Santander Consumer USA Holdings Inc (SC) Q4 2020 Earnings Call Transcript

Image source: The Motley Fool.

Santander Consumer USA Holdings Inc (SC)
Q4 2020 Earnings Call
Feb 3, 2021, 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 Fourth Quarter and Full-Year 2020 Earnings Conference Call. [Operator Instructions] Following today's presentation, the floor will be open for your questions. [Operator Instructions]

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

Evan Black -- Head of Investor Relations

Thanks, Tracy. Good morning, everyone, and thanks for joining the call today. On the call, we have our CEO, Mahesh Aditya; and our CFO, Fahmi Karam.

During the call, we'll make some forward-looking statements. Please refer to our SEC filings and risk factors regarding those statements. We'll also reference some non-GAAP financial measures and a reconciliation of those measures to US GAAP was included in the earnings materials issued earlier this morning.

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. Thank you for joining us to review our fourth quarter and 2020 results. 2020 was a year that will stick with so many of us given the devastation caused by the pandemic and the national awakening to social injustice and systemic racism.

We begin 2021 full of hope and confident that we, as citizens and our institutions, will come together to pull us out of this very unique and severe crisis, and we will emerge stronger and united as a country. I'm proud of the way our company and our employees adjusted and responded, to help each other and our communities, to serve our dealers and our customers, demonstrating resilience and a determination to do the right thing in this very challenging time.

Thank you to our team at SC for your dedication, feedback and contribution to our efforts to help our customers through this crisis. We also launched several new programs this year to address inequality in the workplace and to contribute to our communities in a meaningful way. I will cover these in my closing remarks.

Turning to Slide three, I'd like to discuss some of the highlights. We earned $521 million in net income for the fourth quarter of 2020. The fourth quarter capped off a strong year of financial results, it did in part by fiscal stimulus, but also a product of our efforts over the past couple of years to improve credit quality, enhance our risk and compliance framework and refine our pricing decisions through advanced analytics.

Net income for full-year of $911 million was $2.87 per diluted common share, down $83 million versus last year, primarily from an increase in provision expenses. Despite the headwinds of the past year, we were able to improve the quality of our bookings, both in terms of borrow of credit and deal structure, while maintaining strong volumes.

Total auto originations of $31 billion were down only 2% versus 2019, which is a record volume year for the company. $5.4 billion was originated for Santander Bank, mostly in the form of Chrysler prime loans. Our FCA penetration rate was down versus the fourth quarter of 2019, but stable for the full-year of 2020, when compared to 2019. Overall, we are extremely pleased with our results, demonstrating an ability to grow responsibly, while navigating through the crisis.

We also stayed true to our mission, taking care of our employees and focusing on our customers. We adapted quickly to execute a work-from-home strategy for 1,000 of colleagues, while providing additional compensation for frontline employees to offset their additional expenses. We provided relief to nearly 700,000 customers via loan deferrals during their time of need and achieved all-time high customer satisfaction scores. We continue to support Fiat Chrysler by collaborating on their incentive programs and provided relief to dealer floor plans through our affiliate Santander Bank. We also supported our communities through the SC Foundation, which donated over $3 million to organizations supporting people hardest hit by the crisis.

Earlier this month, FCA and Peugeot completed their merger, creating the fourth largest automobile manufacturers in the world. For SC, it remains business as usual, and the merger is not affected to effect -- expected to affect our relationship with FCA. As we continue to support their sales efforts and provide quality service to their dealer network, we look forward to our partnership with [Indecipherable] going forward.

Moving to credit. Early and late-stage delinquency ratios improved significantly year-over-year, due to the relief we provided our customers, our disciplined approach to new bookings and the effect of government stimulus and payment rates. Low delinquency levels, combined with record used car prices, led to an all-time low net charge-off rate of 4.4% for the year. From March through December, we granted 1.1 million loan deferrals to nearly 700,000 unique customer accounts. Loan loss reserves decreased by $42 million in the quarter and coverage rate at 18.5% was flat to Q3.

The resilience of consumer balance sheets and cautious consumer behavior, coupled with the record amount of fiscal stimulus, manifested itself with higher than normal payment and payoff rates in the second half of 2020. But we continue to believe that there is a high level of uncertainty in the timing and breadth of the economic recovery. These factors inform our loan loss reserve methodology.

Now, obviously, delinquencies remain below historical averages and payment rates stay high in the months ahead, then that will increase confidence that there is less eventual likelihood of default, which will then play out through our loan losses or balance. Used car prices remain strong, which show in our recovery rates. And as new vehicle inventories have reduced in the pandemic, we have seen robust growth in used car financing in our subprime business.

During the quarter, SC demonstrated strong access to liquidity, executing two successful ABS transactions off of our SDART and SRT platforms. Both transactions also achieved the lowest cost of funds on the platform and company history. We remained well capitalized, ending the quarter and the year with CET1 at 14.6%. We have a strong balance sheet, which will allow us to manage through upcoming challenges.

During the quarter, the Federal Reserve provided the results of the second stress test to our parent company, SHUSA. SHUSA ranked in the top quartile among participating banks for stress capital ratios. However, the Federal Reserve extended the interim guidelines for another quarter limiting capital distributions, which will prohibit SC from paying a dividend in the first quarter. SHUSA has requested certain exceptions to the interim policy. However, the timing and outcome of the request is uncertain. Pending approval of SHUSA's exceptional request, we cannot pay a dividend this quarter.

