Ally Financial Inc.
Q1 2015 Earnings Call Transcript

Published: 28 Jul 2015

[Operator:]

Good day, ladies and gentlemen and welcome to the Second Quarter 2015 Ally Financial Earnings Conference Call. My name is Emma, and I will be your operator for today. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. Now, I'd like to turn the call over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed.

[Michael Brown:]

Thanks Emma, and thank you everyone for joining us as we review Ally Financial's second quarter 2015 results. You can find the presentation we'll reference during the call on the Investor Relations section of our website, ally.com. I'd like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language. This morning, our CEO, Jeff Brown; and our CFO, Chris Halmy, will cover the second quarter results. We'll also have some time set aside for Q&A at the end. Now, I'd like to turn the call over to Jeff Brown.

[Jeff Brown:]

Thanks Michael. Good morning, everyone. Thank you for joining us today. Let me start on Slide 3 and by design this is the same slide we shared last quarter that highlights in a very high level our key strategic priorities. These include; number one, diversifying our Auto Finance business; number two, expanding our franchise so it is best positioned for long term growth; and number three, improving shareholder returns. Chris and I will share more details on our progress as we work through today's presentation and as you will see, we're delivering on each of them. Turning to Slide 4, let me lead with two key points. First, we're fully on track with our financial targets and second, credit continues to perform in line to better than expectations and we're being prudent in new originations coming on the balance sheet. Auto originations were very strong in the first two quarters of the year. We've booked over $20 billion in originations in the first half of 2015. We're fully confident in delivering originations in the high $30 billion range for the full year. The strong start in originations will also allow us to be even more selective on what we've put on balance sheet over the remaining five or six months of this year, while ensuring we're generating appropriate returns on capital usage. The business continues to be more diversified including from a channel, mix and product perspective and we believe this is a better mix of assets given our macroeconomic outlook and auto specific supply trend. As I highlighted at one of the equity conferences during the second quarter, there was an uptick in allowance we booked which is more as a function of the lease to loan product shift versus any meaningful change in credit expectations. We're committed to achieving the core return on tangible common equity target of at least 9%, and the capital actions we've already taken are important steps towards normalizing equity levels. There's still more improvement to come. Specifically, we've been pretty vocal on addressing the remaining Series G in the near term and we're in discussions with the regulator about this matter. We're on target to drive the adjusted efficiency ratio to the mid-40%, even while we make critical investments that will enable us to grow and deepen customer relationships, but obviously a disciplined focus on costs with a constant focus on return on investment also contributes to ROE expansion. So, high level, we're on track against each of these commitments for the year and we're very focused on the next stages of execution that can help surpass these initial targets. Turning to Slide 5, let me touch on the quarter before handing it off to Chris. We delivered net income of $182 million in the quarter, including the $155 million charge related to the debt repurchases. Obviously, these capital and liability management actions are focussed on improving financial returns over time. Core pre-tax income was $435 million for the quarter which is an improvement from the prior year and while down from prior quarter, you may recall we benefitted from about $90 million in one timers in the first quarter. So normalized, we feel very good about the linked quarter progression. Adjusted earnings per share was $0.46, up from $0.42 last year. Core ROTCE was 8.2% for the quarter and the adjusted efficiency ratio was 46%. We also continued to see net interest margin expansion, the 2.58%, which is an increase of 11 basis points from the prior quarter and we got it from both asset yield expansion and cost of funds contraction. Obviously, for this rate environment, we're pleased and we still see opportunities to come. Auto originations were very strong at $10.8 billion for the quarter, which is relatively flat with the year ago, however as you know, the landscape this year is very different than last year. The second quarter was the first full quarter following the change to the lease business and when you exclude all GM subvented business, Ally's originations were up 36% year-over-year and the growth channel in particular was up 58%. The Auto Finance franchise is a formidable competitor with the associate expertise, customer relationships and flexibility to adjust the [indiscernible] dynamics. Results this quarter are another demonstration of it. Now, let me shift to our deposit business. We had retail deposit growth of $1.1 billion in the quarter, which is an increase of 13% and equally important is that we welcomed another 35,000 customers to Ally. We're spending a tremendous amount of time understanding the existing customer base, thinking about emerging trends and financial services, and focused on how we really change the landscape in the years to come. So we continue to make progress on our financial targets, diversifying our business and expanding our customer base. This is a roadmap to improved shareholder returns and we're poised to build upon these. With that, let me turn it over to Chris Halmy.

