Q2 2020 Santander Consumer USA Holdings Inc Earnings Call

Good morning, ladies and gentlemen, and welcome to the Santander Consumer USA Holdings second quarter 2020 earnings Conference call.

Sorry.

And placed in listen only mode. Following today's presentation before we'd be open for your questions.

I'll start once you enter the Q any Q.

Today's call is being recorded at this time, it's my pleasure to introduce your host Evan Black head of Investor Relations Evan the floor is yours.

Thanks Pete.

Thanks, everyone for joining and good morning.

On the call today, we have match of the Jones, our president and CEO and any kind of our CFO.

Certain statements made on today's call maybe forward looking.

Please refer to our public that's easy filings a risk factors, what's the status.

Well also reference certain non-GAAP financial measures that we've been able to useful for investors and a reconciliation of those measures to GAAP cap is included in the occasion today watching about 2020.

With that I'll turn the call over to our CEO that's.

Thank you and good morning, everybody. Thanks for joining after the grew out of spots for this quarter.

Over the last four months, we've experienced in factor covert, arguing that the unprecedented disruption.

And the economy going by the global diabetic.

In these difficult times, we remain committed to serving all shareholders in supporting our employees communities in customer.

Sometimes there can you remind has had borrowed by offering warmer newspaper deferrals red either gardening repossessions again exceeded.

During the quarter South American for you answered foundation basis.

I agree with your dog of Indonesia.

They do not nonprofit organizations that are providing services and.

The impact of the corporate banking pandemic, what our community. These organizations that have been called Mr. hungry children and families and communities and other wasn't a big population.

I would also like the highlights I've done that can do not commitment to do it's Bob and extend agreed.

We have drawing sometime there you it.

In making a multiyear multimillion dollar products will come it's been.

To address ratios equity and social Justice in America.

Something Americans enough commitment.

That doesn't bother.

Donation to the equal Justice initiative at 500000 bought over the next three years would be disagreed integration in social equality.

Your next week.

We are reorienting, the got sort of organizers and going through all that all employees mold. There about you wouldn't have the opportunity to enjoy the water grew I'm conscious five screening mentorship and it's on the computer cruising qualified Douglas.

And then it's our view of the concrete steps you're taking.

To make certain that we have multiple of color another senior leadership and foster environment, because specs and values diversity.

Domestic optimization, taking place is a call to action, yes in this important in this important moment.

Meaningful green tree.

They didn't inside of school is not enough.

Before I turn the presentation over to stand here I'd like to touch it looks a little highlights from the core.

On slide three we'll see some will be important measure of the good thing to support our employees I've got to most probably doesn't have been communities in which we operate getting to corporate banking crisis.

You have an active programs on all fronts to protect our customers and employees.

I won't fall continues to go to fulfill distancing protocols all employees continue to walk from called since launch.

You'd be extremely responsive in managing cost another question previously.

Primarily in the form of warm at least according to June could get the computer at 730000 done extensions and 70000 Lisa.

The performance of these long because you're not causing 60% of your constant had an extension exciting in June.

The pace of deferred because also dropped significantly for the quarter the June dropping more than 55%.

Okay. That's good to hear the in July.

That's got the slight falter discuss Q2 performance.

Performance this quarter was a continuation of being shared last quarter, but most of the country shut down and get broken out shelter in place orders and that's good later in the quarter before improvement in some key trends.

Our results were primarily driven by the I'll pick up you call me and not necessarily the actual performance of the portfolio.

Our net loss this quarter global $97 billion, a 30 cents to shed on like the new could basis.

We booked $400 million, an additional loan loss reserves related to economic factors, primarily associated with the impact of course Nike.

We ended the quarter with them or logs longer issue of 19.2, the fed up from 17.2 0.8 depend at the end of the last quarter.

This calculation considers a variety of factors, including existing nonperforming that'd be impact could be a couple of economic indicators, such as unemployment or used car prices future losses.

Our full cost is derived using a combination of macroeconomic scenario that you best reflect our view of the economy going forward.

The allowance was influenced by the hydrated departments, and you're talking Youre going to bring sees as well as.

Charge offs, no charge offs and the growth in TDR balance.

Given the extraordinary situation and the high level of uncertainty you use qualitative factors in management's best judgment that the government be a grew up here to love Love.

The quarter was also marked by higher depreciation expenses driven by our view is a good values in the future annual gross losses due to the suspension of repossessions and the forbearance programs, we put in place.

Overall, the quality of bookings in the quarter pool, and your cap will be monitoring to Craig what would be Bulldog subprime call book.

Chrysler capital loans and leases.

The outlook for the economy remains extremely uncertain.

Potential for second wave of go with 19 infection. The continued elevated unemployment in the possibility of.

Another government stimulus has impacted our view of the potential piece of the recovery.

We saw some positive momentum over the last part of the quarter.

There remains considerable uncertainty and you're taking a cautious approach in our decision, making including our books.

Yes, definitely not that good steady state situation with friends can become you established had an accurate forecast.

Total auto originations was $7.8 billion during the quarter down 7%, but for the second quarter of last year applications and volumes picked up since April June or July originations outperforming go to what are your comparisons in many segment.

Our dealer partners and strong incredible resiliency and creativity to the fact that make in order to configure. The so called and you can do every month.

He's dedicated says either so three without these in central uninterrupted service levels.

Non prime loan volumes decreased year over year continued to be considered across I'd be book critic segments, given the pending against that.

Finally on volumes increased.

Significantly driven by the incentive programs launched with FCM to $1.7 billion in their visitation to our program it sounds on their bank.

