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Santander Consumer USA Holdings Inc (SC)
Q1 2020 Earnings Call
Apr 30, 2020, 8:00 p.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning and welcome to the Santander Consumer USA Holdings First Quarter 2020 Earnings Conference Call. [Operator Instructions]

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

Evan Black -- Investor Relations

Thank you. Good morning. To begin, I just wanted to say, on behalf of the team, thank you to everyone who joined the call obviously on short notice today given yesterday's events. We appreciate the flexibility and look forward to Q&A at the end.

So on the call today, we have Mahesh Aditya, our CEO; and Fahmi Karam, our CFO.

As you know, certain statements made on today's call may be forward-looking, and we encourage you to look at our risk factors and SEC filings regarding those statements. We'll also probably reference certain non-GAAP financial measures, and we believe those are useful to investors. And of course, we'll have a reconciliation of those to U.S. GAAP with the presentation we filed yesterday.

And with that, I'll turn the call over to Mahesh.

Mahesh Aditya -- Director

Thank you, Evan, and good morning, everybody. Once again, apologies for the glitch yesterday and thanks for joining us to review our results for the quarter.

Let me start by saying that our thoughts are with those who've been impacted by COVID-19. In particular, people who are sick and the medical professionals responsible for caring for them. Our sincere appreciation goes out to all those who put themselves in harm's way every day to deliver food, keep essential establishments running, drive ambulances, cabs and buses and make sure the company stays functioning. Many of these essential workers are our customers, and we want them to know that Santander is here for them. And I'd like to thank our call center colleagues who are at the forefront of this crisis and who made us proud by being there for our customers in a time of extreme stress, listening to them, showing empathy and a willingness to find solutions.

I'd like to draw your attention to slide three to review the critical measures we've taken in response to this unprecedented crisis to support our employees, our customers, our dealers and the communities in which we operate.

Starting with our employees. More than 95% of our employees are working from home. Thanks to massive effort by our information technology team and our operations leaders, thousands of laptops were deployed in a manner in a matter of few weeks in order for us to continue to serve our customers without missing a step. For jobs that require employees to be in the office, we've taken further steps to ensure safety at each of our sites, such as social distancing measures and increased protocols to keep the workplace as clean as possible.

We launched a firmwide emergency paid leave program so that our employees could have the time to make necessary arrangements for their families and child care services. Lastly, we are temporarily providing a weekly stipend to our frontline employees, and a big thank you, finally, to all of our 5,000 colleagues for their tremendous resiliency during this period.

Next, our customers. As you have seen from our previous announcements, we've implemented a series of actions to assist our customers during this crisis. These include expanding payment deferrals for loans and leases, late charge waivers and the temporary suspension of involuntary repossessions.

We have provided significant financial assistance to our customers through loan extensions since the beginning of the pandemic. As of April 22, we have executed more than 350,000 loan modifications related specifically to this economic crisis. For context, during 2019, we were providing approximately 25,000 to 30,000 loan extensions per month. While at a significantly higher level recently due to the crisis, loan modifications for our customers are a standard practice. We have a long track record of offering assistance in times of financial hardship. We have the experience and the tools to execute forbearance programs quickly and assist customers through these uncertain times. The initiatives we have implemented for our customers due to COVID-19 are also in line with our response to large single event natural disasters in the past. The most recent instance occurred in 2017 when hurricanes impacted Houston and its surrounding areas as well as most of the state of Florida. We have a significant percentage of our customers in Texas and Florida, and we executed approximately 80,000 extensions in those affected areas.

While the impacts from COVID-19 are clearly broader than recent natural disasters, our servicing and operations team have a lot of experience providing financial assistance to customers, and we are confident that the actions we have taken are customer-centric and appropriate for the time we are in.

A point worth mentioning is that a majority of our customers who have requested assistance during this pandemic have not availed of any loan forbearance in the past. And at the time of request, most of them were not past due in their payments. Based on our experience, we believe these accounts could have a high rate of cure once normalcy is restored.

Next, for our Chrysler dealers and potential Chrysler Capital customers, we have partnered with FCA to launch new programs, including first payment deferred for 90 days on select FCA models, 0 payment APR for 84 months and selected 2019 and 2020 FCA models. And for our floor plan relationships, Santander Bank has offered 90 days of floor plan interest deferrals; curtailment deferrals for older, new and used vehicles; term loan principal and interest deferrals; the ability to floor older models, used vehicles and to free up cash; and one-off lines of credit and term loans.

