Ally Financial Inc (ALLY) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the Ally Financial first-quarter earnings call. My name is Laura and I am your operator today. During the presentation all participants will be in a listen-only mode. After the speakers' remarks you will be invited to participate in a question-and-answer session. As a reminder this conference is being recorded.

Before we begin the Company has asked me to read the following statement. Today's presentation by management contains forward-looking statements within the meaning of the Securities and Exchange Act of 1934. These forward-looking statements represent the Company's present expectations or beliefs concerning future events.

The Company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated today. These risk factors include, but are not limited to -- changes in general economic conditions; recent geopolitical events; increased competition; work stoppages and slowdowns; exchange rate fluctuations; variations in the mix of product sold; fluctuations in effective tax rates resulting from shifts in sources of income and the ability to successfully integrate and operate acquired businesses.

Further information on these risk factors is included in the Company's filings with the Securities and Exchange Commission. I would now like to hand the call over to your host for today, Michael Brown, Executive Director of Investor Relations.

Great. Thanks, Laura, and thanks, everyone, for joining us as we review Ally Financial's first-quarter 2011 results. You can find the presentation we'll reference during the call on the Investor Relations section of our website, Ally.com. I'll also mention that this quarter we released a financial data supplement which you can find under the conference call information link on our website.

This morning Michael Carpenter, our CEO, and Jim Mackey, Interim CFO, will cover the first-quarter results. After the presentation portion of the call we'll have some time set aside for questions from investors, analysts and the financial press. To help in answering your questions we also have with us Jeff Brown, our Corporate Treasurer; Tom Marano, the head of our Mortgage Operations; and Bill Muir, head of our Global Automotive Services Business. Now I'd like to turn the call over to Michael Carpenter.

Thank you, Michael, good morning, everybody, and thank you for listening in. We're pleased to describe the quarter -- the fifth straight quarter of profitability with pre-tax core income of $428 million and net income of $146 million. We began, importantly, the process of repaying the US taxpayer by selling $2.7 billion of trust preferred securities to third-party investors. And as you all know, we filed the S-1 with the SEC for the proposed IPO at the end of March.

From a business line point of view, we're very, very pleased with the progress that we're making in our automotive business. For the first time we are now the number one overall US auto lender, not just in new vehicles but all vehicles. Originations in the first quarter of $11.6 billion were up 25% from the fourth quarter of 2010 and almost double the first quarter of 2010. We're particularly gratified by the fact that our initiatives and growth in used channels and diversified OEMs are beginning to bear fruit in a serious way. More about that later.

In addition, we've made significant progress on further improving our liquidity position. We refinanced $15 billion of credit facilities on favorable terms in one- and two-year tranches and we continue to receive upgrades from the rating agencies. We're also especially gratified by the progress at Ally Bank where deposits grew $1.6 billion in the first quarter and our customer base is up over 8% from the fourth quarter of 2010.

I turn your attention to page 4, a little bit more detail on the auto finance franchise where I think this clearly demonstrates the tremendous strength of our dealer relationships and furthermore the infrastructure and scalability of our platform. As you can see on the chart, originations in Q1 '10 were $6 billion, $9.3 billion in the fourth quarter, $11.6 billion in the first quarter of '11. So 93% up year over year, 25% quarter over quarter.

Our used originations were up 73% Q1 over Q4 '10. Our lease originations were up 59% on the same basis and non-GM and non-Chrysler was up 68% in the first quarter of '11 over the fourth quarter of '10. And all that while maintaining and in some cases increasing our shares of GM and Chrysler.

On page 5 a little bit more detail to illustrate the strength of the franchise and the leadership position that we enjoy. We look at the total market, 6.7% marketshare in the quarter, Toyota is about one-third behind us, as you can see. On new vehicles 13.5%, a very wide margin over the next largest competitor. You can see that we became the second largest used supplier in the quarter, that's a significant move up based on our 70% market growth and we ranked number three in leasing at 11.4% share.

On the next page, page 6, I'd like to touch on our priorities for 2011 and how we're doing relative to some of those priorities. The first one is really develop and nurture this preeminent auto franchise. And I think some of the statistics that I gave you a moment ago tell you how strong that franchise is and that our strategy of being an ally to the dealer and a strategic partner to the manufacturer is working very well.

