Ally Financial Inc (ALLY) 2010 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second quarter 2010 Ally Financial Incorporated earnings conference call. My name is Charis and I will be your coordinator for today. At this time all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. And I would now like to turn the conference over to your host for today, Mr. Michael Brown, Executive Director of Investor Relations. Please proceed, sir.

Thanks, Charis. And thank you, everyone, for joining us as we review Ally Financial Inc.'s second quarter 2010 results. You can find the materials we will reference during the call as well as our press release on the Media Center section of our website, ally.com. I would like to direct your attention to the legend on the second page of the presentation, regarding forward-looking statements and risk factors. Contents of our conference call will be governed by this language. This morning, Michael Carpenter, our CEO, and Jim Mackey, our interim CFO, will cover the second quarter results.

After the presentation portion of the call, we will have some time set aside for questions from investors, analysts and the financial press. When we reach that portion of the call, the operator will let you know how to queue to ask a question. To help in answering your questions, we also have with us on the call today Jeff Brown, Corporate Treasurer, and Bill Muir, Head of Our Auto Operation, and Tom Marano, Head of Our Mortgage Operations. Now, I would like to turn the call over to Michael Carpenter.

Good morning, everybody and thank you for joining us today. It is a great pleasure to be talking to you because we obviously had a great quarter. We earned pre-tax core income of $738 million, and net income of $565 million for the quarter. We're very proud of that. And the reason we believe that we're accomplishing these kinds of results is that we laid out a strategy at the end of last year which had six major elements to it, and we've stuck to it, and we're delivering results. The first element of that strategy is to continue to be the premiere auto finance provider. We have a strong auto franchise and it is, in fact, the number one provider of new car financing in the US.

And we are experiencing significant growth in that business, 30% quarter-over-quarter from the first quarter to the second quarter, and in fact 75% year-over-year volume growth. We continue to increase our penetration both for GM and Chrysler. We still have preeminent share in wholesale. We have increased our share at GM 33.5% to 34.4% quarter-over-quarter and at Chrysler from 42% to 52% quarter-over-quarter. So we clearly have a preeminent franchise that I will talk to you about in more detail in a minute. As a result of the actions that we took at the end of the year, and the progress we've made strategically, we have had access to the capital markets and it has done over $25 billion of secured and unsecured funding transactions year-to-date. So we feel pretty good about that.

Being a bank holding company, it is part of our strategy, and our bank deposits have grown $2.3 billion in the quarter, and our retention rates of our CDs for renewal is north of 80% currently. So not only are we growing deposits at a healthy rate, but we are also demonstrating that since we actually have no price advantage in the marketplace, demonstrating the validity of the business model of Ally Bank. Since becoming a bank holding company, our cost of funds has declined over 100 basis points. And despite the fact that we're still a junk credit, we actually are competitively advantaged on a cost of funds relative to major captives.

In the case of our mortgage business, historically, as you know, the mortgage business was a major trouble spot, and what a difference a few months makes. ResCap was profitable in the second quarter. It has required no additional capital or liquidity support. The assets that we marked down at the end of the year, we've been able to sell, at a gain, and we are very close to the completion of the sale of our European mortgage operation to Fortress. With regard to the rest of the mortgage business, as you know, we are in the middle of a strategic review of that business. But the thing I would say is this. In the fourth quarter of last year, I said to all of you, our objective in taking the write-downs was to ring-fence the mortgage business.

Our objective during the course of this year has been to derisk the mortgage business. We're now at the point where I'm very confident that we have or are very close to having derisked the mortgage business in terms of its real economic impact on the Company. On the cost side of the equation, we set ourselves a goal of reducing expenses from the year-end run rate, a reduction of around $650 million. I'm pleased to report that we are, in fact, well ahead of plan. And lastly, but by no means least, we are in a transition. We're in a transition from a captive to a market-driven Company, and the transition from a market-driven Company to a bank-holding Company. Those are significant transitions. We're making very good progress as it relates to being a bank holding Company, and the competitive advantages of being a bank holding Company, while it has a slight regulatory burden, associated with it, are becoming, I think, pretty obvious to everybody.

Let me, if I may, take you through the next page. Page four in my chart. And I just want to talk to you a little bit about our auto platform and the momentum about that platform. And to give you a couple of things to think about, the first point I would like to make is the OEMs are our important partners. But the dealers are our customers. The dealers are the people that determine whether we grow, or whether we shrink. And whether we're highly profitable or not. It is not the OEM's. The OEM's get us in the door. The dealers determine our success. And you can see from the momentum that we have in the marketplace, that we're doing something right vis-a-vis the dealers. We have a tremendous platform here and a tremendous set of competitive advantages.

