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Santander Consumer USA Holdings Inc  (NYSE:SC)
Q1 2019 Earnings Call
April 30, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Santander Consumer USA Holdings First Quarter 2019 Earnings Conference Call. At this time, all parties have been placed into listen-only mode. Following today's presentation, the floor will be open for your questions.

(Operator Instructions)

It is now my pleasure to introduce your host, Evan Black, Vice President of Investor Relations. Evan, the floor is yours.

Evan Black -- Vice President of Investor Relations

Thanks, Lou. Good morning and thank you for joining the call, everyone. On the call today, we have Scott Powell, President and CEO; and J.C., CFO. Before we begin, as you're aware, certain statements made today such as projections for SC's future performance are forward-looking statements. Actual results could be materially different from those projected. SC has no obligation to update the information presented on the call today. For further information concerning factors that could cause these results to differ, please refer to our public SEC filings.

Also on today's call, our speakers may reference certain non-GAAP financial measures that we believe will provide useful information for investors. A reconciliation of those measures to US GAAP is included in the earnings release issued today, April 30, 2019.

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

And with that, I'll turn it over to Scott Powell.

Scott Powell -- President and Chief Executive Officer

Thanks, Evan. Good morning, everybody. We will do the usual drill this morning. I'll run through the first quarter highlights before turning it over to Juan Carlos for a more detailed review of the financials and then we'll come back for Q&A together.

So, let's start with page 3 in the presentation and I'll hit some of the highlights. We are very happy to have a good start for the year. We're building on a really strong progress we made in 2018 as we continue to execute our strategy. You'll see that net income totaled $248 million, up slightly year-over-year. Earnings per share is at $0. 70 per share, up 3% year-over-year. And our return on assets was 2.2% and our net charge-offs were 8. 6%.

During the quarter, we completed our inaugural $200 million share repurchase plan. We're declaring a $0.20 dividend for the first quarter. And we're looking -- and looking ahead, we expect to continue to work toward a more efficient capital base, working toward higher levels of distributions versus the prior year. We'll have more details on our third quarter 2019 to our second quarter 2020 capital actions. In line with the timing from prior years, we'll be doing that in June of this year.

Our strategy is continue to focus on dealer experience and pricing, and that led to a strong start to the year, with an increase across all loan channels with a bit of softness in leases. Our total originations for the quarter were up $7 billion, up 10% while maintaining our pricing discipline.

On Chrysler, our quarterly penetration rate was 31%, which compares to 28% a year ago. Our origination numbers also include $1 billion of volume through the SBNA flow program, which we're very happy about.

And regarding originations, one item I'll highlight is our improved efficiency around how we handle in-house contract inventory and days to fund those contracts. Compared to last year, we've seen a significant reduction in inventory levels as well as an improvement in average days to fund contracts across channels. Thanks goes to our funding and credit teams for driving these results. And this is an important step forward in improving our dealer experience.

On funding, our ABS platforms continue to demonstrate strong investor demand, with $2.9 billion in loan ABS in the first quarter. And in April, we did $1.2 billion in lease ABS, which is the third transaction from this newer lease shelf.

Importantly, on credits, our 30 to 59-day delinquency ratio decreased 50 basis points year-over-year and our 59-day-plus delinquency ratio decreased 20 basis points year-over-year. As I said, net charge-offs were 8.6%, which was up 30 basis points compared to a year ago.

Recoveries remain strong. Our auction plus recovery rate was almost 56%, which is up 90 basis points year-on-year. And again, importantly, our TDR balances continued to decrease. They were $450 million lower compared to the prior quarter.

Like everybody else out there, we're keeping a very close watch on all the macroeconomic and consumer trends. I think you all know that job creation, consumer confidence, GDP, all remain very strong. So, we remain pretty optimistic about the current state of the economy and the consumer and also going forward.

New vehicle sales this quarter were pretty flat to down a little bit. But used car vehicle prices remain strong. Depending upon which industry you want to look at, they were up kind of a range, 1% to 7%, quarter-on-quarter. The experts in the industry think, for the full year, used car prices could be down a little bit compared to last year.

Lastly, we'll continue to optimize our current relationships, while also pursuing new opportunities in the market, which we feel leverage our strength and scale. We are focused on doing what's best for our customers, employees and shareholders every day.

And so, with that, I'll turn it over to Juan Carlos.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yep. Thanks, Scott. Good morning, everyone.

Let's turn to slide 4 for some key economic indicators that influence our originations and credit performance. So, building on what Scott said, the overall macroeconomic environment remains supportive of our business. Consumer confidence remains high and unemployment levels continue to be at historic lows.

So, while we are going through a prolonged economic expansion that might warrant some caution, these macroeconomic factors continue to point to a resilient consumer lending environment.

With Q1 now behind us, industry experts are forecasting only a moderate decrease in new vehicle sales for 2019, which is again indicative of a stable market.

