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Santander Consumer USA Holdings Inc (NYSE:SC)
Q3 2020 Earnings Call
Oct 28, 2020, 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 Third 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 -- Head of Investor Relations

Thanks, Kelly. Good morning and thanks, everyone, for joining. On today's call we have our President and CEO, Mahesh Aditya; and our CFO, Fahmi Karam.

Certain statements made on today's call may be forward-looking. Please refer to our public SEC filings and the risk factors with respect to these statements. We will also reference certain non-GAAP financial measures that we believe will be useful to our investors. And a reconciliation of those measures to GAAP is included in the 8-K today October 28th, 2020.

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

Mahesh Aditya -- President and Chief Executive Officer

Thank you, Evan, and good morning, everyone. And thanks for joining us to review our results for the quarter. As evidenced by our third quarter results, we continue to operate our business successfully under unique and challenging times. While the pandemic continues to affect our country and our industry, all of our stakeholders remain a top priority, including our shareholders, dealers, customers and employees.

I would like to take you to Slide 3 to discuss our performance. Our financial results this quarter was strong. Net income totaled $490 million or $1.58 per diluted common share, up $258 million versus the same quarter last year. This improvement was driven by -- primarily by three factors: lower credit losses and provision expenses, better net interest income as we grew the balance sheet and lower operating expenses.

Total auto originations were $8.4 billion during the quarter, flat versus the strong third quarter last year. Our FCA penetration rate was down versus the third quarter of 2019, but up on a year-to-date basis versus last year. Our collaboration with FCA on incentive programs as well as our originations program that Santander Bank have continued to support our Chrysler Capital performance.

We are cautiously optimistic with credit quality of new bookings in our sub-prime or core book and our Chrysler Capital loans and leases. Dealer experience and our dealer relationships continue to be a strategic priority for us. We are very pleased with our competitive position with dealers as we continue to grow market share through this pandemic. Sales experience is likely to become more virtual in the future, increasing the reliance on digital solutions. Leveraging our position in the sector, we are investing in innovative solutions to seamlessly integrate with dealers and enhance the customer experience. We plan to invest significantly in this area to solidify our leadership position for the long-term.

During the quarter, we also booked $293 million in additional loan loss reserves, primarily as a result of an increase in loan balances. Our reserves now exceed $6 billion. And when combined with common equity capital, we are well-positioned to manage through the pandemic. Early and late-stage delinquency ratio has improved significantly year-over-year due to the relief we provided to our customers, our disciplined approach to new through-the-door quality of bookings and the effect of government stimulus on payment rates. Low delinquency levels, combined with record used car prices, led to an all-time low net charge-off ratio of less than 1% during the quarter.

Fahmi will discuss later option performances recovered to pre-pandemic levels with sales rates in the low to mid-80% range and retention rates in below 90% range for loans and close to 100% for lease. While all of our credit metrics have improved, we remain cautious in our outlook demonstrated by our level of reserves.

Regarding customer relief from March to September, we granted more than $900,000 loan deferrals to approximately 645,000 unique customer accounts. Fahmi will give you an update on how these accounts are performing and their latest status. Given our ability to offer this relief, coupled with the federal aid at the start of the crisis, the sudden and profound impact of this pandemic has not yet translated to adverse credit performance. In fact, we've seen an increase in payment and pay-off rates for both loans and leases up until this point. While we feel good about what we've seen so far from the consumer, we also know that without additional government stimulus being approved, many unemployed customers -- consumers will spend for their savings and the tide of this recession could easily turn. So we remain cautious, but we do believe the rapid and extensive actions taken so far has reduced the potential credit impact of this recession, rather than just having delayed it.

During the quarter, SC demonstrated strong access to liquidity executing two extremely successful ABS transactions off of our SDART shelves. Notably the second transaction of the quarter was $1.9 billion in securities with the largest non-prime auto ABS deal in more than a decade and the largest in our history. The transaction also achieved the lowest cost of funds of all of our previous ABS transactions.

In regards to capital, during the quarter, our parent company, Santander Holdings, received an exception to the Federal Reserve Board interim policies limiting certain capital distributions due to the uncertainty caused by the pandemic. With this exception, we were able to pay our quarterly dividend and continue our previously offered share repurchase program, leading to a repurchase of more than 10 million shares of our outstanding common stock. Even with these capital distributions, our CET1 ratio increased 30 basis points versus last quarter to 13.7%. We believe the exception from the Federal Reserve also reflects the significant progress made in strengthening our regulatory compliance over the last years.

You are not expected to declare or pay a dividend in the fourth quarter of 2020 due to the extension of the Federal Reserve's interim policy regarding dividends and share repurchases. Our ability to pay dividend is limited by SHUSA's trailing four quarters of net income. And as part of SHUSA's CCAR 2020 resubmission, we are confident that we will continue to perform well under stress and we expect to be able to return capital to shareholders once these interim guidelines expire.

In summary, we are pleased with the results of the third quarter and are prepared for challenging times ahead. Our originations and credit quality are strong, the pace of customer forbearance request is down and consumers who do not need assistance are performing better than expectation. We have the liquidity and capital to absorb elevated credit losses, invest in long-term dealer-focused strategic initiatives and as the regulatory and current climate presents, we continue to return on capital to our shareholders.

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

Fahmi Karam -- Chief Financial Officer

Thanks, Mahesh. And good morning, everyone.

Turning to Slide 4 for some key economic indicators that influence our performance. The U.S. economy continues to face significant pressure due to the ongoing pandemic. Unemployment has improved from peak levels at the height of the pandemic, but remains elevated versus prior years. The quarter-over-quarter change in the second quarter GDP growth is down significantly. However, recent forecasts show a quick rebound to growth in the third quarter. A significant amount of uncertainty remains regarding the outlook for our economy. COVID-19 cases have continued to increase in most states and another round of government stimulus may or may not be passed. Either of these could have significant impact to our business and our customers.

