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spk01: Good morning and welcome to the Santander Consumer USA Holdings Second Quarter 2021 Earnings Conference Call. At this time, all parties have been placed into a 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. It is now my pleasure to introduce your host, Evan Black, Head of Investor Relations. Evan, the floor is yours.
spk09: Thank you, Sarah. Good morning, everyone, and thanks for joining the call today. On the call, we have our CEO, Mahesh Aditya, and our CFO, Sami Khatam. Certain statements made on today's call may be forward-looking. Please refer to our public SEC filings and risk factors with respect to these statements. We'll also reference certain non-GAAP financial measures that we believe are useful to investors, and a reconciliation of those measures to GAAP was included in the 8K issued earlier today. With that, I'll turn the call over to our CEO, Nash.
spk08: Thanks, Adam, and good morning, everyone. Thank you for joining us to review our second quarter 2021 results. Before discussing the quarter... I'll address the offer we received from our majority shareholder, Santander Holdings USA. On July 2nd, we received a non-binding proposal from Schuster to acquire all of the outstanding common shares of SC it does not currently own. The SC board has formed a special committee to consider the proposal. As the special committee's review is still ongoing, there will be no further details shared regarding this matter or guidance given on this call. We politely request that no questions be directed to this topic during the Q&A portion. Thank you. Now on to the second quarter, which was another record-setting quarter for Santander Consumer, representing the most profitable quarter in the company's history, with $1.1 billion in net income, the highest level of quarterly originations at $10.5 billion, and we finished the quarter with a net credit recovery of $79 million. Total quarterly originations increased 34%, versus last year, with strong increases in lease and non-prime loan, more than offsetting a decrease in prime loan originations due to a sharp reduction in incentive levels versus the prior year. Overall, consumer demand remains strong. However, we remain cautious in our underwriting to ensure resiliency in all new originations, especially given the unique environment resulting from the much-talked-about supply shortages and increased competition. The U.S. economy continues to recover even as uncertainty remains, June unemployment reached its lowest level since the onset of the pandemic, and approximately half the U.S. population has been fully vaccinated. In our portfolio, credit metrics remain strong, with delinquencies well below pre-pandemic levels and unprecedented loss rates highlighted by the net recovery this quarter. Payment rates in both the deferred and non-deferred populations are stable, and deferred requests are in line to lower than 2019. Lower levels of deferrals and government stimulus in the first quarter contributed to an increase in early-stage delinquencies quarter over quarter, but delinquencies remained well below historical levels. Record used vehicle prices coupled with low charge-offs led to a net recovery during the second quarter. June was the first month-over-month decline in the Mannheim Index in 2021, and this trend continued in the mid-July report, but prices are expected to be elevated for some time. As anticipated, significant vehicle inventory shortages pressured industry sales, as the June SAR fell to $15.4 million from $17.7 million in March. New vehicle inventories are at historical lows, but the month-over-month pace of decline moderated in June. The dynamic will likely be a challenge for new vehicle sales and therefore our prime originations for the remainder of the year. Our reserve coverage decreased versus Q1, primarily due to strong credit performance and an improved macroeconomic outlook. At the end of the second quarter, our coverage rate stands at 17.8%, which remains more than 100 basis points above our day-one CISO. This level of reserve accounts for the risk that credit performance may worsen once the government stimulus programs expire and used vehicle prices may normalize. We believe holding reserves at this level is appropriate, given the continued uncertainty around the pandemic, the Delta variant, and long-term unemployment trends. As we have discussed the last couple of quarters, digital investment is a priority for our company as we look to the future. Yesterday, we announced the debut of an innovative digital auto finance experience that will streamline and enhance our interaction with our dealers and customers. Our solution was developed with Autofi, an established digital retail leader, to further our vision of simplifying the car buying experience. SC's digital product suite will enable dealers to self-service across key vehicle underwriting interaction points with SC, enhancing their ability to sell vehicles. The dealer digital experience includes tools to identify cars on the dealer's lot that fit a consumer's budget, as well as specifications to complete these, streamlining the financing process. This dealer tool is the first of several technology advancements we plan to roll out over the next several months. As consumer purchasing habits shift, we are committed to changing our process and giving dealers the right tools to simplify the legal finance process. We are also committed to educating our customers, our consumers about their finance options and ensuring a full understanding of our products. The next wave of technology enhancements will be focused on consumer financial literacy at the time of purchase, throughout the life of the loan on lease, and if modifications are requested. The pandemic has highlighted the need to automate these tools for consumers who have proven to be resilient and prefer to research options online before or without speaking to one of our representatives. With that, I'm going to turn the call over to Fahmy for a more detailed review of our results.
