Ally Financial Inc.
Q3 2015 Earnings Call Transcript

Published: 29 Oct 2015

[Operator:]

Good day, ladies and gentlemen, and welcome to the Third Quarter Ally Financial Earnings Conference Call. My name is Caroline and I'm 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. As a reminder, the call is being recorded for replay purposes. And now, I'd like to turn the call over to Michael Brown, Executive Director of Investor Relations (00

[Unverified Participant:]

Great. Thanks, operator, and thank you everyone for joining us as we review Ally Financial's third quarter 2015 results. You can find the presentation we'll reference during the call on the Investor Relations section of our web site, 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 third 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.

[Jeffrey Brown:]

Great. Thanks, Michael (01

[Christopher A. Halmy:]

Thanks, JB. Let's turn to slide five. We delivered another quality quarter with core pre-tax income of $431 million, net financing revenue of $981 million was up year-over-year and quarter-over-quarter. Stronger auto originations continue to drive earning asset balances higher. We continue to benefit from strong used car prices and funding costs continue to come down. Other revenue declined to $332 million this quarter, driven primarily by lower investment gains, but was still within our expected range. Provision expense of $211 million was up, driven by our strong auto loan growth. And just to reiterate, provision expense is the direct effect of our loan portfolio growth, as the origination mix shifts to more loan versus lease. And we also have the typical seasonal charge-off increase in 3Q. Total non-interest expense was $672 million, which is broken out between controllable and non-controllable items. The big driver of the decline quarter-over-quarter and year-over-year is the insurance weather-related losses, which show up in the other non-interest expense line. While 3Q is typically seasonally lower than 2Q, we did see a nice benefit on a year-over-year basis. We also continued to make progress on controllable expenses, which were down another $20 million year-over-year. These results drove GAAP net income of $268 million. Remember, for the year-over-year comparison, we had $130 million of discontinued operations income related to our China JV, as well as a one-time tax benefit from the sale of the mortgage servicing operations last year. Looking at key metrics, adjusted EPS for the quarter was $0.51, which was up from 2Q helped by lower preferred dividends, and is generally in line with consensus expectations. Core ROTCE was 9.2% and our adjusted efficiency ratio was 44% in the quarter. Both metrics are consistent with our year-end targets. Slide six reviews the results by segment. Auto Finance had a good quarter with pre-tax income of $347 million. Net financing revenue was up driven by strong originations and retail loan growth and this was offset by associated higher upfront provision expense. Insurance reported pre-tax income of $40 million. The benefit quarter-over-quarter is driven by seasonally lower weather-related losses. Lower investment income is driving the year-over-year decline, which as you know is a function of a poor equity market in 3Q. Mortgage pre-tax income of $7 million was driven by higher portfolio balances and a small gain on sale of legacy loans. Corporate and Other continues to benefit from a lower cost of funds and expense reductions. We've expanded our net interest margin disclosure on slide seven to add more transparency around the drivers of our asset yields and funding costs. Overall, NIM was up 9 basis points quarter-over-quarter, driven by lower funding costs and slightly higher asset yields. On the asset side, quarter-over-quarter we saw pretty steady yields across the portfolio, with some upside in lease gains. Specific to the retail auto book, we've seen yields be pretty consistent in the 5.2% to 5.3% range. The originations we're putting on now are averaging around 5.5%, so you should see the auto loan portfolio migrate up as we optimize our loan mix. On the funding side, we saw a benefit of 7 basis points quarter-over-quarter and 18 basis points year-over-year. The drivers here are continued deposit growth and lower unsecured debt levels, which were down $1.7 billion quarter-over-quarter and $3.6 billion year-over-year, and drove our interest expense on long-term debt down $83 million year-over-year. Going forward, our unsecured debt maturities are pretty minimal in 4Q and less than $2 billion in 2016. Further cost of funds reductions will be driven by our continued utilization of the Bank and our ability to fund our assets with deposits. Bank assets represented 69% of the total balance sheet and should trend closer to 75% in the near-term. But, we continue to be focused on eventually getting that in the 90%-plus range over time. With this seasonality in our NIM, we continue to expect year-over-year NIM expansion. We've included slide eight on interest rate sensitivity again this quarter, since it continues to be an important topic for banks. Just to quickly reiterate our position, one of the biggest drivers of our rate sensitivity is the repricing 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 pass-through rate of greater than 80% over time. We do think that it is a big conservative relative to what historical data would suggest. And if you were to assume a pass-through rate of 50%, we become asset sensitive. Compared to the prior quarter, we become less liability sensitive in the model scenario and a little more asset sensitive in the 50% pass-through scenario. One reason for the change is our continued progress on migrating dealer floorplan loans off of interest rate floors. As of September 30, over 90% of these loans will reprice directly with short-term interest rates. So again, while we've modeled a conservative liability-sensitive posture, we continue to believe this could be more neutral to asset sensitive depending on pass-through assumptions. Slide nine covers deposits. We had another great quarter of deposit growth with balances up $1.8 billion quarter-over-quarter and $5.5 billion year-to-date. This pace has really exceeded our expectations all year. We brought our interest expense down and optimized our marketing spend, while continuing to see customers drawn to the Ally brand and our digital platform. As JB mentioned, we surpassed the 1 million customer milestone, growing our customer base by another 36,000 depositors. These new customers represented the majority of our balance