain stable around current levels. Our effective tax rate is (inaudible) slightly better than 2018.

Before we begin Q&A, I'd like to turn the call back to you, Scott.

Scott Powell -- President and Chief Executive Officer

Great. Thanks, Juan Carlos. So looking ahead to 2019, our priorities are similar to what we talked about last year. And over the last year, we've made significant progress fine-tuning our risk and pricing models and improving our operational processes, which really led to another strong year in operations in 2018, which shows up in our originations and our delinquency numbers too. So continuing into 2019, we remain very focused on improving customer service both at the dealer level and for consumers and we really believe the combination of all these initiatives improves our competitiveness in the market.

We are continuing to develop full-spectrum lending and servicing platform across a variety of products, including loan lease, floor plan and third-party servicing in support of our relationship with Chrysler. And again, these initiatives together will make us more competitive in the market and especially make it easier for dealers to do business with us. This should position us well for a good year in 2019 and a strong origination period in the tax season.

I did want to mention one more thing, which is our commitment to the community, which is where we live and operate. We're very excited to be expanding our community commitment, doubling it from where we were last year through our foundation here at Santander Consumer.

So with that, we're ready to open up for questions. Operator, over to you.

Questions and Answers:

Operator

(Operator Instructions) And our first question comes from Jack Micenko with SIG.

Jack Micenko -- Susquehanna -- Analyst

Good morning. Scott, leading off with a big picture question, any update on the Chrysler Capital FCA discussion and their goal to look for a captive?

Scott Powell -- President and Chief Executive Officer

Yes, somehow I knew that would be the first question. Thanks for the question though, Jack. A little bit of an update, which is, as we've said before, we continue to operate under our existing contract. Our discussions with Chrysler are ongoing. I would say they are constructive and we are talking about a number of things including optimizing the contract that we have.

Jack Micenko -- Susquehanna -- Analyst

Okay, understanding you can't say much more than that, but that's appreciated. On the buyback, is there anything you can do before '19 CCAR on the -- now that you've exhausted the $200 million, do we have to wait till June then to see on the buyback because the capital ratios haven't come down all that much and I think you're still at around about (ph) -- is it a 12% (ph) or 12.5% (ph) target, if I remember correctly?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, thank you. 12.5% (ph) that remains in place and the answer is, no we can't. We have to wait for the next submission. I think like we've said in previous calls, we think that we have -- we've made the progress on the regulatory front. We have the balance sheet -- strong balance sheet also to support further progress, OK. When we make the next submission, that -- we have to go through that process through this SHUSA submission.

Scott Powell -- President and Chief Executive Officer

Yes and just to add a little bit to that, probably more than you want to know, which is yes, technically speaking, you can file an amended capital plan with the Federal Reserve if you want to do something off-cycle, but given that the regular capital plan is due at the beginning of April, the likelihood of getting an amended capital plan through their process is pretty low. So as Juan Carlos said, we'll be going through the regular capital plan cycle with the Federal Reserve.

Jack Micenko -- Susquehanna -- Analyst

All right, great. Thanks for taking my questions.

Scott Powell -- President and Chief Executive Officer

Yes, thank you.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks for the guidance for a number of those metrics into '19, that's extremely helpful. Maybe just to expand on that a little bit, how should we think about the reserve build or release given the fact that you are seeing substantially lower TDRs, but at the same time, you are also growing loans, so like how should we kind of think about them?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, I think we'll stick with what we've said in prior calls. You've seen the coverage ratio declining mainly driven by the lower TDR balances. What we've seen in Q4 in terms of lower TDR balances would -- should continue through the early part of 2019 before they stabilize some time mid-year. When that happens, then we can expect a little bit more of a stable allowance ratio. I think we continue to have that view today.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. That's very helpful. Thanks. And just -- if memory serves, I think you had said three months ago that you were looking for up 1% to 3% net interest income this quarter and it was kind of more like down very, very slightly. Did something change? And how do we think about that in the context of what you're looking for in terms of some accelerating growth into '19?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Nothing fundamental has changed. We continue to be able to pass along higher rate environment to our customers, but not as fast as the interest expense increase. With regards to what we expected, we -- as you have seen, we did have more charge-offs in the quarter leading to somewhat higher non-accruals and we also had less contribution from our derivatives portfolio in the quarter, OK? But nothing fundamental has changed as you can see in our guidance for next year, mid-single digits, should be in line with what we were anticipating before the quarter.