spk07: Thanks, Mahesh, and good morning, everyone. Turning to slide four for some key economic indicators that influence our performance. Economic indicators have improved, supported by the vaccine rollout, continued federal aid and reopenings across the country. Unemployment is down but remains well above pre-COVID levels, with several million less jobs today than in March of 2020. Although the economic recovery is well underway, we remain prudent in our approach. The impacts of the pandemic and the health of the consumer after stimulus benefits expire remain uncertain. COVID spikes from the Delta variant have slowed reopenings and caused some states to consider reinstituting restrictive measures. In addition, we're also monitoring the recent uptick in inflation and the potential impacts to consumers. Our performance will depend on the economic recovery continuing and the health of the consumer remaining strong until sustained employment returns across the economy. On slide five, there are a few key auto factors that influence our origination volume performance. New and used vehicle sales decreased versus last quarter. Consumer demand remains high, but supply shortages and elevated vehicle prices are pressuring sales. The Mannheim index increased 12% in June compared to March and 34% year over year. However, as expected, used vehicle prices are beginning to moderate, especially in the last month of the quarter. The mid-July index decreased 2% from the end of June. We expect prices will continue to trend towards normal and decrease in the fall following seasonal patterns. On average, we expect 2021 used car prices will increase approximately 20 to 25% compared to 2020. Turning to slide six for origination trends. During the second quarter, we originated 10.5 billion of auto loans and leases leading to 34% growth in volume versus last year and 22% higher than the first quarter of this year. Reviewing our originations by channel. Core loan originations increased 79% year over year. Total Chrysler capital loan originations decreased 2%, made up of Chrysler prime volume, which decreased 15%, and Chrysler non-prime volume, which increased 41%. Lease originations more than doubled, reaching $2 billion in the quarter. Volume in the quarter was driven by continued strong demand from consumers, spurred by tax refunds and a third round of stimulus checks. Our core loan originations have been strong since the onset of the pandemic, and we expect that trend to continue. Although competition has been intense, our share with our core dealers has increased year over year. Chrysler non-prime volumes return to more normal levels and experience year-over-year and quarter-over-quarter growth. The majority of volume from this channel has historically come from new vehicle sales. However, given the lack of new vehicle inventory and fewer incentives from Stellantis, our strategy and mix shifted to more used vehicles. We are very pleased with the level and credit quality of originations in our non-prime channels. We remain disciplined in our approach from a risk perspective while maintaining strong margins amongst heightened competition. Prime loan originations increased 29% over the first quarter of 2021. However, decreased 15% from the second quarter of 2020. As we have discussed, prime volume in 2020, especially in the second quarter, was supported by significant OEM incentives in the market, exclusive to Chrysler Capital. We expect pressure on our prime volumes for the remainder of the year, depending on the supply of chips for new vehicles. Lease volumes returned to more normal levels, increasing 109% compared to last year. As you may recall, lease volume was most impacted by the pandemic in 2020, as lease heavy regions of the country remained in quarantine for an extended period of time. Plus, significant incentives on the retail side likely shifted volume to loans. Overall, our strong originations are a reflection of our team's execution and our relationships with our OEM partner and dealers. We believe the credit quality and margin profile of each channel positions us well for future profitability. On to slide seven, we break down our 2021 monthly originations by channel and product. Our core loan originations began 2021 relatively in line with the prior years and followed the typical seasonal patterns with tax refunds. Unlike previous years, we did not experience a drop off in the first half of the second quarter because of the third round of stimulus checks, which kept demand elevated. Coupled with higher demand, our market share also increased due to our competitive market offering and dealer relationships. Second quarter