Ally Financial Inc

NYSE:ALLY

Earnings Call Transcript 2020-Q1

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome to Ally Financial’s first quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during this session, you will need to press star, one on your telephone. Please be advised that today’s conference is being recorded. If you require any further assistance, please press star then zero.

I would now like to hand the conference over to your speaker today, Mr. Daniel Eller, Head of Investor Relations. Thank you, please go ahead.

[Daniel Eller, Head of Investor Relations]

Thank you Operator. We appreciate everyone joining us to review Ally Financial’s first quarter 2020 results this morning. You can find the presentation that we’ll reference throughout the call on the Investor Relations section of our website, ally.com.

I’ll direct your attention to Slide 2 of the presentation, where we have our forward-looking statements and risk factors. The contents of today’s call will be governed by this language.

On Slide 3, we’ve included our GAAP and non-GAAP or core measures. These measures, along with other core metrics are used by management, and we believe they are useful to investors in assessing the company’s operating performance and capital results. Keep in mind they are supplemental to and not a substitute for U.S. GAAP measures. Supplemental slides at the end include full definitions and reconciliations.

This morning we have our CEO, Jeff Brown; and our CFO, Jen LaClair on the call to review our results and take your questions following prepared remarks.

With that, I’ll turn the call over to JB.

[Jeff Brown, Chief Executive Officer]

Thank you Daniel. Good morning everyone. We appreciate you joining the call during this critical time for our nation.

The past several weeks have presented significant challenges for many around the world due to COVID-19. I’d like to take this opportunity to thank countless individuals who are battling on the front lines, including first responders, healthcare workers, grocers, delivery and supply chain providers, and many others. You represent the best of who we are. Thank you.

We also hope all of you and your families and teammates remain safe and in good health.

In response to the virus, over 90% of the U.S. economy has been impacted. Individuals in 41 states are currently under stay-at-home orders, resulting in a near shutdown of economic activity across many sectors. At the peak, 23 states had either closed or restricted dealer sales. Essentially all states have deemed fixed service operations or service as essential business, but sales have been obviously meaningfully impacted. These 23 states represented about 50% of our origination volume last year.

This morning, we will review Ally’s response to ongoing developments and provide you with perspectives on: number one, what we’re seeing across our businesses; number two, how we are positioned to successfully navigate the rapidly evolving environment; and third, affirm that our focus remains unchanged on delivering for our customers and driving long-term value.

Over the past several years, the strong foundation we’ve built has allowed our company to thrive during economic expansion and positions us now to be a source of strength for all of our key constituents during this difficult time and when we begin to recover. Remaining disciplined in our customer focus and true to our values will allow us to emerge from this period stronger than before resuming the trajectory of both financial and operational improvements we’ve delivered the past several years.

On Slide No. 4, we’ve outlined the decisive and timely actions taken on behalf of our employees, customers and communities. I’m exceptionally proud and humbled to stand alongside 8,700 teammates, witnessing firsthand how our values have been demonstrated with actions and efforts across our company every single day.

Our number one priority remains the wellbeing of our people, and we executed several rapid actions in this regard. Cross-functional teams acted swiftly in mid-March, enabling 99% of our employees to work from home in a matter of days. We quickly expanded our benefits in late March with emphasis on health and family care and provided a $1,200 financial assistance payment for employees who make under $100,000.

For our customers, we were proud to lead the industry in rolling out comprehensive relief, bringing increased financial flexibility, and added security during an uncertain time for many. Jen will walk through the details in a few moments, but the overall participation rates, sentiment scores, and NPS levels reinforce for us that our customers recognize our efforts to do it right.

Our commitment to them in this environment will ultimately strengthen relationships and mitigate losses down the line. We were not mandated to take these actions, but there is no playbook to navigate an environment like we face. This is a time when your values serve as your guiding principles.

For our dealers, we were proud to offer payment relief and launch an SBA offering under the Payroll Protection Plan program. In a matter of a few days, we stood up a capability that allowed us to submit nearly 1,000 applications on behalf of our dealer customers. At Ally Bank, our direct digital platform that has generated 10 consecutive years of customer expansion and deposit growth, saw record mobile app downloads during March.

For many true to our brand, we waived a variety of charges across our deposit and invest offerings until July of this year. This includes deposit overdraft fees and payment deferral options in our mortgage product, which we’ve never been reliant on overly burdensome customer fees. We’re energized by the overwhelmingly positive responses we’ve received from customers via social platforms, call centers, and direct communications to myself and hundreds of our teammates.

For our communities, we recognize this is a moment in society where the private sector has to play a role, and companies like Ally need to step up and do more. We jumped at the opportunity to increase our giving, pledging $3 million in financial aid to 30 deserving charities focused on housing, health, education, food, and economic development. Across each of these areas, our actions continue to be guided by our customer-centric philosophy and do-it-right approach.

I’ll briefly review results for the quarter on Slide No. 5.

Similar to the past few years, 2020 began with strong financial and operating trajectories while building momentum in ongoing improvement across key metrics. While we don’t know how long the shutdown will last or what the specific impacts will be on broad-based economic activities, we are confident Ally is well positioned to navigate the cycle, supporting our customers, enhancing loyalty, and driving incremental growth opportunities in the long term.

Financial results for the first quarter reflect higher provision for credit losses, including a reserve increase of over 2.5 times the prior quarter level reflecting CECL Day 1 and anticipating COVID-19 impacts. Adjusted EPS was negative $0.44 and core ROTCE was negative 5.4%. Total revenue exceeded $1.6 billion for the third consecutive quarter, a 5% increase year over year.