growth for the quarter. And we continue to invest in our digital capabilities by introducing our Apple Watch ATM Locator app and look for continued advancements in our mobile platform as we expect to begin piloting Touch ID in the first quarter of 2016. As JB stated earlier, Ally Bank continues to rack up the accolades from the likes of MONEY Magazine and Kiplinger's. On slide 10, capital ratios were higher in the quarter driven by consistent profitability and DTA utilization. Our estimate for the Basel III fully phased-in Common Equity Tier 1 ratio was 9.6% for the quarter. We added the chart on the bottom left to help outline the benefit of the DTA to our regulatory capital ratios. If you focus on the disallowed DTA bar, the balance came down approximately $150 million this quarter, directly benefiting our regulatory capital ratios. So, not only do we expect to generate solid net income and capital organically, we will also build excess capital by amortizing our DTA. On the Series G front, not much new to report at this time. We're still focused on redeeming the remainder of the Series G as soon as possible. On the bottom right, we show our adjusted tangible book value, which adjusts for tax-effected bond OID and the remaining Series G discount. We saw a nice increase this quarter to $24.30, up $0.65 per share quarter-over-quarter and over $2 per share year-over-year. Moving to asset quality on slide 11, consolidated charge-offs increased only one basis point year-over-year to 61 basis points. This is primarily driven by our retail order charge-offs shown in the bottom right, which increased to 101 basis points this quarter. As a reminder, the second quarter is typically the lowest and the fourth quarter is seasonally the highest. So, you should expect that number to tick up again next quarter. In the bottom left, our 30-plus-day delinquency rate increased to 2.6%, again as seasonally expected. And similar to losses, we also expect that number to be up seasonally next quarter as well. We detail our provision expense in the top right. As we've discussed, retail order loan provision is the driver and is up primarily due to higher loan balances. Our coverage ratio remains consistent, but order loan balances are up over $4.8 billion year-over-year and almost $2.8 billion quarter-over-quarter. Overall, still no real change to our view on credit. As mentioned in the last quarter, we would expect annualized charge-offs in our retail order portfolio to approach 1% this year and drift up further next year due to continued portfolio optimization. We continue to feel very good about where we see credit trends. We're staying disciplined in our buy box and asset quality continues to perform within our expectations. Now, let's turn to slide 12. Auto Finance reported $347 million of pre-tax income in 3Q. We've already covered most of the drivers here, strong loan growth offset by associated provision expense. Earning assets are up despite approximately $2 billion of loan sales in the quarter and $5.7 billion since the third quarter of 2014. Focusing on originations, we had another very strong quarter at $11.1 billion. Digging in a bit, 76% of the originations were funded at Ally Bank. Non-prime originations were 13.5%, roughly flat from the prior quarter. We show growth in all non-subvented channels, which were up 36% in total. And our continued progress in the Growth Channel led to record application volume for the quarter. The more applications we see, the more selective we can be in achieving our target origination levels. Year-to-date, our $31.7 billion of originations is roughly flat to last year, which demonstrates the strength and versatility of our franchise given the significant shift in origination mix this year. And we continue to see trends early in the fourth quarter – and we continue to see these trends early in the fourth quarter with strong October flow. Dispositions as well to be around $40 billion of originations this year, well above our original targets. But we still think the high $30s billion is the right annual range to think about going forward, as we optimize our mix and focus on risk-adjusted returns. On slide 13, you could see our channel mix stayed consistent, with the Growth Channel up 32%. As the GM subvention business trends towards zero, you may see the GM percentage tick down a bit, but overall we expect this to be fairly representative of our mix going forward. From a product perspective in the top right, you can see that has pretty much reached a new normal as well, with growth in the diversified Used business easily replacing the Subvented business. We don't expect any issues whatsoever replacing declining Subvented volumes going forward. The bottom two charts summarize the balance sheet. We added a breakout of the lease assets in the consumer chart to outline the shift in the balance sheet going forward. And on the commercial side, balances are up slightly year-over-year. On slide 14, Insurance reported pre-tax income of $40 million for the quarter. This was favorable to 2Q where we experienced a seasonal high in weather-related losses. The chart on the bottom left shows that we were not only favorable in losses quarter-over-quarter, but also on a year-over-year basis. This benefit however, was offset by lower investment income as gains we experienced were not as strong as the last several quarters. Written premiums in the quarter totaled $254 million, down slightly both quarter-over-quarter and year-over-year as we've seen increase in dealer reinsurance. As we mentioned last quarter, we launched our new Ally Premier Protection product, which will be our flagship vehicle service contract product going forward and the nationwide rollout of that platform continues to go very well. On slide 15, we show results for the Mortgage segment, as well as Corporate and Other. Mortgage reported pre-tax income of $7 million. The mortgage loan portfolio was up again this quarter to $9.7 billion where we have some bulk purchase activity offsetting amortization of the book. Again, these are primarily high-FICO jumbo loans, which we view as a part of our standard balance sheet management process. In Corporate and Other, we had a core pre-tax gain of $37 million. Results continue to show significant improvement from lower funding costs and expense reductions. And also as a reminder, results for our Corporate Finance business are included here which recorded pre-tax income of $16 million. So, overall, we're pleased with the results and delivered yet another solid quarter. And with that, I'll turn it back to JB to wrap up.

