Santander Consumer USA Holdings Inc.
Q1 2020 Earnings Call Transcript

Published: 29 Apr 2020

[Operator:]

Good morning, and welcome to the Santander Consumer USA Holdings First Quarter 2020 Earnings Conference Call. At this time, all parties have been placed into listen-only mode. Following today's presentation, the floor will be opened for your questions. [Operator Instructions] It is now my pleasure to introduce your host, Evan Black, Head of Investor Relations. Evan, the floor is yours.

[Evan Black:]

Thank you. Good morning. To begin, I just wanted to say on behalf of the team, thank you to everyone that joined the call, obviously on short notice today given yesterday's events. We appreciate the flexibility and look forward to a Q&A at the end. So on the call today we have Mahesh Aditya, our CEO, and Fahmi Karam, our CFO.As you know certain statements made on today's call maybe forward-looking and we encourage you to look at our risk factors and SEC filings regarding those statements. We'll also probably reference certain non-GAAP financial measures and we believe those are useful to investors. And of course, we'll have a reconciliation of those to U.S. GAAP with the presentation we filed yesterday. With that, I'll turn the call over to Mahesh.

[Mahesh Aditya:]

Thank you, Evan and good morning, everybody. Once again, apologies for the glitch yesterday. And thanks for joining us to review our results for the quarter. Let me start by saying that our thoughts are with those who've been impacted by COVID-19.In particular people who are sick, and the medical professionals responsible for caring for them. Our sincere appreciation goes out to all those who put themselves in harm's way every day to deliver food, keep essential establishments, running, drive ambulances, cabs and buses, and make sure the company is functioning.Many of these essential workers are our customers and we want them to know that Santander is here for them. And I'd like to thank our call center colleagues who are at the forefront of this crisis and who've made us proud by being there for our customers in a time of extreme stress, listening to them, showing empathy and a willingness to find solutions.I like to draw your attention to Slide 3 to reveal the critical measures we've taken in response to this unprecedented crisis to support our employees, our customers, our dealers and the communities in which we operate.Starting with our employees, more than 95% of our employees are working from home. Thanks to a massive effort by information technology team and our operations leaders. Thousands of laptops are deployed in a matter of a few weeks in order for us to continue to serve our customers without missing a step.For jobs that require employees to be in the office, we've taken further steps to ensure safety at each of our sites, such as social distancing measures and increased protocols to keep the workplace as clean as possible. We launched a firm wide emergency paid leave program so that our employees could have the time to make necessary arrangements for their families and childcare services.Lastly, we are temporarily providing a weekly stipend to our frontline employees and a big thank you finally to all of our 5,000 colleagues for their tremendous resiliency during this period.Next our customers, as you have seen from our previous announcements, we've implemented a series of actions to assist our customers during this crisis. These include expanding payment deferrals for loans and leases, late charge waivers, and the temporary suspension of involuntary repossessions.We have provided significant financial assistance to our customers through loan extensions since the beginning of the pandemic. As of April 22nd, we have executed more than 350,000 loan modifications related specifically to this economic crisis.For context during 2019, we were providing approximately 25,000 to 30,000 loan extensions per month. While at a significantly higher level recently due to the crisis loan modifications for our customers are a standard practice. We have a long track record of offering assistance in times of financial hardship.We have the experience and the tools to execute forbearance programs quickly and assist customers through these uncertain times. The initiatives we have implemented for our customers due to COVID-19 are also in line with our response to large single event natural disasters in the past.The most recent instance occurred in 2017 when hurricanes impacted Houston and in surrounding areas as well as most of the state of Florida. We have a significant percentage of our customers in Texas and Florida and we executed approximately 80,000 extensions in those affected areas.While the impacts from COVID-19 are clearly broader than recent natural disasters, our servicing an operations team have a lot of experience providing financial assistance to customers and we are confident that the actions we have taken are customer centric and appropriate for the time we are in.A point worth mentioning is that a majority of our customers who have requested assistance during this pandemic have not availed of any loan forbearance in the past. And at the time of request, most of them are not past due their payments. Based on our experience, we believe these accounts could have a high rate of cure once normalcy is restored.Next, for our Chrysler dealers and potential Chrysler Capital customers, we have partnered with FCA to launch new programs including first payment deferred 90 days on select FCA models, zero payment APR for 84 months in selected 2019 and 20 FCA models.And for our floor plan relationships, Santander Bank has offered 90 days of floor plan interest deferrals, curtailment deferrals for older new and used vehicles, term loan principal and interest deferrals. The ability to flow older models, used vehicles and to free up cash and one off lines of credit and term loans.The government, the Federal Reserve, the Department of Treasury, Senate and Congress have responded with urgency and launched the historical stimulus package to assist our fellow Americans during this crisis. Specifically, I would like to recognize the support of our regulators as they helped us rapidly facilitate solutions for our customers.Finally for our communities, Santander U.S. will provide $25 million in financing to community development financial institutions. SC has also donated $3 million to organizations, serving vulnerable populations in our communities hit hardest by the crisis.Let's turn to Slide 4 to discuss our Q1 performance. Early in the year, our financial performance was headed to an excellent quarter and a continuation of the strong results in 2019 prior to the disruption caused