Q1 2020 Earnings Call
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 the listen only mode. After the speaker presentation. There will be a question and answer session. So that's a question. During this session you will need to press star one on your telephone.
Please be advised that todays conference is being recorded.
If you're acquire any further assistance. Please press Star then zero.
I'd now like to hand, the conference over to your Speaker today Mr., Daniel Heyler head of Investor Relations. Thank you. Please go ahead.
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 will reference throughout the call on the Investor Relations section of our website Allied Dot com.
I'll direct your attention to slide two of the presentation, where we have our forward looking statements in risk factors. The contents of today's call will be governed by this language.
On slide three we've included our GAAP and non yeah, we're core measures.
These measures along with other core metrics are used by management and we believe their useful to investors in assessing what companies operating performance and capital results.
Keep in mind, there 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 Gen Leclaire on the call to review our results and take your questions following prepared remarks.
With that I'll turn the call over the JV.
Thank you Daniel Good morning, everyone. We appreciate you joining the call. During this critical time for our nation.
The past several weeks and presented significant challenges for many around the world due to kind of at 19.
I'd like to take this opportunity to think countless individuals who are battling on the front lines, including first responder healthcare workers growth for delivery and supply chain provider and many others you represent the best of who we are thank you.
We also hope all of you and your families and teenage remain safe and a good health.
In response to the virus over 90% of the U.S. economy has been impacted individuals and 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 that either closed or restricted dealer sales essentially all states have dean fixed service operations or service as a central 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 allies response to ongoing developments and provide you with his perspectives on number one what we're seeing it across our businesses number two how we're positioned to successfully navigate their rapidly evolving environment and third affirmed but our focus remains unchanged on delivering for our customers enjoy.
Driving long term value.
Over the past several years strong foundation, we bill 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 about financial and operational improvements we've delivered the past several years.
On slide number four we've outlined the decisive and finally actions taken on behalf of our employees customers and communities.
I'm exceptionally proud and humbled to stand alongside 8700 teammates.
Seen 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.
Weve quickly expanded our benefits in late March with emphasis on health and family care.
And provided a 1200 dollar financial assistance payment for employees, who make under $100000.
For our customers, we were proud to lead the industry and rolling out comprehensive really bringing increased financial flexibility and added security during an uncertain time for many.
Ken will walk through the details in a few mountains, but the overall participation rates sentiment scores in NPS levels reinforced 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 environment like we face. This is a time when your values served as you're guiding principles.
For our dealers, we were proud to offer payment relief and launch an S.P.A. offering under the payroll protection plan program.
In a matter of a few days, we set up a capability that allowed us to submit nearly 1000 applications on behalf of our dealer customers.
It ally bank, our direct digital platform that is generated 10 consecutive years of customer expansion in deposit growth saw record mobile app downloads during March.
Remaining 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 receive from customers via social platforms call centers indirect 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 getting pledging 3 million in financial aid to 30 deserving charities focused on housing health education.
Okay 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 number five.
Similar to the past few years 2020 began with strong financial and operating trajectories, while building momentum and 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 two and a half times the prior quarter level, reflecting seasonal day, one and anticipating Kevin 19 impacts adjusted EPS was negative 44 cents in core ARPC was negative five point.
4%.
Total revenue exceeded 1.6 billion for the third consecutive quarter, a 5% increase year over year.
And auto we originated 9.1 billion of loans and leases during the quarter, while Decisioning 3 million applications.
Three January and February application volume was 5% higher compared to 2019, but declined 6% for the quarter, reflecting a meaningful slowdown of March activity.
New originated auto yields were 7.25% during the quarter ensco's increase year over year to 1.4 or 5% with minimal impact from Kevin 19 in the quarter.
We are continually assessing market dynamics in competitor behavior, while maintaining disciplined underwriting standards. While also remaining focused on potential opportunities. The further support our customers.
Within insurance, we underwrite 317 million of premiums representing our highest first quarter results and demonstrating the meaningful progress we've made expanding our reach.
Turning to deposits, we ended the quarter with over 122 billion and balances an increase of 9 billion year over year through strong that growth every month during the quarter.
We added 71000, new deposit customers in the quarter driving us to over 2 million total depositors.
Study balanced growth and consistent customer trends denim state the resilience of our platform the stability in our funding profile in 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 in our company. Many others in our industry's don't have the robust liquidity posture that exists at Allied. This is a dramatic improvement of our company relative to the crisis in 2008 in 2009.