Moshe Orenbuch -- Credit Suisse -- Analyst

Perfect. Thanks so much.

Operator

And next, we'll hear from John Hecht at Jefferies.

John Hecht -- Jefferies -- Analyst

Morning, thanks very much guys. I guess a little bit of a thought from the prior question. I mean, Q4 this year, we did see a pick -- a greater-than-normal seasonal pick up in charge-offs. I think the gross charge-offs were up 180 basis points from Q3 to Q4 and they're usually around 1%. I mean, is there anything behind that or is there just a greater -- is there just greater seasonal influence in Q4 now or is this mix difference or anything -- anything we can point to there?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, there is definitely seasonality, but remember that last year Q4 '17, we provided a lot of extensions, Q3, Q4 provided a lot of extensions and we provided much less extensions same period in -- of 2018. So the lower extensions, lower modifications has an impact on the charge-offs. We're constantly reviewing our service and practices to make sure that we're assessing the willingness and ability to pay of our customer and making sure that we're doing the right thing by (Technical Difficulty). So that would have an impact on lower delinquency, higher charge-offs as well as a lower inflow into TDRs, OK? But as you can see by our guidance, we're still expecting a relatively stable charge-off ratio for next year.

John Hecht -- Jefferies -- Analyst

Okay, thanks very much, Juan. Scott, remind us where you are -- if I recall, you have one final regulatory agreement that needs to be accounted for. Can you give us an update on your standings there?

Scott Powell -- President and Chief Executive Officer

Yes, thanks John. I mean, it's hard to talk publicly about them. The one that is outstanding, which I mentioned in my opening comments, is the 2017 Written Agreement about compliance and it is -- if you read through it, it is holding company SHUSA-level compliance issues straight on through into Santander Consumer. I would tell you that we've invested a lot in the space both at the holding company and here in Dallas. We feel really good about the progress we're making. I referenced those other two enforcement actions because those are also signs that we are very focused on addressing these issues and making progress.

And so, I can't really give you any guidance on when they will be closed out, except to say, we put a lot of resources against it. We continue to be focused on it and it -- you know, look, it goes to operating at large financial institution standards and we're absolutely committed to get there and resolve that.

John Hecht -- Jefferies -- Analyst

And what it -- and what flexibilities would it afford you if and when it gets released?

Scott Powell -- President and Chief Executive Officer

It's part of the overall regulatory assessment of Santander Consumer and Santander in the US and so, it's one component of the regulatory view of Santander in the US, is about what I can say.

John Hecht -- Jefferies -- Analyst

Okay. Thank you guys very much.

Scott Powell -- President and Chief Executive Officer

Thanks, John.

Operator

And next up, we'll hear from Mark DeVries at Barclays.

Mark C. DeVries -- Barclays -- Analyst

Hey, thanks. I had a question about the guidance for the mid-single digit growth in 2019 and on the net finance and other interest income. I think you were up more 9% year-over-year this year. Just wondering if that mid-single digit growth implies either slower balanced growth or some NIM pressure, or a little bit of both?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

We're -- I mean a lot of the originations that we've done especially on the later part of the year will benefit 2019. We're still -- we'll run our model this afternoon perhaps, but we're still baking in one or two additional hikes, OK. So a -- if we continue to see a higher rate environment, as you know, that would still be a headwind for us. So there is some of that baked in, in this forecast. If it turns out that we get a pause especially on the short-end of the curve, there should be a benefit to this.

Mark C. DeVries -- Barclays -- Analyst

Okay, got it. That's helpful. And then Scott, based on your comments on that -- that you provided updating us on the FCA situation. Should we take it to mean that some of the progress that you've made improving your penetration at Chrysler maybe makes the option of optimizing the existing contract more viable than it might have felt like six months ago?

Scott Powell -- President and Chief Executive Officer

Yes, I think so. I mean, I wouldn't presume to speak for Chrysler, but I think the progress we've made over the last year is pretty significant. They had -- as I said, and you know that they had a really solid sales year, the company is doing really well and yes, I think that is part of the discussion.

Mark C. DeVries -- Barclays -- Analyst

Okay, great. Thank you.