In auto, we originated $9.1 billion of loans and leases during the quarter while decisioning 3 million applications. Through January and February, application volume was 5% higher compared to 2019 but declined 6% for the quarter, reflecting a meaningful slowdown in March activity. New originated auto yields were 7.25% during the quarter. NCOs increased year-over-year to 1.45% with minimal impact from COVID-19 in the quarter. We are continually assessing market dynamics and competitor behaviors while maintaining disciplined underwriting standards, while also remaining focused on potential opportunities to further support our customers.

Within insurance, we underwrote $317 million of premiums, representing our highest first quarter result and demonstrating the meaningful progress we’ve made expanding our reach.

Turning to deposits, we ended the quarter with over $122 billion in balances, an increase of $9 billion year-over-year through strong net growth every month during the quarter. We added 71,000 new deposit customers in the quarter, driving us to over 2 million total depositors. The steady balance growth and consistent customer trends demonstrate the resilience of our platform, the stability in our funding profile, and the intrinsic value of our brand all critically important as we head into a challenging economy.

This should also provide clear illustration of the robust funding machine that exists at our company. Many others in our industries don’t have the robust liquidity posture that exists at Ally. This is a dramatic improvement of our company relative to the crisis in 2008 and 2009.

Within our consumer and commercial product lines, Ally Home and Ally Invest observed [audio gap]. Ally Home direct-to-consumer originations of $700 million reflected ongoing awareness of our offering as the environment drove a strong refinance pipeline for 2Q. Invest accounts grew at the highest and fastest pace in over four years under the Ally brand, and having this capability served as a customer and balance retention tool for Ally. We captured nearly $700 million of balance transfers from our deposit platform that could have otherwise ended up outside of Ally.

Ally lending volume was $70 million in the quarter, increasing 5% quarter over quarter, and corporate finance balances grew primarily as a result of increased line draw activity. In early April, we’ve seen a significant slowdown in additional line draws.

From a capital perspective, we proactively suspended share buybacks through the end of the second quarter, given the events unfolding in the macro environment, and we submitted our capital plan as part of the CCAR 2020 cycle in early April.

Regarding the CardWorks acquisition, we began our integration work and filed for regulatory approval on schedule. We continue to remain in dialog with Don and the team on operational and business trends. While we obviously did not anticipate the rapid economic changes when we announced the deal two months ago, the long term benefits of the acquisition remain unchanged. I know certain provisions of the deal are on your minds, and it’s hard to say much at this time. What we can continue to promise is that we will make the right decisions for our customers and shareholders for the long run.

CardWorks’ long-term track record will serve as an important differentiator in this environment. As we shared when we announced the deal, CardWorks has successfully navigated many cycles across its 32-year history, and thrived following the last cycle. We recognize this environment is a different animal, but we know the quality of this business and these operators.

On Slide No. 6 are the key metrics we’ve highlighted for several years that we believe provide important short-term and long-term context across Ally’s performance and inherent value. While the EPS result in the upper left is not something we’re satisfied with, this reflects actions we’re taking to build reserves and to position for expected losses related to COVID-19. This short-term metric should be looked at in conjunction with tangible book value trends shown in the bottom right to gain a broader perspective of the inherent franchise value and long-term trends. We’ve grown book value year over year to $32.80 even as capital levels remained steady, reserves increased 2.5 times since year-end through CECL implementation, and absorbing the resulting net loss in Q1. We’ve included CECL Day 1 pro forma impacts as added context.

Revenues in the upper right remained strong this quarter, and many aspects of our embedded balance sheet positioning remain intact. Deposits on the bottom left increased to over $122 billion and now represent 75% of our funding base. As I mentioned a few moments ago, we are well positioned to execute in the uncertain environment and believe we will be rewarded by our customers over the long term. Our management team is more focused than ever on the risks in front of us while actively looking for new opportunities to innovate for our customers and build upon our momentum.

With that, I’ll turn it over to Jen to take you through the detailed financial results.

[Jen LaClair, Chief Financial Officer]

Thank you JB, and good morning everyone. I’d like to start by echoing the deep gratitude for those working on the front lines to serve and protect us during this critical time. I’d also like to recognize our employees, who have shown strong dedication and resolve over the past six weeks, rising to the occasion both personally and professionally on behalf of our company, customers and communities. I’m proud of our people and proud to be part of the team.

With that, let’s dive in on Slide 7.

As you are aware, there are many unknowns in our current environment, including the length of the shutdown, unemployment levels, GDP deterioration, and consumer and business confidence. Ally, along with many others, is challenged to accurately project impacts on many key aspects of our business.

Despite this, and in the spirit of providing transparency, we’ve laid out a variety of insights into what we’re currently experiencing and expecting as we move forward this year. These insights are based on what we know today and we recognize and expect many variables will continue to evolve.

As JB alluded to, January and February results were strong and continued to demonstrate growing momentum. Beginning mid-March, the economic shutdown was immediately felt across our business lines, resulting in declines across several areas but also increases in our digital channels, including Ally Home and Ally Invest.

In auto, reduced activity at dealerships lowered app volume and originations by over 50% by late March, which we would expect to continue in line with the shelter in place orders. Over time as the economy improves, we will be positioned to act swiftly on opportunities, including a potential increase in demand for use, prudently stepping in where others may have exited, providing adaptable solutions as we did with the expanded Carvana flow program, and the SBA product launch for our dealers where we’d funded virtually 100% of our applications prior to the program shutdown last Thursday.