Lease volume degrees does geography that leases are prevalent in the north eastern Midwest heavily impacted by the pandemic.

Although volume is down from the prior year on the mix has changed to support a box over the next year, we're pleased with the quality of Q2.

The nation.

Moving to credit performance, we continue to evaluate the back of the pandemic in the near and long term effects that our customers.

My second quarter performance improved versus the prior quarter due to consumer release.

Did you do the consumers' needs you provided in response to pull that might even better.

[noise], both the girls and net charge off ratio has improved but he's differently.

Sure.

In June the auction market for use pod reached record levels. This pent up demand from dealers to Balkan valuation, while many of our credit metrics out of historically low levels, it's not you're doing improving credit and.

The reason is primarily programs we offered to the fact that had the effect of you couldn't be that's even charge offs.

We expect the computer off a hot toxic disposal.

The.

Federal Inter agency guidelines.

During the quarter, if he demonstrated continuing access to liquidity executing securitization.

I see them into benchmarking showed in the space and we're seeing strong credit spreads spreads relative to benchmark.

Yes.

The demand does capitalized ending the quarter with a few do you want to more than 13, but that being a strong balance sheet goods will allow us to manage to the upcoming Charlie. This is clearly not a financial markets disruption as is evidenced by very diversified balance suitable fundings that place.

Besides access to deepen functioning idiots market, we have drug billion dollars bodied evolving that healthland commitment of which only 66% did you all of which 66% without you.

Your continued support from the south of the group, including $3 billion unused capacity to wash himself facilities as well as a new unsecured loans to begin to deleverage from Banco Santander.

During the quarter had to go to the Federal reserve provided the results of this stress test to up and company shoot so.

She was 'cause it starts with a positive without getting into the Gulf quadrant, among participating banks the stress capital ratios.

However, the federal does have suspended all Sherry Buck this isn't it's your GAAP of dividends, which would prohibit you from being a dividend, but good quarter.

The income guidance is set to expire in the fourth fourth quarter. However, it could be extended a revised based on the fed beauty market conditions.

In addition, during the quarter was used to voluntary agreement would be a journey.

The general Cody Acree state stays on the district of Columbia stemming from an investigation on our.

Underwriting practices, which commenced and grateful to the settlement goods laws.

I can see underwriting issue that dates back between debt and is another key milestone into addressing issues related to that time period.

<unk> piece to put this matter behind us.

Let's see was fully reserved for this matter no additional joggers will be taken in the interconnection settlement.

I see the responsible lender in a highly regulated environment, we operate under lots financial institutions that is much improved <unk> compliance controls around lending and loan servicing.

Over the last several years, we've spent in August management across the board improving our policies and procedures to identified prevent be limits gone back and tightening standards and shore affordability.

The progress we have made of the game over the past periods as did our company is significantly better she had to manage through these challenging died.

We have developed a deep bench index, that's a lot credit and off from credit and operations, because it's not as into pricing, which has helped to improve our operational efficiency and overall creditors go to book.

Several months into this crisis is beginning to see some signs of improvement across the broader economy, the courageous Medicare courageous Monday and medical professionals in France, I look and I think as a fixed during these challenging times continues to inspire us.

It's also really pretty motivating to witness our employees Douglas had hoped I'd walk to help our customers and manage the operations all while working from home.

To summarize we have responded to our customers needs to reduce that button in these difficult times provided getting into Repossessing deferrals.

Except as a child has to do I popped and systemic racism, because I think that they got to take action to ensure a companies in the place where all employees a valued feel safe and have an opportunity to succeed.

Sustained the quarter about business is not that that'd be unprecedented economic hurdles we faced.

Our shareholders customers and employees at our top priority as we endeavor to be a great gifts to work, providing providing the highest level just other thing that you've been doing profitability I'm very proud of our performance and the do you look displayed by our employees over the last several months, it's not being easy, but depending on whether or not business is positioned for long term success.

With that I'll turn the call it would affect me for a more detailed review of our results.

Okay.

Thanks, Mahesh and good morning, everyone.

Turning to slide five for key economic indicators that influence our performance.

As it some recent improvement in consumer confidence or employment and GDP. However, each metric is still under significant pressure due to the pandemic as koby 19 cases continued to increase in some of our nation's most populous state is uncertain how long this pressure will continue.

The improvement seen in recent months is partly due to the unprecedented government stimulus to the cares Act reopening most days if cases continue to rise, causing a slowdown in reopenings will further closures and if stimulus expires about another package of governmental aid these metrics could further decline.

These key variables impact our business fundamentals and affect the outlook incorporated in our allowance for credit losses, specifically the can you bear the key business drivers include unemployment levels used car prices H.P. guy and the resulting GDP growth contraction.

Along those lines on slide six or a few key factors that influence our originations and credit performance.

New and used vehicle sales continue to remain under pressure, but haven't fruit from trough levels seen in April.

Mr Resources are forecasting new vehicle sales to be down significantly from pre cobot expectations current industry estimates are just above 13 million units for twentytwenty down from the trend of approximately 17 million units over the past several years.

Used vehicle pricing also the jury didn't April with many dealerships close end demand slowed because a shelter in place orders.

However may and June pricing rebounded significantly leading to a year over year gains in both the manheim and beauty power.

Hey, reaching historical highs.

Okay.

Several factors are impacting used car prices, including among others supply of new vehicles at the dealership a build up of dealer Demandware auctions were close consumer demand for more affordable used cars in interest rates being at low levels, helping consumers obtained financing at reasonable levels.

We'll review our specific recovery rates in a few pages. We're pleased with the results in June and got momentum has continued into July.