Within our consumer and commercial product line ally home, an ally invest the reserve.
Ally home direct to consumer originations of 700 million, reflecting ongoing awareness of our offering as the environment drove a strong refinanced pipeline for twoq.
Investor Caster at the highest and fastest pace in over four years under the Allied brand.
And having this capability served as a customer and balance retention tool for Allied we captured nearly 700 million a balance transfers from our deposit platform that could have otherwise ended up outside of ally.
Oh, I 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 drawls.
On the capital perspective, we proactively suspended share buybacks through the ended the second quarter given the events unfolding in the macro environment.
And we submitted our capital plan as part of the C Park 2020 cycle in early April.
Regarding the card works acquisition, we began our integration work and filed for regulatory approval on schedule. We continue to remain in dialogue with Don and the team on operational and business trends.
While we obviously did not anticipate rapid economic changes when we announced the deal two months ago. The long term benefits with the acquisition remain unchanged.
I know certain provisions of the deal are on your minds and as hard to say much of 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.
Card works long term track record will serve as an important differentiator in this environment.
As we shared when we announced the deal car works has successfully navigated many cycles across its 32 year history and thrive following the last cycle.
We recognize this environment has a different animal, but we know the quality of this business and these operators.
On slide number six are the key metrics, we've highlighted for several years that we believe provide important short term and long term contracts across allies 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 into position for expected losses related to cover that 19.
The 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 remain steady reserves increased two and a half times since year end through Cecil implementation and absorbing the resulting net loss in Q1.
We've included Cecil day, one pro forma impacts is added context.
Revenues in the upper right remains strong this quarter and many aspects of our embedded balance sheet positioning remain intact.
Harvest 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're well positioned to execute and 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 Jan to take you through the detailed financial results.
Thank you JV and good morning, everyone I'd like to start player echoing the deep gratitude and it is working on the front lines to serve to 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 week rising to the occasions I personally and professionally on behalf of our company customers and community I'm proud of our people and proud to be part of the team.
With that let's dive down on slide seven.
As you're 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 impact on many key aspects of our business.
Despite the 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.
Insights are based on what we know today and we recognize and expect many variables will continue to evolve.
As JB alluded to January February results were strong and continued to demonstrate growing momentum.
Beginning mid March the economic shutdown was immediately felt across our business line, resulting in declines across several areas, but also increases in our digital channels, including ally home and ally in that.
In auto reduce 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.
Overtime as the economy improves we will be positioned to act swiftly on opportunities.
Including a potential increase in demand for used prudently stepping in where others may have exited providing adaptable solutions as we did with the expanded carvana fluid flow program and the Sta product launch for our dealers, where we've funded virtually 100% of our application prior to the program shutdown last Thursday.
In deposit customer growth and retention remains strong and we expect that to continue throughout 2020.
We have 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 that invest.
We remain balanced in our deposit pricing decisions throughout 2020, as we're mindful of market rate competitor actions and alternative funding opportunity.
Ally homes that elevated volume in March in early April due to refinance demand.
We expect 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 seen deteriorating impacts on our credit performance, we've already adjusted our servicing strategies real time, including the rollout augmented staffing capacity increased customer outreach and enhanced digital engagement.
Our reserve levels are over two and a half time the level. They were at year end, reflecting lifelock diesel implementation and a deteriorating macro economic forecast, including elevated unemployment approaching 10% and significant GDP decline.
We run a variety of economic scenarios on a regular basis to informed decision and to ensure we have line of sight into various outcome.
We implemented fuselage scheduled this quarter, which as we discussed in Q4 reflects the 12 month reasonable insupportable forecast period and includes the Oh wait Onein macroeconomic data in our historic mean.
I will cover more on our reserves momentarily.
We expect retail MTO is at 1.8% to 2.1% this year, reflecting our current macro economic assumptions with the ultimate outcome dependent on how the environment unfold.
As a reference RC car modeling applied retail ensco's rise to too and I have to 3%, reflecting a persistent broadbased macroeconomic deterioration.
The stimulus checks are likely to have a positive impact of credit performance as pulling has shown the number one expected use of additional funds is to pay down debt or bill.
Within our reserves, we have not embedded any stimulus benefit at this time.
