Ally Financial Inc (ALLY) 2013 Q2 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the quarter-two 2013 Ally Financial Incorporated earnings conference call. My name is Angela, and I will be your operator for today. At this time (operator instructions). As a reminder, this call is being recorded for replay purposes. And now I'd like to hand the call over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed, sir.

Thanks, Angela. And thank you, everyone, for joining us as we review Ally Financial's second-quarter 2013 results. You can find the presentation we'll reference during the call on the investor relations section of our website, ally.com. I'd like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The content of our call will be governed by this language.

This morning, our CEO, Michael Carpenter; Senior Executive Vice President of Finance and corporate planning, Jeff Brown; and our CFO, Jim Mackey, will cover the second-quarter results. We'll also have some time set aside for Q&A at the end. To help in answering your questions, we also have with us Bill Muir, who runs our auto business; and Ray Schrock from Kirkland & Ellis.

Now I'd like to turn the call over to Michael Carpenter.

Thank you, Michael. Good morning, everybody. A reasonably eventful quarter for us. In particular, we showed a net loss of $927 million. And that is really driven by the settlement with the estate of ResCap, which caused us to take an additional charge of $1.6 million in addition to the charge of $750 million that we'd taken in 2012. We'll get into that in more detail.

On an operating basis, the Company had core pre-tax income of $211 million. And from an operational point of view, I think we had a good quarter. Our customer consumer originations on the order side were nearly $10 billion in a very competitive market environment. That allowed our auto earning assets in conjunction with our floorplan business to grow 10% year over year.

Second-quarter retail deposit growth was $1.1 billion. The bank has done incredibly well this year and just surpassed the $40 billion mark in retail deposits in early July; and in the course of that have added 31% to their customer base that is now 722,000 primary deposit customers. So the fundamentals of our business are doing well. Not as well as we expect in the future, we hope, but we are doing well on an operating basis. And we continue to put behind us the difficulties of the past.

The result is that today we have a strong financial profile. The ResCap settlement I will discuss in a minute has been approved by the bankruptcy court. And we hope that from now until November or December when this is finally over, that it's simply mechanics from here to there. On an operating basis, our net financing revenue is up 24%. Our NIM is up 37 basis points, which is, I think, a testament to our ability to reduce our cost of funds. And we have just embarked on a program allowed by the Federal Reserve recently to begin to redeem the high-cost debt that we have outstanding to improve our cost of funds further.

Capital ratio is good at 8.9%, tier 1 common. That is on a pro forma basis assuming the completion of the I/O sales. And we are obviously in a favorable phase of the credit cycle. Net charge-offs declined seasonally to 42 basis points.

From a strategic perspective, on page 4, the strategic transformation of the Company is nearly complete. We have essentially transitioned the Company to an auto finance business, to an auto insurance business, and Ally Bank. And those are going to be the foundation for the Company going forward. The majority of the international sales have been completed, generating $7.7 billion in proceeds. That's 84% of the contractual expectation, with the closing of Brazil and China on the horizon. Importantly, we have exited everything to do with mortgage origination servicing. And our only participation in mortgage business is now the $9 billion of held-for-investment portfolio that we have at Ally Bank, which is very well-reserved by the way.

Importantly, as you know, we reached a comprehensive settlement agreement with the ResCap estate and its creditors that is widely supported by the creditors, and has been approved by the Bankruptcy Court on June 26, and is going forward through hopefully a straightforward confirmation process.

As we look to the future, we are very, very focused on the fact that our return on equity is not where it needs to be. We have strong underlying franchises in auto finance and in Ally Bank in deposits. But we're not where we need to be. And what these franchises are capable of from a return on equity point of view -- there are three keys to unlocking the ROE potential of the Company. The first one is to deal with the $30 billion of very expensive debt that we have on our balance sheet. And, as I've said, we have about $10 billion of that that is callable today, and the Fed has just given us authority to begin to move to redeem that debt. So a series of liability management transactions are underway.