In addition, during the fourth quarter, we entered into a consent order with the CFPB related to an investigation into SC's compliance with the Fair Credit Reporting Act dating back to August 2017. We fully cooperated with the investigation and are pleased to resolve this legacy matter. SC was reserved for this, and no additional charges will be taken in connection with the settlement.

SC is a responsible lender in a highly regulated environment and we operate under large financial institution standards, which include rigorous risk compliance controls around lending and loan servicing. Over the past several years, we've strengthened our risk management across the board, improving our policies and procedures, including bureau reporting.

In summary, we are proud of how Santander Consumer navigated 2020. Looking into 2021, we believe that there's still a significant amount of uncertainty around us, but we are confident in our ability to adapt and execute in any scenario. We have the liquidity and capital to absorb elevated credit losses, invest in long-term strategic initiatives and as the regulatory and current climate permit, continue to return capital to our shareholders.

With that, I'd like to 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 four for some key economic indicators that influence our performance. Although, most economic indicators have recently improved, the US economy continues to face pressure due to the ongoing pandemic. Unemployment has improved from peak levels, but remains elevated versus prior years. The quarter-over-quarter change in GDP growth has come off the spike seen last quarter, and is beginning to normalize.

The outlook for our economy remains uncertain. Despite the early stages of the vaccine rollout, COVID-19 cases continue to rise, and some states have indicated the potential to further restrict economic activity. On the other end of the spectrum, momentum is growing for another round of government stimulus. Either of these events could have a significant impact to our business and our customers.

On Slide five, there are a few key auto factors that influence our origination volume and credit performance. New and used vehicle sales continue to improve and normalize in 2020. New vehicle sales leveled off above 16 million, well over the trough of 11 million units earlier in the year and in line with the fourth quarter of 2019. New car supply still below historical norms and may influence the number of new units sold in 2021. Used vehicle demand remains strong and has been consistent over the past couple of quarters. Used vehicle pricing is off its August peak and trended in line with historical seasonal trends in the fourth quarter.

The fourth quarter was up more than 10% year-over-year and we saw that trend continue in January. Several factors are influencing used car prices, including, among others, consumer demand for more affordable used cars, shortage of new vehicle supply, industry low delinquency and losses limiting wholesale inventory at auctions, and the increased number of consumers choosing to purchase a vehicle versus public transportation or ridesharing services.

We expect used car prices to continue to moderate in the long-term with continued elevated levels over the next couple of quarters and trending below 2020 in the second half of the year. Prices in 2020 were volatile with the large drop off at the onset of the pandemic, followed by a spike to record levels in August. 2021 has started strong above 2020 prices. We believe prices should follow typical seasonal patterns with spring appreciation followed by a dip in the fall.

Turning to Slide six for origination trends. During 2020, SC originated nearly $31 billion of auto loans and leases, down slightly versus a record volume year in 2019. Although volumes decreased only 2% year-over-year, the credit mix of volume was much different, demonstrating SC's unique ability to adapt to market dynamics as we supported our dealers and FCA to provide comprehensive solutions across the full credit spectrum. We ended the year down in our core Chrysler non-prime and lease channels, while increasing our prime originations by 31%.

As we move into 2021, we believe the mix will normalize and we will benefit from the gains in market share across all of our channels. For the fourth quarter of 2020, core loan originations increased 2% year-over-year. Total Chrysler capital loan originations decreased 8%. Chrysler prime volume decreased 4%. Chrysler non-prime volume decreased 13% and lease originations increased 8%.

Our core loan originations have been strong since the onset of the pandemic and we expect the fourth quarter increase in volume to continue into 2021. Chrysler non-prime continues to be under pressure as new vehicle sales slowed and non-prime consumer preferences shifted to more affordable used vehicles. We are very pleased with the level of originations in our non-prime channels as we remain disappointed in the higher risk credit segments. Prime loan originations decreased year-over-year as manufacturer incentives, including incentives from FCA, exclusive to Chrysler Capital, decreased from peak levels earlier in the year.

Lease volumes began to normalize during the third quarter and continued to improve in the fourth quarter, driven by lease as a percentage of sales increased since the spring, although still below FCA's pre-COVID levels. These offers were more attractive to customers in the fourth quarter as extended term retail loan incentives decreased toward year-end and our market share of leases improved in the quarter as we enhanced our offers in the market.

Our lease market share in the second half of the quarter was strong, and that momentum has continued into 2021, as we continuously assess our competitive position and work with our partners at FCA to provide dealers and consumers attractive terms.

Overall, our strong originations are a reflection of our team's execution in sales, pricing and risk. We believe the credit quality and margin profile of each channel of our 2020 vintage positions us well for future profitability. Our focus is to remain disciplined in our approach and originate loans and leases with appropriate risk-adjusted returns, while continuing to serve our customers and our dealers.

On to Slide seven, we break down the 2020 monthly originations versus 2019. Core loan originations were stable to slightly up in the fourth quarter versus levels from a year ago. 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 were down versus 2019 for most of the year. We call this channel has a higher mix of new vehicles versus our core dealer network. As consumers made affordability a priority this year, used vehicles were in high demand versus new vehicles, leading to lower volume in this channel. Chrysler Capital prime loans decreased in the fourth quarter versus 2019, due to lower FCA incentives exclusive to Chrysler Capital in the second half of the quarter. As we've commented on previously, FCA's incentives change monthly, impacting our prime volume. These fluctuations are typical, and we believe prime volume will return to pre-COVID levels in 2021.

Chrysler leases continue to improve throughout the second half of 2020 and increased materially in November and December, as we responded to competitive pressures in October. Lease is a very competitive product for us, and we are focused on retaining share and continuing the momentum into 2021.