Turning to slide seven for quarterly originations. We also added some information this quarter with monthly origination trends, which I'll cover in a moment.

Total second quarter volumes decreased 7% versus Q2, 2019 core originations increased 12% total Chrysler capital loan originations increased 36% Chrysler Prime volume increased 80% driven by Chrysler capital exclusive offers through the FCC partnership.

Yes, there nonprime volumes decreased 23% year over year and lease originations decreased 61% versus the second quarter last year.

Nonprime volume across our core and Chrysler channels decrease to a low two degrees due to lower overall auto sales early in the quarter at a more conservative conservative underwriting approach that we took into higher risk credit segment.

Pardon volume is supported by associate incentive programs, which are generally exclusive to Chrysler capital.

As incentivized programs are driving consumer demand and the new vehicle space, we expect our prime originations and RFC a penetration rates to continue to be stronger third quarter.

Lease volumes decreased year over year, driven by a few factors.

I see a lease mix as a percentage of their total sales decreased during the quarter and as we've mentioned leases also concentrated in certain regions of the U.S. that were heavily impacted by the virus and were under shelter in place orders early on including the northeast Midwest in California.

Also extended extended term retail offered a zero percent for 72 or three four months shifted some lease deals into loans and lastly, our share of FCS leases was under some pressure due to competition throughout the quarter.

At the end of June and into July the F.C.A. mix between retail these has normalized and our share has returned to levels and along with our expectations.

In addition to the macro backdrop volume will be driven by the level of competition during and coming out of the crisis.

We've built our underwriting standards and our pricing strategy to whether a downturn protect the balance sheet, while remaining competitive and to serve as a reliable funding source for our dealers. We believe our nonprime expertise gives us a competitive advantage during these challenging times.

We remain disciplined on achieving the appropriate risk adjusted returns, while continuing to serve our customers and our dealers.

Onto slide eight we detailed the breakdown of 2020 monthly originations versus 29 team by channel.

Core loan originations reached their lowest level in April down, 44% versus 2019, but have improved the rest of fourth quarter with volume up more than 20% in June.

This trend has continued into July depended on consumer demand for used vehicles the rest of the year.

Our share Nonprime girl, who the pandemic a certain competitors stepped away from the market. Some of that competition is coming back where we are pleased with the last couple of months of origination as we have been able to increase share and add margin tightening our underwriting standards.

Chrysler capital Nonprime loans I've been down throughout 2020, but also have recovered in June approaching 2019 volumes. This channel has not seen the same level of recovery as our core channel as the mix between new and used vehicles is different.

Our Chrysler Nonprime originations are typically concentrated in new vehicles and as we've discussed consumers into recession typically seek lower priced used vehicles.

Additionally, in the current environment, new vehicle demand is driven by OEM incentives, which are generally available for prime credits.

Chrysler capital Prime loans have increased each month year to date, peaking in April and still quite strong in June as a result of continued F.C.A. incentives.

Volumes in the current segment will depend on the continued exclusive incentive offers by Chrysler capital through left.

Chrysler lease starting strongest 2020 with year over year gains in January and February the least continues to remain under pressure as we previously mentioned.

Moving on to page nine.

U.S. auto manufacturers, including FC a continued to experience downward pressure and used vehicle sales due to covert 19.

However, we finished the quarter with a 37% penetration rate as we continue to partner with <unk> to deliver solutions to our customers. The drivers of the penetration rate increase year over year. Other programs, we launched with the FDA and our sounds and their bags originations program.

Our penetration rate will likely remain at these levels of respect our lead share to improve and retail incentivize offers to continue to drive consumer demand in the near term.

Turning to slide 10.

During the during the quarter, we added 1.7 billion in originations to the serviced for others platform via our agreement with something they're back due to the significant growth in prime loan volume. This year. We also completed off balance sheet securitization during the quarter selling approximately 500 million in prime loans to investors in order to optimize our balance sheet.

Retain servicing rights and charge a fee on both the S DNA and off balance sheet assets.

The service for others platform generated 19 million in servicing fee income this quarter.

Mission to those servicing fees 7 billion investing in a origination fees or indices provisions in other line item.

Turning to slide 11.

If you ended the second quarter, we had 17.9 billion an outstanding public ABS transactions 9.6 billion private term financings 3.9 billion utilizing our revolving facility and 9.2 billion in funding from sometime there.

Total unutilized capacity of approximately 11 billion.

66% of our third party revolving capacity remains unused.

Rebuilding in commitments from something there also remains fully available.

In the quarter, we obtain 3.5 billion and term unsecured funding from Socgen, there, including a 2 billion term loan to help support our prime retained originations.

We continue to demonstrate our strength and access to wholesale funding, which remains fundamental tessie success and critical to support our customer during times of uncertainty and multi volatility as a result pandemic.

As few as one of the first issuers to access the public ABS markets postcode and our post positive momentum has continued since having issued over 3 billion since April through three public transactions.

Each of these transactions were met with significant investor demand, allowing for issuance levels to normalize.

And our overall cost of funds to improve even compared to the beginning of year.

As I mentioned earlier, we also executed an off balance sheet securitization during the quarter you consolidating approximately 500 million in prime loans due to the continued growth in our prime loan originations were focused on optimizing estes balance sheet to our flow program with talking their bank and off balance sheet opportunities.

Subsequent to quarter end, we also closed at 1.4 billion Upsize Estar transaction, which had nearly 11 billion of investor orders, making it one of the largest auto ABS order books in recent history.

Do you do that strong investor feedback the transaction prices a weighted average cost of funds at the lowest level for an estar transactions since 2013.