[Jeffrey Brown:]

Great. Thanks, Chris. So to sum up, the diversification and shifts we experienced in the Auto Finance business, it really allowed us to build a stronger franchise that is positioned for longer-term steady results. We've diversified not just by vehicle make and dealer, but also by borrower and geography. And we're no longer solely reliant on manufacturer subvention. And our deposit base continues to be an advantage over non-bank competitors, in terms of cost and stability of funds over time. As we mentioned earlier, we remain focused on addressing Series G as well as other capital management actions. Our objective for 2016 is to initiate a dividend and share buyback program, and to focus on driving incremental book value per share for investors. We feel good about our long-term prospects and aim to build upon the expertise we've demonstrated in delivering digitally based financial services to a broad range of customers in a high-quality way. Again in 2009, when Ally Bank launched, we were a disruptor in the consumer banking space. We know how to deliver innovative, competitive products in a format that most consumers have shown preference to, and that is in online and mobile forms. We'll build on this foundation with additional products and services in the coming year. And with that, let me turn it back to Michael and hear what's on your minds.

[Unverified Participant:]

Thanks, JB. As we move into Q&A, we do ask that you please limit yourself to one question plus a single follow-up. If you have additional follow-up questions, after the Q&A session, the Investor Relations team will be available after the call. So, operator, with that, please start the Q&A.