On Slide 5, there are a few key auto factors that influence our origination volume and credit performance. New and used vehicle sales continued to improve and normalize in the third quarter, recently approaching pre-pandemic levels. According to industry sources, the outlook for full year 2020 new vehicle sales is approximately 15.5 million units, improved from second quarter forecast of around 13 million units, but lower than the trend of approximately 17 million units over the past several years. New vehicle day supply remains low due to lower production levels at the peak of the pandemic. Day supply of new vehicles is more than 30 days lower, while used vehicle day supply has trended to pre-COVID levels due to strong demand and auction activity.

Used vehicle pricing continue to improve, setting record wholesale prices for the month of August due to lower levels of inventory and pent-up demand from the preceding months. Several factors are impacting the used car prices, including, among others, consumer demand for more affordable used cars, shortage of new vehicle supply and, as businesses have reopened, consumers choosing to own a vehicle versus using public transportation. We do not expect these record levels to persist. However, we are pleased to observe how well the economy has recovered and has impacted our loss and credit performance during the quarter, which I will describe in detail in a moment.

Turning to Slide 6 for quarterly originations. Total third quarter volume was flat versus the third quarter 2019. Core loan originations increased 5% year-over-year. Total Chrysler Capital loan originations increased 6%, Chrysler prime volume increased 17%, Chrysler non-prime volume decreased 10% and lease originations decreased 17%. Our core loan originations rebounded and increased slightly from a year ago, while our Chrysler non-prime loans continued to be down year-over-year. Given that vehicle sales have been under pressure this year, we are very pleased with the level of originations as we remain disciplined in the higher risk credit segment. Prime loan originations were up year-over-year similar to last quarter, but not to the same degree as manufacturer incentives, including incentives from FCA exclusive to Chrysler Capital decreased from the second quarter.

Lease volumes began to normalize during the third quarter, but remained lower year-over-year due to a couple of factors, including FCA's lease mix as a percentage of sales below last year similar to the second quarter. Extended term retail loan offers shifted some lease deals to loans and our market share of leases continues to be under some pressure due to competition throughout the quarter. As deposits rise for our bank and credit union competitors, we have seen some more aggressive pricing in the market. However, in September and into October, our lease volume has reached prior year levels and we've taken several steps with FCA to improve our share going into the end of the year. Our focus before, during and after the pandemic is to achieve the appropriate risk-adjusted returns while continuing to serve our customers and our dealers.

On Slide 7, we break down the 2020 monthly originations versus 2019. Core loan originations continue to improve in the third quarter, exceeding levels from a year ago with originations up 13% in the month of September. This channel has continued to perform well as we have increased share and added margin while at the same time tightening our underwriting standards. Chrysler Capital non-prime loans continued to remain under pressure but reached 2019 levels by quarter end. As a reminder, our Chrysler non-prime originations relative to our core channel have a higher mix of new vehicles. As we've mentioned, typically consumers during the recession choose a more affordable option of used vehicles. And in the current environment, new vehicle demand is still driven by OEM incentives, which are generally available for prime credits.

Chrysler Capital prime loans began to normalize in the quarter as FCA incentives geared toward extended terms decreased versus the height of the pandemic. Similar to our prime loans, Chrysler leases also normalized throughout the quarter as consumers continue to weigh the pros and cons of incentivized loans versus lease offers. Our lease volume was the most impacted during the pandemic with the slowest recovery. However, September was the strong month and we expect the momentum to continue into the fourth quarter.

Moving on to Page 8. U.S. auto manufacturers, including FCA, continue to experience lower levels of new vehicle sales due to COVID-19, but sales have significantly improved since the second quarter. Our year-to-date penetration rate of 36% improved versus the prior year due to our collaboration on incentive program with FCA as well as our originations program with Santander Bank. We expect our penetration rates to continue at this pace as we partner with FCA to put programs in place for the year-end holiday season.

Turning to Slide 9. During the quarter, we added $1.7 billion in loans to the service for others platform. $1.1 billion of these loans were originated through our partnership with SBNA and the remainder were sourced from our second off balance sheet securitization of the year. Both of these programs support our relationship with FCA by finding the most efficient funding for prime loans. We do retain servicing rights and charge a fee on all assets we originate in service for others. This platform generated $19 million in servicing fee income this quarter. In addition to those servicing fees, $3 million of SBNA origination fees are in the fees, commissions and other line items.

Turning to Slide 10. As of quarter end, SC's total liquidity of both funded and unutilized lines was approximately $55 billion. Liquidity continues to be fundamental for SC's success and remains critical in our efforts to support our dealers and our customers during times of uncertainty. At the end of the second quarter, we had approximately 77% of unused capacity available on our $12 billion of third-party revolving warehouse lines. In addition to our third-party lenders, we also have continued support from our parents, including $3 billion of unused capacity through our SHUSA facilities as well as $2 billion of new term debt from Santander issued in the quarter. This new funding from Santander provides us with additional liquidity and attractive rates to continue to fund our prime business to support FCA, our dealers and consumers. Additionally, this funding contributed to our decision to move approximately $1.7 billion of prime assets from held-for-sale to held-for-investment. I will cover the impacts of the move in more detail when we discuss the reserves.