[noise], our liquidity in our capital levels, which I will touch on later position us to weather the upcoming recession and capitalize on organic and inorganic opportunities that may arise as it could be economy improves and the pandemics upsides.

Moving to slide 12 to review, our financial performance for the quarter versus the prior year quarter.

Interest on finance receivables and loans decreased 2% due to a higher mix of retained prime both from an organic originations as was the Tcf portfolio acquisition and the reserve on accrued interest due to non TDR loans with carbon 19 extensions.

Net leased vehicles <unk> income decreased 45% due to increased depreciation due to low residual value expectations in the future.

Depreciation levels, our updated month in are dependent on our vehicle mix and estimated residual value on our entire leaseback going forward.

During the quarter, we also had lower levels of lease terminations and sales leading to lower residual gains versus the prior year.

Interest expense decreased 6% driven by lower benchmark rigs and continued successful execution across our lending platforms.

Credit loss expense increased to 862 million in the quarter up 431 billion, primarily related to the build in our allowance for credit losses due to economic factors and trophic 19.

Investment losses were 63 million worse year over year, primarily driven by valuation or reduction in the personal lending held for sale portfolio during the quarter.

Devaluation reduction in our personal lending portfolio does the uncertainty in future losses to covert as well as our Counterparties filing chapter 11 bankruptcy.

Although the business and our funding is still operating as usual and the portfolio is performing well so far our valuation was impacted by the uncertainty related to being related to the pandemic and the outcome of the bankruptcy process.

Moving to slide 13, which covers our deferral trends since the beginning of the pandemic.

Last quarter, we referenced that we granted 350000 long deferrals to our customers through the end of June that figure increase of approximately six or 730000 for loans and 70000 for leases since the beginning of the pandemic.

Deferrals began to rise sharply in April at the height of the pandemic Pete peaking in mid may at 27% of active accounts on balance sheet.

As of quarter end, we saw significant improvement with approximately 18% of active accounts with a deferral and that trend has continued to move lower in July and is currently less than 13%.

Oh, the population that has used the deferral since the pandemic approximately 60% of the accounts have never received an extension in the past and approximately 70% had never been in our late stage delinquency status.

As my has said the performance of these loans has been encouraging 60% to 60% of the accounts that had an extension expiring your native payment, 20% received another extension and Twentyth hit the remaining 20% we're in active.

The accounts that have not paid continue to remain active they will mature into early and late stage in love with two buckets and eventually charge off.

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 navigate temporary financial distress overtime, we have developed tools and expertise to execute these extensions successfully for our customers as well as for us.

As we compare the initial payment activity activity from these loan modification to our normal course extensions or past natural disaster deferrals. The current customers are performing slightly better than our past experience.

Connectivity is driven by government stimulus unemployment benefits and rational consumer behavior as consumers continue to save more and pay down their liabilities.

The rate of customers asking for another the deferral isn't along with our expectations as unemployment levels remain elevated and our strategy, which was to provide 60 day pain relief versus longer term modifications. We believe this strategy benefits the customer from a financial standpoint and provides the opportunity for our servicing agents to communicate.

Our customers more regularly to ensure the modification is suitable for each unique situation.

Continuing to slide 14 to cover delinquencies and losses.

Versus the prior year quarter early stage delinquencies decreased 510 basis points and late stage delinquencies decreased 230 basis points.

Rick gross charge off ratio of 11.1% decreased 500 basis points from Q2 last year.

Our recovery rate, which includes metal and non metal proceeds bankruptcy and efficiency sales was 45.7% in the quarter.

The net charge off ratio of 6% increased 40 basis points from the second quarter last year.

Net charge off rate was impacted by lower gross losses do referrals and in activity marketing as repossessions were suspended for most of the quarter reducing auction sales.

In June recoveries came back from both a price and volume standpoint, the Manheim index hit a record high of 149.4 up 6% year over year.

In July towards the third quarter, our expectation is that gross losses will continue to improve compared to the prior year and our recoveries will improve in the second quarter auction activity normalizes and values remain elevated.

Turning to slide 15, we detailed lumpy loss and recovery rates year to date versus prior year.

As you can see we started the year in great position in both gross charge offs and recoveries gross charge offs continue to trend down during the second quarter and <unk>, 8% in June.

Recoveries were in line with 2019, and then Troughed in April at 32% the sharp rebound to pre covert levels in June reaching over 62%.

Combining the two the resulting net charge offs increased in April due to the lack of recoveries benefited from low losses and high recovery rate in June to equal on net charge off rate of 3% for the month.

In July these trends have continued although we have seen a plateau in Austin prices over the last week, albeit at historical highs.

Our expectation assuming no major step back your state closures is that these supply demand pricing dynamics persist in the beginning of the third quarter and trend lower throughout the remainder of the year back to 2019 levels.

As I mentioned previously there are many factors that can influence the price of used cars. Some are headwinds in summer tailwinds.

Now moving onto slide 16 to review last figures in dollars and the walks and prior year.

Net charge offs for rigs were effectively flat year over.

Losses increased 119 million and 33 million due to a lower recovery rate and higher average loan balances respectively.

These are more than offset by 153 million and gross losses, primarily due to covert.

Yes.

Turning our attention supervision and reserves on slide 17.

But the ended the second quarter the allowance for credit losses totaled 5.9 billion, increasing 400 million from the first quarter, which represents an allowance ratio of 19.2% at the end of this quarter.

In regard to the reserve walk the allowance increased an additional 436 million due to the economic factors in the quarter.

Merely as a result of the macro outlook worsening from the first quarter.