Secondly, our noninterest expense still represents to a degree the historical complexity and geographic diversity of the Company. And we are aware that we need to redesign the way we run the Company to reflect its simplicity. And we believe and have plans to significantly reduce our noninterest expense in the process.

And thirdly but not insignificantly, for many reasons associated with the history of the Company -- and really, I'm referring here to the losses that we experienced in the 2009, 2010 period of time; the legacy ResCap situation; and the fact that we are owned by the US government have led our regulators to apply a substantially higher bar to Ally than to any other bank. We were on a 15% capital ratio in the bank. We [can't] put 660 FICOs in the bank. We've got stress tests assumptions that assume that our credit losses are seven times what they were in the great recession, and on and on and on.

We believe that as we transition away from ResCap and transition away from government ownership that, in fact, the regulators will treat us in more normal terms. And that would be a third important driver of return on equity. So that is our operating focus going forward. And beyond that, we are very focused on repaying U.S. Treasury. And beginning with repurchasing the mandatory convertible preferred. And as we announced in our 8-K, we're exploring steps to make that happen. And more to follow. So with that, let me hand over to Jeff Brown.

Thanks, Mike. And good morning everyone. On slide number 5, let me draw your attention to the upper highlighted box, which shows core pre-tax income, excluding repositioning items of $211 million for the quarter. It's pretty flat quarter over quarter and down year over year from a core perspective. The year-over-year drop is primarily driven by the wind-down in the mortgage origination business over the last several months. Let's walk through some of the line items on this page. Net financing revenue was down a bit from last quarter, given some seasonality in commercial asset balances and some dynamics with NIM, which I'll cover in a minute. More importantly, it was up $135 million year over year, which is more indicative of the overall trajectory of that line item. You can expect to see some material improvement in net financing revenue over the next several quarters as we look for opportunities to take out additional high-cost legacy debt, exactly what Mike just pointed out. And we'll cover more on that in just a minute.

Provision expense was down from the prior quarter as we had lower charge-offs this quarter, particularly in our mortgage HFI portfolio. This is a relatively low level of provision for us, and we'd expect to see that expense increase somewhat given the mix of our current originations and some portfolio growth expected in the consumer book. While noninterest expense did come down from prior quarter, we continue to see more opportunity to take expenses out longer term. Our strategic transformation is nearly complete, and we can now fully focus on efficiencies within our auto and deposit franchises. Again, as we commented last quarter, you can expect continued improvement, particularly as we get into 2014. Obviously the significant item that affected net income this quarter was the $1.6 billion charge that we took related to ResCap. And you can see that show up on an after-tax basis in the discontinued operations line item.

So overall, this was another steady quarter for us. Long term, we see very realizable opportunities to target a double-digit ROE driven by the three items that Mike pointed out. We've already begun to make significant strides in addressing legacy high-cost debt, and we're very focused on getting non-interest expense down.

Now let's talk more on NIM on slide number 6. While there's some noise that affected the quarter-over-quarter comparison, we continue to see significant year-over-year improvement. NIM expanded 37 basis points year over year, and we expect to see that improvement accelerate in the latter half of the year as the benefits of our liability management actions take effect.

Quarter-over-quarter cost of funds was up slightly, but this was due to a couple of key items. First, we used some of the cash proceeds from our various asset sales to pay down lower-cost credit facilities. And second, we have a euro-denominated note that moved from our discontinued operations into the continuing operations view that we show here. Again, just think of this as noise for the quarter. And you're going to see meaningful improvement in cost of funds and NIM going forward.