During the quarter, as Mahesh mentioned, we also closed a $1.9 billion SDART transaction, which was upsized from $1.4 billion due to significant investor demand. This transaction was the largest non-prime auto ABS deal in the last 13 years. The weighted average cost of funds is the lowest level of an SDART in the company's history. As I mentioned earlier, we also executed an off-balance sheet securitization during the quarter, deconsolidating approximately $635 million in prime loans. Due to the elevated prime loan originations, we continue to optimize the amount of prime loans on the balance sheet through our agreement with SBNA, off-balance sheet transactions or retaining a portion of that volume. After quarter end, we also issued our second lease ABS transaction on our SRT platform. The $1.2 billion deal was well-received by investors and the overall cost priced better than the first issuance pre-COVID in February.

Moving to Slide 11 to review our financial performance for the quarter versus the prior year quarter. Net income for the quarter of $490 million or $1.58 per share of EPS improved 110% and 135% respectively from the prior year. Interest on finance receivables and loans increased 2% due to higher average loan balances during the quarter. Net leased vehicle income increased 3% due to higher lease balances, more lease maturities and higher net proceeds at disposal. This quarter compared to the second quarter lease income more than doubled. During the third quarter, we were able to dispose of approximately 18,000 more lease units at more favorable prices versus the second quarter.

Interest expense increased 13% or $43 million driven by lower benchmark rates and better pricing across our lending platforms. Cost of debt increased 80 basis points versus last year to 2.8% in the quarter. Credit loss expense decreased to $341 million in the quarter, down $226 million, as charge-offs in the quarter are at historic lows, driven by customer deferrals, strong payment trends in our non-deferred accounts and historically high used car prices. Investment losses were $16 million better year-over-year, driven by lower Bluestem balances and losses, offset by approximately $13 million of losses associated with off-balance sheet securitization during the quarter. Operating expenses were $65 million better than last year, mostly due to lower repossession expenses.

Moving to Slide 12, which covers our deferral trends since the beginning of the pandemic. In total, since the beginning of the pandemic, we have granted approximately $912,000 loan deferrals to 645,000 unique accounts or $11.5 billion on our balance sheet. During the third quarter, we continue to see a sharp decline in the pace of forbearance requests, as a percentage of active accounts asking for deferral ended the quarter at 4.5% of total accounts, down from the peak of 27%. We included additional information this quarter to further describe the performance of the accounts that have received the COVID-related deferral. Of those 645,000 unique accounts, approximately 14% of those accounts remain active, or approximately $1.7 billion, 86% of those accounts have received deferrals have had those deferrals expire, 80% of these accounts remain less than 30 days delinquent, about 18% have expired and are more than 30 days delinquent, 5% paid off their balance and 2% charged off.

For accounts with the COVID deferral with a payment due in September, 55% native payment, 10% were extended again and 35% remain inactive. The payment trend has come down from level of experience in the second quarter with more accounts remaining inactive. As we get further into the pandemic, we do expect some of these accounts to roll through delinquency and ultimately charge-off. This is not unexpected as stimulus benefits have expired and unemployment remains elevated. Accounts that have not received the modification since the pandemic, approximately 70% of our portfolio are performed well and better than our expectations thus far. The percentage of customers making timely payments for these accounts has been over 80% since May. In addition, the percentage of these accounts that are 30 days plus past due is currently under 5%. This same population same time last year was approximately 15%.

Another data point that we are tracking is percentage of payments made as a percentage of total expected payments in a given month. At the height of the pandemic, this percentage dropped to 59% in April. And in September, the rate was 79% incorporating both deferred and non-deferred accounts. We have also experienced more accounts paying ahead and making payments in excess of the current month's bill. We are experiencing a clear distinction between accounts who received the deferment and accounts that did not receive a COVID-related relief. Although deferred population is experiencing an uptick in delinquency, it is still in line with our expectations and the non-deferred population continues to outperform.

Combined, we have experienced record low delinquencies and losses in the third quarter. As Mahesh mentioned, without the approval of additional government stimulus, consumers could spend their savings and these trends could reverse quickly. Our teams have spent considerable time analyzing their deferred population and determining collection and modification strategies to aid these customers, whether it's another deferral or customized payment plan to keep them current and in their vehicles or another solution, we are committed to serving our customers through this pandemic and believe we have the tools and expertise to manage these uncertain times.

Continuing to Slide 13 to cover delinquency and loss. The COVID-19 relief provided to our customers' strong payment rates and recoveries led to record credit performance in the third quarter versus the prior year quarter, early stage delinquencies decreased 450 basis points and late stage delinquencies decreased 230 basis points. Delinquencies began to increase in September compared to August and we do expect that trend to continue in the fourth quarter, which is typically our seasonally worst quarter for delinquencies and losses.

The RIC gross charge-off ratio of 6.8% decreased more than 11 percentage points from the third quarter last year. Our recovery rate as a percentage of gross losses, which includes metal and non-metal proceeds, bankruptcy and deficiency sales was 91.4% in the quarter. The net charge-off ratio of 60 basis points decreased 750 basis points from last year. During the quarter, repossession and remarketing activity returned to more normal levels and were supported by very strong used vehicle environment leading to record recoveries and losses. Our expectation is that losses will remain lower than prior years even as we enter our typically seasonally worst fourth quarter supported by low delinquencies and continued strong used car prices.

Turning to Slide 14, we detailed monthly loss and recovery rates year-to-date versus prior year. The customer relief we were provided earlier in the year resulted in fewer units we can charge-off, leading to a lower gross charge-off ratio in the quarter. The third quarter also benefited from record-breaking wholesale environment with August being a net recovery month, meaning our recoveries outpaced our losses recognized during the month. We expect both gross losses and recovery rates to continue to trend upwards throughout the remaining months of 2020 and into next year.