The allowance decreased 36 million due to mix and lower volume.

The difference in overall ratio of 19.2% versus our estimate of 17.8% from the last quarter is primarily driven by the continued deterioration in the macroeconomic outlook and not based on the performance we have observed in the second quarter.

The cumulative increase in our allowance for credit losses since the end of 2019, including the day when they want impact is nearly $3 billion.

As a reminder, our Cecil methodology uses a three year reasonable unsupportable forecast period, and several economic scenarios with varying degrees of potential outcomes and stress, including the impact of of Coca 19.

The key economic variables are the largest impacted the reserve include unemployment, the Manheim index and H.B. I.

Our baseline economic scenario was based in the latest consensus forecast, we had available at quarter end the assumptions worst steep drop in these key variables in Q2, followed by a recovering the second half of the year supported by reopening of the economy and the government stimulus programs.

The primary economic scenario assumes that peak of unemployment in Q2, 2020 of nearly 15% fall by rebounds, a 10% by the end of 2020, and a slow recovery to 8% by the fourth quarter 2021.

Our allowance does not have seen any benefit from further stimulus package or the government is currently evaluating.

The potential outcome of these variables remains wide and the visibility in the direction of the economy is still very limited going into the third quarter. We will continue to monitor and track. These key economic variables as well as any new stimulus programs and their impact to consumers and our portfolio.

The overall allowance will depend what level of originations in asset balance the macro outlook and portfolio trends, including the rate of loan modifications.

Moving to slide 18 to cover Cecil by asset designation.

On the slide we have provided the seasonal reserve broken out by TDR versus non TDR balances.

As we just reviewed our seasonal methodology relies on various models and assumptions to forecast lifetime losses of the portfolio based on an economic forecasts and other relevant variables.

The coverage rates between TDR and 19 yards and the typical difference between the two classification has changed due to the level of deferrals in the portfolio.

Based on the guidance from our regulators on cobot related modifications. There are significant portion of loans that would have been classified as a TDR under normal rules that are still classified as non tdrs.

Despite the reclassification that has obviously youre this population of loans at a similar coverage rate as a TDR loans at our models to pick up.

Pick up the number of modification as a flag for increased risk.

As such the non TDR covered rate has increased a 180 basis points from the previous quarter TDR coverage rate has come down from the previous quarter as the mix and performance of seed yards have improved however coverage remained above 26%.

The TDR balance in the quarter did increase approximately 400 million the first increase in TDR balance since 2017.

Overall, we believe our reserve as appropriate at 19.2% given the level of uncertainty in the market.

Our reserves as of the end of the second quarter represent approximately 90% of the federal reserve severely adverse scenario, we fast losses.

Using the other income category from shoes as most recent 2020 results.

As we discussed last quarter. The reserve is heavily dependent on them. Among other factors include the mix of our portfolio recent portfolio trends the growth or decline of the balance sheet and ultimately our view of the economic outlook at the end of each period.

Turning to slide 19.

The expense ratio for the quarter totaled 1.8% down from 2% from the prior year quarter.

Our operating expenses were slightly down versus the prior year quarter, primarily driven by lower repossession expense offset by cobot related expenses.

Finally, turning to slide 20.

Our capital remains robust and in excess of our internal targets. Our seat you one ratio for the quarter was 13.4% down 40 basis points versus the first quarter of did your share repurchase activity and the reserve build for expected loan losses.

We believe this level of capital is more than adequate to withstand a severely adverse scenario, it's still remain above post stress minimums.

During the quarter, we repurchased nearly 5 million shares prior to the federal reserves announcement of an interim policy suspending share repurchases for all banks.

Based on the interim policy, we have suspended share repurchases until we receive approval or further guidance from the federal reserve.

As we previously announced in a joint press release with SHUSA based on the interim Federal Reserve Board policy and shoes as expected average trailing four quarters of net income as he is prohibited from paying a dividend third quarter 2020.

Although our standalone trailing income is sufficient to declare unpaid dividends in the quarter as he is consolidated into she says capital plan and therefore subject to the interim policy that utilizes she uses average trailing income to determine the cap on common stock dividends.

She used to has requested certain exceptions to the interim policy. However, the timing and the outcome of the request is uncertain.

We do not currently split expect to declare or pay a dividend in the third quarter 2020 pending approval. If she says exception request.

As the economic backdrop and capital distribution policy revert back to normal we're confident we'll be able to maintain the momentum we have established over the last 18 months and returning capital to shareholders.

Our our strong capital and liquidity ratios are indicative of our balance sheet strength, which will serve us well as we navigate this challenging environment.

To conclude we do see signs for optimism in the market and our current originations. However, we're also cautious of the outlook remain vigilant in monitoring the risks that may arise.

The outlook for the economy is still very uncertain and the key variables impacting our business will remain volatile in the near term.

We'll remain disciplined in our approach conservative in our underwriting and continued to be good stewards of capital.

We are confident that we have the appropriate liquidity capital and resources to successfully manage the ongoing situation and assist our customers they're committed to our long term objective by focusing on risk adjusted returns servicing assets effectively while leaving capacity for opportunistic strategic initiatives.

Before we begin today I would like to turn the call back over to Mahesh fresh thinking of having a in somebody the challenges we faced since the beginning of the pandemic kept that's without relationships.

This model them the resiliency of our employees.

However, we continue to push the business forward and we are hopeful for a quick recovery you feel good about the quality of the loans and leases we book since the pandemic, we've been able to retain and improve our market share in certain segments I'd be a confident that the relationships. We have the Dod below the national accounts sales team have had been determined to their efforts to maintenance service, though.