Turning to slide number 7. We also thought it would be helpful to show a few more details of the components of our funding profile, which drive our aggregate cost of funds. You can see here that while our unsecured debt comprises only 29% of our funding, it makes up 63% of our interest expense. This is driven by our legacy capital structure, which was developed when Ally was a very different Company than we are today. And we've made good progress by getting our cost of funds down by about 160 basis points over the last three years. But you can still see that we have about $35 billion of debt at almost a 6% yield. This is obviously much higher than where we fund in the market today. The good news is, there's about $10 billion of that debt, as Mike pointed out, that's callable at par, and another $11 billion that will mature over the next 2.5 years. We've already issued about $3.3 billion of call notices, and we'd expect to continue the process and address the remaining $6.5 billion over the next 12 months. We don't need to refinance all of that debt by any stretch, as we grow deposits and we have significant excess liquidity on the balance sheet today.

Starting the callable debt program was a key milestone for our Company and was supported by our regulators in light of recent ResCap milestones and confidence the bankruptcy process is on track. So as you think about the profitability of Ally going forward, this is a primary area that will drive improvement to the bottom line. And as you know, our auto business is really in a dogfight every day, and the teams are doing a fantastic job with booking great business. So getting cost of funds down will enable our guys to compete even more aggressively as well as allow for greater earnings leverage to come in the future.

And with that, thank you. And I'll hand it over to Jim to get into the details.

Great. Thanks, JB. Let's start with asset quality on slide 8. Here you can see our loss in delinquency performance for the quarter. If we look at losses first, our net charge-offs are up year over year but down quarter over quarter for both the overall balance sheet and for the US retail auto book. Let's focus on the US retail credit performance shown on the bottom of the slide since it drives the majority of our consolidated results. Our net losses declined to 57 basis points from 69 basis points last quarter but increased off of the recent -- off the historic lows of a year ago. The quarter-over-quarter improvement is largely driven by typical seasonal factors such as tax refunds, where performance improves in the first half of the year, with quarter one typically being the annual low for delinquencies, which then means the second quarter will be the annual low for losses. The year-over-year results are driven by a variety of factors, such as our continued efforts to shift to a more balanced portfolio mix over the last few years, the seasoning of some of the larger vintages now entering their peak loss periods, some impact from used-car prices coming down slightly from their unusually high levels, and a modest denominator effect as the portfolio growth moderates relative to a year ago. We would expect these same dynamics to continue in results in a modest and a gradual uptick in the year-over-year loss comparisons going forward. Importantly, though, our vintages are all performing right in line and better than our loss expectations that we used at origination. So we feel really good about the performance within this book.

So if we turn to slide 9 and talk about our auto finance results, you can see here from the financial results perspective that our auto finance business continues to perform very well in this competitive marketplace, with pre-tax income of $382 million. This is up meaningfully from last quarter but down from a year ago, as last year we had several one-time items that benefited us that did not recur this year. Importantly, we continue to see year-over-year improvement in net financing revenue, which is up $84 million, or around 12% year over year. We continue to grow our earning asset base, and our lease revenue and remarketing gains are helping us as we come through the trough and leasing volumes that we saw over the last few years. Our gains in net revenue more than offset the drop in other revenue compared to a year ago, where in the second quarter of last year we completed two whole loan sales which generated $39 million in gains. Provision expense is down from the quarter due to normal seasonal trends and due to lower commercial balances. However, it was up meaningfully from a year ago. Last year, we had abnormally low provision expense due to the timing of some directional reserve releases.

Now let's turn to slide 10 and cover some of our origination trends. On the top left, you can see consumer originations were $9.8 billion, which is up slightly from last quarter but is down about 7% from a year ago. It's important to note that, last year, we saw unusually high subvention from manufacturers in the second quarter, which positively impacted our originations. And the $10.5 billion that quarter was a recent historic high for us. So as we talked about before, we like the level of our originations. It gives us a good mix of business while we hold the line on asset quality and profitability. And at the same time, we're able to grow the portfolio gradually as originations are exceeding portfolio amortization, and you can see that on the slide in the bottom left.

