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Ally Financial Inc (NYSE:ALLY)
Q2 2020 Earnings Call
Jul 17, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ally Financial Second Quarter 2020 Earnings Conference Call. [Operator Instructions] I would now like to hand the call over to Daniel Eller, Head of Investor Relations for Ally. Please go ahead.

Daniel Eller -- Head of Investor Relations

Thank you, operator, and we appreciate everyone joining us to review Ally Financial's second quarter 2020 results this morning. Today, we have our CEO, Jeff Brown and our CFO, Jenn LaClair on the call to review our results and to take your questions following prepared remarks.

You'll find the presentation we'll reference throughout the call on the Investor Relations section of our website at ally.com. Before handing it over to J.B., I'll note that on Slide 2 we have our forward-looking statements and risk factors. The content of today's call will be governed by this language. And on Slide 3, we've included several GAAP and non-GAAP or core measures. Management uses these and other core metrics, and we believe they're useful to investors in assessing the Company's operating performance and capital results. As a reminder, these are supplemental to and not a substitute for U.S. GAAP measures. The full definitions and reconciliations can be found in the supplemental slides at the end of the presentation.

With that, I'll turn the call over to our CEO, Jeff Brown.

Jeffrey J. Brown -- Chief Executive Officer

Thank you, Daniel. Good morning everyone and thank you for joining our call. We remain in extraordinary times, the human impact and economic repels from COVID continue to be felt across nearly every state and every major industry. However, even more profound, is yet again confronting the deeply disturbing social injustices we continue to see in our nation. Systemic racism has prevailed for far too long. There is zero tolerance for racism at Ally, and we proudly stand in solidarity with our black and brown teammates, customers, and communities. Discrimination of any kind, whether based on an individual's skin color, sexual orientation, beliefs, or cultural background stands in direct opposition to everything we stand for as a Company.

Fostering an environment of inclusivity is one of our core values. At Ally, our focus on inclusion is not considered an initiative or special project, but rather deliberate actions that expand diverse voices and perspectives that help shape our strategy and enhance the future of our Company. This approach starts at the top, including our Board of Directors and the leadership of our Company. We're committed to continue working to ensure diversity and inclusion permeates every corner of the organization.

Our Board and Executive Council formally pledged to focus more efforts and resources toward advancing a quality and contributing to the elimination of systemic racism, an important and symbolic move that reinforces our beliefs and values on these issues. While there is still much to be done in the fight to eliminate broad-based racial inequality in our country, I'm inspired by what I've seen at Ally and what I've heard directly from our employees.

Many of our teammates have showed great courage and strength as they shared in broad forms with our teammates, how their life experiences have not reflected the ideals of equality, opportunity, and basic human safety that we uphold as citizens. We're continuing to identify internal and external actions to take as a Company in driving real and lasting change. This includes the culture and diversity among our own employees and suppliers, along with the products we offer to our customers, that meet the needs of people from all walks of life and backgrounds.

Society has an important opportunity to drive much needed change, and we plan to do our part as we continue to embrace the power that comes from being a diverse and inclusive Company. We have great hope for a brighter future ahead.

Let's turn the quarterly results on Slide Number 4. Ally's priorities and strategic objectives remain unchanged, which provides continuity and clarity for our teammates and customers as we navigate this challenging and often volatile environment. Second quarter results demonstrated realization of this approach across our market-leading and growing businesses. Following a trough in April, operating conditions steadily improved throughout the rest of the quarter.

We delivered adjusted EPS of $0.61 and Core ROTCE of 7.6% for the quarter. Total revenue of $1.53 billion declined only slightly compared to the prior year, a testament to the power of our franchises. We remained disciplined and thoughtful around underwriting and credit management, leading to $7.2 billion of originated auto loans and leases in 2Q. This was sourced from $3.1 million decisioned applications and record used volumes. During the quarter, the number of dealers have submitted applications to Ally reached the second highest level ever, showcasing the broad reach of our platform. New originated auto yields were 7.1%, while charge-offs of 76 basis points declined year-over-year, reflecting solid underlying consumer payment trends.

We're closely monitoring all aspects of consumer health and will remain diligent in finding ways to keep our customers and their cars and mitigate losses as we move forward. Insurance written premiums were $267 million, reflecting lower industry vehicle sales and dealer inventories, though trends improved as we closed out the quarter.

Turning to our direct product offerings. Ending deposits of a $131 billion, increased $14.7 billion year-over-year, fueled by the strongest three months of retail growth in Ally's history. New depositors grew by 94,000, our third highest quarterly result. Over the past decade, we've turned a compelling start-up deposit operation now into the largest direct bank platform in the U.S. with a simple, but highly effective strategy centered around our customers. Among our other consumer and commercial product lines, momentum continued to accelerate this quarter. Ally Home originations of $1.2 billion represented our strongest quarter since launching in 2016. We benefited from a combination of a robust refinance market and our digitally based offering that increasingly meets the demands of consumers who are looking for frictionless financial service products. The Ally Invest customer base grew to 388,000, with cash balances of $1.9 billion and total assets exceeding $9 billion. Despite widespread shutdowns in April, Ally Lending generated the strongest quarter ever with volumes of $75 million. We entered the home improvement space, which will drive incremental volume moving forward through our partnership with Authority Brands.

Corporate Finance balances ended at $6 billion, up 26% year-over-year, but down slightly quarter-over-quarter as pay down activity occurred following outside first quarter revolver draw activity. While the journey through the coming months will undoubtedly be challenging as our country navigates COVID, this was really exceptional performance across the board for our businesses.