The Manheim index hit a record high of above 160 in August, up 16% year-over-year. Prices in September begin to plateau and that trend has continued into October. Specific to our portfolio, we experienced a 16% increase in auction prices in the quarter versus the third quarter 2019. Year-to-date, our option-only recovery rates grew 5% and we expect on a full year basis to be up 7% to 8%. We do expect prices to come down from this point going forward and continue to normalize to pre-COVID levels, which were robust coming into 2020.

Moving to Slide 15 to review loss figures in dollars and the walk from prior year. The net charge-offs for RICs were down significantly year-over-year. Losses increased $72 million due to higher average loan balances. This was more than offset by $446 million in fewer gross losses, primarily due to factors we just covered and a $172 million due to improvement in recoveries.

Turning our attention to provisions and reserves on Slide 16. At the end of the third quarter, the allowance for credit losses totaled $6.1 billion, increasing $293 million from last quarter, driven by an increase of $474 million in reserves due to higher balances, partially offset by a decrease of $181 million due to a higher mix of prime credits and a slightly better macroeconomic backdrop. This represents an allowance ratio of 18.4% at the end of this quarter, down from 19.2% last quarter. Our reserves have increased materially this year due to the adoption of CECL and significant changes in the macro outlook during the first and second quarter.

In the third quarter, the macro outlook improved modestly, but that was more than offset by the increase in balances. End-of-period balances grew to the sharp rebound in our non-prime segments, lower gross losses and our decision this quarter to retain approximately $1.7 billion of prime assets, which we moved from held-for-sale to held-for-investment and are now incorporated into our CECL reserve. Total balance grew approximately $3 billion from the second quarter, $2 billion from prime assets and $1 billion from non-prime assets.

As mentioned, the macro scenario we use slightly improved, but the scenario still assumes elevated unemployment and a prolonged recovery. Our baseline macro scenario assumes an uptick in unemployment in the next few months, up to 9.4% and remaining in the high-single digits throughout 2021, ending the year just over 7%. Our scenario does not include another round of government stimulus or another shutdown of the economy. If either of those materialize, we will have an impact on our portfolio and we will have to incorporate those circumstances into our modeling as approach.

Moving to Slide 17 to cover CECL by asset designation. On this page, we have provided a breakout of reserves between TDR and non-TDR balances. The TDR coverage ratio versus last quarter increased to 33% due to increased credit risk in this population. A higher percentage of loans in the TDR portfolio have received COVID relief and a higher percentage of delinquency exists in this portfolio compared to the second quarter. These accounts were higher risk pre-pandemic and we continue to view them as high risk during the pandemic. Non-TDR coverage versus last quarter decreased to 16.5%.

As mentioned earlier, the growth in the non-TDR balances outpaced the growth in non-TDR reserves. As a credit mix of this portfolio has improved, these are higher mix of time volume from our move from HFS to HFI. Also, this population includes a much higher percentage of accounts that does not receive a COVID deferment. As I mentioned, that accounts are performing well, which also brought the lifetime loss expectation down slightly. Overall, we believe our reserve is appropriate at $6.1 billion or 18.4%, given the level of uncertainty in the market.

Turning to Slide 18. The expense ratio for the quarter totaled 1.7%, down from 2.3% compared to the prior year quarter. Our operating expenses were down versus the prior year quarter, primarily driven by lower repossessions and other expenses.

Finally, turning to Slide 19. As Mahesh mentioned, during the quarter, we were able to pay our quarterly dividend and continue our previously authorized share repurchase program, we need to repurchase more than 10 million shares of our outstanding common stock in the quarter. Even with these capital distributions, our CET1 ratio increased 30 basis points versus the last quarter to 13.7%. The Federal Reserve recently extended the interim policy prohibiting share repurchases and limiting dividends to all CCAR banks to the average trailing four quarters of net income. Although our stand-alone income is sufficient to support our ordinary dividend, SC is consolidated into SHUSA's capital plan and therefore we are subject to SHUSA's average trailing income to determine the cap on common stock dividends. As such, we do not expect to declare or pay dividend in the fourth quarter of 2020.

In consultation with SHUSA, we decided not to ask for an exception this quarter as we are in the midst of submitting a comprehensive capital plan, which uses 2020 CCAR resubmission. Resubmission is almost complete and will be submitted in early November. We are confident based on the previous submission and the internal stress test that we have conducted throughout the year that we will continue to perform well under stress that we will be able to return capital to shareholders once these interim guidelines expire. Our balance sheet, excess capital and reserves position us to weather the uncertainty in the coming quarters, pay our dividend and have excess capital to reinvest in the business or distribute to shareholders. Between our reserves and capital, we have significant loss absorbing capacity.

To conclude, the third quarter was a very unique time where we saw record low losses and record highs in used car prices despite the high level of unemployment. We have trended toward normal in many areas of our business as vehicle sales and originations have improved. Demand for forbearance has decreased and we expect recoveries to come down off historical levels. We will continue to benefit going forward from low rate environment and a strong ABS market, which will help maintain profitability and retain better credit assets. We are cautiously optimistic for another stimulus package, pleased with the consumer behavior to this point and the resiliency of our portfolio. The uncertainty is still there, but we are confident our liquidity and capital give us flexibility going forward from an operational and strategic standpoint. We will remain disciplined in our approach, conservative in our underwriting and continue to be good stewards of capital.

Before we begin Q&A, I would like to turn the call back over to Mahesh. Mahesh?