Moving to Page eight, and our FCA partnership. US auto sales, including FCA sales were lower year-over-year due to the pandemic, but sales have significantly improved in the second half of the year. Our quarterly penetration rate of 28% was down versus the prior year quarter due to lower FCA incentives exclusive to Chrysler Capital. Our full-year penetration of 34% was flat versus the prior year. In January, offers exclusive of Chrysler Capital were back in market, and we saw an uptick in penetration. We will continue to collaborate with FCA on 2021 incentive programs.

Turning to Slide nine. We continue to identify ways to leverage our servicing capabilities and drive growth in our Serviced for Others platform. During the quarter, we added $1.5 billion in originations to the SFO platform via our agreement with Santander Bank. During the year, we successfully converted one external portfolio onto our platform and added a new SFO partner. The Serviced for Others balance remained relatively flat for most of the year, but this avenue remains core to our strategy. And coming out of the pandemic, we plan to grow this fee-generating part of our business. This platform generated $17 million in servicing fee income this quarter and $74 million for the year.

Moving to Slide 10. As of quarter end, SC's total liquidity of both funded and unutilized lines was approximately $53 billion. Liquidity continues to be fundamental for SC's success and remains critical in our efforts to support our dealers and customers during times of uncertainty. At the end of the fourth quarter, we had approximately 65% 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 parent, including $3 billion of unused capacity through our SHUSA facilities.

During the quarter, we also closed $2.7 billion in SDART and SRT transaction, both achieved the lowest cost of funds in the company's history. We continue to seek opportunities to optimize the balance sheet. After quarter end, we successfully executed our first off-balance sheet securitization of the year through our SCARD platform. The transaction totaled approximately $700 million of mostly prime loans.

Moving to Slide 11, to review our financial performance for the quarter versus the prior year quarter. Net income for the quarter of $521 million or $1.70 per share of EPS more than doubled versus the prior year quarter. Interest on finance receivables and loans increased 4% due to higher average loan balances during the quarter. Net leased vehicle income increased 37%, due to favorable auction rates this quarter and increased lease dispositions versus the fourth quarter of 2019.

Recall last quarter, lease income increased significantly quarter-over-quarter due to increased lease dispositions and more favorable prices at auction. In the fourth quarter compared to the third quarter of 2020, we saw a decrease in dispositions and customers and dealers purchasing a higher percentage of maturing units due to favorable residual values. This resulted in less units going to auction and lower gains on sale. This was more than offset by lower depreciation expense as a residual forecast in the portfolio improved compared to earlier in the year.

The net impact of these trends is an increase of 17% in net lease income quarter-over-quarter. Interest expense decreased 17%, driven by lower benchmark rates and robust market conditions. Cost of debt decreased 80 basis points versus last year to 2.7% in the quarter. Credit loss expense decreased to $254 million in the quarter, down $291 million, due to lower charge-offs as customer deferrals, higher auction recovery rates, improved credit quality of the portfolio and government stimulus led to lower losses.

Profit sharing increased $55 million, driven by portfolio performance on our held-for-sale personal loan portfolio, which has benefited from strong payment rates throughout the pandemic and increased lease residual gains, which we share with FCA. Investment losses were $48 million better year-over-year, driven by improved performance and lower balances on the held for sale personal lending portfolio.

Operating expenses were up 3% due to increases in salaries and benefits expense related to a ramp-up in collection staff and one-time expenses related to opening of our new site in Tampa Bay. Our quarterly expense ratio was down 10 basis points year-over-year.

Next, we will turn to Slide 12 for full-year results. Net income for the year was $911 million, down 8% versus the prior year, driven by increased provision expense. Interest on finance receivables and loans increased 2%, driven by higher average loan balances, which grew approximately 10% in the year. Net lease vehicle income decreased 3%, due to increased depreciation expense earlier in the year. Net yield on leased vehicles decreased approximately 50 basis points to 5%.

Interest expense decreased 10%, primarily due to lower benchmark rates, partially offset by an increase in derivatives expense. Cost of debt improved 60 basis points on the year. Credit loss expense increased to $2.4 billion in 2020, up $271 million, driven by reserve build associated with the adoption of CECL and related to the macroeconomic conditions. Net charge-offs were approximately $900 million lower, offset by an increase in reserves of approximately $1.2 billion.

Profit sharing more than doubled, driven by our held-for-sale personal loan portfolio and increased lease residual gains, which we share with FCA, as well as an increase in prime loan volume. Operating expenses decreased 7%, driven by lower repossession expenses due to COVID-19, partially offset by an increase in compensation expenses and employee headcount.

Moving to Slide 13, which covers our deferral trend since the beginning of the pandemic. In total, since the beginning of the pandemic, we granted approximately 1.1 million loan deferrals to 697,000 unique accounts was $12.2 billion on our balance sheet. During the fourth quarter, we saw a slight increase in the pace of forbearance request as a percentage of active accounts asking for a deferral, ended the quarter at 5.7% of total accounts, that's down from the peak of 27%, but up from 4.5% at the end of the third quarter.

We believe the uptick in extension is due to government stimulus ending in August, typical seasonal patterns and continued elevated unemployment. Of the 697,000 unique accounts that received COVID-19 deferrals, approximately 8% of those accounts remain in active deferral or approximately $1.1 billion, 92% of the accounts that received deferrals have had those deferrals expire. 71% of these accounts remain less than 30-days delinquent, 15% have expired in more than 30-days delinquent, 8% paid off their balance and 6% charged off.