[Operator:]

Okay Thank you. Please standby for your first question, which comes from the line of Moshe Orenbuch from Credit Suisse. Please go ahead. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) Thanks. Hey, Chris, I think I heard you say that 76% of the originations were funded in the bank and then just under 10% were non-prime. So, there's still I guess, does that mean that there's another 14% of the originations that could be incrementally funded in the bank even now?

[Christopher A. Halmy:]

Yes. I think... Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) And can you talk about the – yes...

[Christopher A. Halmy:]

Yes. It's actually – we have just shy of 14% in subprime today and about 76%. So, it's – the delta is a little bit different. We have historically had some, what I would call, internal restrictions on what can go to the bank for various reasons. It's something we're actually digging into pretty heavily right now and we expect that percentage to go up as well, as we really normalize the bank-parent construct internally. So, the answer to your question is, yes, we expect that to rise. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) All right. So, just a follow-up. And basically, it means that you're going to have a higher percentage of ongoing originations funded at the bank. So, as those – you're going to build those assets – there'll be a better spread on those. And then on top of that, the 76% number could be going up as well?

[Christopher A. Halmy:]

That's correct – that's correct. So, I would expect – I would expect our order originations, close to 85% of those, to start getting directed to the bank in very short order. And then, obviously, with the funding cost that we have at the bank, that obviously is where we're focused on expanding our profitability going forward. And then on the long-term, there's no reason for us to not move that percentage really into the 90%'s as we look to continually to normalize those regulatory restrictions at the bank. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) Okay. Maybe a follow-up on the Chrysler, you've continued to increase your penetration, just talk about the outlook there?

[Christopher A. Halmy:]

Yes, listen, the Chrysler channel has been great for us. We have great relationships really at the dealership level. We participate both in their retail books as well as their lease books at times. So, our penetration is up on a year-over-year basis. We think it'll be pretty steady and there could be opportunities to go up further. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) Great. Thank you.

[Jeffrey Brown:]

And I'd just say, within the Chrysler channel, we're getting the opportunity to really compete heads-up there with other players that are in the space. So, I think we're doing a good job. And in fact, earlier Monday, Tuesday this week, spent time with a number of Chrysler dealers and just continue to feel pretty optimistic about progress in that channel. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker) Thank you.

[Jeffrey Brown:]

Thanks.

[Operator:]

Thanks for that question. Your next question comes from the line from – of Eric Beardsley from Goldman Sachs. Please go ahead.

[Christopher A. Halmy:]

Are you on mute, Eric?

[Eric Beardsley:]

Sorry, yes. Thank you. Hi. Just on the Series G, is there anything else that you, I guess, need to demonstrate to the Fed, or are you just waiting for them at this point?

[Christopher A. Halmy:]

I mean, I think, look, we're in a very active dialog with the Fed right now. And as we stated, we will be very direct and straightforward to the market whenever we've got a conclusion. We've been in dialogue for really past few months on it and hey, the fact that we are in dialogue, I think is a positive sign. I still remain optimistic that we're going to be able to do something, but it's a process and hopefully we'll have news to report one way or another in the next 30-plus days.

[Eric Beardsley:]

Got it. Great. And then just on the credit side, I guess given where the mix is, just want to hear your thoughts on where the allowance could go moving forward? In the past, you've talked about stability, are we to expect it to stay in this 125 basis points to 130 basis points range over the next year?

[Christopher A. Halmy:]

Yes. So I mean, when you think about where our – and I think you're referring really to the retail auto loan book and like I said, I expect the overall charge-offs to be around 1% this year and drifting up. So, if you think about the coverage ratio of 125 basis points to 130 basis points, that should provide us plenty of cushion. So the answer to that is, yes, I expect that coverage rate to be in that area.

[Eric Beardsley:]

Okay.