Secondly, growing our deposit franchise. We continue to grow Ally Bank based on a very strong consumer value proposition, not bleeding edge rates, with our service levels 24/7, talk to humans, no hidden fees and so forth, we really believe we offer superior consumer value. The advertising that I think is pretty creative reinforces that proposition. So we now have a lot of customers with multiple accounts and we're seeing very high retention on our balances and you'll see that a little bit later.

A lot of headlines obviously in the mortgage business these days. We operate a leading mortgage origination and servicing platform with substantially lower risk and higher operational efficiency than in the past. You all know that a major priority for last year for us was de-risking our mortgage business and we really believe we have done that. But we're in an industry which is evolving. We're not exactly sure where it's going to end up three or four years from now, but we do think that we are very well-positioned.

As you know, there is a lot of discussion around the issues involved in the mortgage servicing business. We did sign a consent order with regulators that require us to implement new practices. Now I want to point out to you a couple things. One is we did not foreclose on anyone who was not repeatedly delinquent. Secondly, our record in mortgage modification which is really the most important thing is stellar relative to our competition.

We have modified about 25% of our service loans. Most of our major competitors are in the 5%, 6%, 7% range. So we have substantially outperformed. We also have the highest temporary to permanent ratio of any of the major participants in the HAMP program. Keeping people in their homes has been a priority for Tom Marano and his team since Tom joined the Company and we really have a very good record in that regard.

The fourth priority for us is continuously to improve our cost structure. Last year, as you know, we took 15% out of our controllable operating cost. We're now in more of a mode of continuous improvement rather than dramatic change. But particularly with the volume growth we're seeing on the scale platform that we have we are going to get improved productivity. We're also very focused on doing everything we can to improve our funding cost over time which is why deposits and why ratings are so important to us.

Fifth on our list is effectively managing all our business risk. I think we do a pretty good job, but if you look at the mortgage issues in the robo signing area, these were largely inherited and they go back many years. But having said that, we want to make sure that we're absolutely all over not only the credit risk and the market risk, but also the operating risk in our franchise. And that's something everybody is focused on around here.

Part of managing risk, but partly winning in the marketplace is building a winning culture. All good companies, all great companies have a culture that is well defined that people can relate to, that's not superficial BS. In our case frankly we've been so busy dealing with the issues that you know about in '09 and '10, we really have not had the luxury of focusing on defining what kind of company we want this to be going forward, but we think this is critical for our future success and something we're focused on in '11.

And lastly but by no means least, we are anxious to repay the US Treasury as quickly as we can. The only people that would like to have them get liquid more than them is us. And so we're very focused on that. So you can see this year we have seven strategic priorities, last year we had six, some of them are obviously very similar.

In 2010 in many ways we laid the foundation of the house and we framed it in. 2011 is all about completing it and adding the finishing touches and I think we're well on the way to doing that. So with that overview let me hand over to Jim Mackey to go into some of the detail.

Great, thanks, Mike. Let's turn to slide 7 and we'll walk through some of the details of our first-quarter results. As you can see, we had another good quarter of solid profitability; this was our fifth straight quarter of profitability and all of our lines of businesses made money. Our core income was $428 million, this is down from the prior quarter where we earned $533 million and year ago of $584 million.

On a net income basis we earned $146 million, this is versus $79 million in the fourth quarter and $162 million a year ago. As we mentioned on prior earnings calls and we talked about this several times, there were a variety of notable items which drove incremental revenue in 2010. And as we've been expecting, they were expected to moderate. And we'll discuss this a little bit more on the next slide, but -- just to put that in perspective.

Now let's walk through some of the drivers specifically on the income statement. Total net revenue was $1.9 billion for the quarter; this is down from the fourth quarter and a year ago. The drivers are primarily the lack of gain on sale or lower gain on sale from what we saw in previous quarters. We have the expiration of our forward flow agreements and lower sales in the mortgage area both from our de-risked assets as well as the ongoing origination and servicing business due to lower refi volumes.

Now NIM, on the other hand, was relatively flat compared to the fourth quarter; it was down 80 basis points from a year ago. You'll see in a second loan growth continues to be very strong and will certainly help us long term. But over the last year as we've been repositioning the balance sheet, especially earlier in 2010, we have lower margin due to the higher yielding higher risk assets being sold off of our balance sheet. So what you have today are the higher-quality lower risk assets, and on a quarter-over-quarter basis margin was relatively stable.