Scott Powell -- President and Chief Executive Officer

Yes, you bet.

Operator

Next up, we'll hear from Eric Wasserstrom at UBS.

Eric Wasserstrom -- UBS -- Analyst

Thanks, thanks very much. Juan Carlos, just to follow-up a little bit on the loss guidance, are you also anticipating a -- effectively a stable gross charge-off rate relative to last year?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

We're guiding on the -- on net, right. So net should be a stable and gross should also be relatively stable because we're talking about stable used car prices. So it follows that it would be kind of along the same lines, yes.

Eric Wasserstrom -- UBS -- Analyst

Okay. And now that you've -- it sounds like you're moving to a little bit more of a conservative modification posture. The seasonality of the loss experience in '19, should that basically follow '18 as well?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

You could have some lag impact of the lower modifications done in 2018, it could impact the early part of 2019, but you're still going to have the same seasonality trends by and large.

Eric Wasserstrom -- UBS -- Analyst

Okay and then just lastly on the TDRs. Recognizing that you've just talked about how you're doing a little less in terms of mods, but just given that '18 was a much larger vintage than '17, in terms of mod units, how do we think about that year-over-year?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Still the size is going to be the main driver, right. So the -- I think the important thing is that when we talk about the expected outlook for those TDR balances, doing less modifications might just add to the underlying trend, but we still expect them to stabilize sometime during the mid-part of the year. It might be at a lower base, right, at a lower level, but still we should have the same type of trend. 2018 is not (ph) much of a bigger vintage than 2017.

Eric Wasserstrom -- UBS -- Analyst

Great. Thanks very much.

Operator

And our next question comes from Steven Kwok at KBW.

Steven Kwok -- KBW -- Analyst

Hi.

Scott Powell -- President and Chief Executive Officer

Hi, Steven.

Steven Kwok -- KBW -- Analyst

Thanks for taking my question. Just wondering on the personal loan portfolio, are there any updates around like the sale of it? And how should we think about the results into your 2019 guidance?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, so -- yes, we continue -- no real update there. We continue to explore alternatives that will make sense for this portfolio, which remains as available (ph) for sale and then in terms of our guidance for next year, it's still included in there -- in terms of our general guidance, even though it is our intention to work out the regional (ph) transaction, you're looking at a relatively flat performance.

Steven Kwok -- KBW -- Analyst

Got it and then just around the -- sorry, just around the net finance charge, what's your assumptions around originations growth and then the overall portfolio, the retailer -- the retail installments contracts growth?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, so in terms of -- like I said earlier, the fact that we've had significant growth in 2018 will support the increase of net finance and other interest income in 2019. In terms of originations, there isn't a specific level of originations that we want to guide, but you could think of them as some growth in terms of applications and somewhat stable in terms of the model, right. The important thing for us when it comes to originations is making sure that we get the right risk-adjusted return when we think about core non-prime, OK. Like I said earlier, the prime paper is for us a Serviced for Other line, OK. We'll -- especially with the new SBNA platform, none of that really touches our balance sheet anymore. And then in lease, what we want to do is maintain an important presence.

Steven Kwok -- KBW -- Analyst

Got it. Thanks for taking my question.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Thank you.

Operator

And next up, we'll hear from Chris Donat with Sandler O'Neill.

Christopher Donat -- Sandler O'Neill -- Analyst

Good morning. Thanks for my questions. JC, wanted to ask one about the tax rate, both for the fourth quarter and then looking forward. Was there anything unusual with the tax rate coming in around 27%? And I know you said it would be lower for the full year, but just trying to think, is 21% sort of the right number or 22% or -- and if you can help us quantify it?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, so yes, there were some -- in Q4, there were some one-offs where we adjusted our accruals for how some states apply certain components of the tax reform just like adjusting the way we're accruing. For 2019, we expect the effective full-year rate to be somewhat better than the, call it, 23% we've seen in the full year of 2018, so somewhere below that.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. Okay. And then, for Scott, your comments or you -- maybe for both of you, comments on the impact of the government shutdown so far. Magnitude is less than what we've seen from say the hurricanes. Is it -- I think you said minimal impact or small. So I'm just trying to get a sense. And then, should -- we should be a little bit worried though going forward just because it might impact the timing of tax refunds, right?