Moving to the bottom section, we remain and constructive dialogue with our regulators keeping them apprised. Some trends, we're seeing the fiscal and monetary actions taken by Congress and the fed are providing critical cash for Americans unnecessary liquidity for the broader market.
Ali does not have any outstanding discount window draws. However, we believe this is an efficient and rational mechanism for banks to access liquidity.
We applaud the regulatory community for broad and sleeping actions taken to support the U.S. economy and as you are aware we missed your 2020 financial out like earlier this month.
Well, 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 precision 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 shutdown.
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 are 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're positioned heading into this downturn, so let's turn to slide eight.
The multiyear transformation of our funding profile and improved liquidity position are evidenced Rudi's chart.
Wholesale funding has been replaced by deposit providing increased stability and lower funding costs.
These trends will continue although we will opportunistically access wholesale markets from time to time as we get in early April with our first unsecured issuance as an investment grade company.
Our liquidity position highlights alleys ability to withstand adverse changes in the broader environments 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 nine RCT, one levels have remained consistent and above our 9% target over the bats, several years as weve efficiently deploy capital through balance sheet expansion indirect shareholder distribution.
For context, we remain substantially above our minimum capital levels and model peak, our scenarios, incorporating stressed assumptions and ongoing dividend payment.
Well, we are not inferring events wonderful exactly as prior stress scenarios imply this provides insight into our capital preparedness and ability to withstand a severe prolong 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 allen stands ready to support our customers through all of our banking products.
On slide 10 watts through our first quarter financial results net financing revenue excluding to Leahy of 1.154 billion declined linked quarter 10 million can increase year over year by 16 million.
The decline versus prior quarter was primarily driven by a nonrecurring revenue retiming item related to the conversion of our retail auto servicing system.
As you would expect when converting on large asset base to unused system. There were some minor timing differences in certain calculation, but these variances will neutralize over the life of the asset.
Excluding this item underlying trends continued this quarter were auto portfolio yields increase while deposit costs decline.
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 covert 19.
Noninterest expense increased by 40 million linked quarter, and 99 compared to the prior year increases versus prior quarter were largely due to compensation seasonality and certain kobin 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 brands and tech capabilities and expenses from our expanded consumer products, including Allied lending Onboarded 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 reduced discretionary spend given a material change in our operating environment.
Key metrics at the bottom reflect the impact 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 tenants, including 150 basis point reduction and by the federal reserve to support the broader economy.
It's a 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 sheet.
However, the flat shape of the curve will weigh on margin expansion.
Turning to the quarter net interest margin, excluding all AG was relatively stable at 2.68%.
Included a five basis point reduction to consolidated NIM, and an 11 basis point reduction to retail auto yield 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 reverse in late March due to lower sales where industry days supply jump by 25 days to 95 days overall.
We are observing downward trends in April which is likely to continue and OEM production resumed.
Looking closer at some of the line item retail auto balances will be dependent on originated volume while portfolio yields will continue expanding this year.
Lease yields will be heavily dependent on auction lanes reopening in consumer demand returning.
Well used car values decline in the near term I, primarily due to lower option level. We believe the more relevant pricing trends will not be available until auction activities resumed normal level.
Commercial auto balances will reflect dynamics discussed a moment ago, well lower benchmarks will drive lower yields.
Nearly 60% of our corporate finance book has LIBOR floors, which are expected to mitigate the impact of lower market rates.
Mortgage balances will grow into Q, reflecting strong refinance volume given historically low mortgage rates.
Turning to liability cost of funds continue 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 continued this quarter ending at 122.3 billion.
Retail deposits grew by 2.3 billion despite record outflows to brokerages that exceeded full year 2019 level.
We retained a third of these outflows that and that testament to the retention value of the platform.
And isn't that in addition to capturing outflows and experiencing record self directed trading activity. We garnered several industry awards and leading reviewed.
We also launched a suite of deposit savings tools for our customers designed to increase customer's 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 will we are well positioned to remain thoughtful and disciplined around pricing and growth.
We added 71000 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, CPT, one was 9.3% in Q1 inline with our recent trends, we elected to defer capital related impacts associated with diesel for two years her 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 in Q2 dividend of 19 cents per share payable on may 15th.
We completed our see car 2020 process during the quarter and submit our capital plan to the Federal reserve in early April.
We remain in regular dialogue with the fan navigating the potential implications of the card worked acquisition, our capital plan, including implementation of the STB final rule effective October 1st 2020.