The government, the Federal Reserve, the Department of Treasury, Senate and Congress have responded with urgency and launched a historical stimulus package to assist our fellow Americans feeling this crisis. Specifically, I would like to recognize the support of our regulators as they helped us facilitate rapidly facilitate solutions for our customers.

Finally, for our communities, Santander U.S. will provide $25 million in financing to community development financial institutions. SC has also donated $3 million to organizations serving vulnerable populations in our communities hit hardest by the crisis.

Let's turn to slide four to discuss our Q1 performance. Early in the year, our financial performance was headed to an excellent quarter and a continuation of the strong results in 2019 prior to the disruption caused by the virus. New vehicle sales were off to a good start, and used car prices were strong in January and February. Our business began to see the pressure in mid-March, and our results for the quarter began to reflect some of that pressure, as highlighted in the first quarter results.

During the quarter, we booked $452 million in loan loss reserves related to economic factors primarily driven by COVID-19. Excluding these reserves, our day-1 CECL estimate was relatively in line with the estimate we provided last quarter, and our net income was in line to slightly better than Q1 2019.

We ended the quarter with an allowance-to-loan ratio of 17.8%, up from 9.9% at the end of 2019 and 16.8% on Jan 1, 2020, post-CECL implementation. Fahmi will discuss the underlying assumptions in the reserve for loan losses, but it's worth mentioning that the two significant drivers of our reserve build are inherent portfolio quality determined by the historical performance of accounts and the forward economic view over the life of loan on our books.

Our total auto originations were $7 billion during the quarter, relatively flat versus Q1 2019. Originations again started the year strong until mid-March when shelter-in-place orders nationwide began to decrease applications and volumes.

Prime loan volume increased driven by the new programs we launched with FCA and $1.1 billion in originations through our program at Santander Bank. Lease volume also increased slightly due to a strong January and February as our share increased, however, nonprime loan volumes decreased. Fahmi will provide more details to you shortly.

During the quarter, we also announced a multiyear strategic preferred lending relationship with Vroom, an innovative end-to-end e-commerce platform designed to offer a better way to buy and sell used vehicles. We have been supporting Vroom since 2018, and this new preferred relationship will make it even easier for Vroom customers of all credit profiles to obtain financing.

Moving on to credit performance. While we are still evaluating the impact of the pandemic, our first quarter performance was stable to better versus Q1 of 2019. Both the gross and net charge-off ratios improved as well as early stage delinquencies. Late-stage delinquencies increased by 40 basis points, and our recovery rate was down year-over-year. Most credit metrics were only slightly impacted by the economic downturn this quarter, and we expect performance to be more stressed moving forward.

Factors that could impact these credit metrics include loan extensions which will have the effect in the short term of improving delinquencies and reducing charge-offs over the coming months, temporarily suspending repossessions will reduce recoveries and used vehicle price declines as dealers clear their lots of used cars and auction activity remains slow. We also expect that once repossessions start, there will be an increased downward pressure on used cars until the supply subsides and demand begins to pick back up. All these will be important determinants of our credit performance going forward.

During the quarter, Santander Consumer demonstrated continued access to liquidity, executing two securitizations and accessing additional funding at the end of March. After the quarter ended, we were one of the first ABS issuers to execute a transaction since the beginning of the crisis.

Given the month of April is almost behind us, I would like to provide a brief review into some of the recent trends we've seen across our business. Through April 22 versus the same time last year, our total application count decreased approximately 26%, and total originations decreased about 22% due to continued shelter-in-place orders, dealership closures and weaker demand. Due to auction house closures and repossession suspension, we have also seen lower recoveries in April. For example, our auction sales have gone down approximately 50% in April versus the same time last year. However, auction house activities seemed to be picking back up in the last week. And Fahmi will cover some of the other green shoots we are beginning to see across our business shortly.

During this crisis, our goal was to keep our employees safe. We knew if we could care for our teams and position them for success, they, in turn, will take care of our customers. Fortunately, that's exactly what we've seen play out. During mid-March, as we experienced the initial surge of customers calling in for assistance, we saw our post-call survey results hit record highs. Two key points of evidence how our customers feel about us. First, the overall satisfaction from our customers during the last four weeks has been more than 10 percentage points greater than previous levels. Even with extended hold times and significantly stressed customers, our service team was there when they were needed the most. Second, and just as impressive, is that we've seen the response rate for taking the post-call survey double in the last four weeks.