Scott Powell -- President and Chief Executive Officer

Yes Chris, exactly. The level of hardship deferments -- extensions that we did for folks during the government shutdown was significantly lower than what we did even in last year's hurricane season. So that's why I -- a very small impact on delinquency and on other metrics, so very small, but you're right, I mean the bigger concern is, what happens during tax season both for originations and then collections because that has a big impact on our delinquency rate and ultimately our loss rate during that period. So we're hopeful there that we get the issue settled.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay, got it. Thank you.

Scott Powell -- President and Chief Executive Officer

You're welcome

Operator

Next up, we will hear from John Rowan at Janney.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Good morning, guys.

Scott Powell -- President and Chief Executive Officer

Good morning.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Just one question for me, as far as the recovery rate, I mean there have been gains over the past year. It looks like it slowed down a little bit in the fourth quarter. Are there any -- in your guidance, it almost sounds like you're looking for flat recovery rates. Is there -- are there any programs that you can do, any change in the way you repossess vehicles where maybe we can do a little bit better and continue to improve the recovery rate?

Scott Powell -- President and Chief Executive Officer

Well, go ahead, go ahead Juan Carlos.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

No, I think first it should be said that we've continued to see good auction performance. They were supposed -- we were expecting we talked about it last quarter, we were expecting some normalization. We had an unusually strong summer, unusually strong Q3. We saw some of that, but we still feel good about the performance that we're seeing and our expectation going forward is still -- there should be -- I think the industry economies have talked about maybe a 1% decline in 2019 in terms of used car prices. So we do expect a relatively stable recovery performance in 2019.

Scott Powell -- President and Chief Executive Officer

Yes and...

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Thank you.

Scott Powell -- President and Chief Executive Officer

And -- John, we're always looking for ways to be more efficient and get better results in the auction lanes and we think we're pretty good at that. We're all looking for ways to improve it, but that would move things only at the margin. Just to be the optimist in the room, Juan Carlos pointed out that the outlook for 2019 is down 1%. Just keep in mind that, that outlook last year was for used car prices to be down 4% or 5%, 6% something like that and we actually ended up 3%. So I would take those things with a little bit of -- a lot of salt actually and based on our view of the strength of the consumer and the demand for used cars, we're pretty optimistic, but that's our guidance.

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Okay. Thank you.

Scott Powell -- President and Chief Executive Officer

Yes.

Operator

And next question comes from Rick Shane at the JPMorgan.

Richard Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for my taking questions this morning. I just wanted to circle back on Bluestem. The approach historically has been to -- considering selling that contract and that portfolio. We're now basically a year from the expiration of the initial part of that contract and then win potential renewals. As we approach that point, will you guys instead of negotiating with a third-party buyer, negotiate with Bluestem about potentially having them not exercise those options?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, I think the extension will go until 2022, OK. What I can tell you about the process areas that we explore with -- together with Bluestem in partnership, a number of different alternatives, OK, just making sure and always keeping in mind that we're not just selling a portfolio, we're selling a -- basically a flow agreement as well. So there isn't a whole lot that I can tell you there, other than we explore all the alternatives from different angles really, but they have the ability to extend it until 2022.

Richard Shane -- J.P. Morgan -- Analyst

Got it. And again, look, I recognize that there's a distortion between the optics and the economics of that relationship, but does it make sense as -- and again, the contract holds (ph) in April 2020 with a two-year extension. I don't know if it's two one-year extensions or a two-year extension, but does it make sense to try to buy them out of that extension?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Again, we're looking at all alternatives. I have to really...

Richard Shane -- J.P. Morgan -- Analyst

Got it.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Leave it there.

Richard Shane -- J.P. Morgan -- Analyst

Okay. Thank you guys.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Thanks. Thanks for the question.

Operator

Our next question comes from Betsy Graseck at Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Good morning.

Scott Powell -- President and Chief Executive Officer

Good morning.

Betsy Graseck -- Morgan Stanley -- Analyst

A couple of questions. Juan Carlos, I think you mentioned you've got one or two rate hikes in your forecast or in the base case that you provided to us. I'm wondering if there were no rate hikes, could you give us a sense as to what that NII guidance would be?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

It would probably be on the -- I'm giving you -- and I would say, a yearly outlook of mid-single digits. We are still liability sensitive. It would depend on how our hedging would initially perform and how we are adjust it, but it would certainly be a benefit. When you look at our financials, you will have our Q and certainly our upcoming K, you will have the sensitivity analysis that we have for 100 basis points rate stock in there. So we can work from there.