[Chris Halmy:]

Thanks JB. Let's go to details for the quarter on Slide 6. We delivered another solid quarter with core pre-tax income excluding repositioning items of $435 million. Net financing revenue of $927 million was up both year-over-year and quarter-over-quarter. Strong order originations are driving earning asset balances higher and these loans are coming on at attractive yields. Funding costs continue to come down and we continue to see used car prices remain strong. Other revenue of $368 million returned to a more normalized level this quarter. As you will recall, we booked a gain last quarter of about $65 million on the sales of legacy TDR mortgage loans. Provision expense of $140 million was up driven by our strong loan growth, as well as some releases in prior periods that did not repeat. Total noninterest expense came in at $724 million which is broken out between controllable and non-controllable items. The increased quarter-over-quarter is driven by insurance weather-related losses, which are seasonally the highest in 2Q. We continue to make progress on controllable expenses which were down another $10 million year-over-year at $21 million quarter-over-quarter. These results including the debt tender charge resulted in GAAP net income of $182 million. Adjusted EPS for the quarter was $0.46. Core ROTCE was 8.2% and our adjusted efficiency ratio continued to decline to 46% in the quarter, and both metrics are on track to meet our year-end targets. So overall, another solid quarter. Slide 7 gives the results by segment. Auto Finance had a great quarter with pre-tax income of $401 million. Strong originations resulted in higher asset balances which combined with favorable net lease revenue drove the increase quarter-over-quarter. Year-over-year results were partially driven by higher provision expense and compression and commercial yields and lease revenue. Insurance pre-tax income of $15 million was up from prior year. 2Q is typically the seasonal high for weather-related losses, but were favorable to last year's record high levels. Mortgage reported $9 million of pre-tax income but had some significant items in the comparative quarters that did not repeat. As we discussed earlier, we had the TDR asset sale last quarter. Corporate and Other continues to benefit from lower cost of funds on a year-over-year basis. Net interest margin is covered on Slide 8. NIM was up 11 basis points quarter-over-quarter driven by lower funding cost and slightly higher asset yields. In 2Q, we made great progress on liability management and also benefited from some legacy debt maturities which we did not replace. Overall, funding costs were down 32 basis points year-over-year and 8 basis points quarter-over-quarter. For reference, there's a slide in the appendix that outlines our progress on liability management and reducing the overall unsecured footprint, which is down by almost $4.5 billion since the third quarter of last year. We expect further NIM expansion next quarter, as the full effect of our liability management strategy is realized. Longer-term, cost of funds improvement will be driven by our ability to get more assets in the bank where we can fund with deposits. Currently, about 68% of our assets are in Ally Bank, but we did get approval from our regulators to start booking the 620 to 650 FICO loans at the bank, so that percentage will rise. This should get us closer to 75% in the near-term, but obviously we are focused on eventually getting everything funded at the Bank. Turning the page, we've added a new slide outlining our sensitivity to changes in interest rates. This is a hot topic right now. So we thought it would be helpful to provide a little more context around some of the comments we've made publicly. Keep in mind that Ally's balance sheet is pretty short duration, turns over quickly, and is primarily funded with deposits and securitizations. When the biggest drivers of our rate sensitivity is the re-pricing assumptions we use for the retail deposit book. While we have numerous inputs to our interest rate risk model, the assumptions we are currently using, result in a past due rate of greater than 80% over time. We do think this is conservative relative to what historical data would suggest. You can see the sensitivities, but if you were to assume a past due rate of 50%, we become neutral to slightly asset sensitive. I'll also point out that if you look at the stable rate scenario, we would benefit versus the forward curve, which has played out well for us as rates have stayed lower for longer. The other area of interest rate exposures is the rate floors we've historically had on our floor plan loans. As we previously noted, we've been migrating dealers off the floors and as of June 30th, approximately 80% of these loans will re-price directly with short-term interest rates and while that move may have cost us in near term margin compression, it positions us much more favorably when rates do start to migrate up. So overall, while we've disclosed a liability sensitive posture in the past, we believe this could be more neutral to asset sensitive depending on past due assumptions and the progress we made on the floor plan side. Moving to Slide 10, let's discuss deposits. Another solid quarter with $1.1 billion of retail deposit growth, up 13% year-over-year. We've experienced some better than expected deposit inflows in the first half and now expect to grow the retail deposit by about $6 billion this year. We grow our customer base 16% year-over-year adding another 35,000 depositors this quarter alone and we're quickly approaching the 1 million customer milestone. We continue to invest in the brand by enhancing the functionality of our iPhone app with Ally Assist which allows voice interaction and predictive analysis to help customers manage their accounts. Let's move to capital on Slide 11. Our capital normalization process is well underway, with capital ratios trending towards our target levels primarily a 9% Common Equity Tier 1 ratio. The drivers of capital this quarter with a Series G and Series A actions, as well as about $4 billion of risk weighted asset growth. In the chart, we show our estimate for the Basel III fully phased-in Common Equity Tier 1 ratio of 9.3%. The key messages here are, we're still running at very comfortable levels of capital. We expect to continue to generate excess capital through earnings and DTA utilization and we will continue to normalize our capital structure as quickly and prudently as possible, so we can initiate a dividend and consider share repurchases. On the bottom right of the page, we show our adjusted tangible book value which adjusts for tax affected bond OID and the remaining Series G discount. It was flat quarter-over-quarter as financial results were impacted by the liability management actions and OCI adjustments but up over $2 per share year-over-year. Moving to asset quality on Slide 12. In the upper left corner, consolidated charge-offs declined seasonally to 39 basis points and is primarily driven by our retail auto charge-offs shown in the bottom right. Retail auto losses declined to 65 basis points this quarter and should be the seasonal low point for the year. In the bottom left, a 30 plus day delinquency rate increased to 2.29% as seasonally expected. The first quarter is typically the low point for the year, so you should expect delinquencies to continue to increase throughout the rest of the year. We thought it would be helpful to provide additional information on our provision expense, so we added the chart in the top right to help explain some of the dynamics. A couple of key points I'd make, first over the past year, we had some releases and recoveries in commercial auto, mortgage and corporate finance that have affected our consolidated provision expense. Second, retail order provision is up, due primarily to higher loan balances. As you can see in the chart, our coverage ratio has been pretty consistent, but auto loan balances are up over $2.6 billion year-over-year and $3.3 billion quarter-over-quarter. Remember, as our origination mix shifts to more loan versus lease and our loan portfolio grows you should expect this trend to continue. So, to reiterate what we've been saying for several quarters, we feel very good about where we see credit trends and asset quality continues to perform well within our expectations. I would expect annualized charges in the retail auto portfolio to approach 1% this year and drifting up further next year. Let's turn to Slide 13 and go deeper into the segment results. Auto Finance reported $401 million of pre-tax income in 2Q and we've already covered the drivers of the financial results for Auto, so let's focus on originations. We had a great second quarter at $10.8 billion, with strong performance across all non-subvented channels. These originations combined with stable floor plan balances resulted in an asset growth of around 3% year-over-year. Looking at the walk in the bottom right, you can see how our origination mix compares on a year-over-year basis excluding GM subvented products. We grew this business 36% year-over-year, which is a testament to the breadth and depth of our order franchise including our dealer relationships and capability of our associates. On the credit front, about 14% of our 2Q originations were non-prime, which is up from a little over 9% a year ago. This is consistent with our recent focus on capturing more profitable loans in this segment and we continue to be very comfortable at these levels. Year to date, our $20.6 billion of origination is up 3% year-over-year and puts us well on track to achieve our target of high $30 billions of auto originations in 2015. Turning to Slide 14, you'll see the growth channel made up 32% of our first quarter originations. We continue to see nice gains in Chrysler and for the first time in our history, GM made up less than half of our quarterly originations. From a product perspective in the top right, you can see that the strength and standard rate new and used loans is offsetting the declines in lease. We fully transitioned away from the GM lease business and since subvented loans are such a small portion of what we originate, we expect this origination mix to be more representative of our dealer channel and product composition going forward. The bottom two charts summarize the balance sheet, continued consumer asset growth and pretty consistent commercial balances. Now let's turn to Insurance on Slide 15, which reported pre-tax income of $15 million for the quarter, up $38 million year-over-year. The driver of the quarter-over-quarter decline was weather-related losses, which are seasonally the highest in 2Q. This year, we recorded $67 million of weather-related losses which are up seasonally quarter-over-quarter, but significantly down year-over-year to a more normalized level. Written premiums in the second quarter totaled $263 million, relatively flat year-over-year and up $24 million quarter-over-quarter, primarily driven by higher retail volume. On Slide 16, we show the results for both Mortgage as well as our Corporate and Other segment. Mortgage reported pre-tax income of $9 million. The Mortgage loan portfolio was up this quarter to $9.1 billion reflecting bulk purchase activity and again, these are primarily high cycle jumbo loans which we view as part of our standard balance sheet management process. In Corporate and Other, we had a core pre-tax gain of $9 million. Results in this segment continued to show significant improvement year-over-year driven primarily by lower funding costs. So overall, we had another solid quarter and a great first half of 2015. With that, I'll turn it back to JB, to wrap up.