Turning to capital, as you are aware, we received feedback from the Federal Reserve on our CCAR 2020 submission, including a preliminary 350 basis point Stress Capital Buffer. Along with all other participating banks, we were notified that we'll be required to resubmit our capital plan later this year. As one of the largest banks in the U.S., we appreciate the unique circumstances our regulator space and ensuring broad-based financial stability. Ally's balance sheet and capital position remained robust, and under the established CCAR framework and stress process, our capital deployment plans were fully executable.

Now, obviously given the uncertainties with COVID, we decided to suspend share repurchase activity through the end of the year. While all banks await further clarity from the Fed, we remain confident in the strength of our capital position and our proven ability to effectively manage and deploy shareholder capital in a balanced and responsible manner. Jenn will show you the capital details in a minute, but levels look very solid, and we'll do our part in ensuring the Fed and others understand the strength of our key financial ratios.

Let's turn to Slide Number 5 to review core metrics. Trends across each quadrant demonstrate our resilience and ability to deliver even in a challenging operating environment. EPS returned to positive territory as revenues remained above $1.5 billion shown in the upper right. Prudent balance sheet positioning and improved funding profile and disciplined credit management power these results. Deposits in the bottom left grew to $131 billion, and now represent 79% of our funding profile. And on the bottom right, tangible book value, a metric we point to as an indicator of long-term inherent value, expanded year-over-year to $33.73, despite CECL implementation and COVID headwinds. Ally remains strong and will continue executing in a manner aligned with our values and strategic objectives in driving long-term value enhancement.

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

Jennifer LaClair -- Chief Financial Officer

Thank you, J.B., and good morning everyone. I'll begin on Slide 6, providing an overview of monthly trends within our Auto segment. As J.B. mentioned a moment ago, we saw steady improvement throughout the quarter as shelter-in-place orders eased and dealers quickly adapted to COVID environment. Many began offering contactless concierge services and increased the use of digital tools in the sales and closing process. Ally's application trends steadily improved with used volume as a percent of originations reaching the highest level on record, reflecting supply dynamics and a shift in consumer preferences that fit our model. Origination trends, shown in the upper right, reflected our prudent and disciplined underwriting approach. Specifically, we increased manual underwriting in lieu of automated decisioning and adjusted our buyback across our riskiest credit segments.

As we closed the quarter, we were pleased to generate higher year-over-year volume in June at appropriate risk-adjusted returns. Used car trends in the bottom left demonstrated strong consumer demand and improved option activity throughout the quarter. Year-to-date used car values are down 2%, including a 10% decline in April and 2% increase in June. We continue to embed a decline of 5-plus percentage points for full year 2020, given elevated off-rental and off-lease supplies, coupled with ongoing macroeconomic uncertainties. Industrywide vehicle inventory levels dropped 33% year-over-year, the lowest level in 10 years, as OEM factories went offline in March and April and sales activity depleted dealer stocks. Production has largely resumed, and we expect balances will slowly build over the coming months. In the interim, new vehicle floorplan shortages will challenge dealer sales activities.

On Slide 7, our direct bank product growth continues to accelerate, reflecting the value of our digitally based banking model. Retail deposit growth was fueled by a combination of market dynamics and Ally's specific drivers. Industry deposit levels have expanded due to stimulus and related consumer support, reduced consumer spending, and the delayed 2019 tax filing deadline. Ally further benefited from robust new customer growth, a testament to our competitive rates, industry-leading service levels, and award winning digital platform. On the bottom left, Ally Home origination trends were up meaningfully compared to prior period. Consumer appetite has significantly increased for end-to-end digital products. Our best-in-class MPS levels in the upper 50s, and our continued accelerating business volumes reflect our ability to deliver. Low rates drove significant refinance volume, along with elevated prepayment activity, which I'll cover more on later.

Turning to Ally Invest. Trading levels, customer growth, and account balances, all gained momentum this quarter. Between the months of March and June, Invest generated the four highest months of trading activity since we acquired the business in 2016. As we've highlighted impact, we intend on providing consumers with convenient, digitally based products and exceptional customer service. This consistent approach has driven steady performance and improving trends over the past several years that we expect to continue. The strength and benefits of a digitally driven model are apparent across all our businesses.

Turning to Slide 8, the improved metrics demonstrating the strength of our balance sheet. During the quarter, we approached or exceeded our highest levels across each metric, reflecting actions taken recently and over the past several years to solidify our Company's balance sheet. These results allow us to remain nimble and focused on supporting our customers. Stable, cost-efficient deposit portfolio has increased nearly 80% of total funding, up from approximately 50% in early 2016. We've also continued to diversify our liabilities with wholesale funding. While balances have normalized lower, we've continued to demonstrate improved execution levels with two cost-efficient unsecured issuances this quarter.

In the upper right, our liquidity position increased significantly to $43.6 billion, reflecting our ability to withstand adverse changes in the broader environment and remain opportunistic in support of our customers. CET1 levels shown on the bottom left exceeded 10%, well above regulatory minimums. At this level, we have $2.9 billion of excess capital above our SEP requirement of 8%. Allowance for loan losses of 2.85% or $3.5 billion represents over three times our reserve balances in early 2016, even as the relative size and risk profile of our balance sheet has remained stable. Together, our reserves plus access CET1 represents $6.3 billion in total loss absorption capacity. While many unknowns remain around the full extent and ongoing developments surrounding COVID, these metrics reiterate our ability to navigate the challenges ahead.