Betsy Graseck -- Morgan Stanley -- Analyst

Right, because -- OK the...

Juan Carlos Alvarez de Soto -- Chief Financial Officer

I would just say in the better end of -- better end of the guidance.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay because looking through the quarter results today, it looked like the funding cost might have been impacted a little bit more than prior quarters for the level of interest rate hike. I don't if you would agree with that or there is anything specific to this quarter that's not likely to be repeated going forward?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes Betsy. Specifically we had less -- with regards to interest rates, we less contribution from our derivatives portfolio because of the moves that we saw especially, call it, late November and December, OK. So the mark-to-market component of the derivatives portfolio wasn't as beneficial as what we had got in the past.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

And obviously...

Betsy Graseck -- Morgan Stanley -- Analyst

Carry on.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

(multiple speakers).

Operator

And next question comes from Arren Cyganovich with Citi.

Arren Cyganovich -- Citigroup -- Analyst

With respect to CECL, we've started to get some financial companies to provide some ideas of the magnitude of increase on allowance, your allowances, 11.4%. Do you have any preliminary thoughts on how much that allowance might have to go up to for -- with respect to CECL?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

We're not providing specific guidance yet. We, like all our peers, are working on making sure that we are ready by this time next year, which we will be. We expect to be running parallel sometime mid-year or so and at this point I can (ph) give you a specific number. We also are looking at how -- kind of a related topic is how CECL will impact capital ratios especially regarding how CECL may impact our CCAR submissions going forward, right. So that NPL that came out gave us a little bit more clarity, but I think there is still more analysis to be done and going for final thoughts there. As we look at our 2019 submission, as you know, CECL is not in there and then later in the year, we hope to be able to provide more clarity there.

Arren Cyganovich -- Citigroup -- Analyst

Okay, so you don't anticipate having any change to your plans for capital in this upcoming submission?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

No, not in this upcoming submission.

Arren Cyganovich -- Citigroup -- Analyst

And then just one quick modeling thing. You had mentioned there was a benefit in the expenses for a better outcome in legal, can you (Technical Difficulty) the magnitude of that?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

So we don't talk about specific legal matters, but some of them have received some press. All in all, the impact would be -- call it, the benefit would probably be somewhere between 10 (ph) and 20 (ph).

Arren Cyganovich -- Citigroup -- Analyst

Okay. Thank you.

Operator

Up next, we'll hear from Vincent Caintic at Stephens.

Vincent Caintic -- Stephens -- Analyst

Hey thanks, good morning, guys. It's great to see the continued Chrysler loan on lease growth. So two questions on that near long term, so when you think about the long term, what do you think is the rate -- penetration rate and then when I think about the -- when we think about the near term, just trying to get a sense of the pipeline from Fiat, if you've seen a lot of campaign and subvention activity recently. It seems like there's a lot of recent model roll outs that have done well like the Ram pickup truck and there is going to be some new rollouts coming out soon. So just want to get a sense of any campaigns? Thanks.

Scott Powell -- President and Chief Executive Officer

Yes, thanks Vincent. So I think we've -- on the penetration rate question, I think we have gotten kind of to a more reasonable place, I mean. So I -- yes, I mean this past year was a significant improvement from where we were from 21% to 30% on average. So I wouldn't -- I'd -- we look to continue to improve that certainly, but to answer your second question, we don't control those decisions about subvention and other bonus incentives that are put into the market. So I can't really give you a good answer on that one just yet. Certainly in the case of our partner Chrysler, they do have some really cool new models coming out. So we're hopeful there.

Vincent Caintic -- Stephens -- Analyst

And then secondly just on the charge-off rates, so this quarter you had charge-offs, net charge-offs 30 basis points higher year-over-year. Just kind of wondering what might have driven that and then how that compares to the guidance of charge-offs being flat year-over-year in 2019?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, I think that goes to the point we made earlier about how -- when you look at Q4 '18 versus Q4 '17, that charge-off level -- ratio was impacted by just providing lower modifications in Q4 '18. If you normalize for that or when you include that, you will have a better delinquency and higher charge-off ratio for the same period of time. That was one of the big drivers in the quarter.