In deposits, customer growth and retention remains strong and we expect that to continue throughout 2020. We had the second highest customer growth for a first quarter and retention rates remained at 96%. In addition to the growing preference for digital, Ally continues to gain momentum with brand recognition at all-time highs. We also grew in spite of increased transfers to brokers, reflecting equity market volatility, but captured nearly 30% of the outflows at Invest. We will remain balanced in our deposit pricing decisions throughout 2020 as we’re mindful of market rates, competitor actions, and alternative funding opportunities.

Ally Home saw elevated volume in March and early April due to refinance demand. We expect the shelter in place provisions will reduce demand for purchase volumes, which have already started to decline in various areas of the country.

Managing credit risk remains a top priority for us, and we know you’re focused on this topic as well. While we are not yet seeing deteriorating impacts on our credit performance, we’ve already adjusted our servicing strategies real time, including the roll-out of augmented staffing capacity, increased customer outreach, and enhanced digital engagement. Our reserve levels are over 2.5 times the level they were at year-end, reflecting life of loss CECL implementation and a deteriorating macroeconomic forecast, including elevated unemployment approaching 10% and significant GDP decline. We’ve run a variety of economic scenarios on a regular basis to inform decisions and to ensure we have line of sight into various outcomes.

We implemented CECL as scheduled this quarter, which as we discussed in Q4 reflected 12 months reasonable and supportable forecast period and includes the ’08-’09 macroeconomic data in our historic means. I’ll cover more on our reserves momentarily.

We expect retail NCOs at 1.8% to 2.1% this year, reflecting our current macroeconomic assumptions with the ultimate outcome dependent on how the environment unfolds. As a reference, our CCAR modeling implies retail NCOs rise to 2.5% to 3%, reflecting a persistent, broad-based macroeconomic deterioration. The stimulus checks are likely to have a positive impact to credit performance as polling has shown the number one expected use of additional funds is to pay down debt or bills. Within our reserves, we have not embedded any stimulus benefit at this time.

Moving to the bottom section, we remain in constructive dialog with our regulators, keeping them apprised of trends we’re seeing. The fiscal and monetary actions taken by Congress and the Fed are providing critical cash for Americans and necessary liquidity for the broader markets. Ally does not have any outstanding discount window draws; however, we believe is an efficient and rational mechanism for banks to access liquidity. We applaud the regulatory community for broad and sweeping actions taken to support the U.S. economy, and as you are aware, we withdrew our 2020 financial outlook earlier this month.

While we are experiencing near term earnings headwinds, as JB touched on a moment ago, the current environment will not impact our long-term strategies and value. Our balance sheet remains strong with sufficient capital, funding and liquidity, which I’ll cover more on in a moment. For 2020 broadly, we expect revenue trends to reflect the rate environment and moderating originations due to the shutdowns.

As we discussed, credit charges and reserve levels are based on what we know today, which we will continue to monitor and adjust as conditions unfold. On expenses, while we continue to invest in areas that will enhance our company over the long term, we are active in identifying and reducing discretionary spend across the company.

The next two slides provide additional context around how we are positioned heading into this downturn, so let’s turn to Slide 8.

The multi-year transformation of our funding profile and improved liquidity position are evidenced through these charts. Wholesale funding has been replaced by deposits, providing increased stability and lower funding costs. These trends will continue, although we will opportunistically access wholesale markets from time to time, as we did in early April with our first unsecured issuance as an investment-grade company.

Our liquidity position highlights Ally’s ability to withstand adverse changes in the broader environment and demonstrates significant growth in liquidity over the past several years. Over 80% of our available for sale portfolio is in highly liquid securities, ensuring we have significant flexibility, and we continue to have access to unused capacity at the FHLB.

Turning to Slide 9, our CET1 levels have remained consistent and above our 9% target over the past several years as we have efficiently deployed capital through balance sheet expansion and direct shareholder distributions. For context, we remain substantially above our minimum capital levels in model CCAR scenarios, incorporating stress assumptions and ongoing dividend payments. While we are not inferring events will unfold exactly as prior stress scenarios imply, this provides insight into our capital preparedness and ability to withstand a severe prolonged downturn.

Allowance for loan losses grew to $3.2 billion or 2.54% of loan balances, representing the highest loss absorption capacity in the history of our company as we head into a downturn. We have built a strong foundation which will ensure Ally stands ready to support our customers through all of our banking products.

On Slide 10, we walk through our first quarter financial results. Net financing revenues, excluding OID of $1.154 billion, declined linked quarter $10 million and increased year-over-year by $16 million. The decline versus prior quarter was primarily driven by a non-recurring revenue re-timing item related to the conversion of our retail auto servicing system. As you would expect when converting a large asset base to a new system, there were some minor timing differences in certain calculations, but these variances will neutralize over the life of the asset. Excluding this item, underlying trends continued this quarter were auto portfolio yields increased while deposit costs declined.

Adjusted other revenue of $451 million remained elevated this quarter, reflecting strong investment gains and expanded mortgage fee income. Provision expense of $903 million reflected reserve build activity related to COVID-19. Non-interest expense increased by $40 million linked quarter and $90 million compared to the prior year. Increases versus prior quarter were largely due to compensation seasonality and certain COVID-19 related employee benefits.

Compared to prior year, drivers included items that should be familiar to you, including volume and revenue-based activities reflecting our growing customer base and insurance-related expenses commensurate with written premium growth. Investments in our brand and tax capabilities and expenses from our expanded consumer products, including Ally lending, on-boarded late last year. As I discussed earlier, we expect to continue prudently investing in our company but expenses will grow at a slower pace as we reduce discretionary spend, given the material change in our operating environment.