[Jeffrey Brown:]

And then obviously, Eric, I mean, we're going to follow very closely what's going on in the macro economy, what's going on in unemployment. I mean even this morning, you see claims, initial claims at a 42-year low. So, still positive signs that consumers are pretty healthy right now. We recognize it is still mixed economic data, but there a number of positive signs that lead us to believe credit is going to be in good shape for quite a while.

[Eric Beardsley:]

Great. And then just lastly, in the Growth Channel, are there any OEMs that you could point you where you're doing significantly better than you were before, whether it's at Ford or somewhere else?

[Christopher A. Halmy:]

I would say, it really is across the board. We've had some success with other U.S. manufacturers, the one you just mentioned, as well as some other Korean nameplates as well. So it is fairly distributed, but it's a nice mix of nameplates.

[Eric Beardsley:]

Okay. Great. Thank you.

[Christopher A. Halmy:]

Thanks.

[Operator:]

Thank you. The next question we have comes from the line of Cheryl Pate from Morgan Stanley. Please go ahead.

[Cheryl M. Pate:]

Hi. Good morning. I just wanted to touch upon, obviously, you've been very successful in growing the market share in the non-subvented channels over the last couple of quarters. We have heard from a couple of other auto finance companies that the competitive environment seems to maybe be getting a little bit more heated again. And so, I just wanted to get your thoughts on what you're seeing in terms of pricing and terms and maybe some color you can share around recent originations?

[Christopher A. Halmy:]

Yes. I mean, the one stat I would like to look at is – look at the quarterly yields that we're originating versus the expected annualized charge-offs for those loans. And for the last couple of quarters, as we kind of changed the origination shift, the yields have been in the 5.5% area and the losses have been just a tick over 1%, 1.05% to 1.00% to 1.10% in annualized losses. So, we're not necessarily seeing the competitive environment really affect the auto yields in any major way. Where we're seeing the competition honestly has been on the dealer floorplan book and as we've been pretty transparent, we've taken a lot of our dealer floorplans off of prime rate floors, most of them to a 30-day LIBOR to really help compete. Now, that has obviously compressed some of our asset yields overall the last year, but obviously sets us up well for a rising rate environment.

[Cheryl M. Pate:]

Okay. That's really helpful. And then as a follow-up, just wanted to touch – obviously, as you move more and more through the Bank in terms of fundings and have been successful growing the deposit platform, how do you think ultimately of the mix of funding and sort of where ABS fits in there as you continue to grow deposits?

[Christopher A. Halmy:]

Yes, it's so – Cheryl, it's so nice having a Bank in a growing deposit base. I mean, we've seen the ABS market be very choppy over the last three months. The credit spreads, the availability of credit have really been difficult in this market and to be able to have a deposit base that right now that funds almost 50% of our assets is phenomenal. It gives us the ability to back off the ABS markets when conditions aren't great. And really for the first time in a while, you're seeing ABS funding being much more expensive than deposit funding. That wasn't true a year or two ago. So, you're seeing that dynamic really change. So, when you think about us adding $6 billion to $7 billion of deposits a year going forward, that 50% is going to continue to rise every quarter. And I'd like to see it in the 60% to 70% range. So, we feel pretty optimistic about having that growing deposit base and really providing stability of funding going forward.

[Cheryl M. Pate:]

Okay, great. Thanks very much.

[Christopher A. Halmy:]

Thanks, Cheryl.

[Operator:]

Thank you. The next question we have comes from the line of Sanjay Sakhrani from KBW. Please go ahead.

[Steven Kwok:]

Great. Thanks. This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one I guess is, you've been making great progress around the efficiency ratio. How should we think about it over the longer-term? Could you give us some guidance around how low it could perhaps go over like next couple of years or so?

[Christopher A. Halmy:]

Yes. We're pretty comfortable today in the guidance we've put out to have that mid-40s level efficiency ratio. What we're balancing now really is getting more efficient in the current operations of the company, but being able to redeploy a lot of those savings into future investment, whether it's on the technology side or on product innovation side, to make sure that we continue to build for the long-term future. So, my guidance to you over the next year or so would be to look at the efficiency ratio in a very consistent range.

