Santander Consumer USA Holdings Inc (SC) Q1 2021 Earnings Call Transcript

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Santander Consumer USA Holdings Inc (SC)
Q1 2021 Earnings Call
Apr 28, 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 First Quarter 2021 Earnings 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

Thank you, Lisa. Good morning, everyone, and thanks for joining our call today. We have on the call our CEO, Mahesh Aditya; and our CFO, Fahmi Karam.

Certain statements made on today's call will be forward-looking. Please refer to our public SEC filings and Risk Factors with respect to these statements. We'll also reference some non-GAAP financial measures that we believe will be useful to our investors and a reconciliation of those measures to GAAP was included in the 8-K that we issued earlier this morning.

And with that, I'll turn it over to our CEO, Mahesh.

Mahesh Aditya -- President and Chief Executive Officer

Thank you, Evan, and good morning, everyone. Thanks for joining us to review our first quarter 2021 results. Before describing our results for the quarter, it's important to highlight a number of corporate milestones we achieved in 2021.

First, this quarter we reached a significant milestone by closing the last of our written agreements with the Federal Reserve. The 2017 written agreement required us to strengthen our risk management framework and the recent termination shows the significant strides made to strengthen our business across the board. Our employees have worked tirelessly to build a culture with a compliance mindset with the highest operating standards. These enhancements are fully embedded in Santander Consumer's operations. Next, we executed the sale of our personal loan portfolio allowing us to focus on our core competencies and opportunities in auto finance. In March, we paid our Q1 2021 ordinary dividend, as well as a special dividend for a total dividend of $0.44 per share. Also during the quarter, we deconsolidated $2.5 billion in prime auto loans optimizing the balance sheet while growing the service for other portfolio.

Finally, I'm pleased to welcome Bruce Jackson, our newly appointed Head of Chrysler Capital & Auto Relationships. Bruce joined Santander from JPMorgan Chase's auto business. In his new role, Bruce will manage origination sales and funding for all channels, while also building a best-in-class dealer experience. We believe there's tremendous potential to transform and grow our auto originations [Indecipherable] Bruce will make a strong impact on our business. Having another tried and tested seasoned executive on our team will position SC to accelerate our growth plans, enhancing dealer experience and digital advancement in the years ahead.

During the quarter we earned $742 million in net income, record earnings quarter for the company. We continued to grow originations following the momentum built in the second half of 2020. Originations were up across all channels for a total of $8.6 billion in volume, an increase of 24% versus the prior year. The growth in originations this quarter is driven in part by strong industry sales across new and used vehicles, as well as an increase in demand from consumers following another round of fiscal stimulus.

A robust economic recovery seems under way. We've seen the unemployment rate continue to fall, as job creation has picked up. Consumer spending has risen above pre-pandemic levels and the country has begun to open up in varying degrees. Still, risks and uncertainties remain and while many Americans have recovered, many still have not, which is why this latest round of stimulus was so important. The level of government support is what likely kept this pandemic from translating into a credit event up until now, and with support now extending through September, it's unlikely we'll see any material deterioration in credit losses this year.

As we learned during the prior rounds of stimulus beyond just supplying for the day-to-day, many Americans were able to use the money to build up additional savings, which helped them bridge the uncertain months that followed between the programs. Given the pickup in consumer spending following this round, it's likely we are seeing the benefits of more Americans being employed and stimulus money being spent more freely; but still for many, this assistance is what's keeping them afloat. One important difference with this round of stimulus when compared to those prior is that most financial services companies have stopped the broad-based payment assistance programs enacted in the heart of the pandemic, which showed affected customers -- which allowed affected customers to defer payments. These programs slowed the rise in delinquencies following the end of the prior stimulus programs. So, it's possible that we will see a more pronounced increase in delinquencies toward the end of the year if the economic recovery hasn't hit full stride.

Within our portfolio, delinquencies and loss rates are well below historical norms due to government support, our disciplined underwriting, and direct -- and our direct support of our customers. But below the surface, the signs are also encouraging as we see payment rates holding strong and steady and the percentage of our customers under payment deferrals has returned to historical norms. These encouraging trends can also be seen in our originations over the recent months as new customers on average are carrying less debt, have better payment history, and are bringing more cash to the table.

Our business has been further aided by an incredible -- by the incredibly strong used car values, which continue to reach all-time highs and of course, serve as an offset to any defaults. Expectations are, used car markets stay strong for the foreseeable future given the much talked about supply chain issues affecting new car inventories. Consumer demand is obviously high for new vehicles as well, given the March SAAR of 17.7 -- 17.7 million. New vehicle inventories have now fallen to 10-year lows and manufacturing may be affected throughout the second quarter for a multitude of factors, including the global semiconductor shortage, Texas weather events, and even the temporary closure of the Suez Canal. Given the supply demand dynamics, used vehicle prices are likely to be elevated in the near term.

Fahmi will cover the details of our Q1 performance, but I'd like to talk specifically about the loan loss reserve and some trends we are observing on TDRs. Our reserve coverage this quarter is higher than Q4 due to the sale of prime loans, which were replaced by new origination coming in -- coming on at a higher rate. The coverage rate of 18.9% translates to an annualized loss rate of 8.2%, which is in line with our historical loans -- which is in line with our historical losses and about 100 basis points higher in loss rate than our original CECL reserve under -- on day one. Implicit in this coverage number is the assumption that there will be a reversion to mean in delinquencies and losses once the stimulus programs expire. As we progress through the year and emerge out of the current economic environment, we will have a clearer line of sight on where credit losses will settle and how much reserve coverage will be needed. We do believe we are holding prudent levels of loan loss reserves considering all the different factors weighing on the economy and our portfolio.

On TDRs, we saw the population go by 400 million this quarter and about 900 million since the start of the pandemic. Over the quarter, we saw flows into TDR increase as classification of COVID-related extensions reverted back to pre-pandemic practices, offset by exits due to charge-offs and paydowns, which were flat to slightly higher than last quarter. The number of accounts under forbearance have reverted back to pre-pandemic levels and we expect flows into TDR to remain constrained -- contained through the next few quarters as forbearance activity continues to decline and payment rates remain elevated. While it appears we are on the path to a strong recovery, we also plan for more negative outcomes that could result from additional waves or strains of the virus and the resulting impact on labor markets. Resilience to downside scenarios remain focused in our origination policies.