On the top right, you can see our origination mix. As expected, the subvented business continues to decline but is being offset by other product types. With the Chrysler subvented contract expiring in April and the loss of Chrysler Capital in May, we would expect to see very little Chrysler subvented business going forward. That's not unexpected, and we've obviously been positioning the Company for the last four years to succeed in the marketplace without reliance on the exclusive rights to subvented business. Our used and lease originations remain strong, comprising over 53% of our originations. We like the margins on those products, and our infrastructure and risk management give us a competitive advantage in managing these products. Our efforts to diversify paid off, and we continue to be very well-positioned with our dealer customers, and we've added nearly 900 new diversified US dealer relationships compared to the second quarter of last year. And our retail application flow is up around 16% year over year.

On the bottom right chart, you can see our commercial outstandings of approximately $30 billion, which is down from prior quarter and a year ago. The decrease is primarily related to lower dealer inventory levels, given the strong retail sales environment as well as the competitive market dynamics that we've been discussing.

As we discussed for the last several quarters, we remain focused on expanding the profitability of our dealer relationships and not just market share or growth for growth's sake. As we continue to further enhance our full suite of products and services we provide the dealer customers, we've launched a few new services this quarter. We launched a service called Ally Performance Development Center that provides dealership employees with customized training to improve their processes and profitability. And in addition, we've launched a mobile app for SmartAuction, which provides dealers an additional way to access the online used vehicle auction marketplace.

Let's turn to insurance on slide 11. You can see insurance reported pretax income of $45 million. This is down from the $61 million last quarter due to typical seasonal patterns as a result of elevated weather-related claims each spring. However, the results are up from $20 million a year ago driven mainly by higher realized investment gains. Dealer products and services, or DP&S, continues to see strong written premiums with $276 million this quarter. Written premiums increased seasonally, driven by higher vehicle service contracts. We achieved the highest level of written premiums since 2008, experiencing a 7% growth since last year in the number of dealers participating in a full suite of services. So this business continues to perform well for us and obviously is an important component to the overall dealer relationship.

Let me talk a minute about mortgage on slide 12. We reported pre-tax loss of $27 million, which is primarily the result of exiting the mortgage origination and servicing business. Originations have ceased, and we completed the sale of our MSR back in April. What is left is the $9 billion held-for-investment portfolio at Ally Bank. This book is now in runoff and will slowly decline as loans mature over time. And as you think of the economics of the segment going forward, we will continue to earn interest income off of the HFI portfolio, which will be offset by provision expense and a modest amount of direct and indirect expenses.

On slide 13, we show you a view of our corporate and other segments. It consists of our centralized treasury operations, our commercial finance group, as well as a reclassification and eliminations between the various reporting segments. It also contained some unallocated non-interest expenses that have resulted from exiting several businesses over the last year. And this is the segment where you'll actually see a lot of improvement going forward, and our goal is to get this segment to close to as close to zero as possible. As Mike and JB have discussed, we expect cost of funds and non-interest expense to decline materially. And a lot of this activity is captured in this segment.

So let's turn to the Ally Bank deposit franchise on slide 14. And you can see that both our deposits and customer base continue to consistently grow. Total deposits ended the quarter at over $49 billion, and we now have over 722,000 primary customers, which is up 31% year over year.

Regarding retail deposits, we just surpassed the $40 billion milestone in the first half of July, only four years after the launch of Ally Bank. And this is certainly something we're very proud of.

On the bottom right, you can see our retail deposit growth of $1.1 billion this quarter. And this is flat to second-quarter performance for the last two years. Second-quarter growth is seasonally lower due to tax payment outflows. Our customer retention remains strong with CD balance retention of over 90%, and we've had this for eight consecutive quarters. And our customer satisfaction has been over 90% as well for the past four quarters. We continue to receive great feedback from customers. And this quarter, we received several additional third-party awards, and we note that on this slide. And as we noted before, the trends within online and direct banking continue to provide a tailwind for us, and the Ally brand is very well positioned within the industry.

If we turn to slide 15, let's touch on the strength of our franchise and the high customer loyalty which is reflected in the stability of our deposit base. This graph provides a breakdown of the retail deposits by vintage. And what is evident on this graph is that every vintage remains steady or is growing. Once customers try Ally Bank, they generally stick with us and many times will open additional accounts with us. And it's also notable that we've seen this level of stability in this book despite the fact that our customer rates have generally drifted lower over the time horizon.