dollar volume was up nearly 60% compared to the second quarter of 2019. Dollar volumes are elevated due to the continued strength of used car prices. The average amount financed in our core segment has grown $3,000 to $4,000 per vehicle compared to historical norms. Unit growth for the quarter increased nearly 40% compared to 2019 and 45% compared to 2020. Chrysler Capital non-prime experienced a similar uptick for the first four months of the year and ended the quarter in line with 2019 levels. Unit growth was also strong, increasing 33% over 2020 and 6% compared to the second quarter of 2019. Stellantis incentives continue to influence the level of our Chrysler Capital prime loans. The beginning of the quarter benefited from strong demand and incentives exclusive to Chrysler Capital. However, as new vehicle inventory levels continue to decrease, so do OEM incentives in the market. Our volume, especially in June, was impacted by both lower sales and lower market share as incentives were significantly reduced. The prime volume ended the quarter in line with 2019 levels and continues to be supported by our partnership with Santander Bank. Lease volume trends follow a very similar pattern as prime loans, starting the year at elevated levels and trended down throughout the quarter due to lower sales and reduced incentives. We expect both lease and prime loan volumes to remain under pressure as long as inventory levels and Stellantis incentives remain low. Moving to page eight in our Stellantis partnership. Year-to-date industry auto sales, including Stellantis' sales, have benefited from robust consumer demand. Our penetration rate decreased versus the first quarter, but remains in line with performance experience in 2019. We remain committed to Stellantis and providing exceptional service to their dealers. As inventory levels normalize, we expect incentives to normalize as well, increasing our market share and our volume. Turning to slide nine. Our service for others balance increased to $15 billion at quarter end, of 35% versus the prior year quarter, driven by $2.6 billion in originations via our agreement with Santander Bank and $300 million in off-balance sheet prime loan sales. This platform generated $23 million in servicing fee income this quarter. Moving to slide 10 for an overview of our liquidity. As of quarter end, SE's committed funding, including unutilized lines, was approximately $55 billion. At the end of the second quarter, we had approximately 94% 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. Utilization levels have significantly been reduced in 2021 as customer payment rates have been elevated, and we have successfully executed several large ABS transactions along with our unsecured borrowings from Santander in 2020. Given our greater utilization of ABS and unsecured debt, which are generally fixed rate liabilities, our balance sheet has become less sensitive to rate movements. We have historically been more sensitive to rising rates than we are today due to larger utilization of floating rate bank facilities. The ABS market continues to be very supportive of our securitization platforms. During the quarter, we executed approximately $5.3 billion in asset-backed securities across two loan transactions and one lease transaction. All three transactions were upsized at record low cost. Subsequent to quarter end, we executed our third S-DART transaction of the year for a total of $2.5 billion. This was the largest retail auto ABS transaction since 2008 and the largest non-prime auto ABS deal on record. The transaction price is the tightest weighted average credit spread and lowest cost of funds in the S-DART platform history. Our liquidity position and continued investor demand positioned us well to benefit from the macro environment in auto and grow volumes across all of our channels. Moving to slide 11 to review our financial performance for the quarter versus the prior year quarter. We achieved the highest level of quarterly earnings in company history, more than $1 billion of net income or $3.45 per share. Our earnings through the first half of 2021 are also the highest level of earnings generated in any single full year at SC. The drivers of the quarter's strong results are a combination of our solid execution and supportive macro conditions. Interest on finance receivables and loans decreased 60 basis points due to the sale of the personal lending portfolio. Interest on retail installment contracts increased 7% due to higher average loan balances during the quarter, which were up 6%, or $1.8 billion. Net leased vehicle income more than tripled, primarily driven by an increase in the amount