Mahesh Aditya -- President and Chief Executive Officer

Thank you, Fahmi. I want to conclude by thanking all of our employees who despite the personal and professional challenges caused by the pandemic continue to execute with a level of dedication that's unsurpassed. Our employees' hard work continues to inspire and give us confidence as we look to the future and position the company for long-term success. These efforts resulted in key customer satisfaction scores, or Net Promoter Score, which measures the likelihood that our customers would recommend SC to friends or families, also increased significantly. Each metric remains above our targets and outperformed the year. The COVID crisis saw our leadership team make tough decisions where the customer was foremost in our thoughts at all times.

We launched an unprecedented assistance program almost immediately at the start of the pandemic. At the peak, 27% of our active accounts were under forbearance. We were sensitive to the immense hardships facing our customers and stopped all involuntary repossessions for a minimum of 60 days and we waived late fees for those who stated that they were impacted by COVID-19. We recently announced a $1.7 million in charitable grants to 29 non-profit organizations, funding programs and needed continued resources during the pandemic. The grants support organizations in the surrounding communities in which SC operates, providing services including virtual classroom capabilities, support for homeless residence, child care services for working parents, clinics and shelters for vulnerable families and food distribution.

This quarter, we made great progress in our diversity and inclusion program by launching 16 employee-driven initiatives that cover a wide range of areas from recruitment and training to career development and mentorship to financial education. We are also in the process of engaging a well-known not-for-profit to help us launch customer-oriented relief programs in the near future.

Earlier this month, we announced that we are opening a new servicing center in Tampa, Florida. We expect the facility will bring approximately 850 jobs to the area and will expand our operations coverage in the Eastern Time Zone. In addition to becoming a part of the Tampa business community, we also look forward to supporting local charitable causes and organization through missions aligned with ours.

Santander Consumer has a track record of profitability and resilience through economic cycles and the current pandemic is no exception. We are confident that we have the capital, liquidity and support from our parent and holding company to withstand these headwinds. The crisis has helped us emerge as a more customer and dealer-centric organization with an enormously resilient workforce. In these unique and trying times, I am extremely proud of our management team and the amazing stamina and creativity of our frontline and support staff. Together, we are there to support our customers, dealers, our OEM partners, and more importantly, our community.

With that, I'll open the call for questions. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll hear first from Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning. Can you hear me?

Mahesh Aditya -- President and Chief Executive Officer

Good morning, Betsy. Yeah.

Betsy Graseck -- Morgan Stanley -- Analyst

Oh, OK, thank you. Yeah, a couple of questions. There was -- you were commenting quite a lot of detail around the delinquencies, the deferrals, what you are seeing and a couple of things really stuck out, the fact that you are even getting folks paying ahead of time, which I have never heard of in any kind of consumer lending, in particular, in sub-prime auto. So, maybe you could give us a sense as to why you think that's happening, the payment rates so high in the non-deferral group of customers that you see and if you could give us a sense as to what you are thinking about the used car outlook here with the persistency that you think that, that could have, how many months or for quarters and what kind of rate of change you are anticipating as we go into 2021 now? Thanks.

Mahesh Aditya -- President and Chief Executive Officer

Yeah, Betsy, thanks for the question. I mean, we have seen payment rates generally go up across the industry, across product categories. As you are very familiar with, you have been tracking some of the banks that you cover. We have also noticed that and our portfolio is no exception. So, at the start of the pandemic, we noticed as soon as the stimulus program was around both the $600 and $1,200 payment, we began to notice a spike in the payment rate after an initial very steep falloff just after the pandemic, the payments rates began to come back. So, this was essentially happening from customers who we figured had excess cash, who had the ability to deploy that cash and pay ahead. And in some cases it was the stimulus. In other cases, it was customers who received moratorium on their other asset products who were then paying ahead and getting themselves in a better situation.

We also know that during the pandemic, FICO scores went up significantly and part of the reason was exactly this phenomenon that we know that's in our portfolio in both loans and leases. And Fahmi also covered one other interesting aspect that we noticed, which is the payoff rates have increased for both loans and leases. So that's generally I think -- that's generally the trend and the tendency that we have noticed, which is the ongoing -- the continuation of stimulus package is going to be important. We understand some of this is artificial created by the stimulus, but in order for the economy, continue with the soft landing, there needs to be a second round of stimulus and/or a vaccine, whichever comes in order to support this.

Fahmi Karam -- Chief Financial Officer

And Betsy, maybe I can also add, if you remember when we first talked about the level of deferrals that we had in our portfolio, we talked about how some were asking for the deferral without even really needing it, because they didn't have a clear sense for how the pandemic was going to impact them. So, I think that's also contributing to people paying ahead and some of the people who asked for a deferral may not have needed it at the beginning.

And then maybe on used car prices, I think that was the second part of your question. Yes, obviously, used car prices have been really strong for us and really for the industry. As I mentioned, we do expect that to be the case at least in the near-term, at least the next quarter or two. We talked a little bit about headwinds and tailwinds over the last few calls. Honestly, now, we see a lot more tailwind than we do headwinds with new supply still being off 25%, 30% from pre-COVID levels. The consumer demand is still very strong, we see a shift from new to used during any recession and then that COVID-related phenomenon of people wanting to own a vehicle, first taking public transportation as economies have opened up. So, we definitely see more tailwinds into the future. We do not expect the levels to stay at historic level every quarter obviously. But we do expect them to trend down toward pre-COVID levels, which were obviously very strong coming into the year.

Betsy Graseck -- Morgan Stanley -- Analyst

Yeah, just a question, we've been getting from people because obviously the reopening has slowed down and then we're seeing a little bit of a pullback in certain geographies given the virus spread. So just wondering how you're thinking about that specifically into 4Q as well. Can the level of used car price stay where it is through the full quarter, or is there anything that you would think would potentially pull back down again thinking about the virus spread that's going on right now?