Let's move to Slide 9 to review the income statement. Net financing revenue, excluding OID, of $1.063 billion, declined $92 million linked quarter and $101 million year-over-year. While a departure from our ongoing trend of steady improvement, the long-term outlook for NII and NIM expansion remains intact. The decline in the quarter can be attributed to several items unique to the current environment, including reduced floorplan balances, lower lease gains, elevated mortgage premium amortization expense, and excess liquidity that weighs on near-term margins. These impacts were partially offset by accretive retail auto and deposit optimization trends, which will continue and accelerate as we move forward. Other revenue, the $465 million, remained elevated due to strong realized investment gains and robust mortgage fee income. Provision expense of $287 million was materially lower versus prior quarter, but remained elevated compared to prior year as coverage grew.

Non-interest expense increased by $65 million linked quarter and $104 million versus prior year. As we outlined in our 10-Q filing in April, we recognized a one-time impairment on the Ally Invest business, adjusted out of core metrics, reflecting industry dynamics including zero commission trends. Despite this action, core business trends are gaining steam, and we're pleased with the progress the Ally Invest team has made and the potential for this business long term. Excluding the impairment, quarter-over-quarter increases reflect seasonally higher weather losses. Year-over-year, we've made committed to prudently investing in our businesses for the long term, including technology and brand, revenue-related insurance expenses, and the inclusion of Ally Lending. In this environment, we've renewed our focus on identifying and reducing spend across non-essential areas. Key metrics at the bottom are adjusted for the goodwill impairment charge and other normalizing items.

Slide 10 includes the detailed results of our balance sheet. Q2 net interest margin, excluding OID, of 2.42%, declined quarter-over-quarter and year-over-year, driven by the dynamics I mentioned a moment ago; 20 basis points of NIM pressure due to excess liquidity; 10 basis points of -- from lease impact; and 8 basis points from premium amortization as mortgage rates declined to a 30-year low. It was partly mitigated by 10 basis points to 15 basis points of NIM expansion from Auto and deposit dynamics, which will drive NIM higher in the back half of 2020 and beyond.

Average earning assets grew $176.5 billion as cash and equivalent growth more than offset declines in floorplan balances. Outside of these line items, all other asset categories remained relatively stable or grew quarter-over-quarter and year-over-year. Retail auto portfolio yield, excluding hedge impacts, expanded 11 basis points quarter-over-quarter and 17 basis points year-over-year. Lease balances remained flat versus prior quarter and increased year-over-year, while yields declined due to lower off-lease gains. Average commercial auto balances fell $4.4 billion quarter-over-quarter and $8.7 billion year-over-year due to the declining OEM production and dealer inventory as mentioned earlier. Turning to liabilities, cost of funds improved 26 basis points, the fourth consecutive quarter-over-quarter decline, a trend we expect to continue over the next several quarters.

Turning to Slide 11, total deposits grew to $131 billion, a 13% year-over-year increase. Retail deposit growth of $9.7 billion, exceeded our next highest quarterly growth by 55% or $3.4 billion. We expect our growth trajectory will continue moving forward, but will reflect dynamics associated with the delayed tax filing deadline and potential stimulus activity. In the bottom left, retail deposit rates declined 24 basis points linked quarter and 58 basis points year-over-year. We remained disciplined and focused in our pricing decisions, balancing competitive dynamics, and preservation of customer loyalty that we've earned over time.

We generated our tenth consecutive quarter of an industry-leading 96% customer retention rate. And as J.B. covered earlier, customer growth of 94,000 pushed us over 2.1 million customers, nearly doubling early 2016 levels. We are also pleased to be recognized by Kiplinger's as the Best Internet Bank for the fourth consecutive year.

Let's turn to capital on Slide 12. CET1 ended at 10.1% in Q2, well above recent trends due to earnings growth, lower RWA, and the suspension of share repurchases. As a reminder, we elected to defer capital-related impacts associated with CECL until the beginning of 2022 per guidance provided by the Federal Reserve. This week, our Board of Directors approved the Q3 common dividend of $0.19 per share payable on August 14. In the bottom left, we've summarized CCAR 2020 feedback from the Federal Reserve regarding our CET1 operating requirement of 8% as compared to our internal target of 9%. While in a normal operating environment, this result will position us to execute our planned capital actions. We remain in a holding pattern for further details on the resubmission process. Our Q2 ending reserves equaled 70% of our internal nine quarter stress losses and 41% of the 2020 debt estimate, with the variance driven by retail and commercial auto modeling assumptions.

For some added context, during the great financial prices, Ally's retail auto portfolio losses roughly doubled for one to two quarters, compared to Fed model losses that more than doubled for the entire nine quarter horizon. Similarly, while Ally's commercial auto losses peaked at 35 basis points of annual NCOs, a level reflective of the secured highly liquid portfolio, the Fed's average NCOs for C&I, two-thirds of which is commercial, is 2.8% across the nine quarter horizon. These variances account for between $2 billion and $3 billion of higher Fed modeled stress losses.

Despite these differences, our planned capital distributions remained well within the prescribed SCB framework. We recognized the fluid nature of the environment, but feel good about our strong capital levels, and our ability to remain nimble in our deployment.

Asset quality details are on Slide 13. Consolidated net charge-offs of 58 basis points, increased 3 basis points compared to prior year. Net charge-offs of $178 million, declined $4 million year-over-year, driven by lower retail auto, which was largely offset by corporate finance activity. Moving to retail auto details on the bottom, a few broad comments on what we're seeing embedded within our results this quarter. Overall, actual credit performance has been stronger than we anticipated at the onset of COVID. While much remains unknown around the ongoing economic environment, comprehensive stimulus support programs and proactive customer engagement actions to date have driven encouraging trends. Robust payment activity occurred across our non-deferred customers materially lowering frequency year-over-year. There is a modest increase in severity as used vehicle values declined and repossession volume decreased due to state imposed moratoriums in place through June.