On slide 5, there are a few key factors that influence our low severity and credit performance. Our auction recovery rate, which represents all auto-related recoveries from the auction lanes, is 50%, up from 46.8% during the prior-year quarter.

The recovery rate, which includes non-metal proceeds, bankruptcy and deficiency sales, was 55.9% in the quarter compared to 55% the same quarter last year. Additionally, nonprime industry securitization data, including net loss and delinquency trends, have remained stable compared to last year.

Turning to slide 6 for origination trends. On RICs, we've had a good start to the year. Core loan originations increased 14% in the quarter compared to the prior-year quarter.

Chrysler capital loan originations increased 23%. They've been strong -- we've seen a strong growth across both prime and nonprime. In particular, we expect the SBNA platform to be steady around $1 billion per quarter for the rest of the year.

In our prior call, we highlighted the importance of tax refunds for nonprime originations. By the end of the first quarter, average refunds per individual were almost in line with the same period last year, but total refund dollars were down approximately $6 billion. We'll continue to monitor during Q2.

Switching to lease originations, volume decreased 6% versus Q1 last year. We're expecting stronger lease originations during the quarter, but we have a better outlook for the rest of the year.

Looking ahead, we must remain disciplined with respect to the risk return profile of our nonprime originations and we also expect to continue to support FCA prime loans with our SBNA program, while maintaining a strong presence in lease.

Turning to slide 7, our average quarterly FCA penetration rate for the quarter was 31%, up from 28% in the prior-year quarter. We continued to optimize our full spectrum lending and servicing platform across loans, leases, floor plan and third-party services.

Dealer floor plan balances increased quarter-over-quarter as dealers ramped up their floor plan utilization in Q4. Going forward, we do expect dealer floor plan balances to continue to trend upwards. The floor plan relationship brings value to both SBNA and SC as the assets are booked at SBNA in part of our overall FCA offering.

During coming quarters, we aim to build on the progress made in 2018 by remaining focused on optimizing our relationship, continue to drive improvement in FCA dealer satisfaction scores and refocusing our efforts on loyalty programs, collaborating with FCA to drive another strong year of sales.

Turning to slide 8. The Service for Others platform generated $24 million in servicing fee income this quarter. In addition to those servicing fees, $6 million of SBNA origination fees show up in our fees commissions and other line item.

During the quarter, we added $1 billion in originations to the SFO platform via our agreement with Santander Bank. Despite this addition, we saw overall SFO balance trend down slightly as our SFO book pays out faster than our retained portfolio.

Moving to slide 9, we'll review our financial performance for the quarter. Net income for the quarter of $248 million is up from $245 million during Q1 of 2018. Interest on finance receivables and loans increased 7.3%, driven by higher average loan balances.

Net leased vehicle income increased 41% due to continued growth in lease balances. Interest expense increased 39% versus the prior-year quarter due to the increase in benchmark rates compared to Q1 2018.

Provision for credit losses increased to $551 million in the quarter, up $41 million versus the same period last year, driven by a combination of higher balances, lower modification levels and lower TDR balances.

Total other income was $51 million in the quarter and included $67 million of held-for-sale adjustments related to the personal lending portfolio, which is comprised of $109 million in customer charge-offs, offset by a $42 million decrease in the market discount.

Continuing to slide 10, versus the prior year, earlier-stage delinquencies decreased 50 basis points, while late-stage delinquencies decreased 20 basis points.

We move to the bottom portion of the slide for losses. The RIC gross charge-off ratio of 19. 5% in the quarter increased 100 basis points from Q1 last year. The RIC net charge-off ratio of 8.6% increased 30 basis points from Q1 last year. So, as we referenced last quarter, loan modification levels are lower relative to prior years, and less modifications impact delinquencies, charge-offs and lower inflows into TDRs.

Turning to slide 11 to review the loss figures in dollars. Net charge-offs for RICs increased $74 million versus prior-year quarter to $615 million. And I will briefly address the components of the walk.

Average loan balances increased more than $2.5 billion year-over-year, driving a $58 million increase. The $33 million increase is driven by higher gross losses due to a higher gross charge-off rate. $17 million decrease is primarily due to better recovery environment.

Now, turning our attention to provisions and reserves on slide 12. At the end of Q1 2019, the allowance for credit losses totaled $3.2 billion, decreasing $64 million from last quarter, which represents an allowance to loans ratio of 11% at the end of this quarter.

I'll now go over the components of our reserve walk. The allowance increased $235 million due to new originations in the quarter. $17 million increase was due to unfavorable performance adjustments, but these increases were more than offset by fewer inflows into TDR migration, which drove a benefit of $9 million and $307 million decreased due to payoffs and charge-offs.

Let's now turn to slide 13 to discuss TDRs in more detail. TDR balances, Scott mentioned, decreased more than $450 million quarter-over-quarter. As was the case last quarter, lower modifications led to lower TDR inflows and reinforced the downward trend in balances. This slower generation of TDRs could allow balances to trend lower through the rest of the year.