Mahesh Aditya -- President and Chief Executive Officer

Yeah, we still think that there is a -- so there is a couple of phenomenon here. One is, yes, as Fahmi said, there is a supply demand issue. That dynamic is playing out and there is a shift of preference from new to used. The second phenomenon that we're seeing is this availability of liquidity, which is what's creating the demand for used cars and the car is the ultimate mask at the end of the day. If you can avoid public transport and can afford a used car, I think there is a general tendency or general belief out there that it's probably the safest way to get about. So we do believe that in the fourth quarter, while the used car prices are likely to soften, they won't soften significantly and they'll continue to sort of -- we'll continue to see the high levels of recovery through the fourth quarter.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

We'll hear next from Mark DeVries with Barclays.

Mark DeVries -- Barclays -- Analyst

Yeah. Thank you. So your gross charge-off terms, a lot could be benefiting from kind of a heightened deferral activity the last few quarters, but those deferral balances are bottoming this quarter. Can you help us think about the timing for gross charge-off rates to kind of normalize in the coming quarters?

Fahmi Karam -- Chief Financial Officer

Yeah, good morning, Mark. Thanks for the question. So from a timing standpoint there's a lot that goes into the timing. We talked about kind of the lack of clarity around another government stimulus. I think that's going to be really the important factor when it comes to timing of our losses. If things kind of stay as they are today and no new government stimulus occurs and there is not -- a stoppage of the economy, we think we can see elevated losses at the end of Q1 going into Q2 of next year. And obviously, you'll see the delinquencies before that. But, of course, as we've talked about, we do you feel like a government stimulus will help, obviously, our portfolio, help the industry and to the extent that happens, we do think that will delay some of the losses that we'll see and maybe even lower the severity of the losses that we'll experience.

Mark DeVries -- Barclays -- Analyst

Okay. Can you remind us what the average income is for your customers and to what extent there we're seeing income replacement if they were unemployed from kind of the federal unemployment supplement?

Fahmi Karam -- Chief Financial Officer

Yeah. I think, Mark, the way to think about is there is a lot of consumers who were able to replace the income they were making with the stimulus package. And at the same time, even before COVID, were saving a lot more of their income than prior years and prior recessions. So the consumer is definitely in better footing going into this. I think the stimulus helped them continue making payments and so now the question is around how long does that last with the high level of unemployment.

Mahesh Aditya -- President and Chief Executive Officer

Yeah, I mean, Mark, if you just look at it -- this is Mahesh, if you just look at it, you have -- at some point, we have about 70% of our portfolio supplying, right? And if you take the instance of -- and I'm just throwing out data points that we've already announced. One is that at the peak, 27% of our portfolio had availed of an extension or forbearance program. And that has come down to lesser for us to somewhere around a 4% range. If you think about that big decline, sharp decline from 27% to 4%, one would have expected that during that period, you would have had an uptick in delinquencies, which didn't happen to the extent that one would have expected it. Little more than a quarter of the portfolio coming down to 4%, there is no corresponding uptick in delinquencies.

So something is going on over there and we [Indecipherable] to the continued existence of the stimulus money and the fact that there is this reliance right now and probably a reallocation of the payment hierarchy toward more -- a greater desire to repay the auto loan because the repossession cycle is shorter and therefore you enter this period where customers are making decisions of their own. And it's really, really important at this point that for us to have a view and an outlook on when losses will start emerging in the portfolio, it's very important to know when the next stimulus package is going to come in and what the impact of that is going to be. So it could be extended out another couple of quarters. But a big percentage of our portfolio has come off the extension program, which for us is really encouraging.

Mark DeVries -- Barclays -- Analyst

Great, thank you.

Operator

We'll hear now from Jefferies' John Hecht.

John Hecht -- Jefferies -- Analyst

Thanks very much, appreciate all the color. You guys talked about the -- clearly there has been a migration toward higher quality portfolio mix, higher FICO bands. I'm wondering what is that due to overall NIM pre-losses in the coming quarters?

Fahmi Karam -- Chief Financial Officer

Sure. Thanks, John, for the question. So NIM actually is obviously a very positive story for us this quarter. Compared to the second quarter, our net interest margin increased 150 basis points and it's from a combo of -- a combo but the big driver there is around our lease yields. Our lease yields more than doubled this quarter compared to the second quarter. And some of that is -- we talked about a little bit in the prepared remarks, but it's the level of maturities and disposals we had in the quarter. So this quarter was about 50% higher level of disposals than the prior year and about 35% higher than in the second quarter. And we were able to have those disposals at much higher used car prices, and so the gain on sale per vehicle was definitely increased quarter-over-quarter. Some of that gain on sale is offset by the depreciation expense. But that's the big expansion in NIM going in this quarter.

The other piece of NIM for us is around the prime assets and the level of mix prime compared to our non-prime book. Last year, prime assets, as a percentage of our total earning assets, was about 4%. This year, it's about 8%. So it's also doubled, which brings our NIM down. And another component of it is around our cost of debt. We mentioned that cost of debt was 80 basis points better than this time last year, it's about 30 basis points better from the second quarter and we expect that to continue. So going forward, I think you'll see a betterment in our cost of debt, you will see some of the prime assets weigh on our NIM, but as we mentioned on the non-prime side, we also feel like the originations are strong there and have high returns. So net-net, we feel the level that we're at today is consistent going forward.

John Hecht -- Jefferies -- Analyst

Okay, very helpful. Thanks. Second question, unrelated, there has been a lot of development particularly over the past six months, kind of digital channels to purchase cars. I'm wondering, do you guys -- can you guys sort of elaborate on your focus or strategy there on how to capture market share in that category going forward?