In the lending business, strong and profitable growth coupled with historically low losses and continued focus on expense management is the recipe for outsized financial performance and you can certainly see that this quarter. The focus and commitment we have made toward supporting our OEM partner Stellantis and to our dealer community is bearing fruit and we expect that trend to continue as we move forward with our ambitious plans with these partners. With the benefit of strong financial performance, we have been able to step up investment in our -- on our -- in our internal and external facing technology to make it easier for our dealers and customers to interact with us and provide us a platform from which we can scale into the future. We view investing in these capabilities as a strategic imperative and believe what we are building in this space will further solidify our leadership position for the long term.

At Santander Consumer, we are keenly aware of the hardships that consumers are facing, particularly those in underserved communities. We believe it's our responsibility to be a part of the solution and help people achieve better financial well-being, and that begins with us. Over the next several months, we are placing greater emphasis on ensuring that our policies and practices and every interaction demonstrates our commitment to customers and communities. We have an obligation as a lender in our industry to pave the path of change. Our investments in financial education and environment community partnerships and supporting minority and women-owned businesses are only the beginning of what we will contribute to the coming of a more fair and equitable society.

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

Fahmi Karam -- Chief Financial Officer

Thanks. Mahesh, and good morning, everyone. Turning to Slide 4 for some key economic indicators that influence our performance. As Mahesh mentioned, most economic indicators have improved on the back of the vaccine rollout, Federal aid, and measured reopenings across many states. Unemployment has improved, but the pace of improvement has slowed since the fall of 2020 and several million Americans continue to file for unemployment benefits, well above pre-COVID levels. Although the economic recovery has begun, we remain cautiously optimistic in our approach. The impacts of the pandemic and the health of the consumer after stimulus benefits expire remain uncertain. Ultimately our performance will depend on the speed of the recovery and whether the stimulus benefits last long enough to allow sustained employment to return across the economy.

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 as consumer demand remains high. New vehicle SAAR at the end of March reached 17.7 million, the highest level seen for several years. Despite the new vehicle supply shortage, OEMs and dealers have adjusted their sales cycles to meet the demand.

Used vehicle demand remained strong and grew in the quarter. Used vehicle pricing has continued to rise setting new records in March and April. Manheim Index increased 11% in March compared to December and 26% year-over-year. Mid-April the index grew another 6.5% from March and more than 50% year-over-year. Several factors are influencing used car prices, including shortage of new vehicle supply, industrywide low delinquency and losses, limiting wholesale inventory at auctions, and the increased number of consumers choosing to purchase a vehicle as the economy reopens.

The third round of stimulus checks plus savings accumulated last year are also supporting consumer demand. We expect used car prices to continue to moderate in the long term. However, we believe they will be elevated for the remainder of the year. These supply and demand dynamics are likely to persist as inventory levels are low for both new and used cars. We still believe prices will dip in the fall following seasonal patterns, but on average we expect 2020 prices will likely be up 10% with upside potential compared to 2020.

Turning to Slide 6 for origination trends. During the first quarter, we originated $8.6 billion of auto loans and leases. Originations were up in every channel versus the prior year leading to 24% growth in total volume, driven by continued strength in new and used vehicle sales. Reviewing our originations by channel for the first quarter. Core loan originations increased 21% year-over-year, total Chrysler Capital loan originations increased 40%, Chrysler prime volume increased 64%, Chrysler non-prime volume increased 11%, and lease originations increased 7%.

Our core loan originations have been strong since the onset of the pandemic and we expect that trend to continue into the second quarter. Although competition has returned and it is more intense in some respects than pre-COVID times, our market share with our core dealers has increased year-over-year.

Chrysler non-prime volumes returned to more normal levels and experienced year-over-year and quarter-over-quarter growth. We are very pleased with the level and credit quality of originations in our non-prime channels as we remain disciplined in our approach from a risk perspective while maintaining strong margins among heightened competition.

Prime loan originations continued their performance from 2020 into the first quarter. Although OEM incentives for new vehicles have come down from historic levels, Stellantis programs exclusive to Chrysler Capital generated almost 2.5 billion of prime volume, an increase of 64% from last year. Our prime volume for the remainder of the year will depend on new vehicle supply, Stellantis incentives exclusive to us, and the continued strength of our partnership with Santander Bank. Lease volumes continued to improve in the quarter as Stellantis sales increased year-over-year, as well as our growth in our market share.

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

On to Slide 7, we break down our 2021 monthly originations versus the past two years. Our core loan originations began 2021 relatively in line with prior years, but increased significantly in March in line with industry sale increases. February volume was impacted by severe weather in Texas and a few other high-volume states, as well as a delay in tax refunds. March more than made up for the delay and represents the largest single month of originations in our company's history.

Turning to Chrysler Capital non-prime. Recall that Chrysler Capital non-prime loans were lower throughout most of 2020 versus 2019. This quarter our Chrysler non-prime channel followed a similar pattern as our core channel ending the quarter up versus both of the prior year levels. Stellantis incentives continue to influence our Chrysler Capital prime loans. As we mentioned in February versus the end of 2020, incentives that were exclusive to CCAP increased in the first quarter leading to an increase in prime loans versus both of the prior years. Our partnership with Santander Bank also continues to benefit our prime originations. Lease volumes were under pressure throughout 2020, but the sales and market share are near historic levels. We expect lease volume to stabilize near 2019 levels for the remainder of the year.

Moving to Page 8 and our Stellantis partnership. Industry auto sales, including Stellantis sales have continued their momentum from the second half of 2020. Our penetration rate increased versus the fourth quarter, but remains below peak levels experienced in 2020 at the height of the pandemic when our penetration rate was higher due to significant levels of incentives in the market.