And let me begin, some of them are spelled out on this particular chart, as well as some of the momentum, but the first thing I would like to mention is that in the financial crisis, we were there. We supported the wholesale financing we supported the Chrysler dealers. The dealer community in this country would have gone out of business with a substantial degree without Ally Financial, and they know that. And they want Ally to be successful because when the financial crisis came along, the banks, all of whom are very anxious to be their friends today, fled the sinking ship as fast as they possibly could while Ally Bank stayed there and funded them. And you better believe that is important.

But aside from that, we have a much fuller product line than any of our competitors and that is indicated on this chart. We meet floor planning needs. We meet retail leases, retail loans, working capital, mortgage finance, we auction cars that come off lease, we allow them to have vehicle protection plans to sell, service contracts, we insure the inventory on their lot. So we are very much a full service provider. We have a tremendous infrastructure. It is not only the $20 billion on the balance sheet in North America alone that is committed to the dealers. We have an infrastructure in terms of computer systems, and upwards of a thousand people that, that's all they do is focus on dealers and doing a better job for dealers, and monitoring our credit in the dealers. So we have tremendous infrastructure. We have tremendous knowledge. We have tremendous scale and the advantage that, that brings. We have focus. This is our business. We are in and of the industry.

We are not a bank where this is a product line that sometimes is in favor and sometimes isn't depending on whether the person running the business happens to sell a good story that quarter. We also have the advantage of bank holding company funding. As I mentioned a moment ago, probably relatively one of the largest platforms in North America, we have almost 100 basis points cost advantage today, and that advantage will be translated into both profitability and more competitiveness over time. You can see the benefit of this platform and the momentum that is shown at the bottom of this page, whether it be with Chrysler or GM. And the only negative facing this company, and it is very obvious to all of you because you write about it all the time, is the liability structure. And our challenge is to get to be an investment grade company and to get away from having the bare minimum of common equity for a bank holding company to having the right capital structure. And at that point in time, I don't think there is anybody that can stop us.

On page -- next, on page five, even though Mr. Obama didn't mention us last Friday, much to the dismay of some of our crews, the fact of the matter is, without Ally, there would not have been a recovery in the auto industry. And page five, I think it is clearly indicative of that. Despite the fact that both GM and Chrysler shrunk their number of dealerships, we've actually maintained a relatively stable cadre. In other words, we have a net gain share of dealerships. Just in the last 12 months, we financed a million vehicles for dealers to sell. We have financed an increasing share of GM and Chrysler sales. You can see the growth from 59% to 81% to 84% as we've onboarded the Chrysler dealers.

We funded 700,000 new vehicles sold by GM and Chrysler to consumers. And that represents today 38% of GM and Chrysler's combined sales. And just for perspective, our share is eight times greater than the next largest competitor in financing for GM and Chrysler. So if you wonder -- if one of your questions is are we important to Chrysler, are we important to GM, with 84% of wholesale financing, and 38% of resale, eight times the largest competitor, you better believe we are.

Let me go to the next page. We need to tell a better story about our relationship with the OEMs and this is the first attempt to do that. I think there is a lot of misunderstanding out there about the contracts that we have with GM and Chrysler, known as the operating agreements. So this page attempts to give you a picture of what those agreements depend on -- or cover. And the takeaway I want you to have from this is very simple. Yes, we have a contract with GM. That contract is not critical to our success or failure. Our success, or failure, is determined by our ability to service our dealers effectively and maintain our product capability. And as you can see on this chart, and I will start from the bottom because it is the easiest way to do it, in insurance products, we are the number one provider of vehicle service contracts and wholesale insurance for GM and Chrysler. We have the number one position that is not covered in the contract at all so that position is earned by our competitiveness.

In non-prime, we are number one in non-prime, with about 30% market share, AmeriCredit has about 23% and that is about 13% of Ally's US originations. We are number one in non-prime. We don't have exclusivity because AmeriCredit is in there with 23% share and in general focused on a lower FICO Score. And the floor plan area, that is not covered by the contract. We account for 84% of GM sales to dealers, and financed 75% of Chrysler sales to dealers, and we are clearly number one. This is not covered by the operating agreement. Retail lease, we have 72% share at GM. US Bank Corp has 28% share of GM. It is about 10% of our originations. We are clearly the number one, this is not covered by the contract. And on non-incentivized retail loans which are a majority today of our retail originations, not true three or four years ago. Three or four years ago, regular retail business was not more than 10%, 15%, 20% of our business. Today, it is the majority of our retail loan business. We are number one by a very wide margin that is not covered by the contract.

And then lastly, is the incentivized retail loans. That's 41% of our business. This is where the manufacturer gives some incentivized rates. And in that particular case, we, by our operating agreement, have the majority share of that business this year, a declining percentage from now until 2013. The point I want to make to you is the operating agreement between us and GM only relates to the incentivized retail part of the business. And everything else we do, anybody can come compete any time, and my answer to that is, bring it on. And so that leads I think reasonably nicely into the GM relationship. In its most simple terms, this is a relationship which is vitally important to both organizations. The GM dealers represent a large portion of our business. And we represent the dominant portion of financing for GM sales. And so we are very much committed to GM. We are very much obligated to support them in subvention programs. We are committed to assisting them in selling vehicles. We're committed to their new initiatives in the marketplace as you could expect of the number one provider to their dealer network.