For all 15000 deals we have across the country.

Operationally, our service fee and connection functions of proven that the adaptable and can perform at a high level under severe stress. The next few quarters, we fully expect an increase in delinquencies and losses as a fall then its programs and stimulus packages expire.

However, we are also confident in our operational DEFINITY in capacity to serve our customers that had to potentially deterioration in credit.

Underpinning our operations as a very robust balance sheet with a significant level of total loss about this.

Robbing capacity, including capital them to vote, which gives us confidence we were the most from the crisis in a position of strength.

With that I'll open up the call for questions operator.

Thank you.

Hello, We'll now open up the call for questions. Please limit yourself to one question and one follow up question. Thank you.

[noise]. Our first question is from John Hecht with Jefferies.

Morning, guys and thanks very much for taking my questions. First one is just kind of getting handle on the 19.2% allowance level.

Yes, maybe can you give us context of.

Well you losses were slow until 2000 <unk> into Q losses in the 2009 to 2011 period.

And yeah, well I guess, that's that's the point number one question number one is.

Context, the level of sort of like that.

Compares to cup higher losses.

Hey, John Good morning. Thanks for the further question I think the answer your first question on loss through the last crisis. We peaked out of just over 12% on I think bleed into 2008 from a net charge offs standpoint, but I want to caution you on trying to compare this situation too.

Financial crisis, both from a macro standpoint, as well as are our our portfolio itself back in 2008, who are much deeper credit portfolio didn't have any leases. We didn't have any of the Chrysler origination requests are prime originations.

And we've talked a lot about some of things we've done from a risk management perspective, our focus on risk adjusted margins over the last several years and some of that you've seen our portfolio performance to this point, but I would caution youre comparing the losses from 2008 2009 to one or more facing.

Okay.

As far as a 19.2% I think we did mention that were 90% from this effect severely adverse scenario.

We feel that adequate from off from a couple of standpoint for the losses going forward.

Okay.

Hello can be Andy.

Yeah, sorry, John be <unk>, the 19.2 profits to an 8.3 person down your lives lost snake, maybe to get the average.

Weighted average life, so that's in our estimate and kind of reasonable.

Coverage right.

Okay.

Let's be clear that 8.3 was that.

One of the average over the next.

18 loves 24 months or.

But you wouldn't be applying for this year.

Yes, that's that's average, though they stick to have the unrealized loss rate taking over the life of the months. If he said as have after the life of loan is about 2.3 is.

De Eightpointthree translates to the annualized version of like 19.2.

That's very helpful. Peggy among quick follow up is you live in the mix change you know.

So with underwriting changes and so forth.

What should we think that will trends all else equal over the next deal.

Number three quarters.

Yeah, absolutely yield the yields during our NIM story I think is a continuation of what we've looked at over the last several several quarters.

And there's a couple of new things that I'll mention here in a moment, but if you go back and think about 29 team vintage we've talked a lot about the 2019 ventured on the Nonprime side being a really strong credit quality vintage was cut which comes with lower yields lower NIM, but hopefully better risk adjusted margin. That's it that's our belief.

Also from a NIM standpoint, and yield standpoint, as lease becomes a bigger part of the balance sheet, it's still growing that mix that we've talked about in the past that trend will continue.

We also talked about the Tcs portfolio acquisition, the gateway portfolio acquisition that we made at the end of 2019, you're starting to see some of those impacts come in or 2020.

Yes.

This quarter couples of new items that I think are worth mentioning that will continue the trend.

The next few quarters is around the lease expense, we've talked about lease expense really being hurt bye bye.

Two things one is the overall lease liquidations in the quarter compared to lease liquidations. Prior year. So we we liquidated 8000 units less this year that we did in 2019, which is about an 18% drop off.

So that will improve as we go forward that that's definitely you're seeing in Q2 leased depreciation expenses I mentioned is based on our view based on a couple of different forecast of our then level lease portfolio and the expected residual values for that portfolio going forward.

And we update that monthly and it's usually based on a 30 45 day lag and so what you're seeing it from a depreciation expense now.

It is you know forecast from April and so I expect that to continue to improve but that will be pressure compared to the to the prior year and their specific to this quarter. We often mentioned that we did book a accrued interest reserve that's on top.

Diesel reserved around accrued interest as our delinquency improved base on the level of deferrals for accruing more interest. So it's prudent for us to take a reserve on that.

That extra accrued interest that was about 40 basis points on our Ricky yield the impact of bad debt reserve.

So depending on the level of extensions and level deferrals going forward you could still see some of that pressure and then prime loans, we've talked a lot about prime loans and how those pertaining problem loans.

From the Chrysler business.

We did execute an off balance sheet securitizations trying to optimize those who plan to do that was going forward. If we're successful and selling off some of the prime assets and you'll see an uptick in our and our.

But that's kind of the story around them.

Great. That's very helpful color appreciate it thanks guys.

Well take our next question from Betsy Graseck with Morgan Stanley.

Hi, good morning, Thanks for taking my questions I guess, coupled one just to keep also what was just being discussed.

The residual value expectation you have this quarter, we because of effectively beginning its a quarter outlook for used car prices, whereas as we look into next quarter that should reverse given your outlook for used car prices that chair summary.

That's a good morning, I I think it will improve you know I think he used car prices, it's hard to extrapolate what we've seen in June July and say, that's going to be the new norm going for similar to how we talked about it in April we gain we talked about it at the end of Q1, we said, it's hard to extrapolate the big drop.