And related to the deferred population, accounting guidance led to a $50 million increase in NCOs. We expect actual losses to be below this level as we work through our standard process to keep our customers in their cars. Collectively, this resulted in retail auto NCOs of 76 basis points, a decline of 20 basis points year-over-year. Delinquency performed favorably versus our expectations overall, even considering deferral program impacts. Based on these trends, we still believe our full year NCOs will remain within our previously stated 1.8% to 2.1% range.

Slide 14 provides additional detail on reserve levels and coverage. Reserves of $3.35 billion and coverage of 2.85% increased as the consolidated levels, reflecting higher retail auto coverage level and the impact of declining floorplan, which carries a lower coverage, given the strong credit profile of the portfolio. The reserve walk on the bottom reflects the Q2 impact of the deteriorating macroeconomic forecast, including unemployment peaking about 14% before declining to 10% by year-end 2020, and then migrating to our CECL model's 6% historic mean.

We've continued to exclude any stimulus-related benefits or assumptions within our modeling. Loss absorption capacity of this magnitude prepares us to navigate the elevated NCO activity we are expecting in the coming quarters.

On Slide 15, we've included an update on our auto deferral program. Cumulatively, 1.3 million auto customers enrolled with 87% in current payment status. Customer payment trends increased every month during the quarter, with 24% of our customers paying in June prior to their scheduled due date, supporting our view that many used the program for added payment flexibility. On the right-hand side of the page, we've included a monthly view of deferment exploration timing. 30% of the total population has scheduled expirations during the quarter, including the majority of customers who entered the program in 30-plus delinquency status. Payment trends for this population have been in line with expectations.

Balance of the deferral expirations will occur over the next few months. Keep in mind, the vast majority of these customers enter the deferment in a non-delinquent payment status. We've remained proactive in preparing for this phase of the program, managing staffing levels, launching new digital payments tools, and maintaining steady engagement with participants. We're pleased overall with outcomes to date.

On Slide 16, I'll highlight a few additional metrics in the Auto segment. Net financing revenue trends reflect lower commercial balances, LIBOR levels, and lower lease gains. Non-interest expense declined seasonally quarter-over-quarter with essentially flat year-over-year. The resilient and adaptable nature of our auto business was fully reflective this quarter, where estimated retail new origination yields remained above 7% for the ninth consecutive quarter. We seamlessly transition to consumer preference for use, and we were opportunistic as we've done in the past among established and emerging industry players.

Let's turn to Slide 17. Q2 auto originations of $7.2 billion declined quarter-over-quarter and year-over-year, reflecting industry dynamics. Average FICO and non-prime volumes remained steady, used comprised 60% of originations, the highest level we've seen of the Company. And in the bottom left, ending consumer assets were up slightly quarter-over-quarter and year-over-year to $81.5 billion, while commercial assets on the bottom right declined as described a few moments ago.

Insurance results are on Slide 18. Core pre-tax income of $39 million in Q2 was down $38 million linked quarter due to seasonally higher weather losses and up $43 million year-over-year as realized gains offset weather losses that normalized higher following historically low levels in 2019. Written premiums of $267 million, declined year-over-year and quarter-over-quarter, reflecting lower floorplan levels and declining vehicle sales. Underlying trends steadily improved throughout the quarter as June written premium levels were higher versus prior year.

Turning to Slide 19, Corporate Finance core pre-tax income was $31 million in the quarter, up $95 million quarter-over-quarter and down $16 million year-over-year. Ending assets declined $366 million during the quarter, reflecting repayments of approximately 60% of elevated Q1 credit line draws related to the pandemic and additional pay downs from some borrowers who received government stimulus. We charged off two credit string orders [Phonetic] that were impacted by COVID. These exposures were largely reserved for and had a provision impact of $6 million in Q2. Our origination strategy remains focused on a steady approach to growing balances and returns, while managing risk largely through asset-based deals. We continue to monitor criticized and non-accrual loan trends, along with ongoing developments among our client base.

On Slide 20, mortgage pre-tax income of $8 million in Q2 declined versus prior quarter and year-over-year due to the impact of elevated prepayment activity within bulk portfolio. Direct-to-consumer origination volume was robust, as we continued leveraging existing relationships with 60% of originations sourced from existing Ally customers. The low rate environment drove strong refinance activity for us, representing 78% of originations in the quarter. We're encouraged by these trends, and expect volumes to remain strong as we move forward.

I'll close by reiterating how proud I am of our Ally teammates who remain the driving force behind our results. 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 J.B.

Jeffrey J. Brown -- Chief Executive Officer

Thank you, Jenn. On Slide Number 21, let me reiterate our strategic priorities. At Ally, we've diligently and purposely built our Company upon pillars of strength to prepare us for turbulent times and being able to navigate the full economic cycle. I am grateful for how our associates continue to do it right and remain resilient in the face of adversity. Ally's success is a result of the great work they do every day. Our values will continue to guide our work protocols as we prioritize safety and well-being during this pandemic. We'll also stay dedicated to building a Company where no one is excluded for who they are or the color of their skin.

For our customers, we often use two words, relentless and obsess, to describe the approach we take in meeting their financial needs, and we're energized to see how this has turned into accelerating results within our businesses. We take great pride in being a comprehensive and digitally focused consumer and commercial finance provider, and we will continue innovating and adapting. We've a strong well-positioned balance sheet with a deeply rooted foundation across funding, capital and liquidity that will ensure we remain a source of strength for customers over the long term.