Turning to Slide 9. Our Serviced for Others balances increased to $14.2 billion at quarter-end, up 23% versus the prior quarter, driven by $2 billion in origination [Indecipherable] agreement with Santander Bank and $2.4 billion in off-balance sheet prime loan sales. At the end of 2020, we held approximately $3 billion in prime loans on our balance sheet, primarily due to the significant growth in incentives during the pandemic. The loan sales this quarter allow us to deconsolidate these lower-yielding assets from the balance sheet while continuing to earn servicing fees through our Serviced for Others platform. This platform generated $18 million in servicing fee income this quarter.

Moving to Slide 10 for an overview of our liquidity. As of quarter-end, SC's committed funding, including unutilized lines was approximately $57 billion. At the end of the first quarter, we had approximately 80% of unused capacity available on our $11.8 billion of third-party revolving warehouse lines. We also have $3 billion of unused capacity from our parent, Santander.

Our asset-backed security platforms continue to demonstrate strong investor support. During the quarter, we executed approximately $3.5 billion across two ABS transactions, both of which achieved the lowest cost of funds and the largest deal size in platform history. During the quarter we also executed $3.7 billion of asset sales, which included $2.4 billion of prime auto loans and $1.3 billion of unsecured personal loans. As we discussed last quarter and consistent with our strategy to continue to optimize our balance sheet, the prime asset sales allow SC to increase capital, earn servicing fees going forward, and capitalize on investor demand for consumer assets. In 2020, we experienced a significant increase in prime volume as we supported Stellantis and our dealers through the pandemic. In the first quarter of 2021 on the back of the economic recovery and strong liquidity in the capital markets and at third-party banks, we were able to sell the majority of the excess prime loans retained in 2020 at a gain on sale.

We are very pleased to execute the sale of our personal lending portfolio to funds managed by Castlelake, L.P. In addition to the portfolio sale, we have entered into a forward flow agreement with Castlelake to sell future receivables through the remainder of the contract. We remain committed to fulfilling our contractual commitments under our agreement until it matures. Later in the call, I will touch on the impacts of the sale and the forward flow agreement on our financials.

Moving to Slide 11 to review our financial performance for the quarter versus the prior-year quarter. Net income of $742 million or $2.42 per share of EPS for the quarter was a company record. Interest on finance receivables and loans increased 2% due to higher average loan balances during the quarter, up 6% year-over-year or nearly $2 billion. Net leased vehicle income increased 63% and continues to benefit from record used vehicle prices. Improved residual values led to lower depreciation expense and increased gain on sale during the quarter. Net yield on leased vehicles increased to 7.3%, up approximately 300 basis points year-over-year and 50 basis points over the fourth quarter 2020.

Recall last year at the onset of the pandemic, we experienced a delay in off-lease vehicle dispositions and a sharp increase in our depreciation expense as the residual outlook of the portfolio decreased. First quarter 2021 continued the momentum we experienced in the second half of 2020 as the residual forecast has stabilized, lease dispositions increased, and we achieved record prices at auction. We do not expect lease yields near 7% long term, but we do anticipate strong used car prices for the remainder of 2021 and lease yields to be elevated compared to historic levels.

Interest expense decreased 23% driven by lower benchmark rates and lower average debt balances. Cost of debt decreased 80 basis points versus last year and 20 basis points from the fourth quarter 2020 to 2.5%. Credit loss expense decreased to $136 million in the quarter, down significantly due to the improved credit quality of the portfolio, lower charge-offs, higher auction recovery rates, and $106 million reserve release compared to a $314 million reserve build at the beginning of the pandemic in the prior-year quarter.

Profit sharing expense increased $53 million, driven by residual gain sharing with Stellantis and strong performance from the personal loan portfolio, which we sold in the quarter. Moving forward, this line will only include expenses related to sharing payments with Stellantis. Investment losses were $49 million better year-over-year as a result of improved performance and lower balances on the held for sale portfolio and gains associated with asset sales this quarter.

Operating expenses increased 4% due to salary and benefits expense, including severance costs related to the closure of our Colorado facility, partially offset by lower repossession expense. Our quarterly expense ratio was down 10 basis points year-over-year to 1.8%.

Continuing to Slide 12 to cover delinquency and loss. Credit performance improved across the board in the quarter with lower levels of delinquency and loss both quarter-over-quarter and versus the prior year. Versus the prior-year quarter, early stage delinquencies decreased 390 basis points and late stage delinquencies decreased 240 basis points. As a result of our customer relief efforts during the pandemic and strong payment rates supported by government stimulus, delinquencies are at an all-time low for the Company. Since the beginning of the pandemic, we have granted approximately $1.2 million loan deferrals to 720,000 unique accounts or $12.2 billion on our balance sheet.

In the first quarter, we granted 84,000 deferrals down 50% from the fourth quarter last year and down significantly from the peak of the pandemic. Excluding deferred accounts that paid off or charged off, 2% remain under active deferral, representing approximately $180 million in balances. The accounts with expired deferrals approximately $9.7 billion, 85% are less than 30 days past due and 13% are more than 30 days past due.

Requests for relief continue to drop as we revert back to normal servicing practices. April 2021 was the first month since the pandemic started with lower levels of modifications than our average pre-COVID. In addition to reduce relief requests, payment activity continues to outperform historical norms as consumers utilize increased savings and new stimulus benefits to pay down their loan balances. The RIC gross charge-off ratio of 9.7% decreased 580 basis points from the first quarter last year.

Our recovery rate as a percentage of gross losses was nearly 70% in the quarter, up quarter-over-quarter and versus the prior year. Recovery rates continue to benefit from low losses and high used car prices. The net charge off ratio of 3% decreased 470 basis points from last year. Based on the latest round of stimulus, our current levels of delinquency and our experience last year with the impacts on our portfolio from stimulus benefits, we believe losses from the pandemic will be pushed into 2022. We will likely see an uptick in delinquencies in the latter part of the year as stimulus benefits expire coupled with typical seasonal patterns.