And I don't need to reiterate my comments on the advantages that we have, as a result of our infrastructure and our long-term relationships. So let me just focus for a minute on the obvious question of where does AmeriCredit fit in, and I will give you the cute answer. The cute answer is you should really talk to GM and ask GM about that, but I think if you look at what they've said publicly, I would make the following observation. Since the industrial revolution, you don't have to own the cow to get the milk. Now, GM's agenda is to sell cars. Their margins on selling a car, of almost any type, is about ten times our margin. Therefore, they can take more risk than we can take, whether it is with regard to credit risk or residual risk. And so AmeriCredit, which has obviously a strong subprime basis, and I would assume would extend into the leasing segment, becomes a captive vehicle to fill that gap over time. We are very comfortable with our participation in subprime. We are very comfortable with our participation in leasing.

But there are risks which we will not take, which as a manufacturer, you may wish to take, and I say that, you may wish to take because from the point of view of your economics, it is a good risk to take. We're very comfortable with that position and we understand what is going on. I thought on page eight, the next page, it might just give you a little bit of a flavor of the issues that a manufacturer faces, particularly in the leasing marketplace. Now, in the leasing marketplace, if you look at the numbers, the domestic manufacturers, Ford, Chrysler and GM, have about the same percentage of business -- of their business is leased. But if you look at the Japanese competitors, about double that percentage is leased. And so clearly, one might wish to increase one's competitiveness, vis-a-vis the Japanese in the leasing segment, and what the incentives show in this page is the economics of leasing.

And if I draw your attention to the box, the box assumes that the financial provider of right to lease at 100% of ALG, and at 100% of ALG, a Chevy is priced at $348 a month, versus $295 a month for a Honda. And the reason for that is that over an extended period of time, the Chevy residual value at the end of 36-months is 49%, and the Honda is 57%. Now I don't care how aggressive we are as a financier. Just to give you an idea, if we went from 100% of ALG to 105% of ALG, which those of you who worry about credit would shoot us for, that would in fact would make a $13 difference. So there is nothing the finance company can do here to change the fundamental difference in the residual value of the automobile.

It is a risk that whether it is through a captive or whether it is through working with third parties like us, the manufacturer has to take. And in fact, it is even worse than this because historically GM cars have sold at 93% of ALG. And so for a financier to price at 100% of ALG, it is pretty aggressive. And by the way, I'm not saying we're doing that, either. So you can see that the difference in the monthly payments, which is what is important to the consumer, is a gap that the manufacturer can only make up on a lease by taking residual risks themselves. It is not a residual risk that a prudent finance company, bank, whatever, can take. So that's a little tutorial of the economics of leasing.

And with that, I will simply say I am very pleased with where we are. I think the team has done a great job. The results speak for themselves. And I am very confident, both about the franchise in the auto world and the job that Tom Marano and his team have done in minimizing our risk on the mortgage side. And the fabulous job our team has done with building out Ally Bank into an entity which has a differentiated and valid consumer proposition. So with that, let me hand it over to Jim Mackey who is going to give us the details.

Thanks, Mike. Let's turn to slide nine where we will review our second quarter financial results. Continuing the positive momentum that we experienced in the first quarter, we reported core pre-tax income of $738 million, up 28%, from the first quarter's $578 million. As a reminder, we define core pre-tax income as earnings from continuing operations, before taxes, and before the OID amortization expense. Our net revenue remains steady this quarter, increasing slightly to around $2.4 billion, as we saw good trends in our core businesses, and we benefited from some additional pick-up in our mortgage origination and servicing business. Provision expense increased $74 million, from the first quarter, to $220 million, primarily driven by the growth in our retail auto portfolio, and the seasoning of our mortgage HFI book. We continue to see the impact of our cost reduction efforts as our controllable expenses declined $124 million from a year ago, and we're on track to achieve our goal of reducing run rate expenses by over $600 million a year.

GAAP net income this quarter was $565 million, up significantly from $162 million last quarter. This was driven in part by lower OID expense and tax expense as well as meaningful gains from discontinued operations. Our total balance sheet decreased to around $177 billion, down $2.6 billion from the first quarter, largely driven by net declines in our lease portfolio and additional sales of non-core assets, partially offset by strong loan originations. Our total capital ratio is strengthened by 40 basis points to 16.8%, Primarily due to our positive net income and a reduction of $2 billion in risk-weighted assets.