Mahesh Aditya -- President and Chief Executive Officer

Yeah, thanks for the question, John. I mean, there is clearly going to be a shift to more virtual sales, perhaps even further exploration of the direct-to-consumer lending model. But I think right now our interest is in servicing our dealers better and making sure that whatever happens in terms of digitization and assisting dealers to consummate sales quicker in a more remote fashion without having to carry your documents back and forth and all of that stuff. That's going to be the sort of emphasis of our investment and our efforts going forward and going into this quarter.

We've got to make it easier for dealers to be able to look at alternatives to deal, to be able to shop around between lenders and for us to be able to give them the best offer in order to be able to do the deal and be sensitive to the fact that dealers have a certain preference to sell certain kinds of products and back-end and all of that, and give them that full flexibility all in a remote fashion without them having to have too many sort of dips at the well. So that's -- without getting into too much elaborate detail around what exactly what kind of technology we are planning to use, there is a lot of effort going on internally in terms of developing some of those functionality, dealer-facing functionality.

John Hecht -- Jefferies -- Analyst

Great. Appreciate that. Thanks guys.

Mahesh Aditya -- President and Chief Executive Officer

Okay.

Operator

We'll hear next from Steven Kwok with KBW.

Steven Kwok -- KBW -- Analyst

Hi. Thanks for taking my questions. Just the first one I had was just around the competition. You mentioned some of the competitive pressure on lease side. Can you just talk about it on both the loan and lease side and what you're seeing? Thanks.

Fahmi Karam -- Chief Financial Officer

Sure. [Technical Issues], Steven. So, we mentioned non-prime, we're pleased with the level of originations over the last four or five months. We mentioned this a little bit last quarter that some of the non-bank kind of non-prime focused specialty finance companies definitely took a step back on the onset of the pandemic. A lot of that competition, I think, has come back. So I would characterize it as fairly stable and returning to kind of pre-COVID conditions. But we were able to kind of maintain the momentum that we built in May and June into the third quarter. So, as I mentioned, we were able to tighten our underwriting standards, increase our margin and grow our share, which is a great combo. It won't last forever, but it's a nice combo that we've experienced over the last four or five months. So that's on the non-prime side.

On the lease side, leases coming back from a year-over-year basis, it has been slower for us on coming back. Some of that is competition. As I mentioned, some of the banks and credit unions that we compete with on lease have seen an influx of liquidity and higher deposit that they've become more aggressive from a pricing standpoint. And you know some of this at least we've talked about in the past is an ebb and flow of competition each month. And we have decisions to make on how much we hold margin and how much we want to go and chase some of the volume. So that's something we deal with on a day in day out basis month in month out, we pick our spots. It comes and goes. But as I said, we feel very good that September was a strong month. And we're going to have a strong fourth quarter.

Steven Kwok -- KBW -- Analyst

Great, thanks. And my follow-up is just around the buyback activity in the quarter. How much of the -- I think you have approximately $360 million of capital [Phonetic] remaining. How much of that was done during the quarter and then also, as we look ahead, like how should we think about the capital and versus what -- probably the level of capital you would need and kind of how much of excess capital can be used to return back to shareholders? Thanks.

Fahmi Karam -- Chief Financial Officer

Yeah, Steven. So we bought about 10 million shares throughout the quarter. Some of that detail will come out in our 10-Q. The level of what we have left on our authorized plan getting back from the combination 2018 and 2019 is somewhere in that $400 million range. As far as capital going forward, I mentioned, we feel very confident in our liquidity and capital position, we're going through the process now with SHUSA to submit CCAR 2.0 and through that plan, we expect to hear back by year-end.

So once we get some feedback from the regulators around not only our portfolio, but their feedback and their view around the industry in general, we'll have a better sense of where we go from a capital standpoint going forward. And then we'll also get feedback from them on when the interim policy will expire. And then the FCB policy framework then would kick in. And so once all that happens, we'll come back, we'll have to obviously evaluate what the conditions are at that time and we'll be able to give you a better sense of the capital going forward.

Steven Kwok -- KBW -- Analyst

Okay. Thanks for taking my question.

Operator

[Operator Instructions] We'll hear next from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. And thanks for all the detail about the performance coming out of forbearance. I guess maybe I was just a little confused and unfortunately there's a lot going on this morning. Could you just talk a little bit about what is likely to happen subsequent during the fourth quarter? You mentioned that some 35% of the borrowers that came out in September were inactive. I mean, at what point do those flow into delinquency? What percentage of them do you think would start making payments and kind of what does that mean? Are there other -- and for the stuff coming out in -- if there are any in October, and in future periods? Thanks.

Fahmi Karam -- Chief Financial Officer

Good Morning, Moshe. So I'll start and Mahesh can add-on. But I think part of what our expectation is for the fourth quarter and leading into next year is you will see a higher uptick in delinquency as the accounts roll from bucket to bucket, that it is our expectation. That's why we're reserved to 18.4%, because we do expect them to increase from this point going forward, specifically around our TDR portfolio, which has a higher population of accounts that did receive COVID relief. You saw the TDR coverage ratio of 33%. And so I think from this point forward, you will see higher delinquencies into the fourth quarter, specifically around this population. And then you will see them eventually charge off into, as I mentioned, Q1 and into Q2. But you got to remember also, we also mentioned the other part of the population, which is a bigger part of the population is still performing really well. So that's going to offset the extended or the deferred population.