[Jeff Brown:]

Thanks Chris. Again, let me sum up by saying that we remain focussed on driving improved shareholder return and long term growth. We continue to be successful in diversifying our Auto business and we're comfortable with the assets we're generating. Our credit performance continues to be in line with expectation and while we modestly increased appetite, you have to put that in to perspective relative to GM lease residual exposure, that's rapidly coming off balance sheet. The deposit business continues its strong and steady growth and we're getting more efficient in gathering deposits. We've a very competitive offering and believe there's still a lot of runway to grow this franchise. The opportunities we have in front of us include, looking at the broader customer base and focusing on them as Ally customers, as opposed to just a consumer of one type of Ally product. That is really what we mean when we say, One Ally, looking at our 5.5 million customers holistically as Ally customers. By doing that, we can more effectively explore opportunities to serve them better, deliver products of value to them and of course, expand our base of business over time. The Auto Finance franchise will continue to be a key focus and a cornerstone of our Company. We have a strong heritage and expertise in this business and no plans to divert our focus and obviously, the adaptability we've demonstrated is quite powerful. So, with that let's turn it back to Michael Brown and discuss what's on your minds.

[Michael Brown:]

As we move into Q&A, we request that you please limit yourself to one question plus a single follow up. If you do have additional follow up questions after the Q&A session, the Investor Relations team will be available after the call. Emma, if you could please start the Q&A session.

[Operator:]

[Operator Instructions] The first question comes from Sanjay Sakhrani from KBW. Please proceed.

[Tai DiMaio:]

Hi. This is actually Tai DiMaio in for Sanjay. I just had a question on expenses. You saw a good expense reduction in the quarter despite the diversification strategy and you're almost at your efficiency ratio target. How should we think about the efficiency ratio long term and how much of the runway is left in controllable expenses and how much will come from scale?