Key metrics at the bottom reflect impacts of our large reserve build during this quarter.

Let’s turn to Slide 11. From an industry perspective, benchmark rates this quarter touched all-time lows across many tenures, including 150 basis point reduction by the Federal Reserve to support the broader economy. The combination of these events has resulted in a persistently flat forward curve. To reduce earnings volatility, we’ve managed to a relatively neutral interest rate position for some time, insulating our NIM relative to more asset-sensitive balance sheets; however, the flat shape of the curve will weigh on margin expansion.

Turning to the quarter, net interest margin excluding OID was relatively stable at 2.68%. This included a 5 basis point reduction to consolidated NIM and an 11 basis point reduction to retail auto yields due to the system conversion I just mentioned. Year-over-year average earning assets remained stable at $173 billion as we expanded across every line item except commercial auto, where inventory levels were 8% lower year-over-year. Notably, this trend reversed in late March due to lower sales, where industry days supply jumped by 25 days to 95 days overall. We are observing downward trends in April, which is likely to continue as OEM production resumes.

Looking closer at some of the line items, retail auto balances will be dependent on originated volumes while portfolio yields will continue expanding this year. Resales will be heavily dependent on auction lanes reopening and consumer demand returning. While used car value declines in the near term are primarily due to lower auction levels, we believe the more relevant pricing trends will not be available until auction activities resume normal levels.

Commercial auto balances will reflect dynamics discussed a moment ago, while lower benchmarks will drive lower yields. Nearly 60% of our corporate financing book has LIBOR floors, which are expected to mitigate the impacts of lower market rates. Mortgage balances will grow in Q2, reflecting strong refinance volumes given historically low mortgage rates.

Turning to liabilities, cost of funds continued to improve this quarter, down 12 basis points linked quarter and 27 basis points year over year. These trends are fueled by deposits, which we cover on the next slide. Deposit expansion continues this quarter, ending at $122.3 billion. Retail deposits grew by $2.3 billion despite record outflows to brokerages that exceeded full-year 2019 levels. We retained a third of these outflows at Invest, testament to the retention value of the platform.

At Invest, in addition to capturing outflows and experiencing record self-directed trading activities, we garnered several industry awards and leading reviews. We also launched a suite of deposit savings tools for our customers designed to increase customers’ ability to plan, allocate and grow their savings.

In the bottom left, retail deposit rates declined 14 basis points linked quarter and have fallen 26 basis points year over year. Competitive dynamics reflect the uncertain outlook on consumers, but we are well positioned to remain thoughtful and disciplined around pricing and growth. We added 71,000 customers, surpassing the 2 million mark this quarter, an important milestone for us, and our industry-leading customer retention levels remained at 96%.

Let’s turn to capital and shareholder distributions on Slide 13. CET1 was 9.3% in Q1, in line with our recent trends. We elected to defer capital-related impacts associated with CECL for two years, per guidance provided by the Federal Reserve. We repurchased 3.8 million shares before suspending the repurchase program through the end of the second quarter. Last week, our board of directors approved a Q2 dividend of $0.19 per share payable on May 15.

We completed our CCAR 2020 process during the quarter and submitted our capital plan to the Federal Reserve in early April. We remain in regular dialog with the Fed, navigating the potential implications of the CardWorks acquisition on our capital plan, including implementation of the SCB final rule effective October 1, 2020.

Asset quality details are on Slide 14. Consolidated net charge-offs of 84 basis points this quarter increased 11 basis points year over year, reflecting retail auto activity. In the upper right, net charge-offs of $266 million increased $29 million compared to the prior year, driven by increasing auto loan balances and ongoing seasoning of the portfolio, including a higher used mix.

In the bottom left, retail auto net charge-offs were up 12 basis points year over year, in line with our expectations. While we expect the deteriorating environment should drive this metric higher moving forward, COVID-19 impacts were immaterial in Q1.

Looking at delinquency trends in the bottom right, 60-plus increased 18 basis points year over year and 30-plus increased 63 basis points over the same period. In the far right, we’ve highlighted the balance impact of the customers participating in the payment deferral program. These populations fall under unique accounting treatment where participating customers are effectively frozen in their status for the duration of the deferral. This unique population resulted in increased reported delinquencies year over year as these accounts do not follow the normal flow to better and flow to loss trends. These dynamics will also impact reported net charge-off rates in future periods.

While we know this will make it difficult to rely on these metrics as we have in the past, two key points to keep in mind. First, our allowance levels contemplate consumers’ willingness and ability to pay regardless of forbearance participation, and second, we believe these programs will help mitigate future losses across our portfolio and within our securitization as we work to find solutions to keep our customers paying for and in their cars.

Slide 15 provides additional detail on reserve levels and CECL. On the top half of the page, we’ve highlighted the significant increase in reserves and coverage levels resulting from CECL implementation and the forecasted macroeconomic deterioration related to COVID-19. The consolidated trends are driven primarily by increases in the retail auto book with coverage of 3.91%. Overall reserve balances shown on the bottom reflect similar drivers.

Moving to Slide 16, we have provided a summary of the deferral program for retail auto customers. Overall 1.1 million auto customers elected to participate in our deferral program as of April 16. The vast majority of this population, or 76%, have never had an extension while 70% have never been delinquent with Ally. We believe participation in this program will lower lost content due to the additional time and flexibility we are providing to our customers. In addition, we are increasing our customer servicing support, employing use of additional techniques and readiness tools to maintain line of sight into their ability to pay and to provide a seamless transition to resuming payments at the end of the program.