Turning to slide ten, we will highlight our segment results, where again, we achieved profitability in each of our operating segments this quarter. Our finance business continues to perform well with good origination momentum, a strong used car market, and continued improvement in credit trends. On the mortgage side, we recognize positive results in our origination and servicing business due to favorable margins as well as improved servicing revenue. Our legacy portfolio held up well, with stable performance, and we continue to make progress working out of these assets, by selling loans with $1.2 billion of unpaid principal balance this quarter. You can also see the impact of our cost of funds improvement, which is reflected in our corporate and other line, which improved over $200 million year-over-year. I should also note that ResCap and Ally Bank were both profitable this quarter as well.

On slide 11, I would like to spend a minute discussing what we see on the horizon from an earnings perspective. Importantly, we expect to sustain positive core income going forward. Our auto franchise is strong and improving. We're seeing solid revenue from our mortgage origination and servicing business. And we believe our legacy mortgage risk is largely contained. In addition to these positive core trends, we've also had the added benefit of some additional items which we may see moderate over the coming quarters. Historically, we've used forward flow agreements as a liquidity tool to sell a portion of our auto loan originations and would recognize a gain on sale as a result. Given our stronger liquidity and capital position, we will be migrating to more of a balance sheet approach later this year, as these agreements mature. As a result, we will recognize more interest income over time on our retained loans.

The combination of significant lease maturities and high used car prices has resulted in us realizing some stronger remarketing gains versus our book basis. We expect that this will moderate as our lease portfolio declines and used car prices normalize. Additionally, we've opportunistically been selling portions of our legacy mortgage assets at a gain to where the assets are marked, and we expect this will reduce over time as this portfolio shrinks. We've also had some outside gains on our investment portfolio and wouldn't rely on them to continue in the same magnitude.

Lastly, we could see a temporary impact from the fact that we scaled back our retail originations in late 2008, and early 2009, as we would normally see higher revenues from those vintages at this point. Over the long run, however, we do expect to continue to improve profitability and earnings in our core businesses due to several factors. First, we will continue to improve our margins, as our deposit base grows, and our cost of funds continues to decline. Second, we will begin to rebuild our earning asset base as legacy asset attrition will no longer exceed our pace of originations and we will reposition into a more profitable balance of risk and reward in our asset mix. And finally, we will continue to benefit from our expense reduction efforts and the continued run-off of OID.

Turning to slide 12, we will touch on consolidated asset quality. This is a new slide that we've added to give you a consolidated view. And in the second quarter, we saw favorable trends as we saw broad-based improvement with declines in delinquencies, charge-offs, and non-performing loans. This reflects our continued progress that we've made in working out of legacy portfolios. You can see our loan balances grew by $3.9 billion this quarter, driven by strong originations on the auto side, and our help for investment portfolio. Our allowance balance and coverage ratios declined slightly this quarter, due to progress we made in resolving problematic legacy assets and shifting to higher concentrations of better quality portfolios. Our provision expense was up this quarter, as we maintained allowance at strong levels relative to our charge-offs and non-performing loans.

Our global auto business, which is highlighted on slide 13, includes our North American operations, international operations, as well as our insurance segment. Each of these businesses continues to perform well, and notably we saw a pick-up in profitability from international this quarter. We increased originations this quarter by $2.5 billion or 30% from the first quarter. We continue to leverage our competitive advantages in auto finance, and our efforts to transform from a captive finance Company to a sales-oriented market-driven Company, are showing results. Our new and used standard for non-incentivized loan growth was a significant contributing factor this quarter. And our retail penetration rates were up for both GM and Chrysler, who both increased their market share as well. Our lease originations increased modestly, and we had some notable growth in certain international markets, such as Brazil and China.

On slide 14, our North American operations earned pre-tax income of $630 million, down slightly from the first quarter, as a result of a net decline in our lease portfolio, and slightly lower gains on sales. Gain in this quarter was $66 million this quarter as we delivered $3 billion of auto loans under our forward flow agreements, compared to $5 billion in the first quarter. We have around $1.5 billion left under the forward flow agreements which we will use up later this year. Provision expense was relatively flat quarter-over-quarter despite growth in our HFI portfolio since we've seen loss rates come down meaningfully. US retail penetration rates for GM increased to 34.4%, and Chrysler increased significantly to 52.5%. Increased penetration rates helped drive a 33% increase in US originations, given our continued focus on new and used non-incentivized business, as well as the benefit from increased Chrysler incentivized originations.

Our percentage of originations coming from incentivized programs continues to comprise less than 50% of our retail originations, and our percentage of GM incentivized retail originations is less than 42%. Keep in mind this is down significantly from a few years ago, when incentivized originations were over 90% of our business. Our ability to grow overall origination volumes on a non-subventive basis is evidence of our ability to compete head-to-head with other market participants by providing competitive rates and strengthening our relationship with dealers. You can see on the wholesale penetration side that this remained very strong. The number of dealers we financed remained consistent, although dealer stock dropped this quarter, reflecting the recent improvement in industry sales performance. And we saw a typical seasonal dynamic where the larger dealers that we do business with dropped their inventories, in anticipation of new year models arriving on the lots.