[Chris Halmy:]

Yeah, I mean -- let me address -- the first half of the year, we've taken out about additional $30 million of expenses over the 2014 run rate. We expect that expense will continue to be reduced over the next three or four quarters to really hit what I would call a consistent run rate of an efficiency ratio in kind of the low to mid-40s. Beyond that, very focussed on the investments we need to make particularly to keep the deposit franchise to be the real leading digital franchise out there as well as the ever-changing dynamics in the Auto business. So we'll continue to invest in the franchise and at this point, I would guide you towards that mid-40s efficiency ratio going forward.

[Tai DiMaio:]

Okay, and just a quick question on remarketing, gains are pretty strong this quarter. Anything to call out specifically?

[Chris Halmy:]

No. I would just mention that 2Q is always usually your strongest for used car originations and used car prices. So, you normally see a pickup in the second quarter on used car prices which really drove some of the remarketing gains on the cars coming off of lease. So, you usually start seeing a drop off in the third quarter and the fourth quarter, so, I would expect a decline for the remaining of the year.

[Jeff Brown:]

And Tai, I mean, I would say that's been an area that sort of pleasantly surprised us, I mean, used car prices for the first half of the year has held in very strong. Stronger than we initially expected coming into this year, but I think as Chris pointed out, we think at some point, that's got to normalize, and we'll start seeing lower levels.

[Tai DiMaio:]

All right, great. Thanks.

[Jeff Brown:]

Thanks.

[Operator:]

Okay, thank you. Your next question comes from the line of Cheryl Pate from Morgan Stanley. Please proceed.

[Cheryl Pate:]

Hi, good morning. I just wanted to touch upon the originations guidance and obviously the front half of the year has been very strong. I'm just wondering how we should think about maybe the competitive environment or sort of the pricing that you're seeing out there that would maybe drive some deceleration on the back half of the year or is there something else we should be thinking about there?

[Chris Halmy:]

No, I mean, I would say that, once again, 2Q and even going into kind of early summer are really the strong quarters for originations. So, you tend to see higher originations really in the first half and in the second half of the year, but on the competitive landscape, it continues to be a very competitive environment, whether it's in -- really the super prime where a lot of the big banks play or right down to the subprime where there's obviously a lot of finance companies out there driving competition in the subprime space. I wouldn't say the competition from our perspective has picked up in any meaningful way on the origination front. If anything, where we see the biggest competition and compression in yields is really on the commercial dealer floor plan balances, and that's where we see really the heavy competition I would say over the last few quarters. So, we're sticking to our high $30 billions origination number for the second half of the year. We obviously had a pretty successful first half. That hopefully will provide us some -- some leverage from a pricing perspective going forward, but we'll have to see how it plays out.

[Jeff Brown:]

Yeah, and Cheryl, I'd just add, I mean, the other thing, application volume, exceptionally strong right now. I think we saw, north of 2.7 million apps in the second quarter. So to the extent that we continue to see looks like that, we like the business flow, we like the profitability, I mean, could we surpass the upper 30s, get into the 40s? Yes, it's very possible. I think Chris is right to point out, I mean, we're going to balance that with a little bit more pricing discipline that's needed in the back half of this year.

[Cheryl Pate:]

All right, thanks. That's really helpful, and just one follow up if I may. I appreciate the commentary on the 620 to 640 FICO, now going through the bank. Can you just maybe help us think about what does it take to get that sub 620 FICO band to move through the bank -- to be originated through the bank over time as well?

[Jeff Brown:]

Patience. I think you know, it's -- in all seriousness, it's an ongoing dialogue that we have with our regulators to make sure they're comfortable with the quality of loans, but I think, as we point out, you look at some of our large and regional bank competitors that book everything inside of the bank, we don't think there's any reason why through time we won't get there, so, as Chris pointed, migrating down from 650 to 620 is an important milestone, but clearly, the long-term game is to get everything inside the bank. I mean, the average FICO when we're doing a nonprime space is 580, so you [indiscernible] but we're not all that far off from being able to put everything in there, but it will just continue to work through with your regulators on what makes them -- through time, we believe we'll get there.

[Cheryl Pate:]

Okay, great. Thanks.

[Jeff Brown:]

Thanks Cheryl.

[Operator:]

Thank you. Your next question comes from the line of Don Fandetti from Citigroup. Please proceed.

[Don Fandetti:]

So, Jeff, can you -- it was good to see your GM commercial market share holding. I was wondering if you could talk about the competition from GM Financial in that segment and what are some of the reasons why a dealer would not want to go with GM Financial assuming they're coming in at better pricing?