In summary, I'm very proud of our performance and the teamwork displayed by our employees over the last several weeks. It has not been easy, but we've handled it well and our business continuity plans worked. As much progress as we made over the last few weeks, we still have some headwinds ahead, and I'm confident that our teams will continue to come together to identify innovative and find effective ways to help our customers and further enhance our brand and reputation. We enter these challenging times from a position of strength supported by robust capital and liquidity, which gives us confidence that we can absorb this abrupt economic slowdown.

We've been preparing for a potential end-of-cycle economic downturn for several years. Over the past three years, in particular, we've made enormous progress improving and enhancing our risk management framework, including operational and credit risk. We've added high-quality talent to our risk organization and invested in advanced tools and data sources, which gives us a deeper and better understanding about through-the-door population. Our portfolio quality has improved because of better analytics and focused credit actions through 2018 and 2019. We eliminated some segments that performed badly and captured market share and others that are profitable and with better risk.

We are still less than two months into the crisis, and it's very difficult to estimate its duration or severity. We are encouraged by the unprecedented and swift actions taken by the government and bank regulators to provide relief to individuals and small businesses, but the depth of the economic impact and the velocity of recovery is difficult to assess and is yet uncertain.

With that, I'll turn the call over to Fahmi for a more detailed review of our results. Over to you, Fahmi.

Fahmi Karam -- Chief Financial Officer

Thanks, Mahesh, and good morning, everyone. Before I get into the quarter's performance, I also wanted to recognize and thank our employees who are going above and beyond every day to help our customers and our business address the many challenges presented by the pandemic. I have been impressed with the dedication to put contingency plans to work, solve new issues and the teamwork across all functions to get the job done.

Now turning to slide five for some key economic indicators that influence our performance. All the metrics on this page started off the year quite strong. However, the macroeconomic environment has changed significantly since we last spoke due to the impacts from COVID-19. The pandemic has caused continued uncertainty in the outlook for our economy and, as a result, consumer confidence has recently deteriorated and the labor market has paused for millions of Americans as federal, state and local governments along with businesses assess how best to move forward. The key factors impacting the economy will be the length and severity of the crisis and the impact of the unprecedented U.S. government support and stimulus programs. Specifically for our business, the key drivers include unemployment levels, GDP growth or contraction and used car prices.

Along those lines, on slide six, there are a few key factors that influence our loss severity and credit performance. Annualized new car sales fell significantly in March as many dealerships were closed nationwide due to shelter-in-place orders. Various industry sources are forecasting new car sales in the U.S. will be down significantly from original expectations. Current estimates are just above 11 million units for the year. Used vehicle price indices did not report significant deterioration in March. However, some industry data providers have previewed April performance showing a decline of approximately 10% in used vehicle pricing compared to the same period one year ago.

At the start of the pandemic, most of the large auction providers were only offering virtual auctions. Typically auctions are a mix of physical and virtual bidding. However, as the severity of the pandemic worsened, many of the auto auctions were shut down entirely. In recent weeks, the virtual channel has reopened, and we now have access to over 90% of the auction sites we utilize. In addition, we, along with many other major auto lenders, have temporarily suspended repossessing charged off vehicles. Both of these factors have led to uncertainty in the auction lanes and negatively impacted pricing.

Given this interruption, it is difficult to extrapolate future used car prices based on the last couple weeks of performance. However, we are encouraged by the reopening of the virtual channel as a first step. Our recovery rate, which includes metal and nonmetal proceeds, bankruptcy and deficiency sales, was 50.1% in the quarter. We will further discuss recovery rate and loss performance shortly.

Turning to slide seven for origination trends. As Mahesh mentioned, this quarter was relatively stable versus Q1 of 2019. However, the story between prime and nonprime retail volume was mixed. Core loan originations decreased 12% compared to the prior year quarter. Total Chrysler Capital loan originations increased 7%. Chrysler prime volume increased 29% year-over-year driven by Chrysler Capital exclusive offers by FCA. Chrysler nonprime volume decreased 11% year-over-year, and lease originations increased 3% versus Q1 last year.

Volumes were negatively impacted by the disruption in the economy and the closures of approximately half of our dealers. We expect volume to continue to decrease on a year-over-year basis in the second quarter, particularly in the nonprime segment. Application counts across our nonprime channels are down more than 50% thus far in the month of April. However, over the last week, we have seen a significant uptick in applications as dealers have begun to reopen and consumers are spending tax refunds and/or stimulus checks.

On the prime side, originations are supported by FCA incentive programs which are generally exclusive to Chrysler Capital. As incentivized programs are driving consumer demand, we believe our prime originations and our FCA penetration rates will continue to increase in the second quarter.