Turning to slide 14, the expense ratio for the quarter totaled 2.1%, down from 2.4% the prior-year quarter, which is important as expense dollars are relatively flat to last year with a strong growth in average balances.

Turning to slide 15, our liquidity position remains strong with total committed funding of more than $45 billion.

SC continued to demonstrate consistent and deep access to the capital markets, having issued $2.9 billion of new ABS transactions in the quarter, including two DRIVE transactions and one SDART transaction.

We also continued to diversify our funding through private financings and lender commitments, which totaled $17.7 billion.

Subsequent to quarter-end, we also closed a $1.2 billion lease ABS transaction, SRT. This is the third transaction since the inception of this new lease platform in 2017 and is important for funding diversification within the leased product.

Finally, turning to Slide 16, our CET1 ratio for the quarter was 15.8%, up from 15.7% at the end of last quarter.

Regarding our capital plan and proposed capital actions for Q3 2019 to Q2 2020, we expect to share those details following a similar cadence to prior years.

In terms of guidance, for the second quarter, my comments will be relative to Q1 and will include the impact of personal lending. We expect net finance and other interest income to be up 0% to 2% in the second quarter, primarily driven by higher loan balances and lower swap rates, but offset by lower starting lease balances given our Q1 originations.

Provision expense is expected to decrease $40 million to $90 million, in line with seasonal patterns.

We expect other income to be $15 million to $25 million worse, driven by normal seasonality of the Bluestem held-for-sale portfolio.

Operating expenses are expected to be flat to $20 million better.

So, that's with regards to our Q2 guidance. But also, last quarter, we provided additional guidance for the full-year 2019. And with Q1 behind us, we wanted to provide you all with an update.

So, for net finance and other interest income, we guided to mid-single-digit growth for the full-year 2019. With the lower lease originations that we experienced during Q1, we could experience some pressure if that trend continues throughout the rest of the year. Some of this weakness should be offset by lower rates. So, all in all, we still expect to be within the guidance range.

We continue to expect a mid-8% net charge-off ratio assuming relatively stable prices used car prices.

On the expense ratio, our outlook has also not changed. We expect the expense ratio to be stable around current levels of 2.1%.

Finally, we guided to a slightly better effective tax rate in 2019 compared to 2018. You will have noticed, our tax rate during Q1 was elevated as we incurred a non-recurring item related to a true-up in accruals for state taxes. With that, we now expect the 2019 tax rate to be slightly higher than 2018.

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

Scott Powell -- President and Chief Executive Officer

Okay. Thanks, Juan Carlos. So, just in summary and looking ahead to the rest of 2019, our priorities are the same priorities we outlined last quarter. We made significant progress to fine tune our pricing for risk models and improving our operational processes, which led to another solid quarter on originations.

Continuing into 2019, we've also been very focused on enhancing our dealer experience. And on capital, as I said before, we remain very focused on working toward a more efficient capital base and working toward higher distributions. And lastly, as I said before, we continue to push to operate at large financial institution standards.

So, with that said, let me go back to Luke, our operator, for questions. Luke?

Questions and Answers:

Operator

(Operator Instructions)

We will take our first question from Steven Kwok with KBW. Please go ahead.

Steven Kwok -- KBW -- Analyst

Great. Thanks for taking my questions. The first question I have, is just if you could provide any updates around the Chrysler capital relationship. And then, my follow-up question is just relating to credit trends, if you're seeing anything on the consumer side, the health of the consumer, anything that warrants calling out? Thanks.

Scott Powell -- President and Chief Executive Officer

Yeah. Great. Thanks, Steven. So, on Chrysler, our talks continue. As we said last quarter, they continue to be constructive and positive, focused on optimizing the existing contract that we have in place. I may have mentioned last time that those discussions have moved away from the sale of Chrysler Capital to Chrysler. I think that's the status.

Yes, on the credit trends, we're all very focused on looking for signs of change in the credit environment. Depending upon which source you look at, some people have pointed to some changes in credit card delinquency trends. With respect to the auto space, we don't really see an impact. There is a lot of focus on tax returns. And, it's true, the dollars of tax returns are down a little bit, 3%, and the average tax return is down a little bit too, but we don't see the impact of that on our payment rates or delinquency rates.

So, as I said last quarter, our radar is fully switched on and we look at a lot of detailed information around vintage performance, payment rates, roll rates. We look across the industry. We track what our competitors report. It seems like most of our competitors in the auto space are reporting lower delinquency and losses. So, I think the short answer to the credit environment is we remain very positive, especially with the macroeconomic backdrop we have. So, nothing negative to report. But, like I said, the radar is fully switched on.

Steven Kwok -- KBW -- Analyst

Great. Thanks for taking my questions.

Scott Powell -- President and Chief Executive Officer

You're welcome.