by the virus.New vehicle sales were off to a good start and used car prices are strong in January and February. Our business began to see the pressure in mid-March and our results for the quarter began to reflect some of that pressure as highlighted in the first quarter results.During the quarter we booked $452 million in loan loss reserves related to economic factors primarily driven by COVID-19. Excluding these reserves that day one CECL estimate was relatively in line with the estimate we provided last quarter and our net income was in line to slightly better than q1 2019.We ended the quarter with an allowance to loan ratio of 17.8%, up from 9.9% at the end of 2019 and 16.8% on Jan 1, 2020 post CECL implementation. Fahmi will discuss the underlying assumptions in the reserve to loan losses, but it's worth mentioning that the two significant drivers of our reserve bill are inherent portfolio quality determined by the historical performance of accounts, and the forward economic view over the life of loan on our books.Our total auto originations were $7 billion during the quarter, relatively flat versus Q1 2019. Originations again started the year strong until mid-March when shelter and press place orders nationwide began to decrease applications and volumes.Prime loan volume increased driven by the new programs we launched with FCA and $1.1 billion in originations through our program with Santander Bank. Lease volume also increased slightly due to a strong January and February as our share increased however non-prime loan volumes decreased. Tammy will provide more details to you shortly.During the quarter we also announced a multiyear strategic preferred lending relationship with Broom [ph] and innovative end to end ecommerce platform designed to offer a better way to buy and sell used vehicles. We have been supporting Broom since 2018. And this new preferred relationship will make it even easier for Broom customers of all credit profiles to obtain financing.Moving on to credit performance, while we're still evaluating the impact of the pandemic, our first quarter performance was stable to better versus Q1 of 2019. Both the gross and net charge off ratios improved as well as early stage delinquencies. Late stage delinquencies increased by 40 basis points and our recovery rate was down year over year.Most credit metrics were only slightly impacted by the economic downturn this quarter. And we expect performance to be more stressed moving forward. Factors that could impact these credit metrics include loan extensions, which will have the effect in the short term of improving delinquencies and reducing charge offs over the coming months.Temporarily suspending repossessions will reduce recoveries. And used vehicle price declines as dealers care their lots of used cars and auction activity remains slow. We also expect that once repossessions start, there will be an increased downward pressure on used cars until the supply subsides and demand begins to pick back up.All these are the important determinants of our credit performance going forward. During the quarter Santander Consumer demonstrated new access to liquidity executing to securitizations and accessing additional funding at the end of March. After the quarter ended, we were one of the first ABS issuers to execute a transaction since the beginning of the crisis.Given the month of April is almost behind us I would like to provide a brief review into some of the recent trends we've seen across our broad. Through April 22 versus the same time last year our total application count decreased approximately 26% and total originations decreased about 22% due to shelter in place orders, dealership closures and weaker demand.Due to auction house closures and repossession suspensions we have also seen lower recoveries in April. For example, our auction sales have gone down approximately 50% in April versus the same time last year. However, auction house activities seem to be picking back up in the last week. And Fahmi will cover some of the other green shoots we are beginning to see across our business shortly.During this crisis, our goal was to keep our employees safe. We knew if we could care for our teams and position them for success, they in turn will take care of our customers. Fortunately, that's exactly what we've seen play out. During mid-March as we experienced the initial surge of customers calling in for assistance, we saw a post call survey results hit record highs.Two key points to evidence how our customers feel about us; First, the overall satisfaction from our customers during the last four weeks has been more than 10 percentage points greater than previous levels. Even with extended hold times and significantly stress customers our service team was there when they were needed the most.Second, and just as impressive is that we've seen the response rate for taking the post call survey doubled in the last fall. In summary, I'm very proud of our performance and the teamwork displayed by our employees over the last several weeks. It has not been easy, but we've handled it well and our business continuity plans worked.As much progress as we made over the last few weeks, we still have some headwinds ahead. And I'm confident that our teams will continue to come together to identify innovative and find effective ways to help our customers and further enhance our brand and reputation. We enter these challenging times from a position of strength supported by robust capital and liquidity, which gives us confidence that we can absorb this abrupt economic slowdown.We've been preparing for the potential end of cycle economic downturn for several years. Over the past three years in particular, we've made enormous progress improving and enhancing our risk management framework including our operational and credit risk.We've added high quality talent to our risk organization and invested in advanced tools and data sources which gives us a deeper and better understanding about through the door population. Our portfolio quality has improved because of better analytics and focused credit actions through 2018 and '19.We eliminated some segments that perform badly and captured market share and others that are profitable and with better risk. We're still less than two months into the crisis and it's very difficult to estimate its duration of severity. We are encouraged by the unprecedented and swift actions taken by the government and bank regulators to provide relief to individuals and small businesses. But the depth of the economic impact and the velocity of recovery is difficult to assess and as yet uncertain.With that I will turn the call over to Fahmi for a more detailed review of our results.