Asset quality details are on slide 14, consolidated net charge off of 84 basis points. This quarter increased 11 basis points year over year, reflecting retail auto activity.
In the upper right net charge offs, and 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 inline with our expectations.
While we expect the deteriorating environment to drive this metric higher moving forward Cobiz 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, we are 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 flood a loss trends. These dynamics will also impact reported net charge off rate in future periods.
Well, 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.
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 seasonal.
On the top happened the page we've highlighted the significant increase in reserves and coverage levels, resulting from seasonal implementation and the forecasted macro economic deterioration related to cobot 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've provided a summary of the deferral program for retail auto customers.
Over 1.1 million auto customers elected to participate in our deferral program as of April 16th.
The vast majority of this population for 76% have never had an extension well, 70% has never been delinquent <unk> with ally.
We believe participation in this program will lower loss content do the additional time and flexibility, we're providing to our customers.
In addition, we're 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 default and intervene early with Las mitigating actions to help keep our customers on track with their payment.
We are encouraged by the positive customer responses and believe our approach reinforces our values. During this time of uncertainty and keep 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 eighth consecutive quarter. This will drive the portfolio yield higher throughout 2020.
And our retail relieve program, we're offering lease flexibility and meaningful support for dealers to support their businesses.
72% of dealers are using some form of relief. We've offered additionally in the paycheck protection program offering we rolled out we funded essentially all applicants representing over 850 million in one's secured.
Turning to auto metrics on slide 18.
Q1 originations of 9.1 billion 1 billion quarter over quarter average FICO remained steady at 66, well nonprime volume declined slightly to 11%.
Moving to the bottom left consumer assets grew year over year to 81.5 billion across loan and lease category.
And 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 on Slide 19 core pre tax income 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 is increased the S. C. 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 level.
Slide 20 has our corporate finance segment results.
Our pre tax loss of 64 million was driven by a 114 million of reserve build during the quarter primarily related to the estimated potential impact of Kobin 19.
Ending assets grew 785 million during the quarter to 1.6 billion year over year, which included 600 million of elevated draws on revolving lines of credit as borrowers thought to boost liquidity.
<unk> activity moderated significantly in late March and into April.
We've been working directly with our individual borrowers most of it which will be impacted in some manner in the coming months.
We believe the portfolio remains strong considering 45% other clubs exacerbate 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 pretax income of 12 million this quarter increased 10 million versus prior quarter thing was essentially flat year over year elevated prepayments drove asset levels down and resulted in higher premium amortization expense.
Origination volume was strong as alley, leverages existing customer base, and leading digital capabilities through our partnership with better Dot 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 and with that I'll turn it back to JV.
Thank you Chad.
On slide number 22 I've included perspectives on the environment, we're operating in today, and how ally, we'll see or through the uncertainty.
The sudden in severe nature of the shutdown as affected the world and our nation in a manner, but as arguably never been replicated on a scale this magnitude.
It is then it is within this context, what 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 has already having negative impacts workers consumer.
Okay 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.
And ally you've heard throughout our remarks, this morning, and as long as I've been in the chair, we're relentlessly focused on our customers. We've built a strong and vibrant culture around this mostra and today, we're even more and bold and 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're confident it will ultimately drive long term shareholder value.
We entered the current environment with a strong well positioned balance sheet with funding capital and liquidity position 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 number 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'm proud of your ability to rise to the occasion doing it right and every interaction with our customers within our communities and on behalf of our shareholders.
And with that Daniel and back to you and I think we're going to take some brief skewing <unk> yep, great. Thanks, JB. So we would ask participants as we head into.
Are you in any to limit yourself to one question and one follow up operator, please begin the M&A session.
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If you remember to keep your questions to one question and one follow up question before rejoining the queue.
Our first question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.
Great. Thanks, I'm, hoping that you could kind of expand a little bit on the process. I know you talked about Uh Huh assumed loss rate you said that you've got on quite a very significant percentage of your customers that are in deferral, but you also said that you weren't relying on stimuli.
So could you kinda talk to us about how those customers actually goes through the process and what we should be a you know looking to see.
You know that would help validate the assumptions that you made.
Sure Good morning Moshe.
Sure 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 model then per our macro economic forecasts and looked at historic correlations and willingness and ability to pay for our overall customer base. We have not at this time included any what we.
I 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 were thinking that way that our reserves are fairly balanced and well continue to very closely monitor that population nothing 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.