[Jeff Brown:]

Yeah, thanks for the question Don. So, I would say, the time to the competitive environment point, I mean, I think where we're facing the most competition right now is out with GM floor plan dealers and we lost some accounts there. I think what we tend to focus on is, overall levels of [indiscernible] remain in check and the kind of the $33 billion-ish type of range there, but while we lost some GM accounts to GMF -- we benefitted by what we're doing in the growth channel picking up growth floor plan dealers as well, I think we've migrated about 275 dealers there relative to a year ago. So, we're making good progress on that front, but why people stay with us, I think it's the comments that we tried to make about the experience of this associate base, and the adaptability of the associate base and even we've also talked in the past about Ally dealer rewards being a key way we get dealers to kind of keep their business with us when we've adjusted dealer rewards and we've worked with the dealers to make sure we can get a better look or a better mix of originations. So, while lease for example is now completely gone away, I mean, what we have seen is an uptick in the amount of the standard rate business, the used business, the nonprime business that our GM dealers have given us. So, it comes back to just the dealers for the most part know what to expect and yes, while we're premium priced, they get a level of associate expertise and the ability to book a lot of loans very quickly and very efficiently. So, I'm not going to deny that we haven't lost some accounts to GMF but I feel overall very good, and obviously GMF continues to still build out. They're still hiring folks and so, through time, we'll see what it'll all lead to, but, the GM dealer relationships we've had are exceptionally solid. I was on yesterday with about 10 of our best GM dealers in the U.S. as well and talking through a lot of the open dynamics that are at play here, but through time I think people stick with Ally because they know what to expect. They know we have the best people in the industry and that's worth the premium on price.

[Don Fandetti:]

And, is it still your hope that you'd be able to take out some or all of the remaining Series G this year?

[Jeff Brown:]

That absolutely is my hope and as mentioned we're in dialog with our regulators on that topic.

[Don Fandetti:]

Thank you.

[Operator:]

Thank you, and your next question is from the line of Rick Shane from JPMorgan. Please proceed.

[Jeff Brown:]

Hey Rick.

[Rick Shame:]

Terrific guys. Thanks for taking my question and I'm really looking for a little bit of a clarification on what you said for charge-offs on Auto into the remainder of the year. You're not guiding towards a 1% loss rate for the year. You're saying that in the second half of the year, losses will gravitate back towards the 1% range?

[Chris Halmy:]

I'm actually guiding for the year. My expectation is it will just be under 1% on an annualized basis, so, second quarter is a low point, so we'll start picking up in third quarter and fourth quarter and when you average it for the year, you'll be, my projection's somewhere in the high-90s right now.

[Rick Shame:]

Got it. And the way we look at it is, on a year-over-year basis for the first two quarters of this year, you're about 7 basis points or 8 basis points above where you were last year, and again, given the seasonality I think that's the right way to think about it. Are the metrics in the second half of the year going to be in that sort of band, plus or minus 10 basis points over where they were in 2014?

[Chris Halmy:]

Yeah, I think so. So, if you look at the asset quality chart on Slide 12, I mean, you'll see that seasonal dynamic and I would expect that the tick up in the third quarter and fourth quarter will be, let's say 10 basis points or 15 basis points higher than the sequential quarter in the prior year, and to give you a little bit more context for -- even what I said for 2015, that's going to drift up from there. The loans we're putting on in both the first quarter and the second quarter have what I would call an annualized loss rate projection of somewhere around 110 basis points. So, you think about that's what we're putting on the books today, the whole overall finance book will migrate up to somewhere, 110, kind of range. Then if you look at the coverage rate, the coverage rate, we're holding right now about 126 basis points. So, we feel pretty good about our coverage rate and where our provision balances really stick today. So, what you'll see is just kind of drift up from here.

[Rick Shame:]

Great. Well, that's helpful in terms of the mix shift. Just so we have apples to apples comparison, if you think that the book that you're putting on today is a 110 loss rate over time, where do you think the legacy book was, so that way we can sort of recalibrate is this 10 basis points or 15 basis points below that?

[Chris Halmy:]

Yeah. I'd probably say that. Yeah, I mean, I think the legacy -- the legacy rate is probably around the 1% range.

[Rick Shame:]

Okay, great. That's helpful. Thank you, guys.

[Operator:]

Thank you. Your next question comes from the line of Eric Beardsley from Goldman Sachs. Please proceed.

[Eric Beardsley:]

Thank you. Just a follow up on that point. As you have your mix-shifts, are you comfortable with the current level of subprime originations today or could that continue to expand and if so, what impact would that have on net charge-off rate?

[Jeff Brown:]

Yeah. Thanks Eric. It's JB. Look, we've kind of seen growth year-over-year from 9% deployment to about 15% -- 14%, 15% where we're at today and I think that was sort of the near term goal. I don't expect us to go meaningfully beyond it. So, I think what Chris is pointing out on direction of kind of charge off trends is pretty much consistent with -- assuming we stay at about that 15% level. I don't see us pressing far beyond that, but again, I think it's being done with a couple of things in perspective, very simplistically and we look at macroeconomic trends, think about where unemployment is trending, we may crack through the 5% level even early next year at some point. So while unemployment levels are very strong, and solidly think credit's going to hold up quite well, again, keeping in mind, this is a relatively short asset. So, two, three year asset turns quickly. So, we're comfortable there and then obviously the other big point is, when you think about the amount of residual exposure that's coming off the balance sheet, this is a way to redeploy and at least sort of step back and think about supply dynamics and levels of used cars. I mean, us, dialling back on residual exposure for a little bit more credit exposure, we think is a pretty smart trade at this point in the cycle.

[Eric Beardsley:]

Got it. Thank you. I just have a follow up. With the 1.1% charge-off rate, what's the consumer loan yield of the new originations that you're putting on?