Lease volumes have also been significantly impacted over the last six weeks. Our lease originations are somewhat concentrated in the Northeast and Midwest where several key markets have been hit hard by the virus. Early in April, our lease applications were down more than 70% year-over-year. But similar to the nonprime segment, we have seen an increase over the last week, albeit still well below this time last year. Volume levels will depend on the key drivers I mentioned earlier and will have an impact on our financials through net interest income and reserve balances.

In addition to the macro backdrop, volume will be driven by the level of competition during and coming out of the crisis. Our underwriting standards and our pricing approach are built to weather a downturn. We believe our nonprime focus will give us a competitive advantage in these times. We will remain disciplined and focused on achieving the right risk-adjusted returns on our portfolio while continuing to serve our customers and supporting our dealers.

Moving on to page eight, you can see the FCA and Chrysler Capital results. U.S. auto manufacturers, including FCA, have temporarily shut down their auto plants since to late March. This, along with dealership closures, has pressured vehicle sales in March, and we have observed continued downward pressure into April. However, we finished the quarter with a 39% penetration rate as we continue to partner with FCA to deliver solutions to our customers. The drivers of the penetration rate increase year-over-year are the programs we launched with FCA and our Santander Bank originations program. As mentioned, our penetration rate will likely increase as incentivized offers drive consumer demand in the near term.

Turning to slide nine. We continue to identify ways to leverage our servicing capabilities and drive growth in our serviced for others balances. During the quarter, we added $1.1 billion in originations to the SFO platform via our agreement with Santander Bank. In addition to our own prime volume, we successfully converted the previously announced TCF portfolio acquisition in the first quarter, which included approximately $500 million in SFO balances. The serviced for others platform generated $19 million in servicing fee income this quarter. In addition to those servicing fees, $6 million of SG&A origination fees are included in fees, commissions and other line item.

During the last crisis, SC converted more than $35 billion of assets onto our platform. We believe our track record positions us well to capitalize on any new opportunities during and post the crisis to leverage our scale and servicing platform. Our nonprime servicing expertise is a differentiator in times of a recession.

Turning to slide 10 and liquidity. As of quarter end, SC had a total of $50 billion in liquidity. This liquidity continues to be a source of strength for SC and the foundation for us to continue to originate loans and leases, supporting customers during these times of uncertainty and market volatility. At the end of the first quarter, we had approximately 45% of unused capacity available on our $12 billion third-party revolving warehouse lines. In the past six weeks, SC has raised or renewed nearly $2.5 billion in wholesale funding, demonstrating the resiliency and strength of SC's liquidity and balance sheet. In mid- to late March, we renewed a $1.25 billion revolving warehouse line and obtained over $1.1 billion in new private bank term credit facilities.

In addition to the strong support from the 13 lenders in our bank syndicate, we were also able to access the public ABS market in April. We are one of the first to do so as the markets have been effectively shut down since mid-March. We closed a $965 million SDART transaction. And with the strong support of our institutional investors, we were able to upsize the transaction and achieve better-than-expected pricing. As a result, our forecasted liquidity sources can support our business.

In addition to our third-party lenders, we also have continued support from Santander. At the end of the quarter and today, we have an additional $3 billion of unused capacity through our Santander credit facilities. Our liquidity capacity coupled with lower originations in the near term position us well to come out of the crisis in a position of strength, ready to capitalize if organic and inorganic opportunities arise.

Moving to slide 11 to review our financial performance for the quarter versus the prior year quarter. During the quarter, we added approximately $442 million in reserves related to the economic outlook primarily driven by COVID-19. Interest on finance receivables and loans increased 2% driven by more than $2 billion in average loan balance growth. Net leased vehicle income decreased 5% due to slightly higher depreciation expense and limited auction sales at the end of March.

Interest expense decreased 2% driven by lower benchmark rates as the cost of debt benefit outweighed the increase in outstanding debt balances. Credit loss expense increased to $908 million in the quarter, up $357 million driven by the implementation of CECL and COVID-19-related reserves. Total other income of $51 million in the quarter was in line with last year and included $63 million of held-for-sale adjustments related to the personal lending portfolio.

Continuing to slide 12. Most of the metrics on this page improved year-over-year as the COVID impact had not begun to materialize by quarter end. Versus the prior year quarter, early stage delinquencies decreased 10 basis points while late-stage delinquencies increased 40 basis points. The RIC gross charge-off ratio of 15.5% decreased 400 basis points from Q1 last year. The net charge-off ratio of 7.7% decreased 90 basis points from Q1 last year as we continued the momentum of positive charge-off performance from Q4.