While this environment caused us to mutually terminate the CardWorks acquisition, I want to reiterate my utmost respect for Don Berman and his team in the strong business they've built. I'd also like to thank the employees of both companies who showed great dedication and professionalism over the past several months working on this deal. So, at Ally, we'll stay focused on protecting and caring for the valuable businesses we already have and finding unique opportunities to further scale and grow those businesses in a disciplined and thoughtful manner. I'm amazed at how this Company has evolved and accelerated its progression and I'm confident that's going to continue.

We'll also leverage our digital model and unique brand and financial services and the way we serve our customers. And as you know, trends are clearly on our side. There is no doubt there is a great deal of uncertainty that lies ahead in the months ahead, but Ally's results this quarter demonstrates we're equipped to successfully navigate and win in challenging environments.

And with that, Daniel, I think we can go into Q&A.

Daniel Eller -- Head of Investor Relations

Thank you. J.B. So, I'll remind participants to please -- as we head into the Q&A session, please limit yourself to one question and one follow-up. Operator, you may now key up the Q&A.

Questions and Answers:

Operator

[Operator Instructions] Our first question comes from Sanjay Sakhrani of KBW. Your line is open.

Sanjay Sakhrani -- KBW -- Analyst

Good morning. Thank you. I guess, first question on the reserve build. I was wondering, Jenn, if you could just walk through some of the assumptions that you've made around the outlook?

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. And good morning, Sanjay. Yeah, and I mentioned in the script here the macroeconomic assumptions. We essentially had unemployment, which is our biggest macroeconomic driver, hit about 14% here in Q2, then glide down to about 10% year-end and then revert to our mean under CECL at about 6% toward the end of 2021. And that did drive a bit more of a reserve and drive our coverage up a bit this quarter. We also have not embedded any assumptions around kind of stimulus or the deferred population, just some of the relief that we've provided through our forbearance programs. So, we haven't embedded any of that either. And at this point, we feel really good about the reserve. Coverage levels on retail auto were 4.09% coverage rate, our NCO levels, we reiterated that 1.8% to 2.1% range that we feel like we're in a great spot in terms of the reserve coverage at this point.

Sanjay Sakhrani -- KBW -- Analyst

Okay, great. And then my follow-up question, J.B, it's for you, on the CardWorks deal. Given it's behind you now, I was just curious. if that all experience has changed any views in terms of the diversification efforts you're considering? Thanks.

Jeffrey J. Brown -- Chief Executive Officer

Yeah, thanks for the question, Sanjay. I mean, obviously, we have been saying for quite some time, we still like the unsecured space, and I think that remains true, but obviously you have to reflect on the environment that you're in and the fact that there's going to be challenges out there for the next while. So, for us, I think the focus in the short term, what I call over the next 12 to 24 months, is really keeping our head down, carrying for the franchises in-house. I mean, I think as Jenn showed and demonstrated in her comments, I mean, all the newer businesses are really starting to accelerate and we feel very good about that.

I mean, Ally Lending, that has number of bright spots, Ally Home, bright spots, Ally Invest the same, and then auto and deposits are just phenomenally well positioned right now. And, I think our focus and what we've done on the used space is just working really, really well. I mean, emerging players like EchoPark, Carvana, just great partners there and then the traditional dealer base. We just got great relationships with dealers across the country. And so, we're comfortable in the positions for now and I think just in this environment, you got to care for what you have more than anything.

In the long term, we'll go through and continue to assess like I think all of our shareholders would expect us to do what makes sense for Ally for the long run. But again, as I said, got a ton of respect for Don Berman. He is a great operator, and I think, Don, in some ways looks forward to the most challenging environments because I believe that's when he thinks his company is going to really shine. So, ton of respect and credit for him and we'll keep our head down and keep Ally advancing forward.

Sanjay Sakhrani -- KBW -- Analyst

Thank you.

Jeffrey J. Brown -- Chief Executive Officer

Thanks, Sanjay.

Operator

Our next question comes from Betsy Graseck of Morgan Stanley. Your line is open.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Jennifer LaClair -- Chief Financial Officer

Good morning, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

I wanted to dig in a little bit on the outlook for net charge-offs that you indicated for the full year, Jenn, especially given that -- you've got some deferments coming out over the next few months. And when I look at the Slide 15, you highlight that the early payment trends for customers exiting deferment is aligned with expectations. Maybe you could help us understand what those expectations are and how we should anticipate deferment roll-off impacting delinquencies and then net charge-offs because you've got a -- you're implying a pretty big uptick in second half NCOs. Just want to get some color around that.

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. Thanks for the questions, Besty, all good questions. And the theme here is going to be a lot still to be determined at this point. But let me just hit on deferment population and then the non-deferment population. But within deferment, we've seen about 30% of our accounts scheduled to expire at this point and we have some expectations in terms of payment activity relative to NCO and relative to delinquency buckets. And as I mentioned, I'd say performance to date is largely in line, but you also have to keep in line, there is stimulus in the system. We don't know what's going to occur just from an overall pandemic roll out or additional stimulus, and so, we're going to continue to watch that population very, very closely, but as I mentioned kind of everything is in line with expectations.

Next quarter, we have an additional 70% of that deferment population scheduled to expire. So, this is our much higher credit quality population. So, we believe that they're going to perform well, but that's a large percent of accounts, and we just have to see how that performs over the next couple of months. And because those two populations are largely to date performing in line with expectations, we're still expecting kind of about 1.8% to 2.1% retail auto NCO rate that we put out in the first quarter. So, everything right now is still consistent, in line with expectations, but I will say there is a lot more to come. We are very much in the early innings of seeing how the deferral population works, and we'll continue to monitor extremely closely.