[Fahmi Karam:]

Thanks Mahesh and good morning everyone. Before I get into the quarter's performance, I also wanted to recognize and thank our employees who are going above and beyond everyday to help our customers and our business address the many challenges presented by the pandemic.I've been impressed with the dedication to put contingency plans to work, solve new issues and the teamwork across all functions to get the job done. Now turning to slide 5 for some key economic indicators that influence our performance.All the metrics on this page started off the year quite strong. However, the macroeconomic environment has changed significantly since we last spoke due to the impacts from COVID-19. The pandemic has caused continued uncertainty in the outlook for our economy, and as a result, consumer confidence has recently deteriorated and the labor market has paused for millions of Americans as federal, state and local governments, along with businesses assess how best to move forward.The key factors impacting the economy will be the length and severity of the crisis and the impact of the unprecedented US government support and stimulus programs. Specifically for our business the key drivers include unemployment levels, GDP growth or contraction, and used car prices.Along those lines on slide 6, there are a few key factors that influence our loss severity, and credit performance. Annualized new car sales fell significantly in March as many dealerships were closed nationwide due to shelter in place order. Various industry sources are forecasting new car sales in the US will be down significantly from original expectations.Current estimates are just above 11 million units for the year. Used vehicle price indices did not report significant deterioration in March. However, some industry data providers have previewed April performance showing a decline of approximately 10% in used vehicle pricing compared to the same period one year ago.At the start of the pandemic, most of the large auction providers were only offering virtual auctions. Typically auctions are a mix of physical and virtual bidding. However, as the severity of the pandemic worsened, many of the auto auctions were shut down entirely. In recent weeks, the virtual channel has reopened and we now have access to over 90% of the auction sites we utilize.In addition, we, along with many other major auto lenders have temporarily suspended repossessing charged off vehicles. Both of these factors have led to uncertainty in the auction lanes and negatively impacted pricing. Given this interruption, it is difficult to extrapolate future used car prices based on the last couple weeks of performance.However, we are encouraged by the reopening of the virtual channel as a first step. Our recovery rate which includes metal and nonmetal proceeds, bankruptcy and deficiency sales was 50.1% in the quarter. We will further discuss recovery rate and loss performance shortly.Turning to slide 7 for origination trends, as Mahesh mentioned this quarter was relatively stable versus Q1 of 2019. However, the story between prime and non-prime retail volume was mixed. Core loan originations decreased 12% compared to the prior year quarter. Total Chrysler Capital loan originations increase 7%.Chrysler prime volume increased 29% year over year, driven by Chrysler Capital exclusive offers by FCA. Chrysler non-prime volume decrease 11% year over year and lease originations increased 3% versus Q1 last year. Volumes were negatively impacted by the disruption in the economy and the closures of approximately half of our dealers.We expect volumes to continue to decrease on a year over year basis in the second quarter, particularly in the non-prime sector. Application counts across our non-prime channels are down more than 50% thus far in the month of April. However, over the last week, we have seen a significant uptick in applications as dealers have begun to reopen and consumers are spending tax refunds and/or stimulus checks.On the prime side, originations are supported by FCA Incentive programs, which are generally exclusive to Chrysler Capital. As incentivize programs are driving consumer demand, we believe our prime origination and our SCA penetration rates will continue to increase in the second quarter.These volumes have also been significantly impacted over the last six weeks. Our lease originations are somewhat concentrated in the Northeast and Midwest where several key markets have been hit hard by the virus.Early in April, our lease applications were down more than 70% year-over-year. With similar to the non-prime segment, we have seen an increase over the last week, albeit still well below this time last year. Volume levels will depend on the key drivers I mentioned earlier and will have an impact on our financials through net interest income and reserve balances.In addition to the macro backdrop, volume will be driven by the level of competition during and coming out of the crisis. Our underwriting standards enterprising approach are built to weather a downturn. We believe our non-prime focus will give us a competitive advantage in these times. We will remain disciplined and focused on achieving the right risk adjusted returns on our portfolio while continuing to serve our customers and supporting our dealers.Moving on to page 8, you can see the FCA and Chrysler Capital results. U.S. auto manufacturers including FCA have temporarily shut down their auto plants since mid to late March. This along with dealership closures has pressured vehicle sales in March and we have observed continued downward pressure into April.However, we finished the quarter with a 39% penetration rate as we continue to partner with FCA to deliver solutions to our customers. The drivers of the penetration rate increase year-over-year while the programs we launched with FCA and our Santander Bank originations program. As mentioned, our penetration rate will likely increase as incentivize offers drive consumer demand in the near term.Turning to slide 9, we continue to identify ways to leverage our servicing capabilities and drive growth in our service for others balances. During the quarter, we added $1.1 billion in originations to the FFO platform via our agreement with Santander Bank.In addition to our own prime volume, we successfully converted the previously announced TCF portfolio acquisition in the first quarter, which included approximately $500 million in SFO balances.Service for others platform generated $19 million in servicing fee income this quarter. In addition to those servicing fees, $6 million of SBNA origination fees are included in fees, commissions, and other line items.During the last crisis, SC converted more than $35 billion of assets onto our platform. We believe our track record positions us well to capitalize on any new opportunities during and post a crisis to leverage our scale and servicing platform. Our non-prime servicing expertise is a differentiator in times of a recession.Turning to slide 10 and liquidity, as of quarter end, SC had a total of $50 billion in liquidity. This liquidity continues to be a source of strength for SC and the foundation for us to continue to originate loans and leases supporting customers during these times of uncertainty and market volatility.At the end of the first quarter, we had approximately 45% of unused capacity available on our $12 billion third-party revolving warehouse lines. In the past six weeks, SC has raised or renewed nearly $2.5 billion in wholesale funding demonstrating the resiliency and strength of STRATEGIC's liquidity and balance sheet.In mid to late March we renewed a $1.25 billion revolving warehouse line and attained over $1.1 billion in new private bank term credit facilities. In addition to the strong support from the 13 lenders in our bank syndicate, we were also able to access the public AVS market in April.We were one of the first to do so as the markets had been effectively shut down since mid-March. We closed the $965 million SDART transaction. And with the strong support of our institutional investors, we were able to upsize the transaction and achieve better than expected pricing.As a result, our forecasted liquidity sources can support our business. In addition to our third-party lenders, we also have continued support from Santander. At the end of the quarter and today we have an additional $3 billion of unused capacity through our Santander credit facilities.Our liquidity capacity coupled with lower originations in the near term position us well to come out of the crisis in a position of strength ready to capitalize if inorganic opportunities arise. Moving to slide 11 to review our financial performance for the quarter versus the prior year quarter. During the quarter, we added approximately $442 million in reserves related to the economic outlook, primarily driven by COVID-19.Interest on finance receivables and loans increased 2%, driven by more than $2 billion in average loan balance growth. Net leased vehicle income decreased 5% due to slightly higher depreciation expense and limited auction sales at the end of March. Interest expense decreased 2% driven by lower benchmark rates, as the cost of debt benefit outweighed the increase in outstanding debt balances.Credit loss expense increased to $908 million in the quarter, up $357 million driven by the implementation of CECL and COVID-19 related reserves. Total