We could see more NIM pressure in the near term. Lately we have been offsetting changes on the asset mix side with lower funding costs. But over time as our NIM improves -- or over time as our funding costs improve you will see higher NIM, but in the near term there could be pressure.

Provision expense this quarter was higher at $42 million -- by $42 million largely as a result of strong auto loan growth. As you know, we book provision day one when we book the loans and you earn the margin over time. It is down on a year-over-year basis quite significantly and that's a result of the overall improvement in credit trends.

As Mike mentioned, controllable expenses are a focus; they are down on a quarter-over-quarter and a year-over-year basis. Other non-controllable expenses are also down compared to both periods. And this is a result of our lower mortgage repurchase expense.

On the net income side you can see in the income tax expense line item we did have a benefit this quarter. We had about a $101 million gain related to a release of a Canadian valuation reserve. As you know, when you have losses over a period of time you have to book up reserves against your deferred tax asset. And as we return to profitability and some tax strategies in Canada we've been able to release that reserve.

On the balance sheet side our total assets grew by $1.7 billion this quarter, that's driven by the strong loan originations that Mike mentioned and also that's somewhat being offset by lower production volumes in mortgage.

So now let's turn to slide 8 and we'll talk a little bit about the notable items. And these are largely the same items that we talked about in previous quarters. But it does help us understand the quarter-over-quarter and year-over-year trends. You can see the cumulative impact of these items are largely explained, some of the variances that we just discussed. So I'll walk down the page and talk about each one of them.

Within our auto business we do have lower remarketing gains, this as trending down as there's less inventory coming through the pipeline. Our lease portfolio is stabilizing at lower levels. Now this is somewhat being offset by higher sale prices as used car prices remain very high, but generally the trend is downward and it's starting to stabilize somewhat.

On the forward flows, as I mentioned, they expired last year, so we're no longer booking gains when we sell assets, we're now booking all of these assets on the balance sheet and we'll earn the income over time.

In our insurance investment portfolio, as you know, investing the cash that comes in off of this business is a key strategy; it's a key part of the business. We did have some outsized gains in 2010 and one would not expect them to continue at those levels. But we will continue to have income off of this business but at more normalized levels that you see here.

On the mortgage origination and servicing side of things we did have lower volumes, we'll get to it in more detail in the mortgage segment, but with higher rates refi, volumes have dropped and so you can see lower gains there.

Now this is being somewhat offset by improved mortgage net servicing revenue and we'll talk about it a little bit more later. But we did have a $79 million expense in our MSR valuation related to the expected cost from implementing single point of contact. So our mortgage net servicing revenue could have been even higher absent that.

And then on the legacy mortgage side you can see mortgage repurchase reserve expense is down significantly from the prior quarter and down from a year ago due to the significant activities that we undertook in 2010 to mitigate this risk. So the main point is these notable items were expected, it's something that we've been looking at on the trends and nothing that came as a surprise.

Turning to slide 9, I'll talk briefly on the results by segment and we'll go into more detail in each of these throughout the presentation. But you can see global automotive services business is our largest segment. It performed very well. It was impacted by some of the notable items we just discussed. But the underlying trends are positive.

The mortgage business is a good diversification for us; it's been a good supplement to the auto revenues. The legacy portfolio is stable and of course the origination servicing business is somewhat -- the results are somewhat volume driven. And then you can see in corporate and other that the drag there is continually improving both on a quarter-over-quarter and a year-over-year basis.

So now turning to our North American automotive finance business on slide 10. You can see pre-tax income of $518 million in the first quarter. Again this is down quarter over quarter and year over year. Let's start with just where assets are going.

You can see that earning assets continue to improve; they are up to $88 billion this quarter, that's reflecting the strong loan growth. As a result you can see financing revenue has increased this quarter, that's probably the most important line item. So the trend is good there and it's growing despite the fact that we're seeing less contribution from the lease disposal gains.

Net revenue was down as a result of the loss of the forward flow gains that we discussed on the notable items page. Provision is up and this is solely -- largely due to the higher volumes. As I mentioned, we book reserves day one when we originate the loans and since volumes are up provision for loan losses are up.

We are taking a conservative posture related to high gas prices. We haven't really seen an impact yet, but we know there's risk there so we're prepared for it should it come. And expenses have been flat on a year-over-year basis, but on a quarter-over-quarter basis they're up slightly and that's largely due to the higher volumes.