As Mahesh mentioned, we began to offer our customers expanded deferral programs in March. Since March one through April 22, we executed approximately 350,000 extensions in our loan portfolio and more than 30,000 in our lease portfolio. The majority of these extensions were provided to customers who have never received an extension in the past, and approximately 80% of the extensions have never been in late-stage delinquency status prior to the crisis. The amount of extensions given to customers in the current bucket is over 3 times a normal month.

As you all are well aware, loan modifications have been part of our normal and customary servicing practices for quite some time and are designed to help consumers who show the willingness and ability to pay, navigate temporary financial distress. Over time, we have developed the tools and expertise to execute these extensions successfully for our customers as well as for SC. We have existing capabilities to track and adjust terms for these accounts if they show any signs of credit deterioration. Although the impacts of COVID are quite uncertain and unlike anything we have experienced in the past, we do have several years of performance data that we can leverage for both normal course modifications as well as extensions related to natural disasters.

Going forward, these credit metrics will be impacted by our extension levels as well as several other factors, including unemployment levels, used car prices, reinstating repossessions, dealer inventory levels and overall demand at the auctions.

Turning to slide 13 to review the loss figures in dollars and the walk from prior year. Net charge-offs for RICs decreased $22 million versus prior year quarter to $593 million. Breaking down the change. $96 million in losses were primarily due to average higher average loan balances which were up $2.1 billion from last year and $48 million in losses due to lower recovery rate. These were more than offset by a lower gross charge-off ratio, which decreased by $124 million and other adjustments of $41 million.

Turning our attention to provisions and reserves on slide 14 and 15. At the end of Q1 2020, the allowance for credit losses totaled $5.5 billion, increasing $2.4 billion from last quarter which represents an allowance ratio of 17.8% at the end of this quarter. In regards to the reserve walk, the allowance increased $2.1 billion due to the day-1 CECL adjustment. The allowance increased an additional $442 million due to economic factors in the quarter primarily due to COVID-19. The increases were partially offset by $127 million decrease due to changes in our portfolio, such as mix, balance, paydowns and charge-offs.

The difference between the overall ratio of 17.8% versus our estimate of 16.5% from last quarter's call is primarily driven by the macroeconomic outlook. Economic factors in the walk represent our determination of how key forecast drivers impact our loan portfolio as constituted at the end of the quarter. We use a three year reasonable and supportable forecast period and several economic scenarios with varying degrees of potential outcomes and stress, including the impact of COVID-19.

In addition to the modeled results, we recorded a qualitative reserve, which, combined, resulted in an increase of $442 million for the quarter. The key economic variables with the largest impact to the reserve include GDP, unemployment and the Manheim Index. Our baseline economic scenario was based on the latest forecast we had available at quarter end. The assumptions were a steep drop in key variables in Q2, followed by a recovery in the second half of the year, assuming a reopening of the economy and taking into account government stimulus programs.

Going into the second quarter, we will continue to monitor and track these economic variables as well as the impact of the stimulus programs to consumers and our portfolio. The overall allowance will depend on the level of originations and asset balance, the macro outlook and the mix of TDRs and non-TDRs.

Moving to slide 15 to cover CECL by loan designation. On slide 15, we have provided the CECL impact broken out by TDR versus non-TDR balances. As we just reviewed, our CECL methodology relies on various models and assumptions to forecast lifetime losses of the portfolio based on an economic forecast and other relevant variables. The impact of CECL will be heavily dependent on, among other factors, the mix of our portfolio, recent portfolio trends, the growth or decline of the balance sheet and our view of the economic outlook at the end of each period.

As we discussed last quarter, our reserve will also depend on the mix of TDRs versus non-TDRs. Under the under CECL, the impact from decreasing TDR balances will still be a benefit but to a lesser degree than we have experienced in the past. As you can see from the slide, the TDR balance continued to drop this quarter versus last quarter, coming down approximately $300 million.

Most of the CECL day-1 impact come from the non-TDR portfolio, which the allowance increases from approximately 8% to more than 16%.

TDR balance going forward will depend on the level of extensions and continued guidance from our regulators related to COVID modifications. Based on the recent guidance and the delinquency status of consumers receiving extensions thus far, the majority of customer assistance deferrals related to COVID-19 will not qualify as TDRs.