Turning to Slide 13, we detailed monthly loss and recovery rates versus 2020 and 2019. Gross charge-offs trended lower from January to March as consumers began receiving their third stimulus checks and tax refunds began to be issued. We expect this trend to continue in the second and third quarter before increasing at the end of the year depending on the economic recovery. Recovery rates as a percentage of gross losses in the month continued to remain elevated as the ratio benefits from low losses and record used car prices. As I mentioned earlier in the call, we expect this trend in used car prices to remain elevated for the remainder of the year. In our own portfolio looking at auction prices on a vehicle basis, we experienced a 17% increase in the quarter versus the prior year first quarter, 22% higher than 2019, and a 5% increase from the fourth quarter 2020. Rates were strong across all vehicle ages and vehicle types.

Moving to Slide 14 to review the loss figures in dollars and a walk from prior year. Net charge-offs for RICs were down significantly year-over-year. Losses increased $97 million due to higher average loan balances, but were more than offset by $279 million in fewer gross losses and $167 million due to improvement in recoveries.

Turning to Slide 15 and the CECL reserve. At the end of the first quarter, the allowance for credit losses decreased $106 million from last quarter, driven by an increase of $75 million due to portfolio mix, which was more than offset by a decrease of $100 million due to improved macroeconomic factors and a decrease of $81 million due to lower asset balances. Despite signs of improvement in the macroeconomic factors, the overall risk and uncertainty in the portfolio remain.

Some parts of the U.S. and the rest of the world have reported an increase in COVID cases, as well as concern over the vaccine effectiveness against variants. The pace of employment growth is slow and disproportionately impacting certain industries and we believe non-prime consumers. Although we are optimistic about our portfolio's performance, we are not through the pandemic. There are approximately 8.5 million fewer jobs in the country than March of 2020 and the timing of returning to those jobs is uncertain. As mentioned, the macro scenario we use quarter-over-quarter improved, but the scenario still assumes elevated unemployment and a prolonged recovery. Our baseline macro scenario assumes unemployment will remain flat to slightly down throughout 2021 ending the year just under 6%.

Moving to Slide 16 to cover CECL by asset designation. The TDR coverage ratio decreased 260 basis points versus last quarter to just under 31%, driven by lower delinquency and improved performance. The percentage of this population that received the deferral has grown 5 percentage points compared to the fourth quarter and now represents approximately 85% of the TDR balance. As expected, TDR balances increased approximately $400 million this quarter as we reverted to our regular TDR classification practices beginning January 1st of this year. We believe we are well reserved for our riskier TDR portfolio with a coverage rate of near 31%.

The non-TDR coverage ratio increased to 17% due to credit mix in the portfolio as our asset sales this quarter came from our prime assets, which carry a lower coverage ratio. Overall, we feel our reserve is appropriate given the non-prime nature of our portfolio, trends we experienced when stimulus expired last year, and the remaining uncertainty in the economic recovery.

Turning to Slide 17. The expense ratio for the quarter totaled 1.8%, down from 1.9% from the prior-year quarter. Our operating expenses were up versus the prior-year quarter primarily driven by salary and benefits expenses as we ramped up headcount of collectors and also include severance and other expenses related to the closure of our Colorado facility.

Turning to capital on Slide 18. Our CET1 ratio for the quarter was 16.5%, up nearly 200 basis points versus the end of 2020. Our capital levels were supported by record income in the quarter and a reduction of assets of approximately $2.5 billion from asset sales. During the quarter, we declared and paid a dividend equal to $0.44 per share, comprised of our ordinary dividend of $0.22 and a special dividend of $0.22. Yesterday, our parent company Santander Holdings U.S.A. received an exception to the Federal Reserve Board's extended interim policy. As a result, the SC Board of Directors will consider declaring a dividend during the second quarter of 2021.

As the economic backdrop and capital distribution policies revert back to normal, we are committed to returning capital to shareholders. Our strong capital and liquidity ratios are indicative of our balance sheet strength, which will serve us well moving forward. We believe this level of capital is more than adequate to withstand a severely adverse scenario if it materializes, provide us the ability to reinvest in the business organically and inorganically if the opportunity arises, phase-in CECL over the next few years, and return capital to our shareholders.

Finally, I would like to provide a few trends and expectations for the next quarter compared to the first quarter. We expect the net interest margin ratio to be flat to slightly down due to the sale of the personal lending portfolio. However, we do expect the yield on RICs to improve due to a higher non-prime portfolio mix and also lease yields to remain elevated. Other income to be lower by $30 million to $50 million due to the sale of the personal lending portfolio and lower gain on sales from asset sales. We expect net charge-offs to be lower than 3% on an annualized basis next quarter due to low delinquencies and strong used car prices. And finally, the expense ratio to be relatively flat depending on the level of repossessions.

To conclude, the first 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 continue to take a cautious approach as we manage through the uncertainty in the market. We will remain in our underwriting and expense management but also committed to reinvesting in the business for future growth. We believe we have positioned the company well to capitalize on the current auto industry tailwinds and have confidence in our team's ability to execute and deliver value to our shareholders.

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

Mahesh Aditya -- President and Chief Executive Officer

Thanks, Fahmi. In summary, as Fahmi said, our first quarter performance has exceeded our expectations. Of the many positive trends he highlighted, I would point to our robust sales growth, improving quality of through the door bookings, and the rapid cure rate of our forborne accounts. That's particularly important and positive over the long term in the future post-stimulus world. The high payment rates, low delinquencies, and charge-offs, and to a lesser degree the higher recovery rates are trends that are likely to dissipate once benefits run out in September. In a post-stimulus world, we would expect to see government assistance replaced by salaries, new car production, and inventories revert back to normal levels, and used car demand and prices normalize.

In the meanwhile, we will endeavor to serve our employees, dealers, customers, and Stellantis in the best way possible through this uncertain period as we emerge from the pandemic and its terrible toll on our country and the lives and livelihoods of fellow Americans. I'm very proud of the way our colleagues have stepped up to support our customers, our communities, and each other over the past year. This has been a very trying year and has dramatically changed the way in which we work with them and made us take a step back to evaluate how we engage with each other. We've made great strides in putting in place a foundation to make our organization more inclusive, but we have a long way to go to ensure sustainable change. I'm proud of the way we've embraced these initiatives and to know that we will be a better place for it.