On slide 15, we highlight our international operations, which earned $105 million of pre-tax income compared to $42 million last quarter. Non-interest expense was down this quarter, principally due to foreign exchange rate changes in Venezuela, and release of local tax reserves in Brazil. Our provision expense was also down due to improved credit performance and a declining portfolio balance. Additionally, we experienced strong originations in Brazil and China, with increases of 95% and 83%, respectively, year-over-year. We are positioned to benefit from an expansion in these countries, given our presence and market share. UK originations were also up significantly this quarter, due to the reintroduction of the GM Friends and Family financing program. We continue to make progress in streamlining our international operations as we have sold six auto-related businesses in the second quarter.

Now, turning to slide 16, you can see the improvement in our consumer credit trends as we begin to experience lower delinquencies and compared to the first quarter. This is reflective of our continued diligence around overall collection efforts, more stable economic conditions, and the improved credit quality of our newer vintages. If you strip out the legacy Nuvell subprime portfolio, our delinquencies continue to fall this quarter. We did have some noise in our Nuvell delinquency numbers as we changed our accrual policy in that portfolio to conform with the rest of our auto portfolio. On the loss side, we saw a broad-based decline driven by lower frequency and lower severity of loss. Our frequency of loss was down approximately 20%, as older vintages have seasoned past their peak loss periods, and newer vintages are benefiting from improved underwriting standards that we put in place beginning in 2008. On the severity side, we have continued strength in the used car market, which has aided in driving down our per loss -- our per unit loss and improving our recovery rates to over 60%.

On slide 17, we highlight our auto credit allowance ratios. In our North American consumer portfolio, the allowance balance increased slightly to $959 million, while the coverage ratio decreased to 2.9%. This decrease in coverage is largely due to a change in asset quality mix, as well as a general improvement in credit quality trends. Our North American commercial ratios remain stable, with a slight decline in coverage due to improved dealer credit quality. We continue to experience low losses in this attractive asset class given our risk management infrastructure and overall strength of our collateral.

On slide 18, we turn quickly to our insurance segment. As you recall, this business continues to be streamlined to focus primarily on dealer-centric products. This quarter, insurance made $108 million in pre-tax income from continuing operations which is down from the first quarter but comparable to what we saw in the second quarter of last year. There are a few things to point out on insurance this quarter. A higher loss ratio was driven by some typical seasonal weather-related losses, and our investment income continued to be strong. However, we did not repeat the extraordinary capital gains that we saw in the first quarter. Our premiums written were in line with the first quarter, as we continued to enjoy improvement in our primary servicing contract business, driven to a large extent by increased auto finance originations.

Turning to slide 19, I will cover mortgage operations, which recorded another quarter of profitability with pre-tax income of $230 million, as our origination and servicing business continues to perform well. As you know, this segment includes ResCap, as well as the Ally Bank, and ResMor mortgage activities. Originations in the quarter were roughly flat to last quarter, at $13.5 billion, which should place us in the top five among originators and servicers. Around 95% of our production was, again,concentrating in conforming and government loans which we sell to the mortgage agencies. Our gain on sale from agency production was $134 million, up from $86 million in the first quarter, due to strong loan demand and continued favorable margins. The performance of our mortgage servicing asset improved this quarter, with net servicing revenue of $307 million, driven primarily by our MSR hedges outperforming the value change of our MSR assets.

The provision was higher than the first quarter, reflecting the seasoning of the HFI portfolio, and the corresponding expected increase in delinquencies. Performance of the HFI book at Ally Bank has been within expectations. The valuations of the HFS portfolio have continued to be validated in the marketplace. We continue to make meaningful progress in liquidating legacy assets at gains and further ring-fencing this business to mitigate losses. This quarter we sold another $510 million in UPB of domestic non-core assets and $723 million in UPB of international assets resulting in a combined gain of around $167 million.

We continue to closely watch our rep and warrant repurchase risks and this quarter took another $97 million expense to reflect current repurchase requests and claim activity. This resulted in a quarter-end reserve liability of approximately $855 million. Something to keep in mind on rep and warranty is that we were relatively proactive in 2009 in bolstering this reserve as we took a $1.5 billion of expense. Additionally, in the first quarter we reached an important settlement with Freddie Mac to help contain this contingent exposure. Our losses and settlements have been largely in line with our expectations but we will continue to adjust our reserve to reflect current market dynamics and discussions that we have with counterparties.

Turning to slide 20, we provided a detailed breakdown of our mortgage operations balance sheet. We have given this to you in prior quarters. However, we focused primarily on ResCap. This quarter, we've added a full picture of our mortgage operations, largely the additional mortgage assets at Ally Bank. As you can see, the total balance sheet increased slightly during the quarter, driven by derivative collateral positions, and growth in our Ally Bank HFS and Warehouse lines, resulting from a strong originations pipeline.