We will be able to track leading indicators of defaults and intervening early with loss mitigation actions to help keep our customers on track with their payments. We are encouraged by the positive customer responses and believe our approach reinforces our values during this time of uncertainty, and keeps Ally top of mind.

On Slide 17, we’ve included detailed auto financial results for the quarter. Much of this has been covered through prior content, but I will highlight a few additional items. Net financing revenue grew year over year even as commercial balances declined, driving end of period earning asset levels lower overall. In the bottom right, estimated retail new origination yields remained well above 7% for the eight consecutive quarter. This will drive the portfolio yield higher throughout 2020. Beyond our retail relief program, we are offering lease flexibility and meaningful support for dealers to support their businesses.

Seventy-two percent of dealers are using some form of relief we’ve offered. Additionally in the paycheck protection program offering we rolled out, we’ve funded essentially all applicants, representing over $850 million in loans secured.

Turning to auto metrics on Slide 18, Q1 originations of $9.1 billion grew $1 billion quarter over quarter. Average FICO remained steady at 686, while non-prime volume declined slightly to 11%.

Moving to the bottom left, consumer assets grew year over year to $81.5 billion across loan and lease categories. Looking at commercial assets on the bottom right, average balances declined $5.1 billion compared to the prior year, reflecting lower dealer inventory levels.

Insurance segment results are on Slide 19. Core pre-tax income of $77 million in Q1 was down $9 million linked quarter and $3 million year over year, primarily driven by higher losses including weather-related expenses. Underwriting income excluding losses was essentially flat year over year, as increased BSC and GAAP revenue was offset by the impact of lower floor plan inventory levels. Written premiums of $317 million grew $12 million year over year and represented our strongest first quarter levels.

Slide 20 has our corporate finance segment results. Core pre-tax loss of $64 million was driven by $114 million of reserve builds during the quarter primarily related to the estimated potential impact of COVID-19. Pending assets grew $785 million during the quarter and $1.6 billion year over year, which included $600 million of elevated draws on revolving lines of credit as borrowers sought to boost liquidity. Draw activity moderated significantly in late March and into April. We have been working directly with our individual borrowers, most of which will be impacted in some manner in the coming months.

We believe the portfolio remains strong considering 45% of the book is asset-based, the strong positioning of our loans in the capital structure, the significant equity investments of our supporting sponsors, and the solid business value proposition of our borrowers. Lastly, we have no direct oil and gas exposure in our book.

On Slide 21, mortgage pre-tax income of $12 million this quarter increased $10 million versus prior quarter, and was essentially flat year over year. Elevated prepayments drove asset levels down and resulted in higher premium amortization expense. Origination volume was strong as Ally leveraged its existing customer base and leading digital capabilities through our partnership with Better.com.

I’ll close by reiterating my support of our Ally teammates who are the driving force behind the strength of our company. I recognize this is a difficult time for many, but I’m confident we will navigate and succeed together. We will continue positioning the company for the future, focusing on doing it right for our customers and communities and delivering long-term value for our shareholders.

With that, I’ll turn it back to JB.

[Jeff Brown, Chief Executive Officer]

Thank you Jen. On Slide No. 22, I’ve included perspectives on the environment we’re operating in today and how Ally will steer through the uncertainty. The sudden and severe nature of this shutdown has affected the world and our nation in a manner that has arguably never been replicated on a scale of this magnitude. It is within this context that I think it’s important to acknowledge that significant action across public and private sectors is necessary and should continue on a size and scale that has not been seen in modern history to directly address the outbreak that is already having negative impacts on workers, consumers, and citizens across America.

While some positive trends are emerging in regard to the spread of the virus, we still do not know how long it will take to return to a state of normalcy. At Ally, you’ve heard throughout our remarks this morning and as long as I’ve been in the chair, we are relentlessly focused on our customers. We’ve built a strong and vibrant culture around this mantra, and today we’re even more emboldened to act in accordance with these principles. This provides clarity for our customers and purpose for our teammates in a time of great uncertainty, and we are confident it will ultimately drive long-term shareholder value.

We enter the current environment with a strong, well positioned balance sheet with funding, capital and liquidity positioned to serve as sources of strength. We’ve grown our auto and deposit offerings into dominant, adaptable franchises ready to continue delivering for our customers, while actively seeking new opportunities to expand. The headwinds we will experience in the near term, while admittedly challenging, will not impact our ability to deliver on our long-term strategies and vision.

I’ll wrap up on Slide No. 23. We take great pride in being a comprehensive, adaptive, and digitally focused consumer and commercial finance provider. We are focused on leveraging expertise and our history to build a stronger company for the future, including disciplined risk management and purposeful capital management.

Thank you to our associates. I am proud of your ability to rise to the occasion, doing it right in every interaction with our customers within our communities and on behalf of our shareholders.

With that, Daniel, back to you, and I think we’re going to take some brief Q&A.

[Daniel Eller, Head of Investor Relations]

Yes, great. Thanks JB. We would ask participants as we head into Q&A to limit yourself to one question and one follow-up. Operator, please begin the Q&A session.

[Operator]

[Operator instructions]

Our first question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.

[Moshe Orenbuch, Credit Suisse]

Great, thanks. I’m hoping that you could kind of expand a little bit on the process. I know you talked about the assumed loss rate - you know, you said that you’ve got a very significant percentage of your customers that are in deferral, but you also said that you weren’t relying on the stimulus. So, could you talk to us about how those customers actually go through the process and what we should be looking to see that would help validate the assumptions that you made?