of leased dispositions, the gain on sale from disposed units, as well as lower depreciation levels. Net yield on leased vehicles increased to 9.6%, up from 2.9% last year and 7.3% last quarter. Interest expense decreased 23%, driven by lower benchmark rates and lower average debt balances. Cost of debt decreased 60 basis points versus the last year, and it was stable versus the prior quarter. Credit loss expense decreased more than $1.1 billion due to a net recovery during the quarter, as our auto recovery exceeded gross losses and $186 million CECL reserve release compared to significant reserve bills in 2020 as a result of macroeconomic factors and COVID-19. Profit sharing expense increased $39 million due to sharing of lease residual gains with Stellantis. Total other income improved $122 million due to the sale of the personal lending portfolio. As a reminder, losses from that portfolio were recorded in other income. Operating expenses increased 14% primarily due to increased compensation and benefit expenses and an increase in repossession expense versus the prior year when repossessions were temporarily halted due to the pandemic. Continuing to slide 12 to cover delinquency and losses. Our credit performance remains very strong and continues to benefit from the proactive credit tightening actions that we implemented at the start of the pandemic. The extensive customer relief initiatives providing our customers the elevated government support and our robust underwriting capabilities. Versus the prior year quarter, early stage delinquencies increased 120 basis points and late stage delinquencies were stable year over year. Despite the increase in the quarter, early-stage delinquencies were nearly 400 basis points lower than 2019, and late-stage delinquencies were 230 basis points lower. As a result of our customer relief efforts during the pandemic and strong payment rates experienced in the first half of the year, gross losses are at historic lows. The RIT gross charge-off ratio of 6.6% is 450 basis points lower than last year, and 950 basis points compared to the second quarter of 2019. Our recovery rate as a percentage of gross losses was approximately 115%. Recovery rates continue to benefit from low gross losses and high used car prices. The net recovery ratio of 1% is 700 basis points lower than last year. As stimulus benefits, forbearance programs, and mortgage moratoriums end, we expect delinquencies to increase in the latter part of 2021 and then begin to normalize throughout 2022. subject to any further government stimulus or deferral programs. Turning to slide 13, we detailed monthly loss and recovery rates versus 2020 and 2019. Gross charge-offs continue to trend lower as consumer balance sheets remain strong. We expect this trend to continue into the third quarter. Recovery rates as a percentage of gross losses in the quarter remain elevated as the ratio benefits from low losses and record used car prices. Although prices have begun to plateau, we expect used car prices to remain above historical norms into 2022. In our own portfolio, looking at auction prices on a vehicle basis, we experienced 44% increase in the quarter versus the prior year's second quarter, 37% higher than 2019, and a 19% increase from the first quarter of this year. Rates were strong across all vehicle ages and vehicle types. Moving to slide 14 to review the loss figures in dollars and the walk from prior year. Losses in the quarter decreased 540 million, resulting in a net recovery of 79 million. Losses decreased 340 million due to strong recoveries, 219 million due to lower gross charge-offs, and offset by 18 million due to higher balances. Turning to slide 15 in the CECL Reserve. At the end of the second quarter, the allowance for credit losses decreased $186 million from last quarter, driven by an increase of $188 million due to higher asset balances, a decrease of $283 million due to improvements in credit quality and portfolio mix, and a decrease of $91 million due to improved macroeconomic factors. Despite improvement in the macroeconomic outlook, the overall risk and uncertainty in the portfolio still remain. Concerns over recent spikes in COVID cases, 7.5 million fewer jobs than pre-pandemic levels, and used car prices normalizing over the life of the loans are incorporated into our analysis. The macro scenario we used quarter over quarter did improve. Our baseline macro scenario assumes unemployment will average approximately 4.5% in the fourth quarter of this year and come down to 4% in the fourth quarter of 2022. moving to slide 16 to cover CECL by asset designation. The TDR coverage ratio increased to approximately 