Okay, and maybe as a follow up could you talk a little bit about the outlook for deposit pricing. Obviously your your groups and deposits has been strong and you're likely to see now if it stays.
The waves was.
Drawdowns on on corporate finance lines as crested that's probably going to see balance.
Levels falling so could you talk a little bit about.
Is it pricing as we go into Q2 in back half of the year, Yeah sure Moshe I mean, the bottom line here as we do see opportunity to continue to look odd deposit pricing and bring it down overtime, especially with you. When you look at where rates are today now we're taking a very balanced approach we want to make sure that we have.
Emerge from this crisis in a in a position of strength and we're positioned to grow our balance sheet appropriately with the with funding available and when she can you turn the machine off it can be harder to turn it back on but if you just look at Kinda then the trends that we're seeing on our balance sheet, we are expecting absent levels to come down.
Jonathan our loan to deposit ratios are approaching 100% and though 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 will be thoughtful around managing customer value competitive rates.
And our funding needs on the balance sheet.
Okay. Thank you.
Thank you so much Moshe.
Thank you. Our next question comes or Betsy Betsy Graseck with Morgan Stanley. Your line is now open.
Hi, good morning, Thanks for the call this morning I'm.
Two questions I'll start with one just on the.
Forbearance, you gave a lot of numbers around.
The forbearance impacts on the de queues could you just you never mind does 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, but the dealer side.
Yeah sure. Good morning, Betsy. So if you look at our forbearance population starting first within retail at 1.1 million customers, it's about 25% of our account little bit higher than that in terms of the balances keep in mind with this population we were very proactive and.
Are you see across the industry a number of reactive offers we were proactive we actually went out and email to our customers and offered them the opportunity to have some more payment flexibility. So we do think that this positions us yeah from a brand and loyalty perspective and doing it right approach positions us incredibly strongly.
On the commercial side, we have about 73% or sale of our dealerships that are taking advantage of payment deferral Ah. That's one of the programs. We've provided a we are offer we are also offering them. The PDP program through the FDIC think about a couple of weeks ago, we weren't even in SP a lender.
We were able to process thousand applications and upward about 850 million in in funded loans for dealers in that regard as well and the whole intention here is I think as JV pointed out a couple of times in his prepared remarks is really to focus on the controllables focused on keeping our market strong our customers strong.
And we believe that's going to position us very well on the back end of this crisis.
Okay. Thanks, and then just follow up here on the auction pricing that you were discussing you know highlighting that is today's price for used cars is impacted by a very low level of you know participants in the auctions. So how do I think about how that.
Feeds into your quarters assessment of you know all used car prices and how you think about the you know remarketing gains et cetera. This quarter.
And then what is the trigger for you know a better price is it a function of number of participants in your opinion or how you could help us understand how how that should trajectory over the next few quarters.
Yeah sure. It's a really important area that were out we're focused on it you know as you think about our leasing yields and our remarketing gains.
You know what we're seeing right now it 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 a we were guiding towards the 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 and we think we'll have a much fear or sense of used car prices one no sheltered place orders are lifted.
And option activities can review more normal levels.
Keep in mind, we are providing lease extensions to our customers and that helps to kind of manage the supply dynamics relative to demand and we think that overall positions the market to be stronger as well, but it's it's a really important focus area for us and I think this is one of those areas that keep tube.
You determine as we go through the next couple of quarters.
So how did that play into one Q numbers.
Yes, so first quarter, we didn't really see any dynamics I mean, we were kind of neutral in terms of linked quarter remarketing gains and and so it hasn't yet materialized Betsy.
Got it thanks, and I think that that's the there's other potential offset some positive catalyst out there obviously, yeah, we're all waiting to see.
What has to public transportation and does it ever usage lift the usage subway taxi does that get negatively impacted and people have to now I don't transportation. Once again, that's likely that sector is likely to get in the form of years. So having all these are things that we've got a balance but I think is John's point now the short.
Term dynamics are really just there so choppy because there's no liquidity in the markets and we're just try to be very thoughtful on what the supplies go for got it right, Yeah and sure point on one on your own car. So thanks, [laughter] kinship color.
Thanks, that's it thanks I think there.
Thank you. Our next question comes from Bill car cash with Nomura. Your line is now open.
Thanks, Good morning GBM Jan.
Notable that exceeds so 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.
So we don't nine credit performance Oh.