other income of $51 million in the quarter was in line with last year and included $63 million of held for sale adjustments related to the personal lending portfolio.Continuing to slide 12, most of the metrics on this page improved year-over-year as a COVID impact had now begun to materialize by quarter end. Versus the prior year quarter, early stage delinquencies decreased 10 basis points while late-stage delinquencies increased 40 basis points.The RIC gross charge off ratio of 15.5% decreased 400 basis points from Q1 last year. The net charge off ratio of 7.7% decreased 90 basis points from Q1 last year, as we continued the momentum of positive charge off performance from Q4.As Mahesh mentioned, we began to offer our customers expanded deferral programs in March. Since March 1st through April 22nd we’ve executed approximately 350,000 extensions in our loan portfolio and more than 30,000 in our lease portfolio.The majority of these extensions were provided to customers that have never received an extension in the past and approximately 80% of the extensions have never been in late stage delinquency status prior to the crisis. The amount of extensions given to customers in the current bucket is over three times a normal month.As you all are well aware, loan modifications have been part of our normal and customary servicing practices for quite some time. And are designed to help consumers who show the willingness and ability to pay, navigate temporary financial distress. Overtime, we have developed the tools and expertise to execute these extensions successfully for our customers as well as for SC.We have existing capabilities to track and adjust terms for these accounts if they show any signs of credit deterioration. Although the impacts of COVID are quite uncertain and unlike anything we have experienced in the past, we do have several years of performance data that we can leverage for both normal course modifications as well as extensions related to natural disasters.Going forward, these credit metrics will be impacted by our extension levels as well as several other factors including unemployment levels, used car prices, reinstating repossessions, dealer inventory levels, and overall demand at the auctions.Turning to slide 13 to review the loss figures in dollars and the walk from prior year. Net charge offs for RICs decreased $22 million versus prior year, quarter to $593 million. Breaking down the change, $96 million in losses were primarily due to higher average loan balances which were up $2.1 billion from last year and $48 million in losses due to lower recovery rate. These were more than offset by a lower gross charge off ratio which decreased by $124 million and other adjustments of $41 million.Turning our attention to provisions and reserves on slide 14 and 15, at the end of Q1 2020 the allowance for credit losses totaled $5.5 billion increasing $2.4 billion from last quarter, which represents an allowance ratio of 17.8% at the end of this quarter.In regards to the reserve walk, the allowance increased $2.1 billion due to the day one CECL adjustment. The allowance increased an additional $442 million due to economic factors in the quarter primarily due to COVID-19.The increases were partially offset by $127 million decreased due to changes in our portfolio such as mix, balance, pay downs and charge offs. The difference between the overall ratio of 17.8% versus our estimate of 16.5% from last quarter's call is primarily driven by the macro-economic outlook.Economic factors in the walk represent our determination of how key forecast drivers impact our loan portfolio as constituted at the end of the quarter. We use a three year reasonable and supportable forecast period and several economic scenarios with varying degrees of potential outcomes and stress, including the impact of COVID-19.In addition to the modeled results we recorded a qualitative reserve, which combined resulted in an increase of $442 million for the quarter. The key economic derivable with the largest impact to the reserve include GDP, unemployment and the Manheim index.Our baseline economic scenario was based on the latest forecast we had available at quarter end, the assumptions were a steep drop in key variables in Q2, followed by a recovery in the second half of the year assuming a reopening of the economy and taking into account government stimulus programs.Going into the second quarter, we will continue to monitor and track these economic variables as well as the impact of the stimulus programs to consumers and our portfolio. The overall allowance will depend on the level of originations and asset balance for macro outlook and the mix of TDRs and non-TDRs.Moving to slide 15 to cover CECL by loan designation, on slide 15 we have provided the CECL impact broken out by TDR versus non-TDR balances. As we just reviewed, our CECL methodology relies on various models and assumptions that forecast lifetime losses of the portfolio based on an economic forecast and other relevant variables.The impact of CECL will be heavily dependent on amongst other factors, the mix of our portfolio, recent portfolio trends, the growth or decline of the balance sheet and our view of an economic outlook at the end of each period.As we discussed last quarter, our reserve will also depend on the mix of TDRs versus non-TDRs. Under CECL the impact from decreasing TDR balances will still be a benefit, but to a lesser degree than we have experienced in the past. As you can see from the slide, the TDR balance continue to drop this quarter versus last quarter coming down approximately $300 million.Most of the CECL day one impact comes from the non-TDR portfolio, which the allowance increases from approximately 8% to more than 16%. TDR balance going forward will depend on the level of extensions and continued guidance from our regulators related to COVID modifications.Based on the recent guidance and the delinquency status of consumers receiving extensions thus far, the majority of customer assistance deferrals related to COVID-19 will not qualify as TDRs.Turning to slide 16, the expense ratio for the quarter totaled 1.9% down from 2.1% from the prior year quarter.Our operating expenses were slightly down versus the prior year quarter, primarily driven by lower repossessions in March.Finally, turning to slide 17, similar to liquidity, our capital remains robust and in excess of our internal targets. During the quarter, we successfully repurchased 18.4 million shares at a total cost of $467 million including the results from the tender offer that was part of our authorized capital plan. Further revised Federal Reserve guidance, we have elected to defer capital related impacts associated with CECL for two years and begin the phase in process in 2022.Our CET1 ratio for the quarter was 13.8%, down from 15.8% in the prior year quarter. We believe this level of capital is more than adequate to withstand a severely adverse scenario and still remain above post stress limits. The company has declared a cash dividend of $0.22 per share to be paid on May 18, 2020 to shareholders of record as of the close of business on May 8 2020.We established our dividend to withstand adverse conditions and given our strong CET1 ratio as well as the loss absorbing capacity of our reserves at nearly 18% we currently have no plans to reduce or eliminate our dividend. However, we will continue to exercise a disciplined approach to capital management and monitor the overall macro-economic backdrop.For further context on our loss absorbing capacity, our reserves as at the end of the first quarter represent approximately 115% of the DFAST Severely Adverse Scenario from [indiscernible] most recent public results in 2018. The size of our portfolio has increased since that time. So looking at the 2020 test results, we are approximately 85% reserved for losses under the severely adverse scenario.We further stress key macro drivers for our informational purposes, including GDP contracting 35%; unemployment reaching 14% and remaining elevated throughout 2020 and returning to 10% by 2022, the Manheim index dropping 18% and not returning back to pre-recession levels.Under this extremely severe scenario based on our current capital levels, we would be able to make all of our planned capital distributions and still be above post stress minimums. From a reserve standpoint, our Q1 reserve is approximately 68% of cumulative losses over nine quarters in this extreme scenario.To conclude, notwithstanding the current environment, we are confident that we have the team, liquidity, capital and resources to achieve our long-term goals and support our customers. We will maintain our disciplined underwriting of loans and leases at appropriate risk adjusted returns. We'll continue to service them effectively while retaining sources for opportunistic strategic initiatives in the event they arise.In light of these unprecedented events, we are withdrawing our financial targets for the second quarter and for this year. We look forward to the economy improving as states and businesses begin to reopen. We are hopeful that the extraordinary government support has an immediate positive impact on our consumers. As things stabilize and the severity and length of the crisis becomes more certain, we will provide you with updated guidance.Before we begin, Q&A, I would like to turn the call back over to Mahesh. Mahesh?