On slide 11 we talk a little bit about originations and Mike touched on these in his section. But they are quite strong this quarter. You can see $11.6 billion in originations this quarter, up from $9 billion last quarter and $6 billion a year ago.

This increase is driven primarily by two things. One is there were a variety of year-end incentives that the various OEMs offered and that carried over into the first quarter. And also we had significant growth in our used and to a lesser extent in our diversified new portfolios.

You can see that our GM retail penetration rates reached 52% in the quarter; this is our highest level since we were a captive in 2006. Obviously these are at unsustainable levels and it's largely due to the creative incentive programs that were available in the last two quarters. These were incentives available to all lenders, but we did garner a large proportion of this business and we wouldn't be surprised to see this moderate over time.

Lease originations were up this quarter as we benefited from strong market share on GM's February lease pull-ahead program. And on non-GM and Chrysler originations it's noted in the chart as diversified new, that is up 358% year over year. Now it is still small dollars, but the growth rate does show that this is a positive trend and it is clearly showing our focus in this area.

A key area of sustainable growth is in the used car market. You can see that volumes are up $1 billion quarter over quarter and we've experienced strong growth in this area. These are attractive assets from a risk/reward perspective and we're also able to leverage our existing dealer relationships as well as help source new dealer relationships.

On slide 12 briefly, just to talk about our mix of originations in our US auto business. The point of this chart is really it shows how the Company has evolved over time. We're now a more diverse market driven competitor. You can see our business has migrated away from our subvented business where we have exclusive rights and more to a business where we compete head to head with others in the market place. So you can see this past quarter our subvented business is down to 20% of volume, down from 32% a year ago and down from 82% back in 2006.

On the international side, earnings were strong. They came in at $40 million, that's up $28 million from the fourth quarter and pretty much flat from a year ago. Net financing revenue was higher by $13 million, it's driven by higher asset levels and improving margin in Brazil.

Asset levels have started to grow in the segment again. You can see in the chart in the upper right on a quarter-over-quarter basis they are up. They're still down from a year ago. As you know, we've been streamlining our international operations over the past several years, but it's nice to see quarter-over-quarter growth first time in a while.

Total other revenue is down -- or excuse me, higher by $12 million and that's due to some earnings pick up in our China business. And total originations were $1.9 billion. This is down from the prior quarter, but most importantly it's up from a year ago. There's a fair amount of cyclicality in this business and we were also impacted by some central bank tightening in China.

On the insurance side on slide 14, this business continues to perform very well. We earned $134 million. As we talked about earlier, it's down from levels we've seen over the last year largely due to some outsized gains that we took in our investment portfolio. You can see our underwriting income and our combined ratio continue to post solid results.

I will mention that the second quarter is where you see a lot of spring related storm activity and losses, so I wouldn't expect this loss ratio to remain so strong. But we will see some of the impacts from these storms. Nothing largely unusual, but it's worth noting.

Written premiums were $411 million in the quarter, that's up $65 million from the prior quarter. That's driven by higher written service contracts at our dealer products and services business and higher fleet contracts internationally. You can see on a year-over-year basis written premiums are down slightly, but that's primarily due to the sale of our international insurance services segment in the fourth quarter of 2010.

Turning to mortgage, just to remind you, we've broken out our origination and servicing business from our legacy business and you can see the results of the ongoing business here on this page. We had another profitable quarter in this segment, pre-tax income of $73 million. This is obviously down from the very strong results that we saw last quarter. Volumes are down as rates have risen and refi volumes have dropped.

You can see the chart at the bottom of the page, loan production is $12.2 billion, that's down $11.6 billion from the fourth quarter and modestly down from what we saw a year ago. And as a result gain on sale revenue was $74 million lower from the fourth quarter but roughly comparable to what we saw a year ago.

Net servicing revenue was favorable by $240 million, that is up from the prior quarter and that's largely due to favorable MSR performance during the quarter. And as I mentioned earlier, our surfacing revenue would have been even higher had we not adjusted our MSR valuation for some increased servicing costs that we see coming ahead of us and we'll discuss that more on the next slide. Total assets were down from the quarter. Given we had lower production volumes there were lower pipeline assets on the balance sheet. Our servicing assets were largely flat from a year ago, however.

On slide 16 let me talk about a couple of hot topics in the mortgage area. Mike talked about a few of these as well. As you know, we signed a consent order with our regulators related to foreclosure policies and procedures, as did the largest servicers across the industry, we were certainly no exception.

