Santander Consumer USA Holdings Inc.

Good morning and welcome to the Santander Consumer USA Holdings' fourth quarter and full year 2020 earnings conference call. At this time, all parties have been placed into listen-only mode. Following today's presentation, the floor will be open for your questions. Please dial star 1 to enter the Q&A queue. Today's conference is being recorded. It is now my pleasure to introduce your host, Evan Black, Head of Investor Relations. Evan, the floor is yours.

Thanks, Tracy. Good morning, everyone, and thanks for joining the call today. On the call, we have our CEO, Mahesh Aditya, and our CFO, Fannie Cutum. 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 the 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, Ash.

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 confidence 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, aided 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 and provision expenses. Despite the headwinds of the past year, we were able to improve the quality of our bookings, both in terms of borrower credit and deal structure, while maintaining strong volumes. Total auto originations of $31 billion were down only 2% versus 2019, which was 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're extremely pleased with our results, demonstrating an ability to grow responsibly while navigating the global 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 thousands 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 plan clients 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, SCA and Peugeot completed their merger, creating the fourth-largest automobile manufacturer in the world. For SC, it remains business as usual, and the merger is not expected to affect our relationship with SCA. as we continue to support their sales efforts and provide quality service to their dealer network. We look forward to our partnership with Stellantis 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 slapped to Q3. The resilience of consumer balance sheets and cautious consumer behavior coupled with the record amount of fiscal stimulus manifested itself at 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, if 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 to our loan loss reserve 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, SEA demonstrated strong access to liquidity, executing two successful ABS transactions off of our S-TAR and SRT platforms. Both transactions also achieved the lowest cost of funds in the platform and company history. We remain 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 SE 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 FUSA's exception request, we cannot pay a dividend this quarter. In addition, during the fourth quarter, we entered into a consent order with the CSPB 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 policy