Top off we saw in April we shouldn't take that Ford Here's kind of working in the same way, but in the opposite direction, we shouldn't take the big increase that we saw in June and continued into July and say, that's going to be our new norm. So the least depreciation takes a longer term view, obviously most of our leases or 36 months and so you're trying to predict.

Those leases come off maturity. So I do think it will improve you know as we updated going forward, but it will be heavily reply of the lines on the used car indices.

And then I just since the second question is how offline to dig into some of the delinquency staff you were discussing on the call as you've seen the folks move out as forbearance I think you mentioned, 60% or retain 20% or asking for another extension, maybe should let us know about how long that extension.

It's just that just another month or a couple of months and then 20% or in Acs gas. So wanted to understand that inactive percentages that just normal you would expect that were what he thinks going on there.

Yeah. So the 60 2020 is inaccurate affectionately to what we've seen over the past two months. The thing is we decided going into the pandemic could be we're gonna give our customers 60 day extension from the get go and some of our competitive decided to go long lived with need gone to 60 gave out and therefore, when they come up for renewal you're expecting something.

Ascended to them, obviously due to want to be we extended.

The good thing about the portfolio, that's a that that they've got extended as opposed to let's say hypothetically go current and non delinquent customers versus what we normally you do.

You know by rate so what we normally see enough advanced programs. So the Mexico around we'd be another 60 days and then we have the agrees and see guideline that says it basically what allowed to go through December all until the end of the all good crisis.

Whenever that's declared so that's the general idea is that we continue to the SEC extend these customers with each time the extend them be do you know we have another point of contact with the customer and they call. It ahead, you have a conversation with them, we have a discussion with them and depending on a on a on they need we we'd be.

Extended so that's that's the dental plan is to stay in before that from an extension program onto a.

You know you've gotten a guideline from the agencies all of you get all the crisis is officially declared a you know.

Two and then on it.

And on the 20% such an act is you know these are people who had.

Applied for and got Forbearance. Initially so you know it seems odd that they wouldn't want the extension if they needed that she could you give us a sense as to why you think that's going on and have you ever seen anything like this in your in your prior.

Ah forbearance programs.

Oh, we havent, though.

You know we do.

Prior to the pandemic, we were doing some of the ingredient 30000 extensions a month. So we did see meat and as I said the to the sample the top of the different the depopulation degree extending right. Now is just has a much higher much much much more speed of credit quality. So when he talked about the inactive extensions, we really need to.

Clients. He maybe see a couple of them all months Apprenda before we decide what it is that machine, but the overall effect of the extension program is a high feeling great. The ones that are not being a basic me either opting to extend.

Or are not being in which case, we need to go back and get another couple of months data before we figured out whether it be though these are just chronic delinquents a lot, but the other important thing that we've noticed is that there has been.

The auto continues to rank high on the payment hierarchy. So that does the trend of the if we're continuing to see and there we have sort of writing that right now because the because there is obviously a higher lines and that demonstrated both by the by the by what you're seeing with extended accounts and the demand and used vehicles.

And that he knew want one more thing that I think the 20% that we're in active it's hard to assess exactly why they remain active but as we compared to our experience in the past. It is in line with Rx expectations you have to lumber.

Fills that we gave out the majority of them more customers, who were current and and or had never received an extension in the past. So they were proactively seeking some kind of.

And the fact that they haven't called US yet tells us either that day, just missed a payment or they plan to make the payment coming out because they know how to get a deferral from us giving them the tools and the access to us if they needed that they know they can do that can reach out.

[laughter] Kim.

Well take our next question from Moshi arm Bush with credit Suisse.

Great going from us.

Shows.

He in terms of <unk> discussion on deferrals.

How does that relate to the TDR. Each accounts. He will then choose would there be torches.

Because the koby crisis, they don't get she'd yard.

Or you know I guess, the 20% that is asking for another extension probably they treated.

So the rule on T.D.R. and a non CDR is basically if their account was less than 30 days past due at the time, we started our pandemic release, which and for US was early in March.

If they were less than 30 days past two didn't pass due and received a cold weather related.

Deferral will not be classified as TDR as long as that relieved as short term in nature, which is defined as six months in nature. So the folks who get a second deferral that came in June it really depends on their delinquency status going back to March.

That will continue to be the case as Matt mentioned through the end of the year as long as they stay within six months of relief.

Okay.

Right and how should we just wanted to kind of today, Oh, sorry, sorry.

Because there's one more thing to add to that maybe something that we mentioned in our prepared remarks switching even though that there are classified as non CD artists from an accounting standpoint, because they have received a modification we are increasing our coverage rate on that population, even though they're not classified as a T.

But in any technical you're doing that on anything suit she shops in any case because your established serves hollister.

<unk>.

That's not what's right yeah.

Yeah understood in terms of the yacht inches above interesting from outlook I guess.

You know <unk> comments about about the the excess kind of excess depreciation if you will lease portfolio I guess it feels like bumps should I mean, it looks like that was a fairly significant factor Q2, you know debt.

Just the absence of not should be even something of a couple of war.

You know more substantive improvement kinda because net interest income that that a thought alone accounted for.

Most of the decline I guess and I, you know and.

I understand thinking that that there's going to be a moderation.

You know you used car values as the year comes on but I guess since we think about this third quarter with that lag you talked about I mean should it be reflective fleets.

You know what machine Kinda currently has the next few weeks.

Yeah, I think that's I I think that's correct.

Just.

Caution on just the level of uncertainty when used car prices and you can just see during the quarter. The results. The difference between April May and June was pretty stark and so it's just a cautionary forecast for us on weather residuals improved or not and I as I mentioned I do think they will improve.