Turning to slide 16. The expense ratio for the quarter totaled 1.9%, down from 2.1% from the prior year quarter. Our operating expenses were slightly down versus the prior year quarter primarily driven by lower repossessions in March.

Finally, turning to slide 17. Similar to liquidity, our capital remains robust and in excess of our internal targets. During the quarter, we successfully repurchased 18.4 million shares at a total cost of $467 million, including the results from the tender offer that was part of our authorized capital plan. For the revised Federal Reserve guidance, we have elected to defer capital-related impacts associated with CECL for two years and begin the phase-in process in 2022.

Our CET1 ratio for the quarter was 13.8%, down from 15.8% in the prior year quarter. We believe this level of capital is more than adequate to withstand a severely adverse scenario and still remain above post-stress limits. The company has declared a cash dividend of $0.22 per share to be paid on May 18, 2020, to shareholders of record as of the close of business on May 8, 2020. We established our dividend to withstand adverse conditions. Given our strong CET1 ratio as well as the loss-absorbing capacity of our reserves at nearly 18%, we currently have no plans to reduce or eliminate our dividend. However, we will continue to exercise a disciplined approach to capital management and monitor the overall macroeconomic backdrop.

For further context on our loss-absorbing capacity, our reserves as of the end of the first quarter represent approximately 115% of the DFAST severe adverse scenario from SHUSA's most recent public results in 2018. The size of our portfolio has increased since that time. So looking at the 2020 test results, we are approximately 85% reserved for losses under the severely adverse scenario.

We further stress key macro drivers for our informational purposes, including GDP contracting 35%, unemployment reaching 14% and remaining elevated throughout 2020 and returning to 10% by 2022, the Manheim Index dropping 18% and not returning back to prerecession levels. Under this extremely severe scenario, based on our current capital levels, we would be able to make all of our planned capital distributions and still be above post-stress minimums. From a reserve standpoint, our Q1 reserve is approximately 68% of cumulative losses over nine quarters in this extreme scenario.

To conclude, notwithstanding the current environment, we are confident that we have the team, liquidity, capital and resources to achieve our long-term goals and support our customers. We will maintain our disciplined underwriting of loans and leases at appropriate risk-adjusted returns. We will continue to service them effectively while retaining sources for opportunistic strategic initiatives in the event they arise.

In light of these unprecedented events, we are withdrawing our financial targets for the second quarter and for this year. We look forward to the economy improving as states and businesses begin to reopen. We are hopeful that the extraordinary government support has an immediate positive impact on our consumers. As things stabilize and the severity and length of the crisis becomes more certain, we will provide you with updated guidance.

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

Questions and Answers:


[Operator Instructions] Our first question comes from Jack Micenko with SIG. Please go ahead.

Jack Micenko -- SIG. -- Analyst

Good morning everybody. Hope everybody's I wanted to drill into the mods a bit. Back of the envelope, it looks like if I take the loan and the lease and choose an average loan amount, kind of feels like a 10%, maybe 10% to 12% take rate on the mods. Is that the right way to think about it?

And I think you'd said in your prepared comments, they won't be TDRs. Would that require another extension beyond the initial 90 to sort of fit your TDR definition? Just wanted to get some color.

And then lastly, on the mod side, can you talk to the cadence of the take? Was it the March payment? Was it the April payment? Are we plateauing now? Would this $350 million balloon to something? How do you think about all that?

Fahmi Karam -- Chief Financial Officer

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

From a trending standpoint, we obviously saw a pretty big wave at the end of March and in the beginning of April. But the trend has begun to slow down. The pace of the request over the last week or so has begun to level out.

Mahesh Aditya -- Director

Yes. And just one more add to that. Most of our extensions today are 60-day extensions. So the TDR treatment will kick in, in the second round once they go into a second round of extensions and the and as Fahmi said earlier, the majority of extensions are coming from customers who either never asked for an extension before and are in an or are in a nondelinquent status. So we expect a significant amount of them once the stimulus package kicks in to be in self-care status.

Fahmi Karam -- Chief Financial Officer

Yes. So the TDR status will be impacted by how long this the crisis lasts and how it's going to impact the consumers. So the way the guidance works from the Federal Reserve, it really depends on their delinquency status on the onset of our COVID-19 extension program, which, for us, was the beginning of March. So if they were in, as we mentioned, current or less than 30 days past due, our COVID-related extensions will not classify as a TDR.