Oh, its predecessor, Heighted losses get in retail auto maybe I'll discuss what changes are important to think about from a credit perspective in that through the business you know for back then versus.
This is what the business is like today and 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 it's affordable.
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Yes sure. It. Thank you for the question Bill It's a it's a really good one and quite frankly, we can even get close to the valuation numbers that we're seeing today.
And I shared with you in my prepared remarks that we would expect units severely adverse scenario, where we've got you know persistent broad based macro economic deterioration for sometimes we'll think about kind of an l. shaped a economy. We would expect then to hit loss levels of kind of 2.5% to 3%.
Today, if you if you look at our internal modeling relative to that severely adverse scenario where reserved at about 70% is back here in Q1, and if you look at the federal reserve modeling, which is significantly more punitive, especially on the commercial portfolios were about 50%. So we feel like where you know purpose.
Ladies and a kind of smartly reserved for what we're experiencing today I'm. You know you asked about alito nine it's a little bit different to get despite a difficult to get apples to apples just because we had a different portfolio back then, but we did see and Ceos in retail auto hit about 3% for very brief period of time.
And then reversed back down and normalize very quickly and within about six months or so, but you know relative to alito nine relative to our severely adverse scenarios, we feel like we we're well reserved at this point no. Obviously a lot of unknowns in terms of what the shape of the economy looks like the severity of it but no.
Attempt to past performance, we feel that we're in great shape now I mean on your confidence that question on reasonable Unsupportable. I mean this is the question that and I'm trying to be answered across the every every MACRA napper economists you at the end of March you had built in kind of what we think of those tend.
20 times unemployment approaching 10% GDP declined by 20% and has a kind of deteriorate a little bit since then in April or ramp kind of 15 30, but there's a lot of ins and outs on our reserves Moshe. It asked the question on the for Barents program. None of the benefit of that is built into our reserves we are.
We expect in our balance sheet to come down and that'll give some offset to reserve build as well. So yeah 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.
The only the only thing I'd.
I'd add built in Gen covered it perfectly.
But I mean, if you if you think about the.
Six and a half $7 billion.
Discount to book I mean, there's not really a conceivable scenario.
Let bottles that out so you know it's been a sudden and aggressive move down and we think through tie them through our performance that will recover but you know that gives us a lot of confidence.
Upside there Tom.
[laughter] that's super helpful. Thank you if I could just squeeze <unk> screen sneaking a quick follow up on your card works comments.
Is it possible to discuss.
Whether the sellers considering.
And to walk away from the deal and you know whether al I would be willing to.
Incurred the additional dilution to compel them to close the deal or maybe just.
Just a little bit little bit more to the except that you can offer.
Little bit more color.
Yeah, I'd, just say not which im not going to really comment right now I mean were because we're in the process as I said in the prepared remarks, obviously, Don and his team and certainly the Allied our team Didnt expect the severe drop off for fall off in the economy to come so we're going through.
The process now, we'll make the right decisions on both sides what.
Our thoughtful for our shareholders when our customers for the long term. So that's that's really all we can say.
Thank you very much appreciate you taking incremental.
Thank you. Our next question comes from Rick Shane with JP Morgan. Your line is now open.
Hey, guys. Thanks for taking my questions. This morning.
John in response to Betsys question, you talked about a this store or the prior assumption of the 5% to 7% decline and used car prices I'm. When you look at sure and I. Appreciate the fact that you guys have provided an update on Ensco guidance. What are you thinking in terms of old a higher.
Our loss frequency in higher loss severity.
Yeah, so within our reserves and within that implied 1.8% to 2.1% retail auto Anzio rate. Rick we have indebted that we would have more material kind of a likely pressure on the severity side as well as higher delinquency. It's just it's just pulling in past correlate.
Given that we've seen.
So think about that's kind of already embedded into that that reserve calculation and then you know and in terms of just what happens with the lease portfolio.
With respect to yields I think that's that that's the question that we're gonna have to answer over the next couple of.
Months in quarters as used vehicle volume in demand starts to start to come back a shelter in place orders are lifted overtime.
But it's largely instilled in that severity.
So that's too.
Put a finer 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 sort of.
Generally assume that severities are gonna go up.
Yeah, that's a good way to look at it I mean, if when is your assuming higher credit losses is gonna be a combination of frequency and severity.