Mahesh Aditya -- President and Chief Executive Officer

Yeah, I mean, just to add to that, there is a couple of things going on with the extended population. We've got, as Fahmi said, 65% are paying, 35% are inactive. By inactive, we mean they're neither paying nor being reextended. And those accounts are likely to go delinquent. So the story with extended accounts is that they are obviously -- there is a greater -- they're self selected at the end of the day. They're customers that demonstrated that they have -- they're experiencing some sort of distress. So you would expect that the extended portfolio would have two things, one is a higher delinquency, sort of steady-state delinquency, as well as a greater reversion to mean, and whatever that is, whichever level of delinquency that is. So the uptick that we are seeing in the extended -- in the ever-extended portfolio, the ever extended portfolio the uptick that we are seeing is much sharper than we are seeing for the portfolio that's never been extended. And that's to be completely expected.

What we do expect to happen is a couple of things. One is, do we continue to offer extension programs going into next year, which relies entirely on the inter-agency guidelines with the Fed and CARES Act and all of that, and therefore there is a decision likely to be taken on that. And the second thing is what, if any, is the second round of stimulus and how is that going to affect the extent the portfolio that's been extended so far. Will they get a second round of stimulus and would they start paying off their auto loans? And would we have some muting of delinquencies on account of that, which is why, when we made the statement about delinquencies emerging in the end of the first quarter, possibly second quarter, it largely depends on this portfolio, the ever-extended portfolio, and how they perform, and what kind of liquidity that they have access to.

Moshe Orenbuch -- Credit Suisse -- Analyst

Okay. when you say delinquencies, I think you meant charge-offs. Right? Just to clarify.

Mahesh Aditya -- President and Chief Executive Officer

Yeah, I meant that [Speech Overlap]. That's right. But delinquencies for me is a leading indicator of what's going to eventually happen.

Moshe Orenbuch -- Credit Suisse -- Analyst

Of course. Okay. And I know you just talked a little bit about the plans for capital return. But putting aside timing because you don't have control over that, maybe could you just spend a minute or two talking about management's preferences as to once you get to the point and see how much -- what's available and how you would think about distributing it. Because I think, obviously, the capital generation has probably been pretty decent. The balance sheet growth has been below expectations over the last year, obviously, and -- just talk about your thoughts about the method of distribution.

Fahmi Karam -- Chief Financial Officer

Yeah. So, I think the continuation of the -- of what we have been doing in the past is probably the right way to think about it, Moshe. And it's going to be a combination of dividends and share buybacks. And the mix between the two have to be -- will depend heavily on kind of the situation at that time as we progress through the pandemic. Another thing to kind of keep in mind, when you look at our CET1 ratios, we will start adding to phase in the CECL impact in the first quarter of 2022. So obviously, we feel very good about our capital position today and we're [Indecipherable] the13.7%, we will continue the capital.

But we do also -- we are also very mindful of the environment that we are in and the upcoming CECL phase in -- beginning in 2022. So it will be a mix. The good news for us is we still have all of the typical alternatives at our disposal, but it will be a mix of dividends and share buybacks mostly.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got you. Thanks very much.

Operator

And from J.P. Morgan, we'll move to Rick Shane.

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

Thank you, good morning, guys. Just want to talk a little bit about some of the competitive dynamics related to the FCA subvention. Obviously, with the supply demand imbalance for new cars, we are seeing a pullback subvention, I am curious what you guys are hearing from FCA. And presumably, they are meeting all of their percentage obligations to you guys.

Fahmi Karam -- Chief Financial Officer

Yeah. So I would say -- good morning, Rick, FCA, just like all OEMs are trying to find ways to drive sales and we partner with them every month to figure out what works for them and what works for us from an incentive standpoint. To answer your question directly, on the level of subvention, yes, they are performing in line with the contract and our expectations. I think as the pandemic continues, we have seen a reduction in some of the zero for four months terms, some of that has kind of shorter term dated us back down to zero for 16, zero for 72. Well, we are working with them now is around what they want to do around the fourth quarter and the holiday season, because it's usually a typically heavily incentivized couple of months. So, whether its subvention or some kind of other way of incentives, we are partnering with them and expect a typically strong fourth quarter from an origination standpoint and a penetration standpoint.

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

Great, thank you very much.

Fahmi Karam -- Chief Financial Officer

Thanks, Rick.

Operator

We'll hear now from Rob Wildhack with Autonomous Research.

Rob Wildhack -- Autonomous Research -- Analyst

Good morning, guys. A question on expenses, the expense ratio is good in the quarter. How much do you think this is a temporary improvement from things you called out like repossession expense that will ultimately revert, and what kind of opportunity are you finding to improve the expense ratio more structurally?

Fahmi Karam -- Chief Financial Officer

So, I think it's a little bit temporary from a repossession, but it is going to take us a while to get back to the level of repossessions that we had pre-COVID, just given the level of losses that we are experiencing. So it is somewhat temporary, our expense ratio was pretty flat at 1.7%, down obviously, pretty significantly year-over-year. I do expect that to trend back up into the 2% range over time.

Rob Wildhack -- Autonomous Research -- Analyst

Okay, thank you.

Operator

And with that, I'd like to turn things back to Mahesh for any closing remarks.

Mahesh Aditya -- President and Chief Executive Officer

Thanks very much and thanks everyone for joining the call today and your interest in Santander Consumer. Our Investor Relations team will be available for follow-up questions and we look forward to speaking with you again next quarter.

Operator

[Operator Closing Remarks]

Duration: 60 minutes

Call participants:

Evan Black -- Head of Investor Relations

Mahesh Aditya -- President and Chief Executive Officer

Fahmi Karam -- Chief Financial Officer

Betsy Graseck -- Morgan Stanley -- Analyst

Mark DeVries -- Barclays -- Analyst

John Hecht -- Jefferies -- Analyst

Steven Kwok -- KBW -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

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

Rob Wildhack -- Autonomous Research -- Analyst

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