[Steven Kwok:]

Got it. And how much of the controllable expenses do you have left that you can still perhaps cut out the business?

[Jeffrey Brown:]

I think you're going to see – in the fourth quarter, you're going to see continued year-over-year decrease in controllable expenses. Okay. So, I think you'll see more efficiency there. But, like I say, as we get into 2016 and we start launching some new products and initiatives, I don't necessarily expect incremental year-over-year savings as long as we really remain around that mid-40s efficiency ratio.

[Steven Kwok:]

Got it. And then, just in terms of when we looked at the average gain per vehicle, that has been holding up fairly well. Can you provide some outlook on around that lines item going forward?

[Christopher A. Halmy:]

Yes. Used car prices obviously continue to hold up very well. Our lease dispositions, obviously, are experiencing pretty good gains. We're seeing it a little lower on a year-over-year basis. We try to change depreciation and obviously look at it on a total lease revenue basis going forward. But, the one guidance I will give you is we're seeing pretty good October flows again. We normally see a pretty big drop-off from 3Q to 4Q. It's a seasonality thing. We have less cars coming off of lease in the fourth quarter and as well because of the winter months, you just have lower used car prices. So, I expect that dynamic to happen again, but maybe as drastic as it happened last year.

[Steven Kwok:]

Great, thanks for taking my questions.

[Christopher A. Halmy:]

Thanks, Steve.

[Jeffrey Brown:]

Thanks.

[Operator:]

Thank you. The next question we have comes from the line of Rick Shane from JPMorgan. Please go ahead.

[Richard B. Shane:]

Hi, guys. Thanks for taking my question this morning. When I'm looking at slide 13, which shows the origination mix, it really shows that you've been able to through the new standard business offset the rundown in GM Subvented business. One of the things that occurs to me and you've showed some additional slides showing standard GM business, how much is the Ally Dealer Rewards program driving that shift? Are you finding the dealers who were doing two or three subvented deals a month, historically, are now just doing an incremental two or three standard deals in order to hit their tiering?

[Jeffrey Brown:]

Yes, Rick, it's JB. Thanks for the question. So, you're exactly right. I mean and I think this ties back to the strengths of the overall relationships out there and as you can see, the GM flows are pretty constant now. We would expect that to continue. So, the one thing I'd say about ADR is, don't view it as a static program. We constantly – it's part of the reason why we're in front of dealers every single day. And we understand their business, we understand flows that can no longer be directed to us because of manufacturer changes. So, we work with the dealers on finding customized approaches to enable them to continue to get ADR. So, it is a very powerful weapon for us. It is very hard to break. And I think we've seen the exact behavior we want out of dealers and they want out of us. We've responded to changes in the market, they've redirected flows to us, and it's part of the reason why you're seeing the GM channel holding up so well.

[Richard B. Shane:]

Got it. And curious, you described it as a dynamic program and that makes sense. Have you seen a meaningful change in the number of dealers that are in your highest tier or have you been able to maintain that as a pretty static measure?

[Jeffrey Brown:]

I mean Champions Club kind of a highest overall level; we've lost very few. I think the trends have been very static there. I think even year-over-year, I think I would call it under two hands of lost dealers. So I mean you're kind of – you're down I think about 10, 12 dealers year-over-year.

[Richard B. Shane:]

Got it. Okay. That's very helpful. Thank you, guys.

[Jeffrey Brown:]

You got it.

[Operator:]

Thank you. The next question we have comes from the line of David Ho from Deutsche Bank. Please go ahead.

[David Ho:]

Thank you. Good morning. Going a little further on Rick's question, it seems like GM Financial continues to be wanting to increase the floorplan penetration and almost double it in the next two or three years. How do you expect that to impact those dealer losses going forward and your ability to go after core business? Obviously, it's now a subvention relationship there, but is it more difficult for them to capture share in that realm?