Operator

We will now take our next question from Jack Micenko from SIG. Please go ahead.

Jack Micenko -- SIG -- Analyst

Good morning. I wanted to just talk through some of the credit trends, maybe prospectively. You're growing the portfolio again. And with that comes the seasoning effect. I know you talked about sort of a mid-8s NCO rate going forward. But how do we think about -- your reserve ratio is down -- your allowance is down about 11%. Does that -- I know it's an output, not an input, but how do we think about the seasoning of some of this growth working its way through the portfolio as it relates to the absolute level of allowance and provisioning beyond 2Q?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. So, maybe first a word on the allowance ratio. So, you see that is down to 11%, but it's largely -- that drop in the allowance ratio is largely driven by the lower TDR balances, which, as we saw earlier, have continued to come down even more than we might have anticipated. If you look at the non-TDR component, that allowance ratio is actually fairly steady, OK? So, we feel good about -- obviously about that level of reserve.

So, with regards to the credit and how those get seasoned, I think we've talked about in the past about our 2017 vintage, right, and what we expected out of it. It's really performing the way we have discussed here in prior calls where it's coming in between the 2015 and 2016 vintage. That's continued to be the case. And now, we're starting to see the 2018 vintage come through. Because of the lower levels of -- lower level of modifications that we alluded to earlier, the losses on the 2018 might be somewhat higher on the early part. But over time, once again, we expect it to come down between the 2015 and 2016 vintage.

So, in that sense, we feel good about the trend in our vintages and the related allowance ratio.

Jack Micenko -- SIG -- Analyst

Okay. And then, when I look at the couple different spots in the slide deck, it shows a little more acceleration in above 540 FICO origination and portfolio and a little bit slower growth maybe below 540. Obviously, you're -- there's some SBNA flow impact to that, I assume. Is that also part of a broader strategic decision, as Scott, a couple of times in the prepared comments, you spoke about continuing to refine the risk pricing model? I'm just curious if that's strategic or if that mix change that we're seeing is just the influence of the higher-quality SBNA flow business?

Scott Powell -- President and Chief Executive Officer

Yes. There's a couple of things going on there. But to the first point, there's no change in strategy with respect to how we're thinking about the underlying mix in our portfolio. The incremental loans you see in the upper tier is really part of that flow program we have with SBNA where some of the assets fall outside of their credit buybacks that they've put in place because they define the underwriting criteria for those loans. And so, it's just a reflection of that. There's no change in strategy here at all across the credit spectrum.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

That's particularly the case as we transition from the group flow agreement to the SBNA platform.

Jack Micenko -- SIG -- Analyst

Got it. Thanks.

Scott Powell -- President and Chief Executive Officer

You bet.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. I wanted to come back to the TDRs because the decline was pretty impressive, but you mentioned that not using some of those modifications could pressure charge-offs. Does is it also -- obviously, as you kind of get rid of the TDRs, I assume there's some charge-off component in that as well. So, could you talk about the impacts of that on the measures that we see externally?

Scott Powell -- President and Chief Executive Officer

Yes. I think -- let me take a shot, Moshe. If I don't answer your question completely, just ask me a follow-up. Yes, the impact of fewer modifications really does just what you said, which is it has a negative impact on gross charge-offs because, essentially, what it does on a vintage basis is it accelerates some of the accounts we'd have charged off later. Right? Because we didn't modify them. They go to charge-off sooner. So, it changes the shape a little bit of vintage curve. We incur losses quicker. And then, those losses normalize over the course of that vintage curve. So, yes, it has the effect of higher charge-offs in the short term, positive impact on delinquency levels and then, yes, that direct impact on TDR balances.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Lower inflows into TDR.

Scott Powell -- President and Chief Executive Officer

Yes, lower inflows in the TDRs because we're not modifying the accounts.

Moshe Orenbuch -- Credit Suisse -- Analyst

Right. I guess, I also was just asking that some of the TDRs that are resolved are resolved through charge-offs and I'm assuming that that -- also both of those happening at the same time probably add to it a bit?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

They would follow a normal course. Actually, the TDR population has performed actually a little bit better, so a bit more seasoned. But I think what's most important here is the fact that those lower inflows could change the trend that we're expecting in prior quarters where we talked about TDR balances stabilizing right around this time. Because of the dynamics that Scott just walked us through, we can see this downward trend a bit longer.

Scott Powell -- President and Chief Executive Officer

Yes. And I think, Moshe, to your question, the amount of charge-offs coming from the TDR population is going down, even though we've got a larger 2018 vintage coming through. So, that will drive higher charge-offs, while those -- so that one is going down, the other one is trending up, if that makes sense.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Yes. And could you -- you had mentioned some things about the lease performance in terms of growth being a little bit kind of softer. What are the factors that could cause that to change? Like, maybe kind of flesh that out a little bit?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. I think just as a percentage of our -- our market share was relatively stable. But as a percentage of our financings, lease was down. So, it's just a softer quarter in terms of the percentage of lease financing. Looking ahead, we're trying to see a little better traction, whether it's weather related or anything else. We're starting to see a better traction early in the second quarter.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Thank you.