[Chris Halmy:]

Yeah, Eric, they're ranging right now about 5.58%. So somewhere between, 5.5% and 5.6% right now, which is up. So, if you see, we even disclosed on our Auto Finance results page on Page 13 that the retail loan portfolio is about 5.3%. So, we're seeing about, what I would call a 20 basis point to 30 basis point increase in yields that we're putting on versus the portfolio today.

[Eric Beardsley:]

Got it. So, over time the whole book will migrate there presumably?

[Chris Halmy:]

It should migrate up. I mean, obviously the rise in interest rates will effect that as well.

[Eric Beardsley:]

Great. Thank you.

[Operator:]

Thank you, and your next question is from the line of Moshe Orenbuch. Please go ahead, you're live in the call.

[Moshe Orenbuch:]

Great. Thanks. Most of my questions actually have been asked and answered, and I think you talked a lot about the job you did on -- defending your market share in the floor plan. Just talk a little bit about what you can and will do with respect to the yield on that portfolio as things go forward.

[Jeff Brown:]

Yeah. Thanks Moshe. It's JB, and Chris, feel free to dive in as well. I think more or less you've sort of bottomed out down and the page that Chris just referred to I think is Slide 13, and we disclosed the net commercial portfolio yield, you can see it's down to 2.9% which is consistent with last quarter. That's net of Ally dealer rewards as well. So, we sort of stabilized. So, despite it being very competitive and certainly there are offerings out in the market. In fact, I saw one yesterday, at 1.25%. so, I mean, there are some low rates in the market, but for the most part, I feel like we've kind of normalized where we're at in the overall portfolio and I don't expect much drip from here and then obviously given the move of accounts off of the primary floors into LIBOR puts us in a much better position when rates do start rising, so, part of the margin compression and you'll see it on that chart, we lost about 30 basis points of margin year-over-year and that's been the result of when we moved accounts over to LIBOR and the floating rate indices, you know, we've given up some near term margin, but obviously it's a much better rate posture going forward.

[Moshe Orenbuch:]

Great. Thanks so much.

[Jeff Brown:]

You got it. Thank you.

[Operator:]

Okay, thank you, and your next question comes from the line of Eric Wasserstrom from Guggenheim Securities. Please proceed.

[Eric Wasserstrom:]

Thanks, very much. I just want to just take a moment if you wouldn't mind summarizing all the puts and takes then that are going to moving through the net interest margin. On the asset side, it seems that the -- it's an overall bias towards higher pricing with an increased mix of non-prime. Is that the basic dynamic?

[Chris Halmy:]

Yes. I mean, I think commercial yields will be pretty flat, so you should hopefully get a little bit of lift with -- you're going to get a little bit of lift on the retail side, but keep in mind, we still have a lease book that's flowing off and the lease yields have been higher than we expected. The lease yields were actually 6.5% this quarter which is because of the high remarketing gain. So, you have a dynamic going on a bit, where retail should have better pricing but the lease book coming off will lower some of the margin as well. So, I think overall, I would guide you that it would be pretty flat on the yield side, but we still see cost of funds improvement particularly as we get into the third quarter which continues to run through the book.

[Eric Wasserstrom:]

And the cost of funds improvement derived specifically from the continued deposit growth or is there additional reduction in that footprint that you anticipate?

[Chris Halmy:]

Yeah, well, what I would say in the second quarter, we had a pretty significant reduction in the debt footprint, and that happened both from maturity. As an example we had a very big euro bond [ph] that matured in the second quarter and we also did some of the debt tender. So we didn't have a full quarter effect of that. So, the biggest driver of the decrease in cost of funds from 2Q to 3Q will really be the unsecured movements coming down. So you'll see that. Now, when I think about it, longer-term, it really has to do with the growth of the deposit book and continued asset migration into the bank. Today, deposits have about 115 basis points cost of funds, and we're funding a lot of those loans at the holding company through securitizations in an unsecured debt that runs at 12%. So, as you migrate those loans over time to the bank, you'll have further cost of funds reduction. So, I would just guide you to say 3Q will be a pretty nice move down and then it will be kind of a steady move depending on the asset migration.

[Eric Wasserstrom:]

Great. Thanks very much.

[Operator:]

Thank you, and your next question is from the line of David Ho from Deutsche Bank. Please proceed.

[David Ho:]

Good morning. Just wanted to clarify on the asset pricing migration. Are we still relatively in the early stages in terms of the nonprime being priced at Ally [indiscernible] second half of the year that these things just become a little more competitive that your buy rates still remain competitive even in a rising rate environment.

[Chris Halmy:]

You know, we look at the risk-adjusted spreads, okay, so you know, the yields we're getting on these loans versus the risk we're taking, and that's a dynamic that we look at on an ongoing basis when we decide to obviously play in this space. So, our view of things like the macroeconomic environment, where we see the losses migrating to, where we see the competition and what the spread we can get over, what are losses are going to be, is a decision that we make on a pretty ongoing basis. So, as we look forward, we do not see deterioration in credit, okay. So we feel pretty good about the credit environment and when it comes down to the competitive environment, it's something that we have to weigh on a really month by month basis. Who are the competitors and what are the prices? Keep in mind, we see lots of applications and when I think about the applications we book, we only book like 13% of the applications we see, so are pretty selective when we make sure that we're going to get paid for the risk we take.