[Mahesh Aditya:]

Thank you, Fahmi. I'd like to conclude by summarizing the areas of attention for us in the coming months. In this time of extreme uncertainty, we will remain focused on the essential drivers of our business, the demand for new and used vehicles are important restoring top line growth.The auto OEMs have been quick to react to the crisis with aggressive and attractive offers which have brought back new vehicle financing applications to almost pre-crisis levels in April. We expect to continue to see promotions in the market as manufacturers look to support new car sales.Our non-prime portfolio is our most resilient and profitable business and we anticipate that it will continue to perform through the next several months. While still early, we are seeing positive effects of the stimulus package and are encouraged by recent consumer behavior.Used vehicle auction prices will also impact our recovery rates to the residual values. Supply and demand dynamics will play a significant role in these values. Santander Consumer has demonstrated a track record of profitability and resilience through economic cycles and we are confident we have the capital liquidity and support from our parents to withstand these headwinds.In these unique and prime times they rely on the depth of my management team and the amazing stamina and creativity of our frontline support staff. We together are there to support our customers, dealers and our OEM partners and most importantly our communities.With that, I'll open up the call for questions. Operator?

[Operator:]

Thank you. We will now open up the call for questions. [Operator Instructions] Our first question comes from Jack Micenko with SIG. Please go ahead.

[Jack Micenko:]

Hi, good morning everybody. Hope everybody's well. Wanted to drill into the March a bit. Back of the envelope, it looks like if I take the loan and lease and sees an average loan amount feels like a 10%, maybe 10% to 12% take rate on the March.Is that right way to think about it? And I think you had said in your prepared comments there won't be TDRs, would that require another extension beyond the initial 9-day to sort of fit your TDR definition? Just wanted to get some color.And then lastly on the March side, can you talk through the cadence of the take? Was it the March payment? Was it the April payment? Are we plateauing now this 350 balloon to something - how do you think about all that?

[Fahmi Karam:]

Sure. Thanks, thanks for the question. So first let me say that the, these extensions are, we believe they're a very effective tool to help customers navigate through these financial distress. It does mitigate losses. And hopefully it keeps them in their vehicles a little bit longer.I think the percentage that you mentioned is a little bit light. We're close to about 19% from a unit count standpoint, have had some kind of extension or deferral. From a bounced standpoint, it's just over 20% of the owned portfolio.We did give our customers a lot of different tools to reach us online, or over the phone. And as Mahesh mentioned, the response has been very positive. As far as the level of extensions it will depend on a lot of the key factors that we mentioned already on the call.The bottom line is we're going to try to make solid financial decisions for the consumer as well as ourselves, and then continue to assess their willingness and ability to pay. From a trending standpoint, we obviously saw a pretty big wave at the end of March and in the beginning of April, but the trend has begun to slow down the pace of the request over the last week or so has begun to level out.