36%, up 570 basis points driven by higher delinquencies, higher percentage of deferred accounts, and a higher percentage of delinquent deferred accounts. TDR balances decreased approximately $200 million this quarter as deferral requests remain low. We believe we are adequately reserved for our riskier TDR portfolio with a coverage ratio of over 36%. The non-TDR coverage ratio decreased to 15%, down 200 basis points versus last quarter, and in line with our day one CECL reserve. The coverage rate dropped due to the improved credit profile of originations, lower delinquency, and strong payment performance. Overall, we feel our reserve is appropriate given the non-prime nature of our portfolio, the ongoing benefits of government stimulus, and the remaining uncertainty in the economic recovery. Turning to slide 17. Our expense ratio this quarter was 1.9% of 20 basis points versus the prior year quarter, and 10 basis points lower than the second quarter of 2019. Operating expenses increased 36 million, driven by higher employee benefits, insurance claims, and repossession expenses as business activities normalized. Turning to capital on slide 18. Our CET1 ratio for the quarter was 18.1% of 160 basis points versus the first quarter. Our capital levels were supported by record income in the quarter, offset by an increase in assets of approximately $1 billion. Our board has declared a dividend equal to $0.22 per share to be paid in the third quarter. At the end of the quarter, the Federal Reserve announced the maturity of the capital preservation rules and reinstituted the stress capital buffer framework beginning in the third quarter. Our parents used a stress capital buffer with a minimum of 2.5%. Our capital levels are in excess of our 11.5% target. We've discussed in the past, we remain committed to utilizing this excess capital in a creative manner. We're excited about the opportunity to reinvest in the business as we announced yesterday with our digital experience, as well as continue to grow originations by enhancing our dealer experience. We will also be opportunistic as strategic opportunities arise. To conclude, the second quarter was another record quarter for SC. The portfolio has performed well, demand for vehicles remains high, and the portfolio has proven to be resilient. Our disciplined underwriting over the years and our robust risk framework that we have established position the company to capitalize on the current auto industry tailwind. Our balance sheet, capital, and liquidity remain strong, and we will continue to take a prudent approach as we manage through the uncertainty in the market. Before we begin Q&A, I'd like to turn the call back over to Mahesh. Ash. Thank you, Femi.
spk08: I want to conclude by thanking all of our employees who, despite the volatile environment caused by the pandemic, continue to execute with a level of dedication that's unsurpassed. Our employees' hard work continues to inspire us and give us confidence as we look to the future and position the company's long-term success. Our employees are our top asset, ensuring their engagement and supporting our communities is top priority for us. We continue to make progress in our diversity, equity, and inclusion programs and have had tremendous response from all of our employees. It's clear that our team is ready to drive change in how we interact, recruit, and manage the business. Over the past year, we've more than doubled our charitable donations in support of nonprofit organizations in our communities. I'm very proud to announce that we plan an additional $50 million donation to the SC Foundation, which will fund a multi-year program focused on transforming lives of low-income students, young adults, and families across the country. The programs will target closing the digital divide and aiding students and families in education programs. to boost digital and financial competencies. Our goal is to reduce the opportunity gap, diminish social and economic disadvantages, and improve life outcomes. In addition to the charitable donations this year, we will be launching several customer relief initiatives for our existing customer base. Although credit performance has outperformed through the pandemic, we believe consumers will go through tough times when stimulus ends, and we are adjusting our servicing policies to accommodate our customers who have been severely impacted by the pandemic. We are committed to offering superior customer service, starting with financial literacy at the time of application and aiding in a soft landing in case of hardships along the way. With that, I'll open the call up for questions. Operator.