[Christopher A. Halmy:]

Well, one of the difficulties they will have, okay, is we talked about the relationships and the great relationships we have, and that's without being said. But, when you think about the cost of funds as well, all of our dealer floorplan book is sitting in our bank, okay? We have a deposit base at 115 basis points that funds a dealer floorplan book. So from a pricing perspective, we really have that type of power to be able to compete. So, and when you think of finance companies that compete in the dealer floorplan space, they have to go to the securitization markets and the securitization markets are more expensive. So, in order for them to conquest dealers away from Ally on price, they're accepting lower profitability. They may choose to do that, but if that's the case, a dealer would be – from a price perspective, we have better pricing power than a finance company. But having said that, we have lost GM dealers and we may continue to lose GM dealers, but as we do that, just like on the retail side, we continue to diversify that book. So, we are going out and conquesting other OEM dealer floorplans as well. So, as we see the shift happening, the shift happens in dealer floorplan a lot slower than it happens on the retail side, but we're not overly concerned about losing overall balances in that over time.

[David Ho:]

Okay. That's helpful. And I know it's still early days on the retail bank expansion but can you remind us, is the strategy to go after more fee-based products, loan-based products? You mentioned the digital strategy, is this possible to go – do a partnership strategy with some of the other online lending platforms that are out there – and maybe if you can shed some light on that?

[Jeffrey Brown:]

Yes. David, it's JB. I'd just say, all of the above. We've got a number of explorations underway right now and I think you'll start to see some of these things manifest itself early in the first quarter of next year. And so, think about that more traditional banking products that you could think, household bank may want to offer, all the way to how do we tend to transact today through our mobile device more direct offerings, things like that. So, we're out exploring both all-out builds from the Ally umbrella, as well as partnership opportunities. And again, we'll get a little bit more specific on that in the first quarter of next year.

[David Ho:]

Okay. And just a quick follow-up on that. Would that impact your capital plans as it relates to the CCAR process and using the balance sheet, et cetera, or it's just not meaningful enough?

[Christopher A. Halmy:]

I don't think it will be initially meaningful. But, keep in mind, we'll always evaluate the growth of the balance sheet and the profitability that brings versus returning capital, whether it's through share buybacks or dividend. So what I would say, it's an ongoing analysis that we do, but I would not expect 2.0 to have a significant effect from a capital perspective in our upcoming CCAR.

[David Ho:]

Great. Thanks a lot.

[Jeffrey Brown:]

Thanks, David.

[Operator:]

Thank you. The next question we have comes from the line of Chris Donat from Sandler O'Neill & Partners. Please go ahead.

[Christopher R. Donat:]

Thanks for taking my questions. Just maybe to connect a couple of questions have been asked, but as you think about these new products and mobile offerings and partnerships, you did say, Chris, that the expense ratio is going to be similar. So it's not like we – I assume we've already been investing in a lot of things – we're not going to see any sort of step up in expenses, is that right?

[Christopher A. Halmy:]

Yes. I mean, let me give you a perfect example. We have been working on a new auto loan backbone system for the last year or so. And it's a multi-year process to really get us the technology that will really bring us, in what I would say, into kind of the next generation of direct-to-consumer lending, and it's something that we've been working on for a while. It's a part of our expenses today and it will continue to be a part of our expenses from a run-rate perspective. So, we've tried to be very focused on finding expense savings and being able to redeploy those expense savings into investments, and I think that will continue. So, as I sit here today, my guidance is, we're going to stick around that mid-40%'s efficiency ratio, which honestly has been about a $300 million savings over the last two years. So, it's been a pretty significant decrease. So I wouldn't expect that type of magnitude going forward from any kind of reduction of expenses, but I also don't expect some meaningful increase at this point.

[Christopher R. Donat:]

Okay. And then just on a different topic, but as we think about how used car prices have performed in the last year and some of the benefit from low gas prices, any sort of general expectations you have for used car price trends in the coming year? I remember JB saying that several months ago that probably down 5% to 10% was sort of conventional wisdom, but just wondering what your thoughts are there?