[Mahesh Aditya:]

Yeah. And just a one more after that, the most of our extensions today are 60 day extensions. So, the TDR treatment will kick in, in the second round, once they go into a second round of extensions. And as Fahmi said, earlier, the majority of extensions are coming from customers who either never asked for an extension before overall in a non-liquid status, so we expect significant amount of them once the stimulus package kicks in to be to be in self-kill status.Yes. So the TDR status will be impacted by how long this, the crisis lasts and how it's going to impact the consumers. So the way the guidance works from the Federal Reserve is really depends on their delinquency status on the onset of our COVID-19 extension program, which for us was the beginning of March. So, if they were in as we mentioned, current or less than 30 days past due, our COVID related extensions will not classify as a TDR.

[Jack Micenko:]

That's great. So, then follow up on how has your credit box changed over the last six weeks? Are you maybe verifying more employment? I know there was a real mix towards prime. I know usually that means we're in this kind of scenario, the captives tend to do well because of the promotional activity. But any points around under anything you can maybe point to that may change proactively in the last couple weeks to a month?

[Mahesh Aditya:]

Sure. So, yes, I think in these times, I think it's appropriate for us to proceed with caution, and that's the approach we're going to take from an underwriting standpoint. We have to appropriately price for the risk that we take on for our balance sheet and we're going to remain very disciplined in our approach and make sure that we get the right risk adjusted returns.Of course, we're going to be there for the dealers, to make sure that we support them and continue to support consumers that are credit worthy. So, we'll continue to do that. We think it's prudent to be cautious, given all of the uncertainty in the market, but really be there for the rebound and really pick our spots on where we want to play, be very selective.And some of the things you mentioned around stipulations or filing income, all of those things that we have, as a tool to try to determine the underlying risk of the deal we're going to utilize those tools. So, for the time being, I think caution is probably our best approach and then coming out of the market be very opportunistic as opportunities arise.

[Jack Micenko:]

Thank you.

[Operator:]

Our next question is from Moshe Orenbuch with Credit Suisse. Please go ahead.

[Moshe Orenbuch:]

Great, thanks. And maybe following up on that, as you start to see dealers open up, maybe could you talk a little bit about the competitive dynamic and both of the new care and the used car market?I would imagine, given what you've seen with Chrysler, a lot of that stuff was put in place for this whole thing hit. And so how you think your market share will fare and then given your better funding capabilities are there going to be opportunities there and the non-prime?

[Fahmi Karam:]

Yes, thanks Moshe for the question. So, coming into the year competition, I would say was pretty intense but rational coming into the year. January, February, we actually probably saw heightened competition, especially on the non-prime segment. You've seen some of that in our results.I think competition going forward, you're right, we have to separate it between prime for us and non-prime. On the prime side as we mentioned, because of all the incentives that FCA is putting in the market that are exclusive to us and exclusive to Chrysler Capital.We expect our new FCA vehicle penetration rate to continue to increase. We ended the quarter for just that 39%. If we look at April so far, we're closer to 50% plus. So we continue to kind of see that going forward. And really for us across all of our new vehicle segments, we would expect the captives to drive the volume there.On the non-prime side, I mentioned, we're going to be pretty cautious in our approach, at least in the near term to position ourselves to come out of this thing in good shape. We do think our scale and platform and our liquidity position, we've worked with a lot of years to diversify our funding approach from a liquidity standpoint.And given our scale, we do feel like we do have a competitive advantage in the non-prime segment compared to some of our other non-bank competitors. So, we're going to position ourselves for kind of being opportunistic in select segments of our market as we come out of it.

[Mahesh Aditya:]

Yes, just to add to that, it's a sort of tale of two cities here right now as the way we see it, we see the captains being very aggressive in the new car space. And we see dealers looking to clear out their existing inventories of used cars. That's a huge opportunity for us. We consider subprime and near prime our strength. So we are - we have advanced scoring models.We have all uses of alternative data sources. And all of that plays a big role in how confidently we approach the market. And to what Fahmi said in response to the earlier question around some of the increased credit checks that we're putting in into place like proof of income and verification of employment. All of that goes in making sure that we're not, that we continue to book high quality going through the crisis.

[Moshe Orenbuch:]

Great. Thanks. And as a follow up just with respect to capital, I appreciate the discussion about the capital stress testing and the dividend. Could you talk a little bit about what you would need to see in either the financing markets or the economic environment to begin share repurchase again, particularly given that the share repurchase has potentially to a point could have some positive capital implications for the parent. So, could you just discuss that. Thanks.