For accounts with a COVID deferral and a payment due in December, 47% made up payment, 14% were extended again and 39% remained inactive. The payment trend has come down from levels of experienced in the third quarter with more accounts remaining in active. We believe this trend is due to certain stimulus benefits expiring and normal seasonality.

In the end of December and into January with the eight of the new stimulus package and extension of the CARES Act, we have seen an uptick in payment rates for both extended and non-extended accounts. Accounts that have not received the modification since the pandemic continued to perform well as consumers continue to behave rationally, controlling spending and increasing savings.

As we mentioned last quarter, we expect some of the active deferral status accounts to roll through delinquency and ultimately charge-off. Based on the information we have today, we believe that losses will increase in the second half of 2021 and remain elevated into 2022. If another larger stimulus package passes, there may be further delay in delinquency and the timing of losses. Ultimately, the pace of the economic recovery and unemployment levels will determine the overall level of losses.

Continuing to Slide 14 to cover delinquency and loss. Similar to last quarter, we saw a quarter-over-quarter uptick in delinquency, and that trend has continued in the fourth quarter as expected. Losses also increased quarter-over-quarter, but remain well-below 2019 levels. Versus the prior year quarter, early stage delinquencies decreased 370 basis points and late-stage delinquencies decreased 200 basis points.

The RIC gross charge-off ratio of 9.9% decreased more than 700 basis points from the fourth quarter last year. Our recovery rate as a percentage of gross losses was 64% in the quarter, up year-over-year, but down versus the last quarter as charge-offs and recovery values begin to normalize. The net charge-off ratio of 3.5% decreased 400 basis points from last year.

Turning to Slide 15. We detailed monthly loss and recovery rates versus 2019. While our fourth quarter charge-off ratios and recovery rates are better year-over-year. As anticipated, these metrics continue to worsen in the second half of 2020. We expect both gross losses and recovery rates to continue to trend toward normal levels as we move through 2021.

In regards to used car prices, the Manheim Index hit a record above 160 in August, up 16% year-over-year. Prices continued to seasonally trend down in the fourth quarter and the year-over-year increase stabilized in the 10% range. In our own portfolio, we experienced a 15% increase in auction prices in the quarter versus the fourth quarter of 2019. Rates were strong across vehicle ages and vehicle types, especially in trucks and SUVs, which represent approximately 18% and 35% of our auction sales, respectively.

Moving to Slide 16, to review the loss figures in dollars and the walk from prior year. Net charge-offs for RICs were down significantly year-over-year. Losses increased $131 million, due to higher average loan balances, but were more than offset by $337 million in fewer gross losses and $116 million, due to improvement in recoveries.

Turning to Slide 17. A new page we added this quarter to show reserve activity through the year. We ended 2020 with $6.1 billion in reserves, approximately double the amount of reserves we carried at the end of 2019. This represents an allowance ratio of 18.5%, up from approximately 10% last year.

Our total reserves increased approximately 20% from our CECL day one balance and just over 100% from the end of 2019. Our growth since day one is in line with other consumer and auto centric peers, but the overall year-over-year increase is well below peers due to our TDR portfolio. Coming into 2020, pre-CECL, TDRs represented about 13% of our total loan balance. And those loans were already reserved for on a lifetime basis. Overall, we believe our reserve level is appropriate given the level of uncertainty remaining in the economy and the elevated unemployment in the country.

Moving to Slide 18. At the end of the fourth quarter, the allowance for credit losses decreased $42 million from last quarter, driven by an increase of $83 million in reserves due to portfolio mix, offset by improved macro factors and a decrease in balances. The decrease in reserves this quarter represents a release of approximately 4% of the reserves we built since our day one CECL build.

Our reserves have increased materially this year due to the adoption of CECL and significant changes and uncertainty in the macro outlook, especially during the first and second quarter. Although, macro factors have improved, the pace of economic improvement has slowed over the last few months and initial jobless claims remain elevated. Also, the uptick in demand for consumer deferrals since the initial stimulus benefits expired is indicative that the economy remains in a recession, and the losses expected from the pandemic have yet to be realized.

As mentioned, the macro scenario we used this quarter-over-quarter improved, but the scenario still assumes elevated unemployment and a prolonged recovery. Our baseline macro scenario assumes an uptick in unemployment in the next couple of months, remaining flat to slightly down throughout 2021, ending the year just under 7%. Our scenario does not include the latest proposed round of governmental stimulus or another wave of shelter-in-place orders. If either of those materialize, it will have an impact on our portfolio, and we will have to incorporate those circumstances into our modeling as appropriate.

Moving to Slide 19 to cover CECL by asset designation. The TDR coverage ratio increased 50 basis points versus last quarter to 33.3%, driven by seasonally higher delinquency and performance deterioration. The percentage of this population receiving of deferral has grown by 5 percentage points compared to the third quarter, further supporting an increase in the coverage rate.

TDR balances increased approximately 4% this quarter. This balance will likely continue to grow in 2021 as TDR accounting guidance continues to be refined for COVID, and our deferral levels continue to be elevated going into 2021. We believe we are well-reserved for our riskier TDR portfolio with a ratio -- with a coverage ratio of 33%.

The non-TDR coverage ratio of 16.5% was stable versus last quarter due to continued strong payment rates and stable levels of customer relief compared to the third quarter. Also impacting the coverage rate was the move of approximately $700 million of prime loans from held for investment to held for sale at the end of the quarter, removing these assets from the CECL reserve. If these assets remained in the reserve, the overall allowance ratio would have been approximately 18.1%.

Turning to Slide 18, the expense ratio for the quarter totaled 2%, down from 2.1% from the prior year quarter. Our operating expenses were up versus the prior year, primarily driven by an increase in headcount as we look to ramp up our collection efforts in 2021.