[Christopher A. Halmy:]

I think it's still conventional wisdom. We still think it will be down 5% to 10%. One of the benefits obviously on the demand side has been the unemployment rate and the nonfarm payrolls number that JB just mentioned. So, we're seeing more people get jobs, therefore, a lot of them need used cars and you're seeing pretty good demand. So, you have to expect that unemployment at some point will start leveling off. The supply will start picking up due to the lease activity in the market over the last couple of years. So, we are still continuing to predict the 5% decrease over one year and a 10% decrease over two years.

[Christopher R. Donat:]

Got it.

[Christopher A. Halmy:]

I would model.

[Christopher R. Donat:]

Thank you.

[Jeffrey Brown:]

Thanks, Chris.

[Operator:]

Thank you. The next question comes from the line of John Hecht from Jefferies. Please go ahead.

[John Hecht:]

Thanks for taking my questions. Just thinking about the margin and where it might be going in the near-term. First of all on the yield side, what were the yields on new loans maybe versus retiring loans in the quarter? And then second, can you quantify to us just in terms of where you're putting on new deposits and maybe near-term capital actions like the potential retiring of the remainder Series G? What kind of cost of funds you might expect to see – what type of, I guess, contraction cost of funds you might expect to see?

[Jeffrey Brown:]

Yes. So on the consumer auto loan front, we're putting loans on around 5.5%. I would say that we all are having some runoff and amortization of some old loans that were in that area as well. But – so, it's hard to look at on a quarter-over-quarter basis. It doesn't really move the needle that much. But, I do think over time, you're going to see that that's 5.25%, which is somewhere – that's where our yields are today on a consumer auto loan. You're going to see that drift up as we put on onboard these higher yielding loan. So, I do expect that to increase over the next year or so, with rates being steady. So, on the Series G front, to the extent that we get the opportunity to take Series G out in the near-term, we will have to replace some of that with unsecured debt. You have to kind of look at where our unsecured debt profile is today and call it somewhere around 4.5% for a five-year or something in that type of area. So, the replacement of a 7% after-tax dividend with 4.5% of debt is obviously pretty meaningful savings. The other thing I would point out is, we started seeing real good momentum out of the rating agencies, and we've got an upgrades by a couple of rating agencies really over the last few weeks. And now, we're really on the cusp of investment grade. So, to the extent that we get to that next level and something we are focused on, that should also decrease our cost of funds going forward when we go to the debt markets.

[John Hecht:]

That's great color. Thanks very much. And then just – I apologize if you addressed this, but you talk about potential dividends and your focus on getting dividends and repurchases in place in the intermediate future. Just, do you have a sense of what your total payout might be or your capital returns might be as a percentage of income, or what you might ask for? Is there any way we can kind of quantify how things might shake out in the next year or so?

[Jeffrey Brown:]

Yes, it's a little early, okay? So we're – and I've gotten this question a few times. And what I try to point people to or guide people to is, if you look at the average payout of a regional bank today in the CCAR process, it's around 75% of their earnings. So, that would be the average. So, when I think about the starting point, that's where I start. But keep in mind, we also – and we highlighted this a bit in the deck – we have an amortizing DTA, okay, and that amortizing DTA will also create regulatory capital that could give us some potential more room. And I think the other thing – the other guidance I would give you is, any dividend will be a modest dividend to start with. So, we'll have a modest dividend and we'll look to grow that dividend over time. But, I would point you to say that it's going to be modest and the share buybacks will be much heavier in that percentage, especially given where the stock trades today under book value. It would really be the best return for shareholders.

[John Hecht:]

Wonderful. Thanks very much.

[Operator:]

Thank you, ladies and gentlemen. That's the end of the question-and-answer session. I would now like to turn the call over to Michael (51

[Unverified Participant:]

Great. Thank you very much. If you have additional questions, please feel free to reach out to Investor Relations. Thanks for joining us this morning. Thank you, operator.

[Operator:]

Thank you, Michael (51