And you know whether or not that plays out exactly we will see and it at some point it will merge with overall used car prices and we'll continue to update it when we have more natural data coming out of our auction.
Okay, great. Thank you so much yeah. Thank you Rick.
Thank you at our next question comes from Sanjay Sakhrani with KBW. Your line is now open.
Thanks, Good morning.
I guess I appreciate all the commentary on reserve a couple of clarifications one inside your Cecil window are you assuming any type of economic recovery.
And then you know some of the banks that have reported up until now has talked about how the macro forecast gotten a weaker since quarter end relative to that 10% unemployment rate. So how should we think about future provision built in and.
That assumption I don't know what your views are in terms of that.
Yeah, Hi, sure. Good morning, Sanjay So as we model reserves Kids mine are kind of end of March time period and meet the forecast that we had it is more kind of a a V shape than in l. shape or U shape at that at this point in time. So we do have a bit over a recovery starting in Q3 and excel.
The rating 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 and so we believe that overall will be a net positive not included in our number.
And also keep in mind that the size of our balance sheet is likely to go down which in a seasonal world provides outside benefited as he moves through the quarter.
So we you know we got to pick a balanced view the macro economic impact will will materialize potentially as we go through Q2, but there's some natural offsets there as well. So overall, we feel like we're in a good position with our current reserve number.
Okay.
And then I guess.
I want to think about hard work I know you can't really speak to whether or not that it will be consummated. It sounds like you guys are assuming goodwill.
Well when we talk about the deal and sort of the profitability of that business during the financial crisis. It was break even I think at its worst in.
In the ended up at the worst point.
In this backdrop would be accounting being what it is what peaceful and should we expect worse than not could you just help us think through any implications on profitability per card work, assuming the unemployment rates youre.
Yeah, I mean, Sanjay look I think card works and similar to every other financial services industry right now, they're focusing on controllable what can they do to help their customers there they're monitoring things very closely.
As a first quarter nothing has materialized on a relative to covert 19, and so it's it's just really hard to say exactly how this is going to play out and I think JV said it perfectly we're in constant dialogue with that team we have a lot of confidence in their ability to navigate cycles they've done it over the past 30 years.
And yeah, we'll continue to monitor and partner with them, but at this time, it's it's just a little bit too early to be decisive on what exactly their profitability. It's gonna look like I mean, it's difficult for us to do that for ally as well keep in mind.
Okay.
Great. Thank you.
Thank you Sunday.
Thank you and our next question comes from Kevin Barker at Piper Sandler Your line is now open.
Thanks, just a follow up with some of the car works a commentary you know is there any specific net worth covenants within.
Yeah I [noise].
Haven't did your did you conclude your question there.
It appears Kevin's line has dropped mid question.
Please.
Yeah.
And operator, we can go to the next into Q Kevin's line has dropped and come back to him or understand.
Understood. Your next question couple of Robert while talk with Autonomous Research. Your line is now open.
Hi, Good morning, guys I just wanted to go back to the deferrals and the forbearance.
It was the velocity of those requests rules evolved since you launched the offering and marching into April.
Yeah. Good morning, Rob. So I mentioned, we were proactive when we rolled the program out so what we saw as heavy heavy velocity in the first two weeks of the launching in particular in the first weekend and since then.
It's plateaued substantially since then and so we're we're seeing very modest tick up over the last couple of days even over the last couple of weeks.
And we do a follow up from Kevin Barker would you like to take question.
Sure.
That's having a lot I will then.
Kevin We Washington Midstream there, yes, sorry about that I just.
In relation to the car worse commentary I'm do you have any specific covenants around the net worth of car works at deal close or if there's some other covenants around elevated impairments go into when the deals closing.
Possibly here in the third quarter.
Yeah, I mean, Kevin I would just direct you to the merger agreement, which is publicly available.
Okay and.
And then a follow up on some of the.
Oh economic scenario commentary.
You have roughly you were saying what 25% forbearance rates.
Given your expectations out there for losses.
What percentage of those do you expect to eventually go delinquent when it happens.
Oh.
Kevin Kline dropped from the call once again.
Okay, we'll follow up Kevin offline.
Yes.
Operator, it looks like we're at the end the call here no more questions. So we will our mine participants than anyone else feel free to reach out to Investor Relations. We appreciate you joining our call. This morning and that concludes today's call.
Thank you ladies and gentlemen, thank you for your participation on today's conference. This does conclude your programming you may now disconnect.
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