And then, in a non-deferral population, and you kind of -- you see this in the overall NCO rate for retail auto coming down 20 basis points, 30-plus DQs coming down about 70 basis points. We continue to see just really robust performance in that population, but again a lot to unfold relative to the overall impact of the pandemic, the macroeconomic environment, stimulus, etc., but so far so good.

Betsy Graseck -- Morgan Stanley -- Analyst

And then just follow-up question has to do with the outlook for used car prices. I think you indicated in the prepared remarks, keeping down 5% for the full year. I think we just had this morning, Manheim, saying that used car prices up 11% year-on-year in the first couple of weeks of July. I wanted to understand, if that makes sense to you given your mix. I know your mix is a little bit more skewed to SUV and truck.

Jennifer LaClair -- Chief Financial Officer

Yeah. I mean, a couple of dynamics that play there. I mean, we came into this year guiding toward kind of 5% to 7% decline in used vehicle prices, entirely just driven by supply dynamics with a lot of off-vehicles coming into the market. As we came through Q2 with the pandemic, we saw a precipitous drop in used vehicle prices. That was about 10% drop in April, which very quickly recovered to a plus 2% as we ended Q2 here. And we're still seeing strong signs as we come here into July. But with all the volatility around used vehicle prices knowing how quickly and materially they can move around on us, we're still guiding toward kind of a 5%-plus decline in used vehicle prices. And then we'll see where it goes from here. I think that positive dynamic as new vehicle inventory is still pretty well. In this environment, with stress on the consumer, the value of the used vehicle outweighs that of a new from a pricing perspective. So those are all positive dynamics.

On the negative here, health of the consumer could further deteriorate and overall demand could decline, and we still do have that supply side challenges. So, we're just being measured knowing that this is a line item that can move around very quickly on us.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay, thank you.

Jennifer LaClair -- Chief Financial Officer

Yeah. Thank you, Betsy.

Operator

Our next question comes from Moshe Orenbuch of Credit Suisse. Your line is open.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. Jenn, I appreciate the comments that you made about that payments. Could you talk just a little bit about how you think about the way the consumer has behaved thus far, the ones in deferment, the ones out of deferment? And the potential for intervention and how you think that -- if you had taken that into account, how would that impact your expected loss reserving in those elements?

Jennifer LaClair -- Chief Financial Officer

Sure. Sure, Moshe. So, consumer behavior, let me start there. What I would say is, a lot of our consumers, as we were expecting, use this program as kind of an insurance policy against what's to come with COVID. And we went out with a program that was open to everyone. It is very easy to enroll. And we've seen over the last couple of months an increase in payment rates even while the payments weren't due. So that started in -- kind of in retail auto about approaching 20%. We ended June almost a quarter of our customers were making payments in spite of the fact that their deferrals weren't expiring. So, we're very encouraged by that. I'd say underneath the covers, just in the more stressed population that was scheduled to expire this quarter, we've been pleased. The vast majority of them are paying and are in current status, but some are in delinquency and we're just expecting those to at some point roll or potentially go to NCO, which is why we've been very consistent in terms of our NCO expectations on this population.

Relative to stimulus and we absolutely think that that's a net positive here. I mean, if you look at savings rates across the consumer, they continue to grow. We're seeing strong payment rates not only in retail auto, but also in mortgage as well as Ally Lending, and certainly, we think stimulus is a net plus from a loss perspective and from a payments perspective, but also we're clearly seeing that in the deposit trends across Ally as well as the rest of the industry. But I feel good right now just in terms of trends are in line with expectations. We've kept consistency around the NCO, our projections this year, and certainly we're very well covered relative to those expectations, Moshe.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. And for a follow-up, you showed on the slides that deposit costs were 1.64% for the second quarter and you mentioned that that's going to be a driver going into Q3. Could you talk about what that would be kind of marked to today's rate and what your plans are for deposit rates, given the strong growth in liquidity that you've got?

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. And I'm sure you've seen on OSA, which is going to be a very big driver of NII and the NIM expansion I talked back half '20 and going into '21. OSA rates are down to a percent [Phonetic]. That's really going to help us. We moved down kind of July 8, so early this month, and that's really going to help propel our NII and our NIM. And if you think about that OSA rates, kind of the data on that relative to the data on the retail auto, new origination pricing is two times and that's really what's going to funnel that continued growth in net interest income, which continue to be very strong in terms of the retail originated yield over 7% for nine consecutive quarters. Now, that could move around a little bit as we go into the second half, but there are clearly opportunities for our overall retail auto book to migrate up toward that 7% we've been originating for so much -- so many quarters and above.

Moshe Orenbuch -- Credit Suisse -- Analyst

Okay, thank you.

Jennifer LaClair -- Chief Financial Officer

Thank you, Moshe.

Operator

Our next question comes from Rob Wildhack of Autonomous Research. Your line is open.

Rob Wildhack -- Autonomous Research -- Analyst

Morning, guys. Just to follow up on the originated yields over 7%. I think that might have been better than you had expected. What were the drivers there?

Jennifer LaClair -- Chief Financial Officer

Yeah. So, a couple of dynamics. One is, we continue to see just record levels of used, which tend to carry a higher yield, so just the favorability on mix overall. And then we continue to have strong flows coming from some of the emerging players in the market and J.B. had mentioned a couple of the names there and just we continue to be very pleased with just some of the flows that we're seeing there that drove the yield up. Now, we're heading into the third quarter here and second half of 2020, we're seeing new originated yields coming in kind of 5%, 6% range, and we'll always aim to outperform that, but it's going to depend a bit on where the market lands.