[Mahesh Aditya:]

Sure. So, first of all, let me say we designed our dividend policy, our capital distribution policy and our plan to be supported through the cycle. And so we think that first of all, the dividend as I mentioned is very sustainable as we kind of withstand the crisis.Capital for us has been something that we focused on. There has been a lot of efforts for us to have a more efficient balance sheets. Since 2018, we've worked really hard to distribute our excess capital. And luckily for us we're still in an excess capital position.We feel like we've taken a very thoughtful and disciplined approach, especially from a pricing standpoint very price disciplined in our approach. We've been very good stewards of capital. And going forward, we're going to make the same determination.Coming off the tender in February, we feel good about the execution there. We still have $400 million left from the previously announced $1.1 billion plan. And we just submitted the submission in early April through [indiscernible] for the CCAR submissions.We'll be able to talk about the go forward more in the coming months as we get those results back. But in general, we feel really good about our capital position. We feel really good about our liquidity position. We'll continue to try to make the best financial decisions on how we deploy our capital going forward.The good news for us is I think all of the options that we've talked about in the past, whether it's organic opportunities, inorganic opportunities, whether it's shareholder distributions through dividends or through share repurchases or if we feel like the right time right now is to preserve capital. All of those options are still being considered and go through our thinking.

[Moshe Orenbuch:]

Great, thank you.

[Operator:]

Our next question is from Mark DeVries with Barclays. Please go ahead.

[Mark DeVries:]

Yes, thank you. I was hoping to get a little bit more detail about the economic assumptions behind the reserve levels where you see kind of GDP falling peaking. And then, are those assumptions kind of consistent with today's consensus? And if so, should we expect kind of a material reserve build in 2Q? Thanks.

[Mahesh Aditya:]

Thanks for the question. Let me step back and maybe take just an overall view of our CECL process. So the process starts with a very detailed and granular loan level model, which looks at the underlying characteristics of the loan as well as some historical data of the loans themselves whether it's payment history, prepayments, delinquencies, whether they're TDRs or non-TDRs.And that model then uses a macroeconomic forecast, which has the key drivers which I've mentioned throughout the prepared remarks. So we come up with a - we use a third party. We come up with a baseline economic forecast that's made up of consensus estimates.We then also use three other forecasts which have varying degrees of economic outputs, some positive, some is kind of slow to moderate growth and one has a negative scenario, in addition to kind of the economic forecast and the model results.I mentioned, we also use qualitative reserves to put in kind of management overlays as appropriate based on either - other risks that we see that are not picked up by the model or we want to further enhance what the model is seeing.So our day one CECL reserves followed that process. This day one reserve did have some weighting to a negative scenario and a downturn scenario, obviously not to the level of what we’ve just experienced going through with COVID. But it did have some level of a downturn blended in.For the quarter end day two very similar approach that we used, and exact approach that we used. We came up with the baseline scenario that assumed a pretty steep drop off in Q2, unemployment about 9%; GDP contracting about 18% to 20% and then a recovery beginning in the second half of the year as the economy started to reopen.So we did have that economic scenario baked in. And then we also had qualitative reserves on top of that just to protect on some specific downside risk that we saw at the end of the quarter. Going into Q2, we’re going to monitor all of those key economic variables that I mentioned.We’re going to update all of the forecast, including hopefully having a better understanding of some of the stimulus programs and the impact on the consumer. We have been very encouraged by some of the early signs over the last few days, the last week or so on some of the impacts on just applications, payments on accounts and things like that.So we have to assess all those things, I think it's very early to give any kind of sense into Q2. We're going to learn a lot between now and the end of June.

[Mark DeVries:]

Okay. That's helpful. And then, do you expect that you would be able to complete a drive securitization in this market? If not, kind of what are your thoughts about the ability to term finance the non-prime assets?

[Mahesh Aditya:]

Yeah. The short answer I think to your question is yes, we do have confidence that we'll be able to execute or drive a securitization just based on the results that we just had with SDART. I think our track record in the ABS market speaks for itself.The ability for us to hit the market right at the beginning of April is very positive for us. So SDART is our benchmark platform, it builds off of that. The successful execution we just had a couple of weeks ago and we'll go from there, but yes, we have confidence that we'll be able to execute a drive.

[Mark DeVries:]

Okay, great. Thank you.

[Operator:]

Our next question is from David Scharf with JMP Securities. Please go ahead.

[David Scharf:]

Hi, good morning and thanks for taking my questions. I was wondering if I could maybe just follow-up on the previous question regarding obviously all the inputs and certainly unknowns at this point on underlying the reserving assumptions. But in particular, can you provide a little more color on what the expectations are for, not just near term, but how you're thinking about the ultimate trajectory of used car pricing as it ultimately drives recovery rates since it's such an important input into the reserving.

[Mahesh Aditya:]

Sure. So as I mentioned, it's very hard to take a view of where used car prices are going over the next month, two months, three months, based on the last month of activity. With all the disruption between repossession and auction houses, dealers also not being open or not being able to go book to the auction to buy cars. So it's very hard to extrapolate used car prices going forward.However, there are several factors that we're looking at to kind of help influence where it's going. And some are positive and some are - will put downward pressure on used car prices. On the positive side, new vehicles with the plant closures recently, there could be more demand for used as new vehicle volume may not be there.Affordability has always been something that drove used car demand, outside of the incentives the OEMs put into the market. There could be an affordability there that drives used car demand. I think for the used car pricing, generally the biggest impact is going to be what OEMs do, what OEMs do with their incentive packages.If they're continue to be very aggressive, I’d put out very attractive offers to customers that typically impacts used vehicles and specifically vehicles in that's kind of two to five year range. And that's the majority of vehicles that we take to auction. So I think, if you've watched those couple of data points and watched what OEMs do over the next couple of months from an incentive standpoint that's ultimately going to drive the used car price market.

[David Scharf:]

I was curious, I mean there was some inflection point in the last financial crisis after a sustained number of months of depressed new vehicle sales, which obviously translates into fewer trade-ins. But at some point, there was sort of a shortage of supply of used vehicles which dramatically increased their values. Is that type of dynamic built into sort of the forecast at any point in time and how you're viewing the impact on recoveries or is that too aggressive in assumption?