Vincent Caintic -- Stephens -- Analyst

Got it. Thank you very much.

Operator

And next, we will hear from Geoffrey Elliott at Autonomous Research.

Scott Powell -- President and Chief Executive Officer

Hi Geoffrey.

Geoffrey Elliott -- Autonomous -- Analyst

Good morning. Thanks, hi. Good morning. Thanks for taking the question. I've got one more on Chrysler. The tolling agreement that you put in place to kind of waive the statutes of limitations originally back in the summer. That was due to expire in December. Can you give us an update on what's happened there and what the implications of that are?

Scott Powell -- President and Chief Executive Officer

Yes, I mean we are just very focused right now with them on continuing to support their sales and working more closely with them and honestly, I don't anticipate any changes to that and like I said with respect to the other conversations, those are constructive conversations and cover a range of things. So...

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, I mean, specifically to the tolling agreement, it has expired.

Scott Powell -- President and Chief Executive Officer

Yes -- sorry, Geoffrey. You still there?

Geoffrey Elliott -- Autonomous -- Analyst

What purpose was that serving while it was in place from, I guess, June or July through to the end of last year?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Like we said back in -- in the summer, that tolling agreement just was simply there to have a period of where we could have the discussions while preserving the status quo for both parties as of April 30th for a certain period in time. That tolling agreement was in place for a number of months and it has now expired. Nothing to it, the -- really the discussions are evolving in the way that it is described.

Geoffrey Elliott -- Autonomous -- Analyst

Great. Thanks very much.

Scott Powell -- President and Chief Executive Officer

You're welcome.

Operator

And our last question comes from Kevin Barker at Piper Jaffray.

Kevin Barker -- Piper Jaffray -- Analyst

Good morning.

Scott Powell -- President and Chief Executive Officer

Hi Kevin.

Kevin Barker -- Piper Jaffray -- Analyst

Can you discuss some of the early indications of the performance of the 2018 vintage versus the 2017? And how that impacts your loss guidance for 2019?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, well, first we should say, the 2017, right we've talked about that vintage for -- in prior calls. We said that we expected it to continue to perform somewhere between 2015 and 2016 and we're definitely seeing that. For 2018, we will expect it to be in the same neighborhood and also it's a vintage that albeit (ph) larger than 2017, we are getting the right risk-adjusted returns, the right profitability. So all of that together supports our guidance of the net charge-off ratio for 2019 somewhere in the mid-8%.

Kevin Barker -- Piper Jaffray -- Analyst

Right and then to follow-up with some of the CCAR comments and CECL as well, are you -- can you discuss any of the -- or potentially expand upon some of your discussions with the rating agencies and how they're going to treat CECL or if you had any early discussions on what could happen there?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Nothing really meaningful to talk about at this point with regards to the -- specifically to the rating agencies.

Kevin Barker -- Piper Jaffray -- Analyst

Right. Thank you for taking my questions.

Scott Powell -- President and Chief Executive Officer

Thanks, Kevin.

Operator

And there are no further questions at this time. I will now turn the call over to Scott Powell for final comments.

Scott Powell -- President and Chief Executive Officer

Great. Thanks everyone for joining the call, thanks for your questions. Thanks for the interest in our Company. As always, our Investor Relations team is available if you have follow-up questions and we look forward to speaking to you next quarter of our progress. Thanks.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Thank you.

Operator

And this does conclude today's presentation. We thank you for your participation. You may now disconnect.

Duration: 59 minutes

Call participants:

Evan Black -- Vice President-Investor Relations

Scott Powell -- President and Chief Executive Officer

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Jack Micenko -- Susquehanna -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

John Hecht -- Jefferies -- Analyst

Mark C. DeVries -- Barclays -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Steven Kwok -- KBW -- Analyst

Christopher Donat -- Sandler O'Neill -- Analyst

John Rowan -- Janney Montgomery Scott LLC -- Analyst

Richard Shane -- J.P. Morgan -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

Vincent Caintic -- Stephens -- Analyst

Geoffrey Elliott -- Autonomous -- Analyst

Kevin Barker -- Piper Jaffray -- Analyst

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