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

Questions and Answers:

Operator

Thank you. All right. We will now open up the call for questions. [Operator Instructions] We'll take our first question from Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks. I am struck, three months ago you did lower your kind of expected required capital down to 11.5%. Relative to that number given the improved capital efficiency steps you've taken in this quarter, you've got a full $2.5 billion on the books right now. I know that you can't buy back stock right now because there isn't a program in place. But I was hoping that you could give us a little more definition since that number kind of exceeds I guess the float that's sitting out there. Just talk about once that's allowed mid-year like how does that -- how will that process work?

Fahmi Karam -- Chief Financial Officer

Thanks. Moshe. Good morning. So yes, capital we're obviously in a really good, a good spot ending the quarter at 16.5%. As you mentioned, it's 5 percentage points higher than what we announced last quarter our target of 11.5%. We're obviously very pleased with the news last night that the regulators gave us approval to pay the dividend this quarter and we'll get with our Board over the next couple of days to figure out next steps. As far as looking forward, we're still under this interim policy. Through Shuster and their capital plan that was submitted in early April, we'll get feedback on that by the end of June just like everyone else. We're hoping that the regulators move back to the stress capital buffer framework in the third quarter and if that's the case, we'll have a lot more flexibility on our capital distributions. But until then, we're going to wait and see what the regulators give us and then we'll reassess with the Board with everything that we have in front of us. But as I mentioned in our prepared remarks, I think it's going to be a combination of one, dividends; two, reinvesting in the business, potentially doing tack-on M&A if the right opportunity arises; but then a big part of it will also be returning capital to shareholders.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great. Thanks And maybe just from kind of at a very high level, you mentioned a bunch of these issues. The fact that at the moment consumers are actually putting in more cash so theoretically things for less risky, but the potential for the environment to get more competitive. Just could you expand a little bit as to what steps you either are taking or will be taking in the coming quarters?

Fahmi Karam -- Chief Financial Officer

Yes. I think we're going to be very thoughtful and disciplined in our underwriting approach. We typically underwrite through a cycle so we're not baking in these high recovery rates and these record used car prices into our underwriting practices. So, we definitely take a longer-term view when we underwrite these loans. As far as competition goes, it's been pretty intense. It was intense pre-COVID. We had a window there at the onset of the pandemic where there was a couple of lenders, one -- us being one of them, that tightened up but didn't pull all the way back and we benefited from that by increasing our market share and obviously we've kept that market share going into the end of 2020 and into the first part of 2021. And so, we're very pleased with the level of originations, the credit quality of those originations, and the margin profile. Obviously, as our cost of debt has come down, our yield has also come down, and we've also had to react to some of those competitive pressures. But overall, feel good about the margin profile of the originations.

Mahesh Aditya -- President and Chief Executive Officer

Yes. And just to add to that, Moshe. This is Mahesh. The whole idea that we have, basically two sort of countervailing issues going on. One is obviously this whole government stimulus, which is having a significant impact on people's cash flows to the positive and that, as Fahmi said, that is suppressing our loss rates and making everything look much, much lower and much better performing than it perhaps would be once the economy is sort of set on its own.

And the other is what of the fundamentals in our portfolio and in our underwriting practices and what is it that we're seeing below the surface in our book that's giving us some cause for optimism that coming out of the crisis and coming out of the stimulus regime that the economy is going to be self-supporting and it's not going to blow up in terms of bad losses or whatever. So, we are pretty confident. But right now just given the underwriting quality and, as Fahmi said, we're not pricing the lower loss rates and all of the other aspects that things will be pretty stable once the stimulus comes off.

Operator

We'll take our next question from Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Fahmi Karam -- Chief Financial Officer

Good morning. Hi.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. I know you mentioned the comment around capital and you'll see what happens, etc post, the CCAR submission and all. But I'm just kind of wondering when you think about the amount of capital that you're generating today, how do you think about on a longer-term basis what the distribution strategy is going to be like? Because there is some optionality here and buybacks obviously it's limited. Is there any discussion about maybe we should buy the whole thing in? Maybe could you give us some color on that?

And then if you could give us a sense as to what kind of acquisitions could really utilize this level of excess capital you have would be helpful? Thanks.

Fahmi Karam -- Chief Financial Officer

Sure. Thanks, Betsy. I just want to remind the capital levels were definitely supported by our asset sales this quarter. That decreased our RWA [Technical Issues] in the quarter so that increased our CET1 up to 16.5%. But as far as our priorities go on how we think about it. Priority one is to always maintain the ordinary dividend of $0.22 per share. And then, as I mentioned, we're going to reinvest in the business some of the technology efforts that Mahesh mentioned in the prepared remarks to position ourselves for the future and really make it easier for our dealers and our customers to interact with us. That's going to be another top priority for us.

As far as the M&A goes, valuation levels right now in the market are pretty elevated. We haven't done true M&A for a very long time. We've done portfolio acquisitions from time to time and I think we will take a look at those things. If there is technology out there that advances some of the things we just talked about, I think that would be interesting to us.

And then returning capital to shareholders is going to be a large component of us getting down to 11.5%. Getting down to 11.5% I would say is a medium-term goal. It's not something we're going to do overnight, but it's something that over the next couple of quarters we'll be discussing as a management team and with our Board on the best use of that capital for all of our shareholders.

Betsy Graseck -- Morgan Stanley -- Analyst

And medium-term [Technical Issues] or something like that or is it like a one-year time frame?

Fahmi Karam -- Chief Financial Officer

Yeah. Betsy, I'm not going to go into specifics on time. I think part of it also is that we have to see how the economic recovery plays out over the next several months, right? We obviously feel really good about where we are from a reserve standpoint and feel good about where we are from a capital standpoint. But until we see how this really plays out over the next few quarters, we're not going to rush into releasing either capital or reserves.