[Jeff Brown:]

And obviously maybe, David, the only thing I'd add is, some of the banks, some of the competitors have told us that they've backed away a little bit from down prime state part of that, I think is us getting a bigger appetite kind of [indiscernible] channel, but if you start to think through who do we compete with then kind of the non-prime zone, more of the [indiscernible] more of the non-bank financials and obviously as rates do start rising, whether that's later this year, whether that's into next year, I mean, they're going to see their cost of funds reprise up pretty much basis point from basis points. So, from our perspective, having $52 billion to rebuild deposits and get lag I think puts us into an even more competitive posture whenever we get to rising rates.

[David Ho:]

That's helpful. Then separately on the Series G potential redemption, what are the main regulatory hurdles in your mind at this point that hit you there? Obviously another quarter of good results probably helps some, but what are those that that you think of?

[Chris Halmy:]

Yeah, I mean, you obviously go back to the CCAR submission and our financial performance tracking against our baseline plan in the CCAR submission, which is -- actually, is better than we had originally planned. So, that is obviously a positive. So, I would say that the -- it comes down to really the regulators' view of the overall capital levels of the institution, and versus the risk we have on our books. So, we're obviously in close dialogue with our regulators on an ongoing basis and right now, we're talking about the Series G with them, so we'll see.

[Jeff Brown:]

Elimination of preferred was a good thing as well.

[Chris Halmy:]

Yeah.

[David Ho:]

Great. Thank you.

[Chris Halmy:]

Thanks David.

[Operator:]

Okay. Thank you, and your next question comes from the line of Chris Donat from Sandler O'Neill. Please proceed.

[Chris Donat:]

Hi. Good morning. Thanks for taking my call. I had a question about your deposit franchise, because I read press reports this month that for Ally Bank, for the ATM fees, that there had unlimited reimbursements and that's -- sorry unlimited reimbursements for ATM charges outside of the network and I understand that that's changed. Can you talk a little bit about that? Does that reflect the -- your deposit franchise is strong enough now that you're willing to let some business kind of go away or is there something else going on there?

[Jeff Brown:]

Now, Chris, it's a good question. I mean, to clarify what we've done is still -- consumers can get, use free ATMs through the Allpoint network which I forget how many thousands and thousands of ATMs are across the U.S., but we still have a wide range of ATMs that are free for our consumers to access, but we basically, what we've done in the policy is shift it to first $10 of ATM charges in any month are reimbursed and then beyond there, there's the normal ATM fee associated with it. I don't think it's necessarily a function of us changing our appetite, but clearly as we comb through the customer base, as we look at profitability by customer accounts, this was just a change that we felt made sense to make and by the way, the offering that we still have out there, we think competes even more favorably against any other bank, direct or brick-and-mortar what's out there today. So, it was a small subtle change. We have thankfully not experienced really much negative customer feedback on it. We've monitored the situation closely. We feel that the number of calls just to clarify to consumers but once they understand they can access thousands and thousands of ATMs still without incurring a fee I think generally speaking, customers were just fine.

[Chris Donat:]

Got it. Just part of the question is the bank's brand is so strong that -- and so you're just so customer friendly and any change is curious to me. Then sort of related to that, it looked like the -- on a year-on-year basis, the number of your deposit accounts grew a little faster than the value of deposits, which I think reflecting a pickup from some smaller size deposit, is that sort of typically how you grow if someone starts with a smaller amount and then it grows over time or is there something else going on in that trend are my reasons to look into it.

[Jeff Brown:]

Yeah, that's exactly right. That's exactly right and one of the big emerging trends we've got in the book I think north of 35% of the existing base is more the millennial customer, and that becomes very important to us as we start thinking through future strategies. So, again back to kind of how we think through One Ally from the pure deposit lens, some of these folks may not appear to be the most profitable deposit customer, but as you start to think through who that customer is going to go through their lifecycle and potentially need an auto loan, maybe they need a mortgage, maybe they need a credit card. You can start to imagine a lot of other products that you can deliver to these consumers through time. So, we think we've got really solid trends in the customer book and yeah, it starts with small amounts and deposit, but when you think long term it's a great opportunity ahead of us.

[Chris Donat:]

Okay. Thanks, very much, JB.

[Jeff Brown:]

Thanks Chris.

[Chris Halmy:]

Thanks Chris.

[Operator:]

Okay. Thank you, and your next question comes from the line of John Hecht from Jefferies. Please proceed.

[John Hecht:]

Thanks very much. I guess, a little bit more color on your tactics on gaining share and competition. So, for the -- obviously you've done a good job both in the Chrysler channel and the used car channels gaining share, you mentioned a few things, you mentioned some of the bigger lenders pulling back potentially you mentioned some of your own tactics to push others out. I'm wondering if you can give us a little color. I mean, is the tactics -- are they pricing? Are they terms? Are they just relationship driven? Then on the large lenders pulling back, I'm wondering if you'd give us some color there.