Rob Wildhack -- Autonomous Research -- Analyst

Got it. And then, can you just remind us what happens when a borrower comes off forbearance? How do they get back to current? Is it just a larger monthly payment or is there a lump sum due? Any color you can add there would be great.

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. So, as the accounts are scheduled to expire, we expect our customers to just make one payment, and that brings them to current immediately. And so, it's just very, very simple process where you just need to start paying your loan again. There is no lump sum payment or anything like that, Rob.

Rob Wildhack -- Autonomous Research -- Analyst

Okay, thank you.

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. Thanks.

Operator

Our next question comes from Rick Shane of J.P. Morgan. Your line is open.

Rick Shane -- J.P. Morgan -- Analyst

Hey, guys. Thanks for taking my questions this morning. First question is, given over the last several years we've seen such strong used car prices and that means that as leases expire, the market value of the cars is actually above the purchase option price. As we're seeing a decline in used car values, are you guys expecting a higher percentage of -- or lower percentage of leases that are expiring to exercise the purchase option?

Jennifer LaClair -- Chief Financial Officer

Yeah. Yeah, Rick, appreciate the question. All right, we're not seeing any big change there, not really. I mean, I'd say overall with respect to off-lease vehicles, demand for used has continued to remain strong, and I think that's really what matters here. I'm not seeing any [Speech Overlap] to off-lease percent that are staying in the vehicle.

Rick Shane -- J.P. Morgan -- Analyst

Got it, OK. Thank you. And then, it's interesting -- and you just said it again and you talk about the strong demand for used cars. I am curious what you guys think about the supply of used cars, particularly given that there has been essentially partial moratorium on repossessions. Do you think that, that dynamic will change as we move through the second half of the year?

Jennifer LaClair -- Chief Financial Officer

Yeah. What I'd say on them, moratorium on repossessions is actually helped to continue to bolster used vehicle prices, and we had some programs around off-lease customer activity that allowed us to preserve pricing in the used space as well. So, I'd say that's overall been a net plus. I think what you're going to see over the next couple of months, barring any systemic reversals on reopenings or any potential stress here in the back half of the year, I think you're going to see those moratoriums really run off and [Technical Issues] certainly starting to run off, so we're getting much more kind of closer to business as usual on repossession.

And I'll just go back to what I've said before, which is 2020 was to be one of the peak years in terms of off-lease vehicles. So, we'd expect -- to your question on supply, we still expect to see some very robust used vehicle supply in the market, which has really helped to offset what we've seen on the new vehicle production stress that we've had. It's really helped to kind of bolster inventory across the system.

Rick Shane -- J.P. Morgan -- Analyst

Great. Jenn, thank you very much.

Jennifer LaClair -- Chief Financial Officer

Thanks.

Operator

Our next question comes from Eric Wasserstrom of UBS. Your line is open.

Eric Wasserstrom -- UBS -- Analyst

Great. Thanks very much. J.B. and Jenn, two questions, one a small one, and then maybe a larger one to follow. The little one just relates to the C&I NCO experienced this quarter, which was a bit higher than the trends. Can you just touch on what occurred there?

Jennifer LaClair -- Chief Financial Officer

Yeah, sure. So we had two credits that we charged off this quarter. They were credits that had started to deteriorate back half of 2019, so we had already largely reserved for those credits and what we saw with COVID kind of accelerated their movement into NCO. Now, I would say just more broadly on that book, the percent of non-accruals continues to remain pretty solid and stable at around 2% and in spite of that we've continued to grow coverage. So overall, credit quality is still performing well, overall book looks good, and those were two credits, again that emerged pre-COVID.

Eric Wasserstrom -- UBS -- Analyst

Got it. And then I guess my larger question is this. I mean, there were so many things that were unusual in this quarter and those things were manifested as you might expect in your balance sheet and income statement. So, is there any way that you can just help us frame sort of what to think about in terms of quarterly cadence of performance for maybe the next few just directionally in terms of some of the other key line items? You've talked obviously a bit to the NIM and to the card and fill rates, but there's just so many other things like liquidity position, etc. Can you just help kind of frame what the range of outcomes might look like?

Jennifer LaClair -- Chief Financial Officer

Yeah. And maybe let me start first on the balance sheet and then a couple of comments on the income statement. But, I mean, on the balance sheet, I appreciate you recognizing unusual events here because we would concur wholeheartedly with that summary. But what we saw across the new vehicle space is just the OEM production has slowed precipitously. Inventories are down about 33% and so kind of the most unusual thing that we've seen on the balance sheet relative to expectations coming into this year is just the floorplan levels have declined about $10 billion linked quarter, coupled with the fact that we've had just incredible deposit inflows. You see just the growth in cash on the balance sheet.

Now, over the course of the last half of 2020, we would expect inventory levels, new vehicle production to increase. So we'd expect slowly to see the commercial balances grow and we'll be very prudent in deploying that cash that we have sitting on the balance sheet, but we'd expect cash over time to come down. I mentioned most of the other line items on the balance sheet performing well. We could see retail auto balances come down a hair just because originations are going to be a little lighter this year, but overall, seeing strong mortgage production, Ally Lending [Technical Issues].