JB touched on funding and liquidity earlier, but let me make a few additional comments on slide 16. You can see on the top right that our parent Company liquidity increased from $19.5 billion to $23 billion this quarter primarily due to the proceeds received from our international asset sales, as well as the $1.1 billion from the ResCap secured debt repayment. Our liquidity metrics are strong; we continue to be focused more on optimizing liquidity versus sourcing liquidity, given all the proceeds we received from the asset sales and the success we've had in our diverse funding strategy. Deposits represent over 40% of Ally's funding profile. We issued another $3 billion in auto ABS this quarter across retail, loan, lease, and floorplan platforms, both at the bank and at the parent Company. We also recently issued $1.4 billion of fixed and floating unsecured, which we'll use to redeem some of our legacy high-coupon callable Smart Notes. And with a limited amount of unsecured maturities for the remainder of 2013, we are now focused on liability management, as JB discussed. And you can assume our unsecured footprint will come down somewhat over time.

On slide 17, you can see our capital ratios. If you look at tier 1 common, you can see that the impact of our asset sales this quarter more than offset the charge we took for the ResCap settlement. And you can see on a pro forma basis, we'd expect tier 1 common to go up another 90 basis points or so as a result of the remaining international sales. We submitted the midyear DFAT plan to the Federal Reserve in July, and we continue to engage in dialogue with the Fed on the Company's CCAR resubmission, which we really can't comment on at this time. We should note that Ally is well-positioned to achieve the final Basel III capital requirements in advance of the proposed timelines. Based on the final rules that were released recently, we estimate that our tier 1 common ratio would only be about 20 to 40 basis points lower under Basel III.

So let me conclude on slide 18. First, we continue to see positive core business trends reflected in our strong auto finance performance. Our continued emphasis on profitability, asset quality, and continued deposit growth. Second, our strategic transformation is nearly complete. Our Company is becoming more streamlined, creating a more predictable and transparent earnings profile. And as we discussed, we're looking forward to improving our profitability and ROE, and we continue to have some highly visible opportunities to do so. Particularly on cost of funds and on the non-interest expense side.

So with that, we'll move to Q&A.

(operator instructions). Doug Karson, Bank of America.

I guess I had a quick question -- or strategically, and I thank you for all the data you put out. Regarding the resubmission to the Federal Reserve Board, do you have any timing of when maybe there is a response regarding the ratios?

Doug, it's JB. I mean, we can't specifically comment. I'd say we are in active discussion and sort of third quarter to early fourth quarter is kind of reasonable timeframe when we think we can move ahead.

On slide 7, you give good color on the Smart Note program and the fact you called $500 million and looking for additional called notices of $2.8 million, which adds up to about $3 billion plus. Just so I'm smart on it, is there any issues around taking that debt out vis-a-vis being, I guess, under the requirement the Federal Reserve Board wanted the capital ratios to be?

No no no.

Like, why give you a green light on that?

So, Doug, no specific tie-in to capital. However, the regulators view the June 26 and July 3 milestones with respect to ResCap as key dates. And we began our program immediately after, and you should expect -- we've kind of listed the 3.3 that we've noticed on today, but you should expect that to continue kind of on a month-by-month basis over the next year. And we've got -- we're sitting at about $23 billion of parent Company cash, and we think that's probably doubled of what we need to run for solid liquidity ratios. And you can look at between the MCP that Mike talked about and the debt we want to address here to get a pretty good idea of how we're going to use some of that excess liquidity.

Right. I remember earlier from the call you said there didn't necessarily need to be a lot of refinancing to meet those calls, given the cash the Company had.

Right.

I guess kind of moving more toward the MCP, is this let's call it stress test kind of still linked with the ability to pay the MCP back? I.e. would we have to wait for the Federal Reserve Board to opine on maybe an updated reading before the MCP gets addressed?