Finally, turning to Slide 19, our CET1 ratio over the quarter was 14.6%, down 20 basis points versus the fourth quarter of 2019. Despite not being able to pay a dividend in the fourth quarter, SC returned nearly $1 billion of capital to its shareholders in 2020. During the year, we repurchased approximately $775 million of shares, inclusive of the tender offer in the first quarter and a block trade in the third quarter.

Even with these distributions, we ended the year relatively flat in our capital levels, which positions us well to expand further stress in the portfolio and to continue to return capital to shareholders when appropriate. We believe this level of capital is more than adequate to withstand a severely adverse scenario and still remain above post stress minimums.

As Mahesh mentioned, based on the Federal Reserve extension of the interim policy and SHUSA's expected average trailing four quarters of net income, SC is prohibited from paying a dividend in the first quarter of 2021. Although our stand-alone trailing income is sufficient to distribute capital in the first quarter, SC is consolidated into SHUSA's capital plan and therefore, is subject to the interim policy that utilizes SHUSA's average trailing income to determine capital distribution restrictions. SHUSA has requested certain exceptions to their interim policy. However, the timing and outcome of that request is uncertain.

As the economic backdrop and capital distribution policies revert back to normal, we are focused on maintaining the momentum we have established over the last couple of years in returning capital to shareholders. Our strong capital and liquidity ratios are indicative of our balance sheet strength, which will serve us well moving forward.

To conclude, the fourth quarter was a very strong quarter for SC. The portfolio has performed well and demand for vehicles remains high. Our balance sheet, capital and liquidity remain strong, and we will approach 2021 with caution. We remain disciplined in our underwriting and expense management, but also committed to reinvesting in the business for future growth. The uncertainty is still there, but we see signs for optimism and have confidence in our team's ability to execute and deliver value to our shareholders.

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

Mahesh Aditya -- President and Chief Executive Officer

Thanks, Fahmi. As I mentioned at the beginning of the call, we've made several strides to build a foundation for growth in the organization. I'm pleased to announce our newly appointed Chief Diversity Officer, Dr. Virnitia Hendricks. Virnitia will serve as our first senior executive in this role, leading SC's cultural change with a focus on comprehensive and results-driven outcomes. In her new role, she will oversee SC's office of Diversity, Equity and Inclusion, helping it build sustainable DE&I capabilities and an inclusive culture through well-established and proven method. She will also provide counsel approaching to SC's leaders and employees as they work to build inclusive teams and processes throughout the organization.

We are also pleased to have announced earlier this week, our partnership with Operation HOPE, to offer HOPE inside an award-winning financial wellness program as a benefit to all SC employees. HOPE insight provides financial workshops and one-on-one personal coaching designed to educate and transform thinking when it comes to making decisions about money, building wealth and working toward financial independence.

As we explore what it means -- truly means to be an inclusive company, we know that when people aren't able to save or invest or don't understand the final points of financial drivers like credit lending and interest rates, they have a harder time translating into their wealth. Our goal is to make sure all SC employees have access to financial literacy and the knowledge and tools needed to build generational wealth and a successful future.

We expect -- with respect to our business strategy, we continue to focus on positioning the company for long-term and sustainable success. Our dealer experience and our dealer relationships remain a strategic priority for us. We are very pleased with our competitive position with dealers as we continue to grow market share. We are dedicated to providing our dealers superior service. Part of that commitment is enhancing our processes and our internal and external facing technology to make our people more efficient and make it easier for our dealers and customers to interact with us.

Customer sales experience will continue 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 customer experience. We plan to invest significantly in this area in 2021 and solidify our leadership position for the long-term. I will end our remarks -- I will end our prepared remarks, again, by thanking all our employees for step stepping up in 2020 and delivering these great results.

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

Questions and Answers:

Operator

Hello. [Operator Instructions] Our first question comes from Mark DeVries at Barclays.

Mark DeVries -- Barclays -- Analyst

Yes, thank you. Can you just discuss -- assuming the Fed lifts some of these interim restrictions on capital returns, how we should think about the cadence of that going forward, balancing both the eventual phase-in of the CECL impact and also kind of your hopes and expectations for growing the balance sheet?

Fahmi Karam -- Chief Financial Officer

Sure. I'll start with the first part, I guess, of the question. Mark, thanks for the question on capital. So capital has been a really good story for us, something that we're really focused on. A lot of efforts to have a more efficient balance sheet, and that journey started back in 2028 -- 2018 as we worked really hard to distribute that excess capital. So we're still in an excess capital position. I feel like we've been very thoughtful and disciplined in our approach up to this point.

We have decided to lower our internal target from 12.5% to 11.5%. And we plan to kind of work our way down to that level over time. Lowering the target to 11.5%, we feel still gives us a room to operate and execute our strategic plan. It gives us the opportunity to grow as well as absorb any stress in the portfolio, allow us to phase in CECL starting next year and the flexibility to distribute capital when the time is right, and we're allowed to do so.

So we think we've been good stewards of capital, and we have a track record, as I mentioned, since 2018 of doing that. We've returned $1 billion of capital in 2020. And when the time arise, we have approved it to DSO, we'll sit down with our Board and make the best decision for the company and all of our shareholders.

Mark DeVries -- Barclays -- Analyst

Okay. Just a related follow-up then. I think, the CECL impact is roughly 360 basis points of CET1. Is it right to think that if we assume little balance sheet growth that that would kind of enable you to maybe have about 100% payout ratio and get you on a glide path to that new target? Is that the right way to think about it?