spk01: Hello. We will now open the call for questions. Please limit yourself to one question and one follow-up question. Thank you. Our first question comes from Moshe Orenbook with Credit Suisse.
spk05: Great, thanks. Excellent results. I would say the discussion of excess capital versus an 18.1%, the number exceeds $3 billion to your 11.5%. And just trying to respect the request you made at the front end, but are you able to buy back stock now? I guess is the first question.
spk07: Hey, good morning. It's Fanny. So, yes, so when the Federal Reserve terminated the interim policy and the capital preservation rules, that does provide us a lot of flexibility with capital distributions. The board has declared that the ordinary dividend this quarter, we're going to continue to evaluate all the alternatives around capital distribution, including share buybacks. But nothing further to announce on that front outside of the dividend that we've declared.
spk05: Got it. Okay. And kind of my follow-up question would be, given you've had really strong net interest income You talked about better funding costs. Can you put that together for us? Because also, you know, coupled with the strong lease gains, you know, obviously, you know, while we are seeing used car values, you know, kind of moderate, they're still going to likely be better. So can you put those kind of three, you know, three things together for us in terms of the outlook for net interest income?
spk07: Sure. So I'll talk about NIM kind of trends, and I'll start with kind of in dollars. So we're up year over year and quarter over quarter because balances are also up. On the loan side, we're up about 6% year over year. As you mentioned, we're also benefiting from lease, even though the average balance there is down around 2%, but obviously that's more than offset by the gain on sales and the lower depreciation expense. So lease on its own from a dollar standpoint increased about $280 million year over year. On the rate side of it, we're also up this quarter because of the uptick in lease. Recall, if you think about last year, lease yields really dropped because of the higher depreciation expense, and we just had lower units come back to us. This quarter, we saw continued record prices. Depreciation expense continues to be low. Net yield lease of around 9.5%, which is a record for us. You know, I don't know if that will persist. As we mentioned, we do expect used car prices to come down. But generally speaking, lease yields were 8.5% almost year-to-date. They're going to look really good compared to 2020 and 2019. On the auto loan side, yield was up, you know, 30 basis points compared to last year despite the cost of funds dropping about 60 basis points. And really that's a result of our prime assets. We've talked about kind of the mix between prime and non-prime. And since we did sell $2.5 billion plus of prime assets in the first half of the year, you'll see an uptick on the auto loan side as well. So overall yield on earning assets and NIM, if you just look at those that we disclosed, you've got to keep in mind that last year's results had personal lending business included, which is a 25% plus top line yield asset. So that is offsetting some of the benefits that I just went through. But to be 300 basis points higher than last year is pretty exceptional performance. So there are a lot of moving parts. I think the auto loans will be stable, just slightly down due to some of that competitive pressure that we mentioned. And it will also be passing on some of the cost of debt benefits that we've seen. Lease yield, as I mentioned, I think will remain elevated. Thanks a lot.
spk01: Our next question comes from Betsy Grisek with Morgan Stanley.
spk00: Hi, good morning. Yeah, first question. I want to say something but slightly different. Just wanted to understand. how you are thinking about the supply of autos entering into the market. I think that's at the crux of how long this used car price is going to stay high. What are you hearing from your dealers, your partners? We hear different things from my colleague who covers autos. Some guys have figured out the chip problem, others still have it. Try to understand what you're hearing and thinking, and when you think the supply chain is going to be resolved.