After adjusting for the pending European asset sale to Fortress, ResCap balance sheet will be down to around $17.7 billion, $4.7 billion of which represents the more value sensitive exposures. We are making steady progress migrating out of challenging legacy assets and are reallocating resources to our ongoing origination and servicing business. This is reflected not only in the ResCap balance sheet, but also in the Ally Bank's HFI portfolio, where newly originated high quality jumbo loan growth is roughly offsetting the amortization of our legacy portfolio. The second main component that Ally Bank consists of HFS, MSR, and Warehouse lines, which are part of our ongoing origination and servicing business.

On slide 21, we highlight our mortgage coverage ratios. You will notice that the consumer mortgage portfolio and the allowance balance are down significantly from last year due to the strategic actions that we took in the fourth quarter of 2009. Because we cleaned up the portfolio at the end of 2009, we would expect delinquencies to naturally migrate somewhat higher, as this remaining portfolio ceases. This quarter, the portfolios coverage and allowance balance increased slightly in anticipation of that effect. Our commercial coverage declined to 3.5%, as our high risk legacy portfolio is now nearly fully resolved. And we've had growth in our lower risk correspondent Warehouse lines which now make up around 90% of the $2 billion portfolio.

On slide 22, we talk about our corporate and other segment, which reflects our treasury activities, OID expense, and commercial finance business. As you can see on the table on the right, OID expense accounted for almost 50% of the total loss in corporate and other. Our OID expense was $292 million this quarter, down from last quarter, which was inflated due to an acceleration of expense related to some debt extinguishment. As you can see in the table on the bottom of the page, we are scheduled to absorb around $600 million more of OID expense this year and around $1 billion in 2011, with large declines after that. The improvement in this quarter in this segment was driven by reduced restructuring fees and favorable mark-to-market adjustments on our forward flow commitments.

Turning to slide 23, our discontinued operations recognized $152 million in net income this quarter as we continued the process of streamlining our operations and divesting non-core businesses in order to focus on our primary competencies. In the second quarter, we executed the sale of the leasing businesses in Australia, Belgium, and France and Poland and in addition to our North American factoring business. We also sold an Australia auto portfolio and certain UK mortgage assets. We were able to generate some decent gains with the sale of some of these assets at prices above book value, and we continue to feel good about where our businesses are marked. The sale of the European mortgage business is on track to close, as Mike mentioned, in the third quarter, which represents an important strategic milestone.

Now, let's turn to liquidity on slide 24. Our funding strategy employs a two-fold approach designed to support continued stable liquidity and diversified funding sources during all economic cycles. The first component is the use of our efficient funding at our banking entities, Ally Bank in the US, and ResMor Trust in Canada. We differentiate ourselves from the captive finance model with the use of deposits and other bank funding and are becoming less reliant on wholesale funding over time. We continue to make good progress on migrating our assets to the bank were over 65% of our new retail auto originations occurred this quarter.

We sequentially increased our bank deposits this quarter, by approximately $2.3 billion, with strong CD retention rates, which we will discuss more in just a second. The second important component of this plan is for consistent and diversified access to the capital markets. So far this year, we've been able to raise over $25 billion in total funding transactions across the Company, both domestic and international. This includes over $5 billion in unsecured funding and around $20 billion of secured ABS and bank funding. On the top right of the slide, you can see the transactions that closed in the second quarter.

We issued from our established retail and wholesale ABS platforms at Ally Bank and also issued two transactions out of our ResCap legal entity. We continue to see improved conditions in the bank market where we increased capacity by $8.6 billion in the second quarter, including $600 million at ResCap. You can see the table in the bottom of the slide that provides the parent company and Ally Bank liquidity where we have almost $37 billion in availability. We remain confident in our liquidity position which has been further bolstered by transactions executed year-to-date and a good rate of deposit growth. We feel good about being able to address upcoming debt maturities, well into the future, even without issuing additional unsecured debt. However, we remain vigilant on strengthening liquidity and look to access the capital markets on a prudent and opportunistic basis.

On slide 25, we provide an update on our deposits. Ally Bank and ResMor Trust continue to contribute to the Company's funding flexibility through deposit growth, and in the second quarter, total bank deposits increased approximately $2.3 billion, to around $34 billion. 50% of this growth is from retail deposits at Ally Bank. The pace of this growth continues to be in line with our plans and expectations for the year. Internet banking is becoming more widely accepted in how people bank and Ally is well positioned to benefit from this trend.

Our CD retention rates, shown in the upper right-hand corner, continue to be robust improving 13 percentage points in the first quarter to 82% in the second quarter, which is well above industry average and demonstrates the strength of our bank franchise. We feel particularly good about this retention given our average CD rate has declined approximately 160 basis points since the beginning of 2009, as shown on the chart in the upper left-hand corner. Additionally, we've had good customer response to our new two-year Raise Your Rate CD, another longer dated product which has resulted in the average maturity of newly-issued CDs increasing to over two years.