Fahmi Karam -- Chief Financial Officer

Yes, I think so. Obviously we're accreting capital every quarter, and we accreted a lot of capital this year with the big buyback. And so, we feel like we're in a really good capital position to absorb it over the next four years from a CECL standpoint. As I mentioned, execute on our plan and appropriately distribute capital in the form of dividends and share buybacks, but also be able to do anything on the strategic front, whether it's organic or inorganic opportunities.

Mark DeVries -- Barclays -- Analyst

Okay. Great. Thank you.

Operator

We will now take our next question from Moshe Orenbuch at Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. I guess, the main question I wanted to ask was here, you saw either strong originations this quarter, but kind of in different sorts of things, leasing came back so well. I mean, I think you mentioned that continued into 2021. But subprime has been weaker and some other subprime players have been talking about both supply and pricing. Can you talk about how you think that manifests itself during the next several quarters over 2021?

Fahmi Karam -- Chief Financial Officer

Yes. You pointed out most of it, which is you have to look at our originations by channel. And you have to look at it and separate it between core, Chrysler non-prime, Chrysler prime and then lease, and they all have different trends to them. On the core side in general, and that's obviously our non-prime used channel, we feel really good about where we stand from both a market share position, credit quality position and a share position.

And you've really been able to see that if you look at Page 7 of our earnings deck. Really since the onset of the pandemic, we've been able to increase it slightly year-over-year and we expect that to continue into 2021. On the Chrysler side, I mentioned in our prepared remarks that it's really driven around incentives that they put into the market on a monthly basis. Earlier on in the year, they were very heavy on the APR, so went through the incentives. And those are usually exclusive to Chrysler Capital.

As we got later in the year, some of those APR incentives of those APR incentives returned into employee pricing programs and things like that, which are less exclusive to Chrysler Capital. And so there we have to just be consistent with our platform and therefore, our dealers, but it's going to ebb and flow based on FCA's incentives.

Lease, we've talked about over the last couple of quarters, very competitive. There's only two other national players that -- that do Chrysler leases in the country. And so that one is something that we have to defend our share and grow it. And we've been able to do that over the last couple of months and hopefully do it in the first quarter of 2021 as well.

Mahesh Aditya -- President and Chief Executive Officer

And we are coming off a general sort of lower percentage of total sales for Chrysler in terms of lease over the last three years. So, the fact that lease has -- overall industry lease vol -- the Chrysler has been deemphasizing lease, our market share has been increasing successfully over the last four months.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Thanks. And I meant to thank you for all the new information that's in here on a monthly basis. But as -- just a quick follow-up on the previous question on capital return. Could you talk a little bit about the potential for what you kind of alluded to at the end of your answer, both organic and inorganic opportunities? Are there things that you see out there, or just talk about last portion and maybe if you would think about how much of your capital base you would be kind of allocating in that direction?

Fahmi Karam -- Chief Financial Officer

Yes, Moshe, we don't have a certain allocation per se of it. I think we've been opportunistic on the inorganic side. And right now, nothing to announce there, but we'll be opportunistic and buying portfolios as they become available. I think the pandemic slowed some of that discussion down as people were not sure exactly how the recovery would shake out and really couldn't reach an agreement on how the loss forecasting would be. So I think that part of it has slowed down, but we'll be opportunistic going forward.

On the organic side, you've seen some of that strategy play out in our volume, and I mentioned in our core channel, as well as our Chrysler channel. We spent a lot of time with FCA and with partnership with the bank to put in programs through the pandemic that really helped our dealer network as well as our customers. So, not a specific percentage of allocation. We're going to be opportunistic on the inorganic side. And then, the organic side, you've seen the benefit of some of the initiatives we've started, and then we still have some room to go.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks very much.

Operator

Our next question comes from Rick Shane at JPMorgan.

Rick Shane -- JPMorgan -- Analyst

Hey, guys. Thanks and good morning. Thank you for taking my questions and good morning. I'm looking at the loan deferral migration. One of the things that jumps out to me is that it looks like about 30-plus-percent of the greater than 30 days delinquent that expired last quarter rolled to charge this quarter. Is that a good way to look at it, that about a third of those loans are going to migrate to charge-offs going forward?

Fahmi Karam -- Chief Financial Officer

No, a third of the portfolio, I don't know if that's the right way to look at it, Rick. Just from a standpoint, it's very unique, depending on the accounts, the level of extensions that we're giving and case by case. So I don't know if that's necessarily a good way of doing it. But generally, thinking on loan deferrals, we do think it's positive for the consumers to give them a relief at this time. The trends that we're seeing, and we mentioned that the inactivity in December was probably a combination of stimulus checks ending as well as kind of the normal seasonal dip that we see in the fourth quarter.

For us, it really depends on the stimulus. And we've seen a big jump in January just from the new checks that were going out in December and January. And so it's something that we obviously monitor very heavily. We feel like we're reserved for the level of extensions that we have currently, but hard to say that's a trend to see quarter-over-quarter and try to extrapolate that going forward.

Rick Shane -- JPMorgan -- Analyst

Got it. And I'm specifically talking that last quarter, there were 84,000 units that were greater than 30 days delinquent in and the forbearance bucket, and the number of charge -- the cumulative -- the change in the cumulative charge-offs was 26,000. So that's where I'm getting that number. That's what I'm wondering about the roll on?

Fahmi Karam -- Chief Financial Officer

Yes. I'm with you, Rick. I see that too. But again, I think it's just a matter of quarter-over-quarter, it's going to be case-by-case on kind of the activity going forward.