spk08: Yeah, thanks for the question, Betsy. So a couple of things. There are two data points that we're going with, and there are several, obviously, from the industry. But fundamentally, the new vehicles we sell are Chrysler vehicles. And I think Carlos Tavares, the CEO of Chrysler, recently said that he expects this problem to continue well into next year, the chip problem, that is. We also talked to our dealers, and dealers tell us they're running at historically low levels of inventory on new vehicles. So you're putting the two together. We fully anticipate that there will be a depletion and there will be a low level of auto and new vehicle supply going into at least the next two or three quarters. until something definitive happens on the chip production side. And my understanding of the chip problem is that it's concentrated among few manufacturers, and therefore there's a high dependency on a couple of factories being able to turn out the volume. I also understand that autos consume only about 10% of the total chips that are manufactured. So these are all data points that we sort of hold on to. The good news is that Chrysler has probably got some new models that they're waiting to launch this year, and we're hoping that that will see some, you know, there will be a good reception in the market, and we are looking forward to supporting Chrysler through the sales of some of those new models that they have, the 2022 as well as the new models as far as the Jeep Grand Cherokee and the Grand Wagoneer. Good stuff.
spk00: Yeah, no, that's great. And then can you talk a little bit about how you anticipate, you know, use crop prices to respond as the supply chain is, you know, fixed stroke improved? Is this going to be a slow? Just trying to understand how you think about that.
spk07: Yeah, Betsy, I definitely think it's going to be a slow burn back to normal. We do not see necessarily a cliff event where used car prices drop all in one month or one quarter. I think the chip shortage on its own will keep used car prices elevated. The supply shortages Mahesh just mentioned will also keep things elevated for a period of time. We do think we will see a drop. We saw it in June. We saw it at the beginning.
spk10: It's going to be elevated down over time. All right, thanks.
spk01: Our next question comes from Steve Kwok with KBW.
spk04: Hi, thanks for taking my question. I guess just one question around the originations as we think about it going forward, given the new vehicle shortage along with the competition. Can you just talk about your thoughts on originations going forward?
spk10: Sure. Good morning. So total originations were up.
spk07: We think we'll be up year over year compared to 2020 and compared to 2019. And really that's a combination of unit growth, which is driven by pent-up demand, consumers with healthy balance sheets, and general moves away from public transportation. The second part of that is pricing of vehicles. I mentioned the ticket size for our average finance amount is up. So I think both will drive higher prime loans and leases as those originations, as Mahesh mentioned, are heavily weighted on new vehicles. So those will probably obviously with a record level of originations. So I think the demand will be there.
spk10: But that momentum in originations for the rest of the year.
spk04: Got it. And then if you can elaborate around the competition on your core business and just what you're seeing there. Understanding Prime, there's a lot of competition, but that's not really the market you cater to.
spk07: I would say we kind of cater full spectrum, both on the prime and non-prime side. You can see that just based on the percentage of our prime and lease originations. But the comment on competition, you know, we've said it now for a couple quarters. It is intense, but I would characterize it as still rational. We haven't seen anyone getting really too aggressive on policies, but we have seen some pressure on pricing. Anytime you have really strong capital markets and robust access to liquidity, you're going to see that heightened competition. You couple that with fewer vehicles to finance, and you have a really good compo to spur competition. Again, it didn't hurt us this quarter, but the competition is there, and sometimes we have to make tough decisions between maintaining share and maintaining margins. We generally like to maintain our margins in general, especially on the non-prime side. You know, competition does come and go. It does ebb and flow month to month, quarter to quarter. You know, we're looking to be very consistent with our programs and consistent with our profitability. So the competition is going to be there.
spk08: Yeah, and the one thing that I'd like to add here is that we understand our competitors, I think, pretty well. You know, there's some of them, as Sammy said, who come in and out of the market and some that are staying there. And the important thing here is to maintain
spk10: And, you know, we're kind of holding the line as far as great quality.
spk04: Thanks for the color and good quarter. Thank you, Drew.
spk01: Our next question comes from John Rowan with Danny.
spk06: Good morning, guys. Again, kind of respecting your ask to not talk about the offer, is there any timing around when the board would be discussing stock repurchases? Is there a meeting or some type of... that we can look for?
spk07: No, there's no meeting or timeline set. We're continuously evaluating all kinds of different capital deployment alternatives, and share buybacks are one of those.