Yes.

Okay, it makes sense. And then I guess finally, the 8-K that came out, I think you may have kind of touched on it regarding the potential of a common stock issuance. And I know there were some headlines surrounding that. Could you maybe -- could you share any more color about what that stock issuance would intend to do? Would it be to help the capital ratios? Would it be liquidity? Would it just be opening up security on the market? Just maybe a little bit of color on that and that would be it for me.

Here's the way I would answer it, Doug which is -- and it relates to your previous question. The Federal Reserve has got to be comfortable for us to repurchase the MCP which is $5.9 billion. The Federal Reserve has got to be comfortable with all our capital ratios. The ratios that we failed on was a common equity ratio in a stressed scenario last time around. And so, we are -- there are a number of ways to go at it. We could -- for example, we could have US treasury convert part of their MCP into common. We could raise common potentially. We could shrink the balance sheet. There's a whole bunch of things we could do. But we are simply focused on passing the stress test as it relates to the common equity ratio because that is the key to repurchasing the MCP. Is that pretty clear?

Yes, that's perfect.

And anything beyond that, we are obviously limited in what we can say. And I would sort of refer you back to the 8-K that we've put out a little while ago. So that's about as candid as I can be.

Okay, well thank you. That's it for me. I appreciate it.

Eric Selle, JPMorgan.

You know, if you look at the slide, I think it's 9 on your financial supplement, you look at the detail on the autos. Your finance revenue's up $200 million but your EBIT is down. And I know there is an absence on the gain of loans and the natural rise in depreciation on lease and loss provisions. And you kind of explained the loss provisions as absence of the release and reserves that we saw last year. But, looking foward -- how should we look at and model lease depreciation? What's the best way to look at it? Should we look at it as a percentage of lease revenues or originations? That's obviously going to precede the revenue but not in a static state. How should we look at that? And then secondly, what is your FICO score done year over year, and does that help explain some of that provision growth?

I would say on leases, the difficult thing is, last few years we were at historic lows in our lease originations. So now we are getting more up to a normalized percentage of lease volume each quarter. And so now you're starting to see -- I think what you saw this quarter is more of a steady -- approaching a steady state of what you'd see on lease-type revenue. Our goal, obviously, is to depreciate the lease asset over the life of the lease so that you get to the end and don't have a gain or loss on the disposition. But obviously it's not a perfect science. But I think if you look at the combination of those two revenue line items, we're approaching a steady state, I believe.

And, on average FICO, we really haven't disclosed FICO. So I would just leave you with -- as we discussed coming through the crisis, our originations and our portfolio trended more toward super prime nature, and now we're more to a normalized mix. So I think, de facto, that means that FICOs would trend down a little bit. But we really haven't put out specifics on anything.

But you know, FICO is actually pretty flat from a year ago. If you look quarter over quarter, it's pretty flat to a year ago.

Okay. That's great. And then you guys, the lease growth if you look at -- I forget the slide where you had the bar charts -- your lease growth is pretty tremendous. I think you went from like 16% originations to 28% if my memory serves me correct. Or 19% to 28%. That's obviously where a lot of the growth comes. It is that 28% of your origination on the upper end, or could you continue to push that? Where should we see that as a proportion of your origination mix going forward, or is that kind of a steady state like you were saying the income statement items?

This is Bill Muir. I would say we're approaching something that's probably closer to equilibrium than not. And what you've seen in terms of the growth in our lease originations and our portfolio has really been mirroring what's been going on in the industry at large during the -- if you go back pre-crisis know time period, the industry average was about 30%, bouncing around in terms of total lease portion of vehicle sales. It dropped dramatically when a number of major players more or less got out of the leasing business for a year or two. It's now coming back, and I think it's getting back towards a territory between 25%, 30% for the industry. And that's going to -- and given our position in the industry, we're going to mirror that.