As Mike mentioned, we take this issue very seriously and remain committed to complying with the order in a timely manner. As such we've devoted quite a number of personnel to work on this issue and have re-assigned our general auditor to assist Tom and his team in this effort. We're now building out new policies and procedures to comply with the order. However, we've been making improvements to our servicing, loan modification and foreclosure practices for quite a while now. So this is not something that we've just started currently.

And as Mike mentioned, we remain committed to helping borrowers stay in their homes. Since 2008 we've completed more than 675,000 default workouts for borrowers, that's comprising 25% of our serviced loan book during that period. And as we've also discussed before, Ally has been a leader in loan modifications; we have the highest HAMP conversion rate among the five largest servicers.

Also back in October we began assigning a single point of contact to borrowers in need of assistance. Throughout the foreclosure review process, as Mike mentioned, we've found no instances where a homeowner has been foreclosed upon without being severely delinquent and in default.

All of these issues, initiatives including the process improvements and foreclosure remediation efforts have resulted in higher costs for the Company. Most of them are reflected within the MSR asset. Some of the foreclosure remediation costs do not flow through the MSR line item, they flow through controllable expenses. And most of the remediation expenses were incurred in the fourth quarter of 2010 and that was roughly $25 million in expense.

Related more broadly to higher servicing costs, we've seen higher servicing costs going back several years and we've been reflecting that in our MSR asset. Total impact to the MSR during that time period was roughly $340 million and that includes the $79 million that we discussed -- that we took this quarter.

On the legacy portfolio side, we've broken that out to provide additional transparency into what's going on in our runoff portfolios. You can see our legacy portfolio is down to $11.8 billion; this is down $500 million from last quarter and, most importantly, down $16 billion from a year ago. Pre-tax loss in this segment was $39 million, down slightly from -- improved slightly from what we saw in the fourth quarter.

We have about $1.7 billion left in our held for sale portfolio and that's marked at about $0.45 on the dollar currently. Our held for investment portfolio at Ally Bank is down to about $7.7 billion and that's a decline of just north of $300 million last quarter. And to remind you, it has about a $508 million loan loss reserve against it.

We did see slightly higher provision losses -- or expense in this quarter, and that's largely due to the seasoning of this portfolio and it's clearly in line with our expectations. Performance on the legacy portfolio has been stabilizing over time.

On the mortgage repurchase reserves on slide 18, as you know, we made significant progress in 2010 mitigating our exposure in this area both by settling with key counterparties and building loss reserves related to this. As we ended this quarter we had about $830 million of reserves, this is flat to last quarter and primarily relates to non-GSE claims.

Rep and warrant expense this quarter was $26 million, that's clearly significantly down from what we saw the last two quarters. New claims were $133 million and this as the second straight quarterly decline in new claim trends. And on the outstanding claims front we were down to $838 million, that's down from last quarter and, as you can see here, the vast majority are related to monolines, as the monolines have attempted to put back a significant number of loans. However, most of these have been reviewed and declined.

Turning our attention to Ally Bank just for a few minutes. Clearly we've had some good strong franchise momentum at Ally Bank and our brand is certainly resonating with our customers. Our core value proposition as well as the growth and acceptance of the direct banking model is certainly helping.

You can see on the lower right our customer satisfaction scores are very strong, that certainly reflects customers' satisfaction with what we deliver. And on the left-hand side you can see our brand awareness. These are all based on third-party surveys and we've continued to improve that; we're up to 32%. Now this is lower than what you may see from long established brands, but it is especially notable that we've been able to build such high brand awareness in just a short period of time as we just launched the brand in May of 2009.

We continue to expand product offerings based on customer preferences. For example, we announced remote deposit capture capabilities this quarter as well as we're improving our website; you can now access your auto loan account from one single Ally Bank website. So we're continuing to make improvements.

Related to deposits, you can certainly see how the brand and these improvements are driving deposit growth. Deposits were up to $40.7 billion; this is up over $1.6 billion on a quarter-over-quarter basis and $7.8 billion on a year-over-year basis. And the majority of this growth is driven by retail deposits at Ally Bank.

You can also see as deposits grow we are extending out the maturity of our book and at the same time our average rate is declining. So with an average CD maturity of just over two years this matches up well with our average duration of our retail auto assets. And consistent with prior quarters our retention rates remain very strong in the mid-80% range.