Jack Micenko -- SIG. -- Analyst

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

Fahmi Karam -- Chief Financial Officer

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


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

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

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

Fahmi Karam -- Chief Financial Officer

Yes. Thanks, Moshe, for the question. So coming into the year, competition, I would say it was pretty intense but rational coming into the year. January, February, we actually probably saw heightened competition, especially on the nonprime segment. You've seen some of that in our results. I think competition going forward, you're right, we have to separate it between prime for us and nonprime. On the prime side, we mentioned because of all the incentives that FCA is putting in the market that are exclusive to us and exclusive to Chrysler Capital, we expect our new FCA vehicle penetration rate to continue to increase. We ended the quarter for just at 39%. If we look at April so far, we're closer to 50% plus. So we continue to kind of see that going forward. And really, for us across all of our new vehicle segments, we would expect the captives to drive the volume there.

On the nonprime side, I mentioned we're going to be pretty cautious in our approach, at least in the near term, to position ourselves to come out of this thing in good shape. We do think our scale and platform and our liquidity position, we've worked a lot of years to diversify our funding approach from a liquidity standpoint. And given our scale, we do feel like we do have a competitive advantage in the nonprime segment compared to some of our other nonbank competitors. So we're going to position ourselves for kind of being opportunistic in select segments of our market as we come out of it.

Mahesh Aditya -- Director

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

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

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

Fahmi Karam -- Chief Financial Officer

Sure. So first of all, let me say, we designed our dividend policy, our capital distribution policy and our plan to be supported through the cycle. And so we think that, first of all, the dividend, as I mentioned, is very sustainable as we kind of withstand the crisis. Capital for us has been something that we focused on. There's been a lot of efforts for us to have a more efficient balance sheet. Since 2018, we've worked really hard to distribute our excess capital. And luckily for us, we're still in an excess capital position. We feel like we've taken a very thoughtful and disciplined approach, especially from a pricing standpoint, very price disciplined in our approach. We've been very good stewards of capital. And going forward, we're going to make the same determination. Coming off the tender in February, we feel good about the execution there. We still have $400 million left from the previously announced $1.1 billion plan. And we just submitted the submission early April through SHUSA for the CCAR submission. So we'll be able to talk about the go forward more in the coming months as we get those results back.

But in general, we feel really good about our capital position. We feel really good about our liquidity position. We'll continue to try to make the best financial decisions on how we deploy our capital going forward. The good news for us is I think all of the options that we've talked about in the past, whether it's organic opportunities, inorganic opportunities, whether it's shareholder distributions through dividends or through share repurchases or if we feel like the right time right now is to preserve capital, all of those options are still being considered and go through our thinking.


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

Mark C. DeVries -- Barclays Bank PLC -- Analyst

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

Fahmi Karam -- Chief Financial Officer

Thanks for the question. I let me step back and maybe take just an overall view of our CECL process. So the process starts with a very detailed and granular loan level model, which looks at the underlying characteristics of the loan as well as some historical data of the loans themselves, whether it's payment history, prepayments, delinquencies, whether they're TDRs or non-TDRs. And that model then uses a macroeconomic forecast, which has the key drivers, which I mentioned throughout the prepared remarks.

So we come up with a we use a third party. We come up with a baseline economic forecast that's made up of consensus estimates. We then also use three other forecasts, which have varying degrees of economic outputs. Some positive, some has kind of slow to moderate growth and one has a negative scenario. In addition to kind of the economic forecast and the model results, I mentioned we also use qualitative reserves to put in kind of management overlays as appropriate based on either other risks that we see that are not picked up by the model or we want to further enhance what the model is seeing.

So our day-1 CECL reserves follow that process. This day-1 reserve did have some weighting to a negative scenario and a downturn scenario. Obviously, not to the level of what we've just experienced or are going through with COVID, but it did have some level of a downturn blended in.

For the quarter end and day 2, very similar approach that we use, same exact approach that we used. So we came up with a baseline scenario that assumed a pretty steep drop-off in Q2, unemployment about 9%, GDP contracting about 18% to 20% and then a recovery beginning in the second half of the year as the economy started to reopen. So we did have that economic scenario baked in. And then we also had qualitative reserves on top of that just to protect on some specific downside risk that we saw at the end of the quarter.

Going into Q2, we're going to monitor all of those key economic variables that I mentioned. We're going to update all of the forecasts, including hopefully having a better understanding of some of the stimulus programs and the impact on the consumer. We've been very encouraged by some of the early signs over the last few days, the last week or so on some of the impacts on just applications, payments on accounts and things like that. So we have to assess all those things. I think it's very early to give any kind of sense into Q2. We're going to learn a lot between now and the end of June.