And then just one clarification. I mean, I was -- and I've gotten a couple of people pinging me on Bloomberg. And I don't want to put words in your mouth, but did you guys, to Doug's question, basically say that you have to comply with the stress test before you go after the MCP? Is that what kind of the gist of it was?

Yes, the way I would describe it is that we will be submitting a revised CCAR. That revised CCAR will assume that we will repurchase the MCP, and the Fed will either bless the CCAR that we submit or it won't. So we don't have the ability to execute the repurchase of CCAR until the Fed -- excuse me -- execute the repurchase of the MCP until the Fed approves that CCAR.

God bless America. And then just one final question --. And I do mean that sarcastically. But now that the ResCap dust is settled and your asset sales are mostly done, have you guys started the IPO process? Are you guys starting to talk to M&A advisors to go through some of those capital plans you outlaid on the prior question? And I'll jump off the call. I appreciate your time.

Look. I think -- our approach to the -- we haven't started any process. The reason that we update the S1 is there have been significant developments, and we want to keep the S1 current. But we are not -- we have not pressed any buttons at this point.

And no M&A advisors?

No. (multiple speakers)

Thanks a lot.

Gary Jacobi, Wexford.

Good morning. Thank you for taking the call. In the call, you mentioned that you might try to redeem some of your mandatorily preferred -- some mandatory redeemable preferreds. Which (multiple speakers).

I did not -- I did not -- excuse me, Gary. I said repurchase. I did not say redeem.

I apologize. Which are those issues in terms of the coupons? Or is that all of them?

It would be all of them.

Okay, and last question is on the same topic. Do you have to do a common stock offering? An IPO in order to do that? Or can you do that through other means?

We simply have to get the Federal Reserve to support our CCAR submission, which is what we were just talking about.

Thank you very much.

Sam Crawford, Stone Harbor.

A couple of questions. I was attentant and listening when you said you didn't intend to discuss FICO in detail. I'm wondering if we can speak a little bit about customer mix in other ways. In particular, I'm wondering about the subprime customer strategy.

Sam, what would you like to know about it specifically?

There is no really great way of getting right down to the essence of the question. But one way of putting it, we've had a fairly benign residual value market now for some time. Is there a sense in which you feel the Company is structured along an assumption of continued benign conditions and residual value relative to the credit mix of the customer base?

This is Bill Muir. I think maybe the -- our approach to the marketplace is not really based on today, on some view of where just general economic consumer trends are going. We've been -- you know, from the kind of the depth of the crisis, where everybody moved to a very pristine kind of credit mix; we've moved back to a more normal approach. And if you look year over year, the portion of our originations in the nonprime category -- we would say that's for FICO 620 and below. It's almost exactly the same. So we've kind of gotten back to a balanced credit mix, one where there is a good portion -- of a meaningful enough portion in the prime in the near prime. But that has not changed, and we don't intend that to change. We kind of feel we're where we want to be.

Okay. From another angle but without exasperating the topic. There's been stepped-up competition in both volume of originations and aggressiveness and pricing of originations in subprime lending on cars. And I'm wondering if that's influencing the terms that you are requesting in the marketplace as well.

Actually, I would say the step-up in competition that we've witnessed has been primarily at the super-prime end of the marketplace. Much less so at the near-prime and sub-prime. Super-prime has just been awash with a lot of excess liquidity at a lot of banks. And so there's almost -- there is very little margin and not a very attractive risk reward trade-off on the super-prime end. And so that's an area of business which we've been less aggressive in going after and kind of staying more in the middle tiers where there is still a good risk reward trade-off.

Okay. And one last question, if I may. I believe the 990 dealers added number was a gross number, and I was curious if I could get the net and what your dealer population is at the present time. And just an understanding of what the Company defines as an active dealer, if it's sort of a one loan/one lease per month or a higher threshold than that.

I don't think we have the gross and net number handy. I do think the active dealers are ones where we are currently doing business. And it is fair to say, as we are adding dealers on the diversified channel, you start off slow and you build up your volumes as you prove your capabilities to the dealers. So I think Bill, anything you want to add on that?