Betsy Graseck -- Morgan Stanley -- Analyst

And on the digitization front, when you're talking about improving your digitalization efforts, is that -- can you just help us understand that? So, it's an eye to the dealer community that you're working with primarily, or is it with an eye toward going direct to consumer or enhancing that?

Fahmi Karam -- Chief Financial Officer

So yes, this is -- Yes. Thanks for the question. So, this is actually both, Betsy. You've got increasing number of dealers at the high end particularly who are going digital and making the sales -- appreciating that the sales experience is becoming more remote and lenders need to step up and be able to have some sort of plug-in into the dealers' digital experience without making it too clunky. So, I think we need to invest or we are in the process of investing in that and making that interface between us and the dealer as seamless and as smooth as possible. And on the direct to consumer front, we obviously -- there are obviously structural resistance as to being able to fully consummate and fulfill a loan directly with a consumer. So we need to bring in the dealers into that as well, but there is a strong belief in our company that we should have a faster smoother better way of attracting customers who want to get -- who have a relationship with us, who want to get an auto loan with us, and for us to be able to fulfill that need and yet maintain our dealer loyalty and be able to have the deal completely consummated at a dealer of choice. So it's a bit of both, but it's essentially moving with the way the rest of the market is moving, which is toward a more remote digital experience.

Betsy Graseck -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from Rick Shane with JP Morgan.

Rick Shane -- JP Morgan -- Analyst

Hey guys. Thanks for taking my question. Look, I'm not big on congratulations. But I think I've probably asked about the personal lending business 10 times over the past five years. So, congratulations on getting that done. I do want to talk a little bit, you guys have spoken about the impact of higher used car prices on credit, but I'm curious if you're adjusting LTVs to reflect that inflation as well?

Fahmi Karam -- Chief Financial Officer

Adjusting LTVs, no, I don't think we're adjusting our underwriting to again see where we are from a used car price this year compared to the years prior. As I mentioned, we kind of stick to the underwriting practices we've had. Obviously LTVs have come in better as people are putting in [Technical Issues] on the deals and when we talk about that we feel like the credit quality of our new originations have improved, that's going to be part of it, Rick.

Mahesh Aditya -- President and Chief Executive Officer

Right. And whatever adjustment in LTV happens, happens by consumer segment based on the behavior of that particular segment. It's not related to the fact that we believe that the value of the vehicle is necessarily inflated. I think that's what you're getting at like. Right, Rick?

Rick Shane -- JP Morgan -- Analyst

That's exactly it. And it's a fair point. Looks to me like oftentimes we hear about companies taking barbell strategies. It feels in looking at the distribution of your FICO scores that you're actually doing the opposite that you're really going to your core business that 540 to 639 segment of the market. Is that where you think there is the best competitive opportunity or do you just think you have the best underwriting there?

Mahesh Aditya -- President and Chief Executive Officer

Well, it's a combination of both, right? We feel more secure in the less than 640 segment, which is where I think we've over the years sort of taken the training wheels off and we really understand the sub-prime lending business. I think it's also where competition sort of thins out. But our experience has been that if we can keep the loss given default under control, which is all dependent on loan to value and how we assess the borrower, we feel more confident right now that that's the space to be in because for all of the reasons you mentioned.

Rick Shane -- JP Morgan -- Analyst

Perfect. Hey guys, thank you very much.

Fahmi Karam -- Chief Financial Officer

[Speech Overlap] I was just going to say, Rick, to add on to that. I mean obviously that's the -- less than 640 is the space that we've had the most history with. That also shows the strength of the partnership with Santander Bank and their ability to take on the prime and near prime assets and then also for us to sell the prime assets that we do retain. And so, what you're seeing in the portfolio is that kind of right in our sweet spot from a FICO standpoint.

Rick Shane -- JP Morgan -- Analyst

Got it. Okay. Thank you, guys.

Operator

Our next question comes from David Scharf with JMP Securities.

David Scharf -- JMP Securities -- Analyst

Yes. Good morning. Thanks for taking my questions. A couple things. One, just mechanical to start out on the personal loan sale. I just wanted to clarify the flow arrangement. Are you going to be retaining any loans in the future or are you just basically providing sort of a warehouse line to the buyer of that portfolio going forward?

Fahmi Karam -- Chief Financial Officer

We will not -- if everything works as planned, we will not be retaining any loans. We will basically act like a pass through entity. We buy the assets from Bluestem and then sell them to Castlelake on a daily basis.

David Scharf -- JMP Securities -- Analyst

Okay, got it. Thank you. And just as a follow-up, I want to just follow up on the previous question. On the competitive kind of environment right now and you acknowledge it remains intense by your description. Are you seeing -- in sort of that core 640 and under segment, are you seeing the bulk of the competition still from non-bank competitors?

I'm curious if you're seeing any large banks reengage in some of the FICO bands where you're prevalent. And as we think about really kind of the next 6 months to 12 months, trying to get a sense for who may still be if not on the sidelines, still pretty restrained and may actually reenter later in the year?

Fahmi Karam -- Chief Financial Officer

I would say most people, David, have reentered the market. Any time you have really strong capital markets and robust access to liquidity, you're going to have heightened competition. So, I think obviously everyone has their different spots. The banks tend not to dip down below 600. But I would say everyone is back in play and they go with the capital markets. If liquidity is available, there's going to be heightened competition.

Mahesh Aditya -- President and Chief Executive Officer

Yes. Specifically in the non-prime space, it's mostly as you said the non-bank people. But there are a couple of banks that are there, who I don't need to name them, I'm sure you know.

David Scharf -- JMP Securities -- Analyst

Sure

Mahesh Aditya -- President and Chief Executive Officer

And they go in and out. And as Fahmi said, it all depends on when they have a strong liquidity position, which many of them do right now. Some of them that they've gotten -- some of them are more comfortable with subprime than others and we sort of see them come in and out of that segment.

David Scharf -- JMP Securities -- Analyst

Okay. So in aggregate, it sounds like we shouldn't be thinking of this as an environment where there's still a couple sizable players that haven't really reengaged and could in the future. And everybody's [Indecipherable] got it. Thank you very much.