Mahesh Aditya -- President and Chief Executive Officer

Also, Rick, the point here is that the deferred portfolio does flow the charge-off faster than the normal portfolio that's not being deferred. So if you -- so the broad math, good work that about a-third of those that were delinquent and did not pay would flow to charge-off. But that's only specific to the portfolio that's under deferral.

Rick Shane -- JPMorgan -- Analyst

Got it. Okay. That's interesting. So, the days to charging off are a little bit shorter for that portfolio once they roll through the 30-day bucket?

Mahesh Aditya -- President and Chief Executive Officer

Right. Because either they've run out of deferrals, because they've come up against the maximum in our policy, in which case, there is no option but to pay the loan. And if they can't pay the loan, then they go to charge-off.

So, the defining constraints of this are -- we don't add infinitum and keep giving deferrals. We have a cap on the number of deferrals that -- number of months that we'll defer a loan. So if you come up against that, then there's no alternative, but to charge-off, or pay.

Rick Shane -- JPMorgan -- Analyst

Got it. Okay. Thank you very much, guys.

Operator

Our next question comes from John Hecht at Jefferies.

John Hecht -- Jefferies -- Analyst

Thanks very much, guys. Most of my questions have been asked. I guess, a couple. One is, the lease portfolio, obviously lease margins were pretty strong. You're getting some residual gains in the back end. Where is your depreciation curve set now? And how do we think about the expectations for the lease margins given that and that and your outlook for used car pricing?

Fahmi Karam -- Chief Financial Officer

Good morning, John. Thanks for the question. So, yes, lease has been pretty volatile from a lease yield standpoint all year. If you remember, go back to Q2, we saw very limited maturity and very limited sales at auction, which really basically drove down and eliminated all of our gain on sales.

So we saw a very low trough in Q2 and then we've seen a big spike up since then. So, in Q3, we saw a lot of dispositions and record used car prices. In Q4, we had less dispositions, still elevated prices, but the big benefit was depreciation. And the way I think about the depreciation expense is that the residual forecasts have improved throughout the year, the depreciation expense that you're seeing in the fourth quarter kind of makes up for the heavy depreciation expense in Q2.

So, for the year, we ended lease at about 5% overall net yield. That's about 50 basis points below where we ended in 2018 and 2019. So, going forward, we still expect to have elevated used car prices. I think the depreciation expense will be lower than normal, but will not be at the level we saw in Q4. The 6.8% or 6.9% yield, net yield, is something that do not think is sustainable. But, overall, for the year, I do think we'll be above the 5% net yield for the year.

John Hecht -- Jefferies -- Analyst

Okay. And separate question. I mean, can you just remind us the unsecured loan portfolio, I believe, has been -- whether it's formally or informally on the market for a few years, and then there's also a contract. I can't remember. I think it's maybe coming up is it this year or next year.

Can you just give us the update on that, maybe talk about your strategic plans around that and what you might do if you do you decide to keep it, or do you decide to sell it with the capital?

Fahmi Karam -- Chief Financial Officer

So nothing to update here, John, as far as our activity on selling the portfolio. We're still -- its part of our plan to exit that business. And hopefully, we're able to do that. The contract does expire in April of 2022, and it does have a 12-month tail on it. That portfolio has been performing extremely well as you can see by the profit sharing increases we saw in both the fourth quarter and for the year. So, nothing to announce at this point, but we'll let the market know as soon as we do.

John Hecht -- Jefferies -- Analyst

And just one residual question on that. Can you tell us how much capital you've got put in that portfolio or any way to think about what kind of capital would be unlocked when you do are able to move on from that?

Fahmi Karam -- Chief Financial Officer

So, in the detail in the appendix in the presentation, I'll let you look through the details there and figure out. But it's about a $1.4 billion portfolio at the end of the year, and we haven't marked to fair value.

John Hecht -- Jefferies -- Analyst

Great. Appreciate that. Thank you very much.

Operator

Our next question comes from Betsy Graseck at Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hey. How are you? Good morning. It's Betsy Graseck.

Mahesh Aditya -- President and Chief Executive Officer

Hey, Betsy. Good morning.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. I just wanted to dig in a little bit to how to think about NIM going forward. I know you highlighted the mix shift that's expected this year between the non-prime and the prime normalizing, but then I'm also wondering about how you're thinking about the cost of funds, in particular, is there room to bring I just wanted to dig in a little bit to how to think cost of funds, in particular, is there room to bring that down further from here? So, maybe you can give us some color on that.

Fahmi Karam -- Chief Financial Officer

Sure. So, NIM, from a dollar standpoint, was obviously up year-over-year and quarter-over-quarter because of the balances are up -- the loan side were up about 10%. And on the lease side, we're up about 6%. But I'm going to separate it again between loan and lease. So, on the loan side, given all of the prime that we retained on the balance sheet in 2020, we've talked a lot about the incentives in the market, exclusive to us, and we've seen a run up in our prime volume.

Now, look at the balance sheet, we had about $3 billion of prime loans on the balance sheet at year-end. And then typically you run somewhere around $1 billion. So, we definitely had extra prime loans, and that's going to bring down our loan yield.

Strategy there, Betsy, is to do what we did in January and try to optimize that balance sheet and periodically execute off-balance sheet securitizations or do whole loan trades to sell off those prime assets. And if we're successful in doing that, then you'll see an uptick in our loan yields toward the end of the year.