As we shift to the income statement, I'd say, just in summary, PP&R looks to be pretty stable first half to second half. We talked about kind of NII being in a trough, we'd expect that to expand back half of this year. Other revenue came in at record levels this quarter. We could see that normalize a bit lower just based on -- it will be dependent on our opportunity to take investment gains. And then the real wildcard here is going to be what happens with the macros and what happens with credit. We think we've got a great handle on it so far, but there's still a lot of uncertainty in the environment that could potentially move provision for credit losses around a bit.

I think the Company with our balance sheet where it is, we feel like we're in a great position in this environment. We've got strong liquidity. We've got our highest level of capital that we've had in the history of the Company. So, irrespective of the unusual that continues, we think we're incredibly well positioned. And we're focused on the right things. We're focused on supporting our customers in this environment. We can do that because of the strength of the balance sheet. We're focused on extensionalism, making sure that we're investing in the right opportunities to position us for the future. And we feel really good about our ability to navigate.

Eric Wasserstrom -- UBS -- Analyst

Great. Thanks so much.

Jennifer LaClair -- Chief Financial Officer

Yeah.

Operator

Our next question comes from Arren Cyganovich of Citi. Your line is open.

Arren Cyganovich -- Citi -- Analyst

Thanks. The deposit growth was very strong and you mentioned that the tax payments kind of shifting from 2Q to 3Q. Are there any other kind of temporary aspects that drove that higher PPP loans, that kind of stuff that you would think that there may be a bit of a pullback in the deposits in the third quarter?

Jennifer LaClair -- Chief Financial Officer

Yeah. So a couple of things I'll say. The overall industry is growing about 10% and I think a lot of that has to do with whether that's PPP stimulus checks that kind of are in consumers' hands right now and just the overall kind of defensive posture that you see around consumers in this kind of environment. So I'd say, just across the industry, it seems robust deposit growth. Then, as you shift to the digital banks, we continue to win from a share perspective. Digital growth -- digital direct bank growth was about double that, over 20% this quarter, so that we continue to have trends in our favor in that regard.

And then I think Ally has positioned itself, just with our digital capabilities, our brand, our great rate paid that we continue to win even within that digital. I think, you mentioned tax payments, we did have that roll through July 15. We're still seeing really robust deposit growth here in July in spite of taxes, and we're expecting that to continue over the back half of this year. But, I mean, there is no doubt that direct banks are going to continue to win in this environment.

Arren Cyganovich -- Citi -- Analyst

Okay. And then, secondly, the trends in retail auto obviously showed tremendous improvement in June. And I know it's still kind of early, but we're seeing COVID resurgence across a lot of the country. Are you seeing anything in July that's kind of slowing that positive trend that you're having there?

Jennifer LaClair -- Chief Financial Officer

Yeah. I mean to be completely measured on this, June may have had a bit of pent-up demand. We saw originations down 50% in April and popped back up to over 10% here in June. I'd say, July is still moving forward, very strong originations. I think the dealers and this asset class has proven to be incredibly resilient in this environment. And obviously, you put all those caveats around that as we don't know exactly what's going to unfold from COVID and the macros, but I think we feel great about just the resilience, even if we do think a bit of a double dip here, that this industry can recover very quickly.

Arren Cyganovich -- Citi -- Analyst

Thank you.

Operator

Our next question comes from John Hecht of Jefferies. Your line is open.

John Hecht -- Jefferies -- Analyst

Thanks guys for taking my question and good morning. Most of my questions have been asked and answered. I guess, over the intermediate term, I'm curious as to digital channels like Carvana are growing, there has been a shift to consumers even getting pre-approved for loans via digital channels. How do you guys think that affects the market and how are you guys positioned to do deal with that in the intermediate term?

Jennifer LaClair -- Chief Financial Officer

Yeah. I appreciate the question. And short answer here is, we feel we're really well positioned and have continued to benefit from being agnostic to whether a dealer is digital, whether they're more traditional. And I think in this environment, we've seen an acceleration of the traditional dealers becoming more digital and finding a lot of opportunities to whether it's offer contactless sales or concierge services. I mean, we are seeing the entire industry shift very quickly to digital.

That being said, with the purely digital offerings out there, we've continued to grow our relationships there and we feel great about just being able to support all of our dealers, wherever they are on the journey to digital. And like I said, this environment has really accelerated that movement overall and we think that's a net plus from a consumer perspective.

Jeffrey J. Brown -- Chief Executive Officer

Hey John, the only thing maybe I would add is just as Jenn pointed out, I think when we talk to the little -- the smaller, one store dealers and the big chains like Rick Hendrick, Hendrick Automotive Group, their biggest challenge right now they just need more cars. I mean, they'll tell you that's the bigger challenge. And obviously, with the factories being impacted, there is just not new car flow coming into them. So that's part of the reason why Jenn covered used cars felt really good right now. We still have sort of a more balanced outlook going forward because we do think new car production should return, but I mean, it's really interesting when you talk to the dealer base. They really say that's the bigger challenge they face more than anything. It's just simple lack of inventory.

John Hecht -- Jefferies -- Analyst

Great. Thanks very much. Appreciate the content.

Jeffrey J. Brown -- Chief Executive Officer

Got it. Thanks, John.

Daniel Eller -- Head of Investor Relations

All right. Thank you all very much for joining our call this morning. That concludes the second quarter 2020 review of Ally's financial results. Operator, you may terminate the session.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Daniel Eller -- Head of Investor Relations

Jeffrey J. Brown -- Chief Executive Officer

Jennifer LaClair -- Chief Financial Officer

Sanjay Sakhrani -- KBW -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Arren Cyganovich -- Citi -- Analyst

John Hecht -- Jefferies -- Analyst

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