Operator

Our next question comes from John Hecht with Jefferies. Please go ahead.

John Hecht -- Jefferies -- Analyst

Thanks, guys. I'm just curious, it sounds like -- is there a tactical or strategic plan to engage in fewer TDRs? Or what's the reason for having less TDR accumulation on the '18 vintage?

Scott Powell -- President and Chief Executive Officer

Yes. The way I would describe it, John, is we are always -- so, there are fewer TDRs coming through because, remember, we had a pretty bad hurricane season in 2017, which kind of elevated the number of TDRs in 2017. That didn't recur last year. And then, we are constantly looking at optimizing our policy around assessing the consumers' ability and willingness to pay at the time we do modifications. And so, as we are more conservative with respect to that and do a better job with that, that has an impact on reducing modifications, which then has the direct effect of reducing the TDR -- inflow of the TDRs.

John Hecht -- Jefferies -- Analyst

Okay. And second question. I understand you may be limited in what you could talk about with respect to capital plans. So, maybe can you remind us what your target CET1 ratio would be and frame any kind of expectations for how long you'd want to get there and how you balance dividends versus repurchases in that regard?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. I think in terms of our strategy, it hasn't changed compared to what we've presented in prior quarters. Our capital target remains at 12.5%. We're higher than that. And what we've said in prior calls is that our objective is to continue to move closer to that internally set target and we'll do that through a combination of capital actions. And we just hope to do better to improve on the amount of capital distributed compared to what we did last year. So, as you can imagine, we look to shape what we would consider to be an appropriate dividend payout ratio and then consider where our stock is trading and everything else that should go into considering the mix between dividends and buybacks.

John Hecht -- Jefferies -- Analyst

Great. Thanks, guys.

Scott Powell -- President and Chief Executive Officer

You're welcome.

Operator

Our next question comes from Rick Shane with J.P. Morgan. Please go ahead.

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

Good morning, guys. Thanks for taking my questions. I wanted to circle back on the TDR issue as well. I'm curious -- look, one of the challenges with TDRs is it creates an accounting distortion. I'm curious if the decision that you guys have made is based on the TDR programs, the economics of the TDR programs not performing the way that you would have expected. And the reason I ask is because I suspect, under CECL some of that accounting distortion will actually go away. So, I'm curious if, going forward, perhaps it's a program you'll consider a little bit more aggressively again.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

No.

Well, I guess, maybe I'll kick off and you can clean up after me. Yes, in CECL, everything would be kind of essentially at lifetime losses depending upon which category it falls in. So, I think some of that distortion goes away because of it.

But to your comment about how conservative or not conservative we are with respect to modifications, we don't really see it that way. It's not something we dial up and dial down. It's more about getting more precise about identifying people that are most likely to reperform once we modify their loans. And so, we're constantly looking for ways to improve that. Sometimes, we exclude certain segments, sometimes we include certain segments based on our own analytics and historical performance. So, there is a set of regulation that requires that we assess a borrower's ability and willingness to pay prior to modifying a loan, and that's kind of what we're very focused on, is making sure we're doing that. And so, we don't really have flexibility beyond our own learnings with respect to what is actually going to perform and meet those requirements.

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

Got it. Yes. Because if you look, I think it's a powerful tool for you guys to help consumers. And so, it sounds like you're narrowing where that is available.

Scott Powell -- President and Chief Executive Officer

Yes. And that's exactly -- we have narrowed it over time, yes. But to your point, it's very important -- we want to help anybody we can help. We want to help consumers that have had some kind of temporary income disruption get back on track. The last thing we want to do is be in a position where we have to repo somebody's car and charge-off the account. If the person has the ability and demonstrates their willingness to repay, and that's why we want to make sure we're doing the right thing for consumers, and also live up to the federal regulatory requirements around ensuring that we have done the proper work around assessing whether the consumer has the ability or willingness to repay. So, that answered your question, I hope.

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

It does. Again, part of it is we're just trying to figure out the difference between the economics and the accounting here on how much that's driven the behavior and just whether that will shift and you very much answered that question. Thank you.

Scott Powell -- President and Chief Executive Officer

Okay, great. You're welcome.

Operator

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

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Good morning.

Betsy Graseck -- Morgan Stanley -- Analyst

A couple of questions on leases. J.C., I think during the prepared remarks, did I hear you right, did you say that you had thought that leases would have come in better in 1Q?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. Yes, they were down 6% year-on-year. We expected to originate more than that.