On slide 21 we'll spend a second on liquidity. As you know, and we've talked about this in prior quarters, we continue to maintain a conservative liquidity posture. Total parent company liquidity at the end of the quarter was $22 billion. Now this compares to roughly $20 billion of unsecured debt maturities over the next several years through 2012.

So in essence this liquidity profile effectively prefunds many of the unsecured maturities that we will face through 2012. Obviously we'll continue to access the unsecured markets opportunistically to support asset growth, but we feel we're positioned well for the maturities over the next few years.

At Ally Bank we have $11 billion of additional liquidity available in addition to deposits to support asset growth at the bank level. We are an active issuer in the capital and bank markets this year, we've issued a total of $27.9 billion year to date and Mike talked about a few of those earlier, but it's worth revisiting.

We've issued $2.25 billion in unsecured in the quarter and another $1.5 billion in April. We also continue to consistently access the ABS market completing over $4.6 billion in the first quarter and $5.4 billion year to date. Now this is across various asset classes and various markets.

And probably the biggest headline on the liquidity side is the renewal of our two largest auto credit facilities, a total of $15 billion. It was significantly oversubscribed. The facilities are both at the Ally Bank and at the parent level and the renewal was at more favorable terms. We extended out the maturity and it had the added benefit of lower funding costs.

On capital ratios on slide 22, you can see our ratios remain strong. Capital on a dollar basis is largely flat to prior quarters. Ratios are down slightly this quarter and it's driven primarily by an increase in risk weighted assets from the strong loan growth that we've been talking about throughout this presentation. Tier 1 capital stood at 14.7% and Tier 1 common at 8.4% and our tangible common equity ratio of 7.5%.

This quarter we're now providing some information related to Basel III. We're well-positioned to achieve the enhanced Basel III capital requirements in advance of the proposed timelines. We provided a pro forma Tier 1 common ratio based on Basel III on a fully converted basis and that was 10.8% this quarter. And as we discussed previously, we are still under review on the capital adequacy review plan. We've been on a slower review timeline given our near-term capital plans differ from that of our peers.

Also earlier this quarter we remarketed Series A preferred that was owned by GM and as a result we will save approximately $15 million in dividends per annum as the security that's now issued has a lower dividend than what was previously on the position.

On asset quality, the trends are positive; they've been continuing to be positive over the last several quarters. You can see on this page that on a dollar basis of 30 plus delinquencies, non-performing loans and net charge-offs all have continued to decline, they're down on a quarter-over-quarter and a year-over-year basis.

The related rate ratios are also declining. I would acknowledge that the growing denominator, you can see our ending loan balances continue to improve so that is depressing the ratio a little bit. But any way you look at it on a dollar basis or a ratio basis the trend is positive.

The trends are being driven by general macroeconomic trends as well as the continued de-risking in our balance sheet and the asset mix changes that we've been discussing. Our auto-related assets are now 85% of our loan balances and those assets have performed very well through the cycle.

Provision expense was up $42 million this quarter, although it is down on a year-over-year basis. The growth recently reflects the strong originations and obviously year over year reflects the mix changes and the balance sheet and the performance.

Allowance balance is down $67 million from the prior quarter, it is now 1.7% of loans. This reflects the mix -- higher-quality mix on our balance sheet which requires lower loss coverage. You can see allowance as a percentage of non-performing loans was up to 145%, very strong, and as a percentage of net charge-offs we have almost 2.4 times coverage.

On slide 24, just briefly, just to dive a little deeper just in auto-related trends. You can see the trend on the 30 plus day delinquencies continues down. We are at 1.42% as the third straight quarter of decline. On a net credit loss basis it's at 83 basis points in the second straight quarter of decline, again reflective of the high credit quality of our newer vintages as well as the improvements in collection processes that we've implemented over the last year.

Notably Nuvell is becoming less of a story each successive quarter. It's demonstrating very strong performance. We've had a significant decrease in delinquencies and the portfolio continues to run off. We're at $2 billion, that's down $300 million from the prior quarter.

So in summary, we've had a good quarter, our fifth straight quarter. Things are as we would have expected with the exception of the foreclosure matters. We're right where we would expect to be this quarter. We've demonstrated our success as a preeminent auto finance company with significant origination growth and strong dealer relationships.