[Jen LaClair, Chief Financial Officer]

Sure. Good morning Moshe. Let me just jump in on our reserve process and how it relates to our deferral population. So, as we went through the reserving this quarter, we essentially modeled it per our macroeconomic forecast and looked at historic correlations and willingness and ability to pay for our overall customer base. We have not at this time included any of what we think will be a net positive benefit from the forbearance programs that we’ve rolled out to our populations, or even the stimulus impact that our customers are likely to benefit from.

So, we kept the processes separate. We think in that way that our reserves are fairly balanced, and we’ll continue to very closely monitor that population that’s in the forbearance program. We’re going to do that through quantitative means as well as through qualitative measures as we’re increasing both human and digital outreach to those customers.

[Moshe Orenbuch, Credit Suisse]

Okay, and maybe as a follow-up, could you talk a little bit about the outlook for deposit pricing? Obviously, your growth in deposits has been strong and you’re likely to see, now that the wave of drawdowns on corporate finance lines has crested, that probably you’re going to see asset levels falling, so could you talk a little bit about deposit pricing as we go into Q2 and back half of the year?

[Jen LaClair, Chief Financial Officer]

Yes, sure Moshe. The bottom line here is we do see opportunity to continue to look at deposit pricing and bring it down over time, especially when you look at where rates are today. Now, we’re taking a very balanced approach. We want to make sure that we emerge from this crisis in a position of strength and we’re positioned to grow our balance sheet appropriately with funding available. Once you turn the machine off, it can be harder to turn it back on, but if you just look at the trends that we’re seeing on our balance sheet, we are expecting asset levels to come down a bit.

Our loan-to-deposit ratios are approaching 100%, and we continue to see just based on our funding needs as well as where rates are that there will be opportunity to take down pricing, and as we always do, we’ll be thoughtful around managing customer value, competitive rates, and our funding needs on the balance sheet.

[Moshe Orenbuch, Credit Suisse]

Okay, thank you.

[Jen LaClair, Chief Financial Officer]

Thank you so much, Moshe.

[Operator]

Thank you. Our next question comes from Betsy Graseck with Morgan Stanley. Your line is now open.

[Betsy Graseck, Morgan Stanley]

Hi, good morning. Thanks for the call this morning. Two questions. I’ll start with one just on the forbearance. You gave a lot of numbers around the forbearance impact on the DQs. Could you just remind us the forbearance percentages of outstanding balances that you’ve been getting requests for on both the consumer side as well as on the corporate side, the dealer side?

[Jen LaClair, Chief Financial Officer]

Yes, sure. Good morning Betsy. If you look at our forbearance population, starting first within retail, it’s 1.1 million customers. It’s about 25% of our accounts, a little bit higher than that in terms of the balances. Keep in mind with this population, we were very proactive, and you see across the industry a number of reactive offers. We were proactive - we actually went out and emailed our customers and offered them the opportunity to have some more payment flexibility, so we do think that this positions us from a brand and loyalty perspective and doing it right approach positions us incredibly strongly.

On the commercial side, we have about 73% or so of our dealerships that are taking advantage of payment deferral. That’s one of the programs we have provided. We are also offering them the PPP program through the SBA. If you think about a couple weeks ago, we weren’t even an SBA lender. We were able to process 1,000 applications and upward of about $850 million in funded loans for our dealers in that regard as well.

The whole intention here, I think as JB pointed out a couple times in his prepared remarks, is really to focus on the controllables, focus on keeping our markets strong, our customers strong, and we believe that’s going to position us very well on the back end of this crisis.

[Betsy Graseck, Morgan Stanley]

Okay, thanks. Then just a follow-up here on the auction pricing that you were discussing, highlighting that today’s price for used cars is impacted by a very low level of participants in the auction. So, how do I think about how that feeds into your quarter’s assessment of used car prices and how you think about the remarketing gains, etc. this quarter? What is the trigger for a better price? Is it a function of number of participants in your opinion, or help us understand how that should traject over the next few quarters.

[Jen LaClair, Chief Financial Officer]

Yes, sure. It’s a really important area that we’re focused on as you think about our leasing yields and our remarketing gains. What we’re seeing right now is essentially the market is illiquid, and that’s the physical auctions as well as the digital auctions, and so it’s just really hard right now to determine what fair pricing is. We were guiding towards a negative 5% to 7% in used vehicle prices. It could potentially go down from there, it’s just very difficult to know at this point. And so, we’re a bit in wait-and-see mode, and we think we’ll have a much clearer sense of used car prices once shelter-in-place orders are lifted and auction activity can resume at more normal levels.

Keep in mind, we are providing lease extensions to our customers, and that helps to manage the supply dynamics relative to demand, and we think that overall positions the market to be stronger as well. But it’s a really important focus area for us, and I think this is one of those areas to be determined as we go through the next couple of quarters.

[Betsy Graseck, Morgan Stanley]

How did that play into 1Q numbers?

[Jen LaClair, Chief Financial Officer]

First quarter, we didn’t really see any dynamics. I mean, we were kind of neutral in terms of linked quarter remarketing gains, and so it hasn’t yet materialized, Betsy.

[Betsy Graseck, Morgan Stanley]

Got it, thanks.

[Jeff Brown, Chief Executive Officer]

I think, Betsy, there’s other potential offsets and positive catalysts out there. Obviously we’re all waiting to see what happens to public transportation and does Uber usage, Lyft usage, subway, taxi, does that get negatively impacted and people have to now own transportation once again. That sector is likely to do it in the form of used, so all these are things that we’ve got to balance.