Betsy Graseck -- Morgan Stanley -- Analyst

Can you give us a sense as to what happened in the quarter and why you think that that will pickup us we go through the rest of the year?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. I think, like I said, it's just a matter of the mix, right? We saw, as a percentage of financing, the amount of lease was down. They went to loans. As we look ahead, we've seen a bit of normalization in early Q2, and that should normalize. The mix should probably stabilize a little bit as we look ahead. Okay? So, there's no specific amount. We're coming in from pretty high levels of lease growth year-on-year, but we should be able to originate more in coming quarters.

Betsy Graseck -- Morgan Stanley -- Analyst

So, when you think about the asset growth in total, did that hit what you were expecting in 1Q?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. It's not -- it's not far from what we were expecting.

Betsy Graseck -- Morgan Stanley -- Analyst

And then, as we think forward on leases, I would think that the used car prices and the strength there would help your customer base. I'm just wondering if that's an accurate statement or not.

Scott Powell -- President and Chief Executive Officer

Yes. I think, Betsy, in general, it does because the cars are worth more when they come off of lease. So, yes, it certainly helps. We adjust kind of those residual values based on future expectations. So, we're constantly looking forward based on expected values at the time the lease ends. So, there's kind of a, I don't know, call it, a natural shock absorbers that adjust over time. So, if the future says, the value of these cars are going to be strong, then some of that gets baked into the leases that we're writing today.

Betsy Graseck -- Morgan Stanley -- Analyst

Yes. That's what I was wondering. Would it be more attractive for folks to do leases as that occurs over the next quarter or two?

Scott Powell -- President and Chief Executive Officer

I don't know if (inaudible) attractiveness for a consumer. No.

Betsy Graseck -- Morgan Stanley -- Analyst

And then, just on the NIM side, I know in the guidance, J.C. mentioned Q-on-Q 0% to 2% up. And you highlighted, for the full year, you might be able to hit the mid-singles, but that's going to be a function of your ability to maybe mix shift your funding costs lower. Did I hear you right? Maybe you could talk through what kind of drivers or leverage you have on the funding side a little bit more in-depth?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. I think probably two opposing forces. One is being able to take advantage of what has been -- I think you and others brought it up last quarter how the lower rate environment should benefit us for the rest of the year. That seems to be materializing. Right? We now have a more optimistic outlook and even commentary from the Fed that would tell us that we can expect at least to operate to be at lower levels than originally anticipated for the full year. So, that's a positive. And then, the other opposing force here will be in terms average expenses, right? Making sure that our originations and average balances keep up for the rest of the year. Okay? So, taking advantage of the lower rate environment.

Betsy Graseck -- Morgan Stanley -- Analyst

Yes, OK. Just anything on the, like, funding side, swap side, would you go longer duration on the funding or shorter duration, anything there that you can share with us?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

No. So, think about it more this may. We are benefiting from the lower swap rate as we securitize. That's really when we really materialize this lower rate environment. One-month LIBOR hasn't really moved that much. That impacts more our warehouse lines. So, no, the term of our funding -- of our ABSs go with the assets. And we already -- if you remember, last year, we already extended our unsecured borrowings a fair amount. Okay? So, that part is already taken care of. It's really just continuing to securitize in line with our -- keeping with our originations, in line with our funding plan. And then, if Fed wants to throw a cut our way and lower LIBOR, that would be great, but we're not counting on that.

Betsy Graseck -- Morgan Stanley -- Analyst

Yes, OK. All right. Thank you.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes.

Operator

We will now take over next question from Mark DeVries with Barclays. Please go ahead.

Mark DeVries -- Barclays -- Analyst

Yeah. Thanks. Morning. I know, Scott, you indicated that the slightly lower average tax refunds and larger aggregate year-over-year decline isn't impacting payment rates. But I think Juan Carlos indicated during his prepared remarks it's something you're watching closely. Is it more for the potential impact to both loan demand and also maybe used car prices that you're kind of monitoring that issue?

Scott Powell -- President and Chief Executive Officer

Yes. First of all, when you look at the stats that the IRS published -- they just published them in total, right? So, if you look at the dollars, it's, obviously, a big dollar amount, and that's down 3%, which is still -- that 3% is still a lot of dollars, right? And so -- and then, when you look at the average tax refund, it doesn't look like it's off that much. I think the season to-date number is -- the average refund is $55 less than the year before. But that's obviously a big pool. And what we don't know is how that stratifies across the credit spectrum. Right?

So, in parts of our business, near-prime, subprime, deep subprime, we're not exactly sure what the tax return change looks like year-over-year. And so, that's why we've been -- our risk people have done a lot of analytics around, do we see any impact on flow rate, people carrying their delinquency status. Their 60 days delinquent, are they paying themselves; the 30 days delinquent, are they paying themselves to current. So, we put a lot of work into analyzing the payment patterns inside the delinquency buckets and we haven't seen anything so far. So, doesn't look like it's materializing there.