[Chris Halmy:]

Yeah, I mean, I'd start with saying that, the dealer relationships are extremely important. Both our existing relationships and in new relationships that we're forging. And as an example when you think about the growth channel, we've added over 900 dealers this year to our growth channel and what does that really translate into? It translates into incremental applications and as JB mentioned, we've got 2.7 million applications in the quarter alone. So, when we think about incremental flow of applications, even at a very similar approval rate, and even a lower, what I had called that book to look rate, we're generating incremental originations because of that. So, that becomes very, very important to us. Now incremental to that, then we get into the penetration of the dealers and how we're penetrating these new relationships. We didn't put it in this deck, but if you remember last quarter, we had a deck on kind of penetration and one of the things we monitor is, is how many dealers give us 5 plus loan applications, when we do 5 plus loans, and last year, in this quarter was 22%, this year was up to 30%. So, what does that say? It says the penetration we're getting in our existing and new dealers is really starting to grow. So, that's driving once again, incremental originations and now we've established a better foothold in our dealerships in the nonprime segment, so they know we're open for business and they're giving us more applications on that side. So, a lot of it has to do with the depth and breadth of these dealer relationships.

[John Hecht:]

That's great color and then follow up question. Just thinking about capital and liabilities, I mean, you've done a lot addressing your capital structure. So, I'm just wondering should we start thinking about repurchases and dividends as part of the '16 CCAR or part of the '17 CCAR. Just maybe give us a sense for the pace for that type of modification?

[Chris Halmy:]

Yeah, I think, our feeling at this point in time is the 2016 CCAR submission which if you remember now will be a second quarter submission, our expectation is that we will have some level of dividends or share repurchases in that submission. So, obviously we're balancing Series G and how long it takes us to take out the Series G, but the next phase for us really will be, become a dividend payer and have that ability to do share repurchases. So, your expectation is that we should have it in the -- in that submission in 2016.

[John Hecht:]

Wonderful. Thanks very much guys.

[Operator:]

Thank you. Your next question comes from the line of Ken Bruce from Bank of America Merrill Lynch. Please proceed.

[Ken Bruce:]

Thank you. Good morning. Appreciate your comments on the competitive landscape and the like and was hoping to understand -- you'd mentioned in the commercial area that you -- had some wins and losses and just on the loss side, what it is that is tends to be kind of the thing that might swing a deal or either towards GM Financial in that [indiscernible] or otherwise on your losses, what tends to be the factor, pricing or otherwise?

[Jeff Brown:]

Yeah, I mean, Ken, its JB. I think it's -- it's very rare and I don't say that to be arrogant, but it's very rare that we lose a dealer with the service. Service levels, I think, generally speaking across the board in bank space, Ally is really top of the list and in fact the J.D. Power Survey just released I think reiterated that for all the bank players. So, it's never really about service. It gets down to price and again, as I mentioned earlier, I saw, a 125 floor plan rate out there and so for us, we never want to lose a relationship but obviously we have a responsibility to our shareholders to balance the appropriate economic returns and so, if we've got to let a floor plan account go, so be it but we won't chase on economic rights. We try to work very hard with the dealers, work with them and that's part of the reason we've had some margin compression, and we've had -- as I pointed out, the 30 basis points year-over-year, commercial yields would come down. Part of that has been to the competitive environment but at the same time I think we've positioned ourselves better for a rising rate environment. So, it's -- there are a lot of aggressive rates out there, but again, I think for us, when we think about the number of dealers that are floor planning with us, we're basically on a year-over-year basis, I think we're flat to slightly up, and so we shifted out of some of the GM space and into more of these growth channel and Chrysler dealers.

[Ken Bruce:]

Okay, thanks. Then, in terms of the move into nonprime, I guess, I'm curious as to how you think about that particular segment. There's been a lot of focus on some of the deterioration in underwriting standards in that sector and I guess if you look at it used car prices have been very strong. I think that has helped credit performance in that space as well and you kind of mentioned this trade-off of residual risk to credit risk and I guess, I kind of look at that as maybe one and the same in the nonprime sector. So, if you could just maybe kind of talk about what you're seeing in terms of the assets that you see and whether you accept or pass any general level of quality trends that we could maybe get your insights into?

[Chris Halmy:]

Yeah, keep in mind, we make loans even in the subprime space or in the nonprime space to customers who we expect to pay back the loan, not -- we don't expect to ever go get the car, which is why we play on really the top half of kind of that non-prime space mostly, and because of that, I know that used car prices are more meaningful in the nonprime sector than they are in the prime sector, but the sensitivity to a lease versus nonprime is much greater on the lease side. So, what we really look at as a much bigger factor is unemployment and the people that have jobs they're going to pay, they're going to pay their loans. So, we're playing in the nonprime space. We're being what I would call, more aggressive from a standpoint of we're open for business there, but we're playing close attention to really the macroeconomic environment and what that will mean to us and we're making sure we're getting paid for that risk.

[Ken Bruce:]

Great. Well, congratulations on another great quarter and appreciate all your comments.

[Chris Halmy:]

Thanks a lot Ken.

[Operator:]

Okay. Thank you. Now, I would like to turn the call over to Michael Brown, closing remarks.

[Michael Brown:]

Great. Thanks for joining us this morning. If anybody has additional questions, please feel free to reach out to Investor Relations. Thanks Emma.

[Operator:]

Okay. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and enjoy the rest of your day.