Just to the degree of how much of the question Yeah. I mean, that's basically the the used car prices like now as you know supply demand issue more than anything else. We are beginning to see a lot of demand obviously for U.S GAAP basis, I don't have the supply side. It's been it's been suppressed because you know there when already possessions. There was limited supply into the wholesale auction market auction houses.

As a shot for a good you know a good beat over time. So so I think it's just that mismatched, that's kind of playing out.

Understood Thanks very much.

Well take our next question from Rick Shane J.P. Morgan.

Hey, guys. Thanks for taking my question I'm looking back at some old slides and where you show.

Kim will work on gross and cumulative net loss rates.

We think about the current vintage years should the way we look at the been to cheat the debt.

As opposed to sort of the linear build of losses, there's a flattening related to forbearance and what's going on right now and then there will be substantial steepening in the back half.

I think that that's probably obvious what what I'm curious about is when you look at the life time loss rates, where we're really going to come out on the current vintages versus a call it 15 or 16 vintage.

Morning, Rick Thanks for the question I think the.

Your question.

Understand it Ah, but it's very hard to answer it given the level of uncertainty in the market. We mentioned that we're very happy with the current originations that we've seen over the last couple of months and into a into July.

You mentioned the competition kind of switching away at the beginning of the quarter and kind of coming back at the end, we were able to tighten our credit underwriting grow our share and add margin, which was which is a great combo.

I won't last very long, but for now we're very pleased with the originations that we're booking.

This quarter.

So the loss profile of that given our underwriting approach is better than what we saw in 2016 in 2017 and is again a continuation of what we've done relieved at the beginning in 2019.

Yeah, I mean, let me just let me just laid out in the context of three benches is right. The dominate our portfolio today 18 1920.

Does that that constitutes the majority of our outstandings.

Austin Threepls vintages 19, you know was a really good been does 18 was maybe slightly worse than 19 of less than 19, twenties, probably better or at least equal to the nike's into just given the credit characteristics of the loans at the booking right now.

Good question becomes.

Were they have even did it the question becomes how quickly do you take the losses. So it really bad been busy with frontload, the losses and pick them into first quarter they'd be maybe 24 months and there's the rest of the time it kind of you know trends towards whatever the me what happens and almost like sort of a reversion to mobile. So that's what that's the difference between a bad because in a good vintage of how how front loaded because a lot.

Losses yet.

Oh, we're very confident about 19, they confident about couldn't be and two and 18 years already paid bossed. Its peak so right now the way we look at it is.

Once the once underneath programs come off and employment comes back hopefully have you begun to see customers behaving normally then you'd actually begin to see the COO losses in the portfolio and obviously, some you know the PDR treatments and banking, which as I see two is actually a good thing because it it it looks that extension that gives it a treatment.

Maybe between non beauty out in PDR, So we're not completely treating a an extended loan.

Rich.

Not fully treating of the PDR extended longer.

So you get some beneski by virtue of the fact that it's been extended.

So we will begin to see some normalizes normalization of losses, but a family said to be inherent credit quality of will walk you booked and ideally.

Twinkie essentially over the last 18 months has been superior to any of the by vintages.

Got it okay. So I think what I would take away from that is 20 isn't vintage being constructed eyes wide open to the environment.

18 was a vintage that was created a more competitive environment, but the reality is it's fairly seasons. It's fairly paid off 19 was probably a good vintage from an underwriting perceptive buddies eating into a more uncertain environment and so.

So probably variance versus whatever your plans all right now over the next six to 12 month has to do with the performance. The 19 vintage is that where we should really be focused on sort of the plus minus.

Yeah, I think I think thats what the.

Great. Thank you got so much.

Okay.

Well take our next question from Rob will packed with an anonymous research. Please go ahead.

Morning, guys.

Back in April you highlighted a more cautious approach to underwriting given the environment at the time I'm looking at things now there's been a lot of.

Tom the data points still a tremendous amount of uncertainty so given all those changes the moving parts how should we think about the approached underwriting now and any changes you put in place there.

When Rob Thanks for the good question I I think it's still prudent for us to take a cautious approach similar to what we discussed in April we are seeing signs that things are improving but there's a lot of signed they give us a lot of caution that we should be very diligent in our and our underwriting.

Mentioned, there's a few times, we have to appropriately price for the risk that we put on our balance sheet and they have to monitor our risk adjusted returns. So for now we still continue to be very cautious we're going to be very disciplined in our underwriting approach.

And utilize all the different tools that we do to assess assessment. So I think you'll you'll continue to see that until we get further clarity on me on the market.

Okay. Thanks, you you're just wanted to ask about competition on the end cap. You saw you know there were some new tracking offers out there is your percent 80 or 84 months since those kinds of losses in that level of competition means to you an f. CIA from here.

Yeah, I think for US you know the offers in the market that you're referring to are generally exclusive to us to the Chrysler capital and so therefore, too and that's driving consumer demand for new vehicles and those consumers are looking for those Europe are saying offers.

As you mentioned you seem to have somewhat tail off a little bit throughout the quarter, but are still predominantly driving the consumer demand. So long as those Ics offer the exclusive to its across their capital we're gonna get.

Taken our penetration rates with that.

Okay. Thank you.

And ladies and gentlemen, this will conclude today's question and answer session that well now turn the conference back to <unk> I do that for I don't comment.

Oh, thank everyone for joining the call today and for your interest in Santander consumer <unk> Investor Relations team will be available for follow up questions and we look forward to speaking with you again next quarter.

Ladies and gentlemen. This concludes today's conference. We appreciate your participation you may now disconnect.

Sure.

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