[Fahmi Karam:]

No, I think all of that plays into it. There's a lot of press recently about consumer behavior kind of post normalization if you will. And little things like, how many people are going to be using public transportation going forward versus wanting to have their own vehicle. That may be something there that increases the demand.Mahesh mentioned, dealer inventory, dealers right now not going to the auctions, not being able to replenish. They're actually selling the vehicles. And they have to go back to the auctions to replenish their inventory levels. So I think it all comes into play. There's a lot of factors that can drive it one way or the other. What we do know is that we're going to be tracking and monitoring it and adjusting to whatever those results are.

[Mahesh Aditya:]

Yes. And the news coming out of the auction houses isn't all negative. I mean these are virtual auctions. Most of the auction houses through which we operate are open but open virtually. And the sale rate is been pretty high. And the percentage of sales to the Manheim market report has also been pretty high.So while we have seen a decline and we kind of expected a decline, we think that a lot depends on how the bent up inventory of used vehicles gets released into the system. And that's supported a lot by what the OEMs do as far as new vehicle manufacturing, because right now we are seeing, it's kind of sort of in one particular area of vehicle category. So in the broad spectrum of used vehicles that are out there, we do expect the demand will eventually pick back up and pick back up pretty sharply.

[David Scharf:]

Got it. And maybe quick follow up just on yield. I mean obviously we appreciate why guidance is suspended and I realize yields going to be impacted by what could be certainly a bigger mix of prime. But given the waiver of late - is there any rule of thumb, we should think about maybe for Q2 in terms of just given the waiver of late fees and extensions, sort of what may be a temporary depression and basis points on yield might be just for the next 90 days?

[Mahesh Aditya:]

No, I have a rule of thumb necessarily, but I think what you've seen in Q1 from a yield standpoint. There is a lot of the - what you saw towards the end of 2019 and a continuation of some of the things you mentioned, whether it is the lease portfolio growing at a faster pace than our loan balances, whether it is more of the prime volume being a bigger mix.I think we're going to expect that going forward as well, especially with the incentives in the market that's driving consumers to us. But outside of yield, if I just maybe mention the NIM, from a NIM standpoint, these low rates [indiscernible] as credit spreads continue to normalize and stabilize. You will start seeing a benefit of that in our P&L overtime. So as things improved throughout the month of April, you're going to start seeing that benefit come through our P&L in the interest expense line item, hopefully for the rest of the year.

[David Scharf:]

Great. Thank you.

[Operator:]

Our next question is from Betsy Graseck with Morgan Stanley. Please go ahead.

[Jeff Adelson:]

Hi guys. It's actually Jeff Adelson on for Betsy. How are you? I was wondering if you guys could actually give us an update on Texas. I know that's a significant size of your portfolio. Obviously, there's been some pretty sharp declines in oil prices there and an impact on the jobs market there in addition to everything else that's been going on. Just help us understand the impacts of that portfolio maybe from both of those factors?

[Mahesh Aditya:]

So, good question. The States that we look at, we look at things from an origination standpoint. We do try to like factor in different sectors. Once those assets are booked onto our balance sheet, it's tough to go back and try to reconcile by sector, so we have to use it by state, we have to do it by state and by zip code.So, if we look at kind of the old patch states, if you will, whether it's, Texas, Oklahoma, Louisiana, Mississippi, all of those states combined, it's about 15% of our portfolio. So, I think, the energy sector along with the entertainment, travel, hotel sector have all, equally been distressed.And I don't think Texas is necessarily any different. But we are starting to see, signs that we mentioned of recovery. I know you're here in Dallas, and in Texas, we are planning to reopen over the next few weeks and I think that will help across the board.But that's a very valid question because we have to take that in the context of the effect of the stimulus package and how that is affecting new car sales as well as repayments and what is the long term impact of what's going on in the oil patch project as far as I buy his dental slump [ph] in Houston and the neighboring area.

[Jeff Adelson:]

Okay, thanks. And then just following up on the - appreciate all the other commentary on your assumptions and so on and so forth. But in terms of the qualitative overlay you were talking about at the end of the quarter, is there a way to think about how much of an additional macro really that was relative to your 9% unemployment at the end of the quarter?

[Fahmi Karam:]

No, I mean, I don't think I get to go into this. Sorry, I was just, I don't think we're going to go into this, the size of the qualitative versus the overall impact. We have to take it all together, right. We have to look at the results and then ultimately look at the reasonableness of the reserve compared to our balance. And we felt at quarter end now that 17.8% are approaching 18% reserve.And I mentioned a few other percentages there from a severe stress standpoint. We feel very well reserved for the time being.

[Mahesh Aditya:]

Yes, and going into the CECL build in the first quarter on the 1st of January, we had a quantitative component already in the CECL number. And then there was an additional add in the first quarter. And this time he says, that is a large part of what our view is of the macroeconomic forecasts.

[Jeff Adelson:]

Okay. Got it. Thank you.

[Operator:]

This concludes the time allocated for questions today. I will now turn the call over to Mahesh Aditya for closing remarks.

[Mahesh Aditya:]

So thank you everyone for joining the call today and for your interest in Santander Consumer. Our Investor Relations team will be available for follow up questions and we look forward to speaking to you again next quarter. Thanks a lot.

[Operator:]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.