Operator

We'll take our next question from Steven Kwok with KBW.

Steven Kwok -- KBW -- Analyst

Great quarter. Thanks for taking my questions. The first one I just had was just a clarification around the capital side. I know you guys are also looking at phasing in the CECL transition as well. And so if we look at it, is the right way to think about it today that you have roughly about $1 billion effectively as capital when you account for the CECL phase-in?

Fahmi Karam -- Chief Financial Officer

So Steven, yes. We have call it 500 basis points of room from our target of 11.5%. CECL -- if we take the full load of the CECL impact, it's going to be close to 375 basis points, so you'll have that remaining left. But of course, that's going to be phased in over four years and will accrete capital over those four years as well.

Steven Kwok -- KBW -- Analyst

Got it. Got it. And then just on the cost of funds, I noticed that that's continued to tick down nicely. Is there more room for that to go? Are there any impending maturities that can help on the cost of fund side?

Fahmi Karam -- Chief Financial Officer

Yes. Cost of funds has been definitely a tailwind for us, 80 basis points better over the year and 20 basis point better from the fourth quarter. I do think there's probably a little bit more room to improve that as the deals -- as the year progresses and we've seen that with the strong executions we've had on our ABS securitizations. So, I do think that will continue to be a positive for us throughout the year.

Steven Kwok -- KBW -- Analyst

Got it. Thanks for taking my questions.

Fahmi Karam -- Chief Financial Officer

Thanks.

Operator

All right. We'll take our next question from Mark DeVries with Barclays.

Mark DeVries -- Barclays -- Analyst

Yes, thanks. Just a question about the reserve levels. It sounds like you're kind of net more concerned about the potential impacts of fading stimulus benefits than kind of the ongoing benefits on recovery rates and the improving macro. And I think, Fahmi, you alluded to part of that I think as trends that you experienced the last time stimulus transpired. Could you talk a little bit more about that and kind of how you're thinking about all these different forces, both the positive and the negative, impacting your loss expectations?

Fahmi Karam -- Chief Financial Officer

Sure. I mean there are definitely positive signs in the portfolio and we talked about a lot of them this morning. But also there's things that give us a little pause and there's a lot of uncertainty out there. I mentioned 8 million to 10 million jobs fewer than we had a year-ago. Several million people who are underemployed are not looking for jobs. But as you said, the reliance on stimulus is real and we saw that last year. We saw about a 16% drop in the payment rates between August and November last year when the first round of stimulus dropped. And then we saw about a 40% increase in payment rates from the end of the year to March once people started to get their third checks. So, very sensitive and reliant on the benefits of the stimulus and having cash. So, that gives us pause on what happens after the stimulus expires. But hopefully, the recovery continues and it picks up and is enough to kind of bridge the gap. But the question I think we're all trying to answer is where is unemployment at the end of the year. And for now we just don't think it's very prudent to release reserves in a meaningful way anyway until we see that play out.

Mahesh Aditya -- President and Chief Executive Officer

Yes. And just to talk -- just to sort of peel that back a little bit further. We look at sort of early signs very specific to our portfolio. So as Fahmi said, there's two things going on over here. One is what happened when the last -- when the July stimulus came off and then it was reinstated. There was the $906 million that was announced in December. So in that period, the July to November-December period, we saw an uptick in delinquencies and first payment defaults, etc. Then the second stimulus came back and then, as Fahmi said, after that payment rates went up, delinquencies started trending down, et cetera. So, that's one data point we have that when the stimulus is lifted unless there is full employment or close to full employment, you're likely to see some uptick in delinquencies, right, which will be offset obviously by the origination quality of the 2020 book. And the other countervailing factor is that you've now got vintages that are aging and more customers are paying and therefore they've got more skin in the game as far as collateral is concerned. So, that could also be sort of improving the portfolio quality so to speak.

The second thing is stimulus is not employment. Employment has to come back and what we look at is employment by industry category, employment by zip code, employment in areas where we are concentrated. And the encouraging sign for us in the last employment data release was that it seems to be coming back in the services sector, which is where we have some exposure. So if services, hospitality, retail, etcetera start coming back quicker than some of the other areas, then it's likely that we'll get some lift from that. So those are all -- we got a bunch of indicators that we look at, the so-called canary in the coal mine, looking for some early signs of what the portfolio is likely to -- how it will shift once the stimulus runs off.

Mark DeVries -- Barclays -- Analyst

Okay, got it. That's very helpful color. And then this may be a very short response. But is there any impact whether near-term or long-term to the Chrysler Capital agreement from the merger of FCA to create Stellantis?

Mahesh Aditya -- President and Chief Executive Officer

For -- in the short term, no. It's business as usual. We have a really good relationship obviously here in North America. Santander globally has a really good relationship with Peugeot. So, we are focusing on what we can do to maximize our relationship day-to-day.

Mark DeVries -- Barclays -- Analyst

Okay, got it. Thank you.

Mahesh Aditya -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Kevin Barker with Piper Sandler.

Kevin Barker -- Piper Sandler -- Analyst

Thank you. Good morning. Could you just clarify will we expect In June something similar to CCAR or we just get a press release on your capital plans? Is that how we should expect that to play out?

Mahesh Aditya -- President and Chief Executive Officer

I'm not going to commit to a press release in June. We're a little bit in unchartered waters here for this quarter. We'll see what the Fed comes back with and we'll go from there. But obviously if there is something material, then we will announce it.

Kevin Barker -- Piper Sandler -- Analyst

Okay. And then going back to some of the disclosure you had on the personal loan portfolio and breaking it out back in the appendix. You have significant investment gains in the first quarter, but it was relatively flat in previous years and that had a lot of noise just given the Bluestem relationship. Could you help us understand like what the run rate is going to look like from an investment gains and losses standpoint? And then also would you look to be more proactive in selling portfolios just given the market environment today? It seemed like you were much more proactive in the first quarter and it seems like that seems attractive given the current market environment.