We began repaying the US Treasury this quarter. We continue to improve liquidity and as we've been -- we've had good success accessing the capital markets. In addition to the success in auto -- our auto franchise we've also had positive momentum in Ally Bank. And with that we'll open it up to questions.

Thanks. Laura, so we're ready to take calls from investors. Please inform our callers how to queue up.

(Operator Instructions). Kirk Ludtke, CRT Capital Group.

Good morning, everyone. As you know, auto loans has become a very sought after asset class. And I was curious if you could expand on any changes that you've seen in the competitive landscape since the last call?

Why don't we let Bill Muir who runs our auto business answer that question -- if he's on?

Yes, I'm on, Mike. Well I would say you're right, it's a very attractive asset class and it's one that competition has been coming back into the marketplace on a steady basis since the depths of the crisis of 2009. So we've seen a steady influx of people coming back into the market and it's very competitive -- it's always been very competitive and it's very competitive now and it just continues to be.

But I guess the good news is this is not something that just happened this past quarter. And if you see the results in terms of our ability to hold share and hold volume, I think it demonstrates that, despite the increased competition, we're able to kind of keep up with it and we're able to maintain our position in the marketplace. But no doubt it's gotten much more competitive over the past year.

I would add to that we are tremendously competitively advantaged, both versus bank and versus captives. And vis-a-vis banks, we have a reputation for being there through thick or thin, what we call being in and of the industry. We are a full product line provider both across the entire credit spectrum as well as insurance and auction products as well.

We have multi-decade relationships with dealers and you can tell from the growth in our used business, for example, and the growth in our non-GM, non-Chrysler business, that they are in fact giving us a greater and greater share of their businesses.

We also have tremendous economies of scale based on the size of our platform and our platform gives us the ability to respond in short order to very substantial increases in demand like that which we saw towards the end of last year and the early part of this year. So Bill is absolutely right which is the competition is accelerating. But on the other side of the equation our competitive position is extremely strong.

And vis-a-vis the captives, I think the captives, they have the same mentality in the sense of dealer orientation, but they don't necessarily have the same cost structure, they don't necessarily have the same risk-based pricing approach to the world, and I think frankly -- I think most of the OEMs are really focused on products and not combining financial risk and marketing risk to a huge degree. So I think we are very much a new model, we are competitively advantaged against both captives and against banks.

Thank you, that's very helpful. Talking about your competitive advantage for a second. I think you mentioned in the slides that you paid on average about 1.6% for deposits this quarter -- or last quarter. And I might have missed it, but did you -- could you expand on where that rate compares, or how that rate compares to what your peers are paying and what constraints -- practical, regulatory, whatever -- what constraints you see in terms of ramping up deposit taking?

If you go back a couple of years you would have seen that we were -- obviously it differs by product. You would have seen a couple years ago that we were in the top 5%, maybe in some cases even the top 1%. If you look at where we are today on broad-based definitions of the banking world, 4,000 or 5,000 banks, we're typically somewhere between the bottom of the first quartile and the middle is typically where we are.

And you also have to keep in mind as a direct banking model we don't have the brick and mortar expenses as well. So direct banks can offer slightly higher rates and still have an all-in cost that's comparable to brick and mortar.

And obviously as we grow we're leveraging our operating expenses; we're leveraging our marketing expenses so that our operational cost diminishes every quarter as a percentage of our deposit base.

And just given the cost advantage that you have here, why not ramp that up? I mean, are you ramping it up as quickly as you can or are there reasons to ramp it up more (multiple speakers) measured pace?

I think we're within the constraints which we operate in we're growing about as quickly as we can. Obviously if I could wave a magic wand and make it two or three times as big tomorrow I would do that in a minute. But I think we're always testing -- for example, we did a test in the early part of the year in terms of if we spend more money on advertising would that be productive, and actually it was. But we're talking about changing growth rates a few percentage points one way or the other. So I think we're -- what you see is what you get.

Fantastic. And then last topic, if I may. On slide 11 you talk about the trends in originations and it demonstrates that some of your initiatives are really kicking in. I'm just curious if you could comment on trends in subprime?

Bill?

Sure. Our subprime business is up quarter over quarter, year over year, but on a very gradual trend. And from our standpoint it's an important part of our value proposition to the dealers and it's also still a very attractive business today given spreads available in the market place. Meaning that we can participate in this segment, make good money while still choosing the right credits and getting the spread to pay us very adequately for the loss experience that we expect.