Quickly on slide 26, this shows the benefits of our bank funding model which Mike talked about earlier. We show over 100 basis points drop in our cost of funds, since the beginning of 2009, and that's largely as a result of our use of -- of doubling our use of deposits as a percentage of our interest bearing liabilities. Our bank funding model is helping us to fill our mission of supporting the US auto industry, by improving our funding stability, and allowing us to provide competitive lending products. On slide 27, you will notice our nominal capital levels improved compared to the prior quarter primarily due to our net income, which more than offset dividends on our preferred stock that has been paid or declared. Also, our risk-based capital ratios also improved this quarter and our risk-weighted assets declined by $2 billion. This decline was primarily due to lower increased whole loan sales and an amortization of our lease book. All of that was partially offset by strong auto loan originations.

Turning to slide 28, in summary, we are pleased with our second quarter results, again, reporting profitability in all four operating segments. Two straight quarters of profitability reflect had we have largely put legacy issues behind us and have a stable core engine to generate earnings. We continue the momentum from the first quarter, further expanding our auto finance franchise with higher originations and penetration rates, improving credit trends, further containment of our legacy mortgage risk, strength in liquidity position through diversified access to the capital markets and the benefits of our growing deposit base, continuing to improve our cost of funds. We are delivering results and executing on our strategic objectives which will be key for the continued momentum in our core businesses going forward. And this will help assist us in repaying the US Treasury Investment in a timely manner. With that, I'll open it up for questions.

Thanks Jim. Charis, we're ready to take calls from investors. Please inform our callers how to queue up to ask a question.

Ladies and gentlemen (Operator Instructions) Your first question comes from the line of Kirk Ludtke of CRT Capital Group. Please proceed.

Good morning, everyone.

Good morning, Kirk.

I was wondering if you could spend some time talking about the status of the negotiations with the counterparties regarding ResCap's repurchase obligations? Do you still think that it's -- the obligations that you've got in that liability are consistent with the obligations you had to Freddie? Is it still two counterparties? Do you think you can -- do you plan on settling them in big chunks or are these more incremental deals? Whatever you can share with us would be great.

The answer to that is we can't say very much, because obviously, we're talking about active discussions that are ongoing. I think that the simple answer I would give you is where we can logically reach an economic settlement, we are attempting to do that. As you know, we put up substantial reserves between the third and fourth quarter last year, well over $1 billion. We put up additional reserves this quarter, and I think all of the analysis that we've done says that our reserve coverage is adequate for what we foresee our eventual exposure to be. Beyond that, I don't think we can really say very much.

Okay. Could you expand on -- you made a comment about boosting common capital was a goal. Could you expand on how you plan to do that and specifically is -- what the potential for a conversion of the treasury preferred?

I mean to be very -- you guys are all financial analysts and if you look at our Company, if we had a balance sheet that was reflected -- reflective of what I will call a normal bank structure, right? In other words, we had -- if its finance were pots and pans, we would all be thinkers, but if we were an investment grade company, which I think we can be in the next year or two, if we had an 8% common equity ratio rather than hovering around 4%, and if we had an appropriate mix of deposits. And if you look at the OID as being a non-cash charge associated with the historical transaction, you would look to what would our return on equity would be, our return on equity would probably be in the top quartile of the major banks. So that's where we want to get to. Now, how do we get from here to there?

Well, part of it is good operating results and good momentum in the marketplace, which we're demonstrating. We have dramatically cleaned up the balance sheet. And I will hold up that balance sheet against any major bank today. And then we do need some assistance from Treasury not to give us more capital. We in fact think we've got much more capital than we need. But we don't need more capital. We need the capital in a different form. And that is an ongoing conversation between us and Treasury, including as recently as yesterday. And one of the major priorities for the rest of the year is to make progress on our capital structure. As I say, if it was not for our liability structure today, here's to looking at our results and saying, these guys are way up there relative to their peers.

Fantastic. And I guess I just want to touch on the AmeriCredit transaction. And you have mentioned that the key to your strategy is your relationship with the GM dealer network, and the Chrysler dealer network. And with respect to the GM dealer network, is there a risk that over time as GM gets closer and closer to an investment grade rating that they allow Ally to start doing wholesale loans to -- or increase their exposure to basically force GM dealers toward AmeriCredit?

Look, first of all, dealers are independent business people. You can't force them to do anything. So let's start there. You win in the marketplace, I don't care whether you're a captive or whether you're a JPMorgan or whether you're us, you win in the marketplace. You don't win by the dictates to the OEM one way or the other. These are independent business people, and I would underline independent. We start there. And our whole strategy is built around creating a very compelling value proposition to these -- to the dealer, and we will compete with anybody, captive, non-captive, foreign, domestic, we don't care. On that platform, we're willing to compete. Interesting -- you raise an interesting question, which is I love the AmeriCredit deal, because the AmeriCredit deal values our automotive segment alone at $25 billion and therefore, I don't have any doubt about our ability to repay US Treasurer. So I think it is great.