On the lease side, I just went through what think at least, I think it's obviously very sensitive to residual forecasting and used car prices. I feel good about both on the lease side. And then, as far as cost of debt, we were 60 basis points better for the year, 80 basis points better for the quarter and about 10 basis points better from the third-quarter. And I do think that trend will continue as we reprice our securitization, and we repriced our private deals. The low rate environment there is definitely a tailwind for us.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. So, we should see some nice uptick in NIM from here, even if auto used car prices pulls back a little bit. I mean, I realize that's a bit -- that's the flex and it's hard to forecast, but ex-used car should definitely be higher?

Fahmi Karam -- Chief Financial Officer

Yes. That's the flex and as well as our ability to do off-balance sheet some of the time that we've retained over 2020. I think that's the big driver.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. And now, on deferrals, because we're getting some questions in on that. I get that the request increased in December, you had the benefit of that stimulus in August running out, so that took basically like four months. At this stage, we have the checks hitting people's pockets for the recent slug of stimulus that was put out there.

So, can you give us a little more color on what you're seeing with regard to the payment rate, since the recent checks have hit people's pockets? And then give us a sense as to what you think the benefit will be from this $1.9 trillion that the government looks like, it's going to be passing in the next few weeks?

Fahmi Karam -- Chief Financial Officer

Yes. So, Betsy, I'll start and maybe Mahesh, you can add in, but definitely saw a change in the payment rates in January compared to December. December, obviously, was a little bit better than in November. So I think part of it was the first round of stimulus ending kind of in late summer. We definitely saw people start asking for extensions again or deferrals again, but in January, it has slowed down, and the payment rates are back to where they were, call it, the August, September time frame. So it is very sensitive in our portfolio and our consumer base is very sensitive to that stimulus, given the level of unemployment in the market.

So we're still going to be there for our customers. We're talking to them and making the right decision for them and right decision for us, but we do expect to have elevated deferral levels at least for the next couple of months or so. And if that $1.9 trillion does pass as proposed, that's obviously going to be a big influx of cash for them, and it should just continue the improvement we've seen in payment rates.

Mahesh Aditya -- President and Chief Executive Officer

So we're seeing -- as Fahmi said, there's almost instantaneous reaction between the passing of a stimulus package and the way our payment rates reacted. And with that comes a slowdown in requests for extension. So, the extension request in January have perceptively slowed down. We've also seen, as Fahmi said, a spike in payment rates. But what we're going to increasingly see is, this whole reallocation, the sort of payment hierarchy of both payment rates and payoff rates are going to continue to increase as the new stimulus package, if it's passed, if it goes through, then both payments, the sort of secular increase in payment rates and payoff rates will continue to increase into 2021, which could result in a couple of things.

One is, lower delinquencies and therefore lower charge-offs, and we've also seen some stickiness in the way balances are holding across vintages. So, vintage -- given vintage, let's say, 2020 vintage at the end of the year has a higher balance as a percentage of what was originally originated versus what happened in 2019, because of what's happening over here in terms of the sort of reallocation -- the availability of all liquidity.

But the important thing here is going to be if this stimulus package gets passed. Then it's a sort of race against race to a sort of, call it, a finish line, which is what happens when normalcy returns. And it's going to be enough to take the economy through to a point where jobs start coming back and people start being able to pay at their own.

The other important thing, countervailing force for us as sort of cross wind or headwind is once the moratoria expire on rents and mortgages, what's going to happen with the payment hierarchy at that point? Does it allocate back toward paying down rents and mortgages that are due? So those are all the factors that we built in when we think about our [Indecipherable].

Betsy Graseck -- Morgan Stanley -- Analyst

Do you have any visibility on that topic in your portfolio? For example, when people are calling in and asking for a delay, do you -- are you able to collect the information at that point as to whether or not they're paying rent or mortgage?

Fahmi Karam -- Chief Financial Officer

So that's a great question. We've, so far, been very light touch as far as handling those calls are concerned because we understand there's a national sort of disaster, and we don't want to cross examine the customer too much, but there is some analysis that we've done at the back on how our portfolio distributes across industry categories.

And about a third of our portfolio is in, what we call, high-risk industries, which have had a significant job change or sort of shift in employment rate deterioration and employment pre-pandemic versus post. So we do understand that there's about a third of our customers who are going through a job event sort of crisis, so to speak. And they are probably the ones who are -- the biggest beneficiary with stimulus and eventually demonstrating this kind of payment behavior.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Our last question comes from Steven Kwok at KBW.

Steven Kwok -- KBW -- Analyst

Hi. Good morning. Thanks for taking my question. I just had just one quick follow-up around the exemptions to the Fed's structure or capital to plan. Was the assumption around just dividends, or did they include buybacks as well?

Fahmi Karam -- Chief Financial Officer

Steven, we're not going to comment on what was asked on the exceptional request. But, as we said, we will announce it whenever we hear back, but hopefully we get some good news consistent with what we did in the third quarter of last year.

Steven Kwok -- KBW -- Analyst

Thanks. Got it. Thanks for taking the question.

Operator

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

Mahesh Aditya -- President and Chief Executive Officer

Thank you. And thanks, everyone, for joining the call today and for your interest in SC. Our Investor Relations team will now be available for follow-up questions, and we look forward to speaking with you again in the next quarter. Thank you and have a great day. Bye.

Operator

[Operator Closing Remarks]

Duration: 57 minutes

Call participants:

Evan Black -- Head of Investor Relations

Mahesh Aditya -- President and Chief Executive Officer

Fahmi Karam -- Chief Financial Officer

Mark DeVries -- Barclays -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Rick Shane -- JPMorgan -- Analyst

John Hecht -- Jefferies -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Steven Kwok -- KBW -- Analyst

More SC analysis

All earnings call transcripts