I think the place on the demand side where it has an impact is on new car sales more than anything because you see the seasonal correlation with tax returns as they come back. Less so with used cars. Yes, and keep in mind, the used car market is 2.5 times the size of the new car market.

Mark DeVries -- Barclays -- Analyst

Okay, got it. That's helpful. Yes, it does. And then, second question, your auction plus recovery rate had a 600 basis points delta year-on-year. Granted that was down from what it was 1Q of last year, but it had been almost flat in the last two quarters. Just trying to understand what drove that widening out again in that spread and kind of what we should expect going forward?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. So, the mechanics of the all-in recovery rate, that really bakes in -- it will vary from time to time, also depending on the time of year. So, it's hard to measure that delta consistently, if you will. I think what's important here is the -- yes, in fact, it seems like timing of debt sales can throw that delta off. So, the auction only recovery rate, the black line shows you the trend of what's happening at the auction. And then, the delta to the blue dot can be impacted by this more uneven event. But it's also up year-on-year.

Mark DeVries -- Barclays -- Analyst

The uneven event you referred to was more the timing of debt sales?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes, that's one significant one. Yes.

Mark DeVries -- Barclays -- Analyst

Okay. And how does that timing normally work?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

We make decisions on -- depending on the size of the target pool. We also refine our analysis -- we've been actually doing a good job of refining our analysis as to which pools might make sense to actually hang on to and continue to service for a longer period of time if we believe we can extract more value or going ahead and actually performing a debt sale at any point in time. So, it's not a scheduled sale (ph) throughout the year.

Mark DeVries -- Barclays -- Analyst

Got it. Thank you.

Scott Powell -- President and Chief Executive Officer

You're welcome.

Operator

We'll now take our next question from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. Your penetration ratio has, obviously, improved quite a bit from the past couple of years, but it's kind of leveled off in the low-30s area. Is that where you want it to be? Do you expect that that could potentially increase over time? Or you think is kind of the new expectation going forward?

Scott Powell -- President and Chief Executive Officer

We continue to work really hard on increasing our penetration rate with our partner. And we have talked almost every day. We worked very closely with them on what they want to do in the market for month-to-month and how they're going to do it. And as their preferred lender, we're working hard to help them sell cars. And so, yes, we would love to see it go up. There's a lot of things that need to fall in place to drive that. So, we are working really hard on it. And we've always got a -- the floor on all this is making sure we're getting paid for the risk that we're taking and that we've got the right profitability, given that we operate across the full credit spectrum. So, yes, it's a careful balancing act. But, yes, we would love to keep driving up that penetration rate and helping Chrysler sell more jeeps and rams and I love the new Gladiator personally. So, it's on my shopping list.

Arren Cyganovich -- Citigroup -- Analyst

And then, on the capital return, are you able to say whether or not you would expect to have a total payout ratio that would be north of 100% of your earnings?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

We haven't guided to that. So, we won't do that now. I think what we've discussed in the past is always reminding you that we have to fit within SHUSA's capital plan. Okay? And that continues to be the case this year. And that 100% payout ratio is what has been, let's call it, a rule of thumb for some competitors. I think I'll just repeat what Scott said earlier and what I think I mentioned as well. We want to continue to improve our capital distributions, get closer to that internal capital target of 12.5%. There is no set time to do that, but we definitely continue to make significant progress toward it.

Arren Cyganovich -- Citigroup -- Analyst

Okay. Just I guess touching on your last point there about the SHUSA ownership. I think in the 10-K, you had said something about, if you get to 80%, then that creates some benefits, frees up some room, I guess, for capital. Is there any way for them to increase their stake to 80% currently? Or is it just going to be from -- over time as you're buying back more of your stock that their position will increase?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. Everything that we're stating here today and what we manage, all the capital actions that we do here at SC and what we showed in the 10-K is the potential benefit that SHUSA and Santander could get if we cross that threshold of 80%. But what we manage here, obviously, is the capital actions that we can do in regards to whether it's buybacks --

Arren Cyganovich -- Citigroup -- Analyst

Are they limited at all, though, in terms of buying back -- their buying more of your shares?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

I would have to ask SHUSA. I don't know that.

Arren Cyganovich -- Citigroup -- Analyst

The CEO is actually on the call.

Scott Powell -- President and Chief Executive Officer

Yes. But I'm wearing my SC hat today.

Arren Cyganovich -- Citigroup -- Analyst

Okay, OK. Got it.

Scott Powell -- President and Chief Executive Officer

We can't comment on that one.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

SC, through the buyback program that we conducted last year, right, it was the initial, inaugural $200 million. Obviously, that increases SHUSA's percentage ownership of SC. So, that's one way of going about it, but the focus is on SC's capital actions.

Arren Cyganovich -- Citigroup -- Analyst

Right. Okay. All right. Thank you.

Operator

Our next question comes from Chris Donat with Sandler O'Neill. Please go ahead.