spk10: Okay, and then you guys have given net chore draft guidance in the past. Now, assuming maybe you don't want to give net chore draft guidance, ...guidance here.
spk06: Either talk about what you think about net charge-offs will be for 3Q or alternatively, you know, are we still running in a plus 100% recovery?
spk07: So, you know, obviously the losses we're experiencing today are certainly well below kind of normal levels.
spk10: You know, gross charge-offs were the...
spk07: quarter were 450 basis points better than last year and 950 basis points better than 2019. We do not think the losses will stay this low going forward, especially in the long term. We've already started. They're still well below normal, but they have shown some signs of increasing there over the last couple months. So I think near term, we'll With the consumer still having really strong balance sheets, we should expect to see continued strong credits, especially for the second half of this year. But long term, we do expect it to normalize. You couple that on the growth side, you couple that with the used car prices and the commentary we had there on used car prices trending down to normal. So I think you'll see both a normalization of gross losses as well as our recoveries and ultimately our net losses. We do think it will be gradual. Again, we don't think it's going to be a cliff event, but 2021, and then translate into losses into 2022.
spk08: So I think just one more thing, John, and thanks for the question, is that there is a couple of examples. One is a September 6th statement.
spk10: The other is how much dry powder do our borrowers have saved up, which they're going to use towards very high levels of payment rates.
spk08: notwithstanding the fact that early stage delinquencies are taking up. All of that stuff eventually, as Tammy said earlier, it's all going to have to normalize at some point, and we generally now think, looking at all the data for the past few months, that it's going to be a gradual normalization rather than any sort of cliff correction. And all of this is supported by used car prices, the sort of deficit or the lower levels of inventory of new vehicles. and the value of the way of the cost sort of general statement.
spk10: We just have to wait and see what happens after. How long does that process take to unwind? Okay, thank you. Thank you very much.
spk01: Our last question comes from John Hecht with Jefferies.
spk03: I had another conversation with you guys at a public It's been a good experience, so good luck with everything. My question is pertaining to more details about kind of elevating the supply chain impact. And I'm wondering what your guys' perspective is on the demand side of the equation. I mean, how much has used car demand? And then pulled forward because of stimulus and maybe reluctance to use. How much of, you know, call it, you know, profit bidding from big used car channels like car market and how fast can those patterns change?
spk08: So we think as a general sort of trend that we're seeing, you're exactly right. There's a lot of the sort of call them virtual internet providers like Carvana, et cetera, are very active in the auction lanes. And they are putting out bids there and picking up vehicles. Some of that is driving the inflation in used car prices, and I think some of it has to do with genuine demand and people wanting to go out there and get a car for safety purposes, easier to get around, safer, et cetera. So we think... I think it's still a little early for us to say that there's this sort of structural correction that's going on where people are moving away from collective transport into more individual forms of transport. But generally, we're seeing a couple of things. One is the shift into vehicle purchases. So as a general thing, we're seeing, obviously, for used cars, much higher sales. And the other trend and tendency that we're seeing is more and more dealers are going digital.
spk10: increasingly want to do their shopping and get
spk08: every single point of interaction, and as much of the fulfillment process on the Internet as possible, which is why we've done what we've done with AutoFi. And sort of thinking a little bit ahead of how the market is likely to evolve over the next three, six months to a year, we are kind of preparing ourselves for that. So, you know, used car prices largely driven by demand and the possibility of new inventory. New inventory will come back hopefully next year, hopefully later this year, but, you know, probably... And I think we might, you know, it's a little early, but I think we might be going into a period of significant legal ownership and more remote, you know, remote fulfillment.
spk03: Great. I appreciate that.
spk10: Thanks.
spk01: There are no further questions at this time. I'll now turn the call over to Mahesh Aditya for final comments.
spk08: We appreciate your participation and support. Have a great day and stay well.
spk01: This concludes today's call.
spk10: Thank you for your participation. You may now disconnect.
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