But the question, can you take it from where you are, from what its initial -- I mean look, it is a pretty small company, right? $9 billion, or something like that in assets. You take it from there to a fully-fledged captive, first of all, it would take a long time and would be very expensive. You would have to have $100 billion on your balance sheet as a manufacturer. You would have to add 1,000 people. And you would have a cost of funds disadvantage relative to anybody with a bank license, even if you're investment grade, what will go from here to eternity. Well, do I -- if -- all I can say is that if I were the CEO of GM, that's not a direction I would be wanting to go in. And I suspect if GM told you they were going to put $100 billion on the balance sheet tomorrow, you would probably have an opinion on that.

Great. Thank you very much.

Your next question comes from the line of Doug Karson. Please proceed.

Great, good morning, guys.

Hi, Doug.

Thanks for giving so much color around the AmeriCredit situation. I guess if somebody asked you a year or so ago if GM would have a captive finance partner other than Ally, I would have said no, but I guess it does make sense. But as you look at that transaction, and you think more about your long-term strategic plan, could what has happened accelerate your goals maybe to diversify somewhat away from GM? Or look at other industries, or other type of customer base that you could slowly diversify away so you're in a way less wed to GM? Even though it is a good relationship, it just calls into question, now that we have somebody else in there, it is going to be a little more competitively possibly. And secondly --

I think that is a great question. I mean, Chris Liddell publicly said, look, I stress the -- and I quote, "I would stress a relationship with Ally is incredibly important to us, and they are a very strong participant in our business. We don't see that changing. It is important they're successful. It is important they're strong." And all of that is true. And by the way, I would say the same thing about GM. It is very important to us, that GM and Chrysler are successful. We are going to do everything we can to help make them be successful. Having said that, our situation is a mirror image of one another, right? Which is if you're GM, you want as many potential ways to finance vehicles as you can. And therefore, you're going to build up other capabilities over time. If you're us, you have the same issue, which is we need to diversify our business, in the same way they need to diversify their business.

It doesn't mean that we won't be as important to them, and they won't be as important to us, but when I first came into this job, the question I -- other than talking about ResCap, the question I would get from all of you guys is well, how do you feel about being so dependent on GM, right? So I look at the world and I say, from our point of view, we have a very high share of the business. I think we will continue that because of our competitiveness, not for any other reason. And I expect GM to expand its relationship. At the same time, we are not even a player in the used car market to speak of today. That's a huge growth opportunity for us. We have the opportunity to grow with other OEM's. Because other OEM's want other sorts of financing available to them, and one of these days, the industry will pick up from its 11 million production rate to 12 million, 13 million, 14 million.

So as I look at the world, the growth opportunity for us is very significant, even if over time we were to lose some share of the GM relationship, the growth opportunity is still there. So from your point of view, as you think about when you ask all of these questions, you're really asking, what cash flow are you guys going to generate and are you going to be able to pay off your bond obligations and so on and so forth. I look at it as, yes, we would probably be a little less important to them over time, they will be a little less important to us over time, as we go on to other things. But net-net for us, anyway, the market opportunity is incredible. Particularly given our competitive advantage as a specialist in this business.

That is a good answer. The value that was assigned to AmeriCredit was a little bit higher than I would have thought. Does that accelerate potentially an Ally Bank IPO? Or is it too early to tell?

I tell you what it does do, it does -- most of my colleagues sitting around the table get paid almost entirely in stock. It has actually lifted their spirits materially over the last several days. And I don't think we will get 16 to 17 times earnings on the IPO, but you know, anything reasonable we would be happy with. In all seriousness, I think the IPO is very clearly within our sight. I see it as a 2011 event. As I said before, I think de-risking mortgage was the single highest priority. I'm pretty close to saying we've done that. And that -- then beyond that, I don't see any particular barriers. So obviously markets are good, markets are bad, as you all know better than I, IPO windows open and close, and -- but the obvious road to repay treasury is an IPO, unless somebody comes along with a check for $30 billion, based on the AmeriCredit valuation.

Great. Well thanks, for the answers. I will let someone else in the queue.

We have time for one more call today.

And your next question comes from the line of David Origlia. Please proceed.

Yes, hello. I had a question regarding loan production within the mortgage segment. What portion-wise attributable to the legacy ResCap operations, if any, or is all of this production through Ally?

The vast majority of the production is done in conjunction with Ally, which has our correspondent business, and our wholesale lending business. I would say that the retail production was in the vicinity of about 15% of the total volume we did.

Was that responsive, David?

Yes. Thank you.

Great, okay, that's all the time we have this morning. If you have additional questions, please feel free to contact Investor Relations. Thanks to all of you for joining us this morning and for your interest in Ally. Thank you, Charis.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a wonderful day.