I think as Jen’s pointing out, the short term dynamics are really just so choppy because there’s no liquidity in the market, and we’re just trying to be very thoughtful on what this implies go forward.

[Betsy Graseck, Morgan Stanley]

Got it. Fair point on wanting to own your own car, so thanks. Appreciate the color.

[Jeff Brown, Chief Executive Officer]

Yes, thanks Betsy.

[Jen LaClair, Chief Financial Officer]

Thanks Betsy.

[Operator]

Thank you. Our next question comes from Bill Carcache with Nomura. Your line is now open.

[Bill Carcache, Nomura]

Thanks, good morning JB and Jen. It’s notable that ex-CECL, you guys were able to actually grow tangible book value per share sequentially, despite the big reserve build this quarter. But with your stock trading at less than 50% of tangible book value per share, I think some investors are struggling with their assessment of the downside risk to tangible book value. Can you offer some perspective on the historical ’08 - ’09 credit performance of Ally’s predecessor - you know, how high did losses get in retail auto, maybe discuss what changes are important to think about from a credit perspective to the business for back then versus what the business is like today?

Then maybe just more broadly, any color that you could give us to maybe frame your confidence level and your ability to defend tangible book value under your current reasonable and supportable assumptions?

[Jen LaClair, Chief Financial Officer]

Yes, sure. Thank you for the question, Bill. It’s a really good one, and quite frankly, we can’t even get close to the valuation numbers that we’re seeing today. I shared with you in my prepared remarks that we would expect in a severely adverse scenario, where we’ve got persistent broad-based macroeconomic deterioration for some time, so think about an L-shape economy, we would expect then to hit loss levels of 2.5% to 3%.

Today, if you look at our internal modeling relative to that severely adverse scenario, we’re reserved at about 70% of that here in Q1, and if you look at the Federal Reserve modeling which is significantly more punitive, especially on the commercial portfolios, we’re about 50%, so we feel like we’re appropriately and smartly reserved for what we’re experiencing today.

You asked about ’08 - ’09. It’s a little bit different to get--difficult to get apples to apples just because we had a different portfolio back then, but we did see NCOs in retail auto hit about 3% for a very brief period of time and then reverse back down and normalize very quickly, within about six months or so. But relative to ’08 - ’09, relative to our severely adverse scenarios, we feel like we’re well reserved at this point.

Now obviously a lot of unknowns in terms of what the shape of the economy looks like, the severity of it, but relative to past performance we feel that we’re in great shape.

On your confidence question on reasonable and supportable, this is the question that is trying to be answered across every macro economist. At the end of March, we had built in what we think of 10/20 - that’s unemployment reaching 10%, GDP declining by 20%. It has deteriorated a little bit since then. In April, we’re at kind of 15/30, but there is a lot of ins and outs on our reserves. Moshe had asked the question on the forbearance program - none of the benefit of that is built into our reserve. We are expecting our balance sheet to come down, and that will give some offset to reserve build as well.

I think our overall confidence is about as high as it can be right now, and we’ll continue to manage and monitor it as we go into Q2 and beyond.

[Jeff Brown, Chief Executive Officer]

The only thing I’d add, Bill, and Jen covered it perfectly, but if you think about the $6.5 billion, $7 billion discount to book - I mean, there’s not really a conceivable scenario that models that out. It’s been a sudden and aggressive move down, and we think through time and through our performance that will recover. That gives us a lot of confidence of upside to come.

[Bill Carcache, Nomura]

That’s super helpful, thank you. If I could just sneak in a quick follow-up on your CardWorks comments, is it possible to discuss whether the seller is considering his option to walk away from the deal and whether Ally would be willing to incur the additional dilution to compel him to close the deal, or maybe just a little bit more to the extent that you can offer, a little bit more color.

[Jeff Brown, Chief Executive Officer]

Yes, I’d just say not going to really comment right now. I mean, we’re in the process. As I said in the prepared remarks, obviously Don and his team, and certainly Ally and our team didn’t expect the severe drop-off or fall-off in the economy to come, so we’re going through the process now. We’ll make the right decisions on both sides that are thoughtful for our shareholders and our customers for the long term. That’s really all we can say.

[Bill Carcache, Nomura]

Thank you very much. Appreciate you taking the questions.

[Operator]

Thank you. Our next question comes from Rick Shane with JP Morgan. Your line is now open.

[Rick Shane, JP Morgan]

Hey guys, thanks for taking my questions this morning. Jen, in response to Betsy’s question, you talked about the historic or the prior assumption of a 5% to 7% decline in used car prices. When you look at your--and I appreciate the fact that you guys have provided an update on NCO guidance. What are you thinking in terms of higher loss frequency and higher loss severity?

[Jen LaClair, Chief Financial Officer]

Within our reserve and within that implied 1.8% to 2.1% retail auto NCO rate, Rick, we have embedded that we would have more material likely pressure on the severity side, as well as higher delinquency. It’s just pulling in past correlations that we’ve seen, so think about that already embedded into that reserve calculation.

Then in terms of what happens with the lease portfolio with respect to yields, I think that’s the question that we’re going to have to answer over the next couple of months and quarters as used vehicle volume and demand starts to come back, as shelter in place orders are lifted over time, but that’s largely embedded in that severity.

[Rick Shane, JP Morgan]

So to put a fine point on this, you increased your severity assumption, which makes sense, but you have not explicitly changed your used car price assumptions, you’ve just generally assumed that severities are going to go up?