Mahesh Aditya -- President and Chief Executive Officer

Yes. We've seen a lot of investor demand for consumer assets and we were able to take advantage of it going into 2020 and we said it on the call. We had a real run-up in our prime volume as we stepped up for our dealers and for Stellantis through the pandemic. And we took advantage of it in the first quarter of interest in the consumer assets and were able to sell those assets off into the market and generate a servicing fee. So, we're always going to look to do that. It's been consistently our strategy over the years with prime loans and we'll continue to do that.

As far as the investment gains and losses go for going forward, there that's really going to be around asset sales only. Historically you've had, as you said, a little noise there with the personal lending portfolio. So, that will stop going forward and it will just be related to any activity we have on the asset sale side.

Kevin Barker -- Piper Sandler -- Analyst

So if you continued with the asset sales, it would probably cause capital to build up. Are you comfortable with the capital build up from that or would you just be more proactive in utilizing that capital? How do you give and take that think about?

Mahesh Aditya -- President and Chief Executive Officer

Yes, we're comfortable with it If the economics make sense for us to sell the assets. I mean typically we're going to retain most of the non-prime/bottom end of near prime, because we think we can service and generate a nice margin. To the extent we do originate higher end of prime, super-prime paper and we can sell it off at a reasonable price and earn a servicing fee, we're always going to look to do that.

Kevin Barker -- Piper Sandler -- Analyst

Okay. Thank you for taking my questions.

Mahesh Aditya -- President and Chief Executive Officer

Thanks.

Operator

Our next question comes from Vincent Caintic with Stephens. Please go ahead.

Vincent Caintic -- Stephens -- Analyst

Hey, thanks. Good morning. Thanks for taking my question, just one. So, I wanted to talk about the vehicle supply issues and we've been talking about this, seems like there's going to be a struggle for a while in terms of vehicle supply. But I'm just wondering how do you think that's going to affect your business going forward? I was impressed with this quarter's originations and your Chrysler originations were up 40% year-over-year so that's really impressive. So I'm just wondering do you have expectations for that to affect your business in 2021? And also how does it affect maybe any discussions you have with Stellantis in terms of the programs you launched like any subvention or anything like that? Thank you.

Mahesh Aditya -- President and Chief Executive Officer

Thanks for the question. So yes, we are fully committed to supporting Stellantis' production and whatever happens in this whole semiconductor thing. Right now it's just speculation, what's out there and when -- how quickly supply will be restored. But we are -- as Fahmi said, we utilize -- we figure out -- really we've hit our stride as far as utilizing the flow agreement we have with SBNA and we are able to service -- be a full service -- full spectrum lender for Stellantis. So, that really helps a lot because we prime, near prime, subprime, and lease. And I think as the market begins to sort of settle and production comes back. It's in nobody's interest right now to see production start thinning out and inventory levels being where they are. So I'm sure they're doing all they can to bring back the semiconductor supply and all the other issues. But we'll be there fully to support them.

But our prime -- I mean our other very profitable business is the used car business that we do through our core subprime part of the business and that continues at full steam and we expect to see continuing growth there supported by higher demand for used car prices -- higher demand for used cars. And as Fahmi said, that's also a very, very profitable part of our business.

Vincent Caintic -- Stephens -- Analyst

Okay. That makes sense. There isn't like -- even with the vehicle supply issues, it doesn't seem like there's maybe a fall-off in origination volumes or anything like that.

Mahesh Aditya -- President and Chief Executive Officer

Potentially you could see later in the year a shift more into the new side from an origination standpoint, but we haven't seen that yet.

Vincent Caintic -- Stephens -- Analyst

Great. That's all I had. Thanks very much.

Mahesh Aditya -- President and Chief Executive Officer

Thanks.

Fahmi Karam -- Chief Financial Officer

Thank you.

Operator

Our last question comes from Rob Wildhack with Autonomous Research.

Rob Wildhack -- Autonomous Research -- Analyst

Good morning, guys. You highlighted the expense ratio lower and repossession expenses contributing there. Longer term as repossession expenses normalize, would you expect the expense ratio to revert or do you have some levers that you can use to offset that?

Fahmi Karam -- Chief Financial Officer

I think we'll stay in that 1.8%, 1.9% range. Rob. I mean we've been pretty consistently under 2%. But I think we're pretty tight in that range.

Mahesh Aditya -- President and Chief Executive Officer

Yes, Rob [Speech Overlap] Sorry. Your repossession expenses coming back, collection costs staying down because of lower delinquencies, originations possibly -- expenses possibly also staying flat. So, the puts and takes are there, but as Fahmi said, we've operated in the 1.8%, 1.9% and probably expect to stay there.

Rob Wildhack -- Autonomous Research -- Analyst

Right. That makes sense. And then a broader question on credit and how you're thinking about modeling going forward. Obviously losses in 2020 and year-to-date have not followed what macro trends and historical correlations might have suggested. I'm wondering how you treat that going forward. Are you going to bake that in and train models at least partially using 2020 data or do you just kind of delete that from the record?

Mahesh Aditya -- President and Chief Executive Officer

That's a secret sauce kind of question. So, we want to be -- we need to come out of the situation right now before we decide whether to factor out these two years or this 1.5 years of artificial performance that we've seen. We know that our models go back several years, particularly the CECL model, and we're going to -- we're going to just have to wait and watch and see whether there is any way in which we can make sense of this data or is -- will we need to factor it out completely.

Rob Wildhack -- Autonomous Research -- Analyst

Okay, got it. Thank you.

Mahesh Aditya -- President and Chief Executive Officer

Thanks, Rob.

Operator

All right. And there are no further questions at this time. I'll 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 be available for follow-up questions. We look forward to speaking with you again next quarter. Thanks a lot.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Evan Black -- Head of Investor Relations

Mahesh Aditya -- President and Chief Executive Officer

Fahmi Karam -- Chief Financial Officer

Moshe Orenbuch -- Credit Suisse -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Rick Shane -- JP Morgan -- Analyst

David Scharf -- JMP Securities -- Analyst

Steven Kwok -- KBW -- Analyst

Mark DeVries -- Barclays -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

Vincent Caintic -- Stephens -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

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