Mark C. DeVries -- Barclays Bank PLC -- Analyst

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

Fahmi Karam -- Chief Financial Officer

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

Mark C. DeVries -- Barclays Bank PLC -- Analyst

Okay great. Thank you.


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

David Michael Scharf -- JMP Securities LLC -- Analyst

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

Fahmi Karam -- Chief Financial Officer

Sure. So as I mentioned, it's very hard to take a view of where used car prices are going over the next month, two months, three months based on the last month of activity with all the disruption between repossession and auction houses and the dealers also not being open or not being able to go to the auction to buy cars. So it's very hard to extrapolate used car prices going forward. However, there are several factors that we're looking at to kind of help influence where it's going. And some are positive and some are will put downward pressure on used car prices.

On the positive side, new vehicles, with the plant closures recently, there could be more demand for used as new vehicle volume may not be there. Affordability has always been something that drove used car demand outside of the incentives the OEMs put into the market. There could be an affordability there that drives used car demand. I think for used car pricing, generally, the biggest impact is going to be what OEMs do, what OEMs do with their incentive packages. If they continue to be very aggressive and put out very attractive offers to customers, that typically impacts used vehicles and specifically vehicles in those kind of two to five year range. And that's the majority of vehicles that we take to auction.

So I think if you watch those couple of data points and watch what OEMs do over the next couple of months from an incentive standpoint, that's ultimately going to drive the used car price market.

Mahesh Aditya -- Director

Yes. There are a lot sorry, go ahead.

David Michael Scharf -- JMP Securities LLC -- Analyst

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

Fahmi Karam -- Chief Financial Officer

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

Mahesh Aditya -- Director

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

David Michael Scharf -- JMP Securities LLC -- Analyst

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

Fahmi Karam -- Chief Financial Officer

Yes. We don't have a rule of thumb necessarily, but I think what you've seen in Q1 from a yield standpoint is a lot of what you saw toward the end of 2019 and a continuation of some of the things you mentioned. Whether it's the lease portfolio growing at a faster pace than our loan balances, whether it's more of the prime volume being a bigger mix, I think we can expect that going forward as well, especially with the incentives in the market that is driving consumers to us. But outside of yield, if I just maybe mention the NIM. From a NIM standpoint, this low rate environment as credit spreads continue to normalize and stabilize, you will start seeing a benefit of that in our P&L over time. So as things improve throughout the month of April, you're going to start seeing that benefit come through our P&L in the interest expense line item, hopefully, for the rest of the year.


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

Jeffrey David Adelson -- Morgan Stanley -- Analyst

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

Fahmi Karam -- Chief Financial Officer

So good question. The states that we look at, we look at things from an origination standpoint. We do try to factor in different sectors. Once those assets are booked onto our balance sheet, it's tough to go back and try to reconcile by sector. So we have to use it by state. We have to do it by state and by ZIP code. So if we look at kind of the oil patch states, if you will, whether it's Texas, Oklahoma, Louisiana and Mississippi, all of those states kind of combined, it's about 15% of our portfolio. So I think the energy sector along with the entertainment, travel, hotel sector have all equally been distressed. And I don't think Texas is necessarily any different.

But we are starting to see signs that we mentioned of recovery. I know here in Dallas and in Texas, we are planning to reopen over the next few weeks, and I think that will help across-the-board.

But that's a very valid question because we have to take that in the context of the effect of the stimulus package and how that is affecting new car sales as well as repayments and what is the long-term impact of what's going on in the oil patch, particularly as far as oil prices and general slump in Houston and the neighboring areas.

Jeffrey David Adelson -- Morgan Stanley -- Analyst

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

Fahmi Karam -- Chief Financial Officer

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

Mahesh Aditya -- Director

Yes. And going into CECL into the CECL build in the first quarter on the 1st of January, we had a qualitative component already in the CECL number, and then there was an additional add in the first quarter. And as Fahmi says, that is a large part of what our views of the macroeconomic forecast.


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

Mahesh Aditya -- Director

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


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

Duration: 61 minutes

Call participants:

Evan Black -- Investor Relations

Mahesh Aditya -- Director

Fahmi Karam -- Chief Financial Officer

Jack Micenko -- SIG. -- Analyst

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Mark C. DeVries -- Barclays Bank PLC -- Analyst

David Michael Scharf -- JMP Securities LLC -- Analyst

Jeffrey David Adelson -- Morgan Stanley -- Analyst

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