[Jen LaClair, Chief Financial Officer]

Yes, that’s a good way to look at it. I mean, if you’re assuming higher credit losses, it’s going to be a combination of frequency and severity, and whether or not that plays out exactly, we will see. At some point, it will merge with overall used car prices, and we’ll continue to update it when we have more actual data coming out of our auctions.

[Rick Shane, JP Morgan]

Okay, great. Thank you so much.

[Jen LaClair, Chief Financial Officer]

Thank you Rick.

[Operator]

Thank you. Our next question comes from Sanjay Sakhrani with KBW. Your line is now open.

[Sanjay Sakhrani, KBW]

Thanks, good morning. Appreciate all the commentary on reserves. A couple of clarifications. One, inside your CECL window, are you assuming any type of economic recovery? Then some of the banks that have reported up until now have talked about how the macro forecasts have gotten weaker since quarter end relative to that 10% unemployment rate, so how should we think about future provision builds and that assumption? I don’t know what your views are in terms of that.

[Jen LaClair, Chief Financial Officer]

Yes, sure. Good morning Sanjay. As we modeled reserves kind of end March time period, and the forecast that we had is more of a V-shape than an L-shape or a U-shape at this point in time, so we do have a bit of a recovery starting in Q3 and accelerating into Q4. Now, that being said, we have not modeled in any of the potential benefits from stimulus or from our forbearance programs, which are providing a lot more cash flow and flexibility around payments to our customers, so we believe that overall will be a net positive not included in our number. Also keep in mind that the size of our balance sheet is likely to go down which, in a CECL world, provides outside benefits as you move through the quarter.

We’ve got to take a balanced view. The macroeconomic impact will materialize potentially as we go through Q2, but there are some natural offsets there as well, so overall we feel like we’re in a good position with our current reserve number.

[Sanjay Sakhrani, KBW]

Okay. Then when I think about CardWorks, I know you can’t really speak to whether or not that deal will be consummated. You guys are assuming it will. When we talked about the deal and the profitability of that business during the financial crisis, it was breakeven, I think, at its worst--at the worst point. In this backdrop with the accounting being what it is with CECL, should we expect worse than that? Could you just help us think through the implications on profitability for CardWorks, assuming the unemployment rates you are?

[Jen LaClair, Chief Financial Officer]

Yes Sanjay, look - I think CardWorks is similar to every other financial services industry right now. They’re focusing on controllables, what can they do to help their customers. They’re monitoring things very closely. As of first quarter, nothing has materialized relative to COVID-19, so it’s just really hard to say exactly how this is going to play out. I think JB said it perfectly - we’re in constant dialog with that team. We have a lot of confidence in their ability to navigate cycles based on it over the past 30 years, and we’ll continue to monitor and partner with them, but at this time, it’s just a little bit too early to be decisive on what exactly their profitability is going to look like. It’s difficult for us to do that for Ally as well, keep in mind.

[Sanjay Sakhrani, KBW]

All right, great. Thank you.

[Jen LaClair, Chief Financial Officer]

Thank you Sanjay.

[Operator]

Thank you. Our next question comes from Kevin Barker at Piper Sandler. Your line is now open.

[Kevin Barker, Piper Sandler]

Thanks. Just a follow-up on some of the CardWorks commentary. Is there any specific net worth covenants within--

[Jeff Brown, Chief Executive Officer]

Kevin, did you conclude your question there?

[Operator]

It appears Kevin’s line has dropped mid-question. One moment, please.

[Jeff Brown, Chief Executive Officer]

Operator, we can go to the next in the queue if Kevin’s line has dropped. We can come back to him or follow-up.

[Operator]

Understood. Our next question comes from Rob Wildhack with Autonomous Research. Your line is now open.

[Rob Wildhack, Autonomous Research]

Good morning guys. I just wanted to go back to the deferrals and the forbearance. How has the velocity of those requests and approvals evolved since you launched the offering in March and into April?

[Jen LaClair, Chief Financial Officer]

Good morning Rob. I mentioned we were proactive when we rolled the program out, so what we saw is heavy, heavy velocity in the first two weeks of the launch, and in particular in the first week. Since then it’s plateaued substantially, so we’re seeing very modest tick-up over the last couple days, and even over the last couple weeks.

[Operator]

We do have a follow-up from Kevin Barker. Would you like to take the question?

[Jeff Brown, Chief Executive Officer]

Sure, go ahead.

[Operator]

Kevin, your line is now open.

[Jeff Brown, Chief Executive Officer]

Kevin, we lost you midstream there.

[Kevin Barker, Piper Sandler]

Yes, sorry about that. In relation to the CardWorks commentary, do you have any specific covenants around net worth of CardWorks at deal close, or if there is some other covenants around elevated impairments going into when the deal is closing, possibly here in the third quarter?

[Jen LaClair, Chief Financial Officer]

Yes Kevin, I would just direct you to the merger agreement, which is publicly available.

[Kevin Barker, Piper Sandler]

Okay, and then a follow-up on some of the economic scenario commentary. You have roughly-you were saying, what, 25% forbearance rates. Given your expectations out there for losses, what percentage of those to you expect to eventually go delinquent when it happens? And I--

[Operator]

Kevin’s line has dropped from the call once again.

[Jeff Brown, Chief Executive Officer]

Okay, we’ll follow up with Kevin offline.

[Daniel Eller, Head of Investor Relations]

Operator, it looks like we’re at the end of the call here - no more questions, so I’ll remind participants and anyone else to feel free to reach out to Investor Relations. We appreciate you joining our call this morning, and that concludes today’s call.

[Operator]

Thank you. Ladies and gentlemen, thank you for your participation on today’s conference. This does conclude your program and you may now disconnect.