And our approach to the subprime business is very strategic these days versus with the some of the players. And by that I mean we leverage our relationship with our dealer customers to make sure that we get a first look at the entire portfolio. And what that does is allow us to leverage our overall relationship across the full credit spectrum to make sure we can look first and choose the right credits in the below 660 CB score bucket and participate with those as opposed to being kind of at the tail end.

And when you have a nonstrategic relationship you tend to get to look at the business after two or three lenders maybe have said no to the credit. So we're coming back and -- but we're doing it in a very strategic way and one that is very attractive to us from a margin and a return standpoint.

Great, thank you very much.

Thanks, Kirk.

Doug Karson, Bank of America.

Thank you, guys. The first question I have relates to the net financing revenue on slide 10. It looks like it came in at $818 million. And I'm trying to foot that with a 93% increase in originations year-over-year, because you're actually down year over year on net financing revenue. I just wanted to understand those numbers better.

Well, I think you'll see the net financing revenue come in over time. So the increase in originations are relatively new and so you earn that over the life. There have been a fair amount of changes in our balance sheet over the last year.

So when you're trying to compare year over year you're looking at a fair amount of lease portfolio running off and some of the higher risk assets running off that benefited the net financing line item a year ago that wouldn't benefit today. On a risk-adjusted basis we're much better off, but that line item feels the benefit or the impact the most.

Doug, let me share with you a way to think about this. First observation is when we book a new loan it is typically not profitable in the first six months or so, right. Number one. Number two, if you look at the history of both the industry and you look at the history of Ally over the last several years, volumes are very high in the '06-'07 kind of period, fell off a cliff in '08-'09 and are now rebuilding.

So with an average duration asset of call it three years we're really at the low point from the point of view of the earning power of the portfolio. Particularly compounded by the fact that you've got high margin lease business that was put on the books back in '07-'08 that is rolling off and our lease volume is growing back again.

So a lot of -- the origination that you're seeing today and the growth in that origination is going to kick in in '12 and '13 from an earnings point of view. I think it's very important to understand that dynamic.

That makes it clear. Thank you. A topic on page 11, the used vehicle originations really hopped up to $2.3 billion, about $1 billion more than 4Q. How big can that segment get and how profitable is that segment relative to some of the other line items?

Bill?

The used market is a great growth opportunity for us. I mean if you go back to chart 5 and you kind of look at the spread of competitors and what our position is there, I think the one thing that you'll notice on that chart is that even compared to like the other market segments, the leader there has only a 4% overall market share. Basically what that tells you is it's much more fragmented and it's something that fewer people are actually able to really attack.

So the used market and the dealer franchise segment is easily as big as new vehicles. And so from our standpoint we see ourselves in the dealer channels we operate running at 30%-40% market shares, but we're only running at 20% of that when it comes to our used participation. And so for us historically we used to obviously focus on helping sell the new vehicle as a captive type lender, but now as an independent we're able to deploy our capital and our platform to go after what's a very highly fragmented market place and leverage our dealer relationships and grow that business.

So it could get -- for us used could -- and I'm talking way out there -- get equally as big as the new business that we do. It will definitely take some time, but I think you have that type of an opportunity for us -- could equally be as big as new.

And done properly the risk-adjusted margins can be very strong in this space.

Yes, absolutely. It tends to be a little bit more down market than the new. But having said that, the spreads also compensate you for doing that.

That's very good, thank you. And then my last question kind of relates to the bank. You established a pretty strong franchise quickly and deposits have grown a lot. Have you considered at all providing more traditional banking products like credit cards or other growth areas in that bank?

Well, before we start going that direction we've got some other things we've got to do yet. We don't really even have an IRA product to speak of at the moment. So there are some basic building blocks that are still not in place. We just introduced remote deposit capture, for example.

And what we're beginning to do, Doug, is we're beginning to start looking at the customer base under the heading of what are the products that we could either cross sell or introduce to that customer base in which we might be differentially advantaged. But we're at a very early stage of that thought process at this point.

Okay. Great, thank you. That was it for me.

You have no further questions at this time.

Okay, great, thanks. If you have additional questions please still free to contact Investor Relations. Thanks for joining us and thanks for your interest in Ally. Thanks, Laura.

Thank you. Ladies and gentlemen, that concludes your conference call for today. You may now disconnect. Thank you for joining and have a very good day.