Christopher Donat -- Sandler O'Neill -- Analyst

Good morning. Thanks for taking my question. I wanted to ask Juan about the competitive landscape because, as we look at what some other bank CEOs and CFOs have said on earnings calls, it seems like, in general, the competitive landscape has actually eased up a bit, particularly on the bank side. But I'm wondering if that reflects maybe -- because most banks are more focused on prime loans that it's a little different part of the market and also Capital One did have some comments about the competitive intensity increasing. So, I don't know if you can just give us a sense of where you think the competitive landscape has shifted recently or if it's shifted?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes. We saw that. I think I might have read the same commentary than you did from our peers. I think it was a mixed bag for us in the market or in the space that we operate. The environment has been consistently competitive, whether it's our market share in the different channels, it's maybe up or down slightly, but there's no significant impact either. So, that's how we would describe it. Just consistently competitive.

Scott Powell -- President and Chief Executive Officer

And I would just add that the auto finance market is super efficient, right, because almost every transaction goes out for auction at different price points. And so, it doesn't surprise me that some people feel like competition dialed a little bit. But to Juan Carlos' point, this is always very, very competitive. I would say, we haven't seen significant moves in or out across any of the segments in the market. It's been steadily -- very steadily competitive.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. Thanks for that. And then, just as we think about capital ratios and what might happen in the future, any thoughts on CECL and impact from that? And I recognize you've got phase-in, things like that, but just anything you're expecting out of CECL?

Juan Carlos Alvarez de Soto -- Chief Financial Officer

So, repeat what we said the last quarter. We continue to make our preparations, especially to be running in parallel this summer. And as of right now, the preliminary analysis would indicate that we -- CECL -- you mentioned the transition period, et cetera, but it shouldn't, let's say, get in the way of our capital planning. Okay? Everything that we said to in response to the earlier question. So, we feel, obviously, good about the implementation of CECL with regards to our capital base.

I think there's still, as you probably know, this year's stress tests, HCR, doesn't include the implementation of CECL. And it won't for some time, but it's obvious that we will start looking at how -- when CECL is rolled out, we should think about our capital targets. Okay? But that's still analysis that is ongoing and we don't have a definitive answer yet.

Christopher Donat -- Sandler O'Neill -- Analyst

Okay. Thanks, J.C.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Yes.

Operator

And our last question comes from Vincent Caintic with Stephens. Please go ahead.

Vincent Caintic -- Stephens, Inc. -- Analyst

Hey, thanks. Good morning. Just two quick ones. So, the recovery rate has been fairly strong. Just kind of wondering if you have an update on how you're thinking about used car prices. So, I think, in the past, you were thinking about 1% down. Some of the other lenders are looking at more like 5% down. Just kind of wondering your thoughts there.

Scott Powell -- President and Chief Executive Officer

Yes. I would bet on flat myself. I think used car -- the new car side is -- car prices are hitting kind of all-time highs. And it makes used cars look much more attractive. We've seen that trend happening for a while. Again, there's a whole host of folks that report used car values. And if you look across all those people that report, the first quarter is up anywhere from 1%, I think, to 7% in the first quarter. I don't -- I personally don't see anything changing that dramatically the other way. The economy is strong. Consumer is strong. If some tariffs get rolled out, that could have a bit of an adverse impact on new car sales too. So, I don't -- I wouldn't -- again, you're asking me for forecast, I'd say flattish for the rest of the year, all-in. Maybe some upside.

Vincent Caintic -- Stephens, Inc. -- Analyst

Okay, that's really helpful. And last one, so the mix between leases and loans and a little bit of the softness in the leases, just wondering if there was any change to OEM support that maybe might have driven that and anything you can see in, say, second quarter or going forward that might change that mix going forward? Thanks.

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Could be. But we always work with our partners on, as Scott said, finding new ways to continue to whether it's sell more vehicles and then get the right risk-adjusted returns for what we book, whether it's a loan or a lease, OK? So, we'll continue to work about it that way with FCA and our other partners.

Vincent Caintic -- Stephens, Inc. -- Analyst

Okay, got it. Thanks very much.

Operator

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

Scott Powell -- President and Chief Executive Officer

Great. Well, thank you all for joining the call. We appreciate you taking the time to dial in and listen and ask questions. As always, our Investor Relations team is available if you have follow-up questions. Thanks, again, for joining the call and have a good day.

Operator

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Duration: 58 minutes

Call participants:

Evan Black -- Vice President of Investor Relations

Scott Powell -- President and Chief Executive Officer

Juan Carlos Alvarez de Soto -- Chief Financial Officer

Steven Kwok -- KBW -- Analyst

Jack Micenko -- SIG -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

John Hecht -- Jefferies -- Analyst

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

Betsy Graseck -- Morgan Stanley -- Analyst

Mark DeVries -- Barclays -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

Christopher Donat -- Sandler O'Neill -- Analyst

Vincent Caintic -- Stephens, Inc. -- Analyst

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