Yes, I was struggling to even kind of figure out which number we were talking about. Yes, I mean, I guess we do publish a number of dealers that we just have any kind of relationship with, even if it's just one or two contracts a month. That number actually will fluctuate up and down on a regular basis as we'll kind of strike out and attempt relationships with some new people. That is kind of less important to us than the number of dealers where we kind of have kind of a broad-based relationship, where we're providing wholesale financing and a number of other products too. And that number of dealers is one that has not changed very much.

Okay, thank you very much.

Robert Smalley, UBS.

Just a couple of quick points of clarification. When you talk about collapsing the debt footprint, you'll still be accessing the unsecured market, from what I understand. Are there any preferred points on the curve that you are looking at, especially given all-in costs and all-in yields at this point?

Go ahead, Chris.

This is Chris Halmy. What I would say is you are correct that we'll continue to be active in capital markets on the unsecured side. And our preference really is to go across the curve. You've seen us pretty short lately; that's where a lot of the investor demand has been. But we are open to go three, five, sevens, and tens.

Okay. And do you have a number in mind that you'll think of issuance between now and the end of the year that you want to share?

I don't think we want to share that to the market right now. But I would say that we'll continue to look at the markets moving forward this year.

And then finally, just to go back on the preferred issue, you talked about repurchase versus redeeming. I'm assuming that's open market purchases versus redemptions.

Remember what we're doing here is we are repurchasing the mandatory convertible preferred from the U.S. Treasury. So, it's a one-on-one negotiation. We're not talking about repurchasing securities that trade in the marketplace.

Right. That's because you still have some rather high-coupon preferreds outstanding. Would you put that in your CCAR submission?

No.

Or would that be something that would be a 2014 CCAR submission?

It could be 2014 or it could be never.

Okay. Thank you for straightening that out.

Daniel DeYoung, Columbia MGMT.

Most have been asked and answered. But just one remaining on the Chrysler operating agreement that expired in April. Is that 4% of the earning asset composition that was new subvented business? Was that mostly done in April? And what do you see in terms of new business with Chrysler opportunity going forward, if any, at this point?

This is Bill Muir again. The 4% that we listed was -- it kind of happened throughout the quarter, with the bigger piece of it in April. So that operating agreement governed only that new -- the retail subvented portion of the business. We continue to do a significant amount of business in the non-subvented retail. We also continue to do a lot of used financing out of the Chrysler dealer channel as well as lease business that's not based on the manufacturer's subvention. So overall, I would say the initial impact has been that we've seen our volume in the Chrysler channel go down by about 30% -- a third, give or take. We expect that that will come back a little bit from that level and that we'll still continue to operate with two-thirds or so of the business we've always had there historically.

Okay. Thanks. And then just looking at GM financial, looking to want to get into the prime market in the auto lending space. Do you anticipate that significantly impacting some of your GM-subvented business that you're currently doing today? How do you view their strategy into getting into US prime?

I think that the GM strategy has consistently been one of making sure that there's full-fledged competition in their channel for all the business that's done. And that includes the new retail subvented business. So you now have, for example, three competitors for the subvented business in the GM channel. And that's GM Financial, Wells Fargo, and ourselves. So we compete head-on-head for that business. And so as a result, you've actually seen -- and if you look into the details, you've seen that the amount of the GM-subvented business that we've done in the first quarter this year compared to last year was down. And it's primarily because last year there was less competition than there is now. And so we're kind of getting into a competitive equilibrium. We expect that we'll continue to be able to compete for that business, and we'll win it based on competitive terms and conditions. But the point I'm making is that the business that we get out of the GM channels for subvention has nothing to do with any kind of an exclusivity arrangement or any kind of a legal obligation or anything like that. It's all competitive business that we earn competing side-by-side with GM Financial and Wells Fargo.

Okay that's it. Thank you guys very much.

George Brickfield, Seaport Group.

First question is that you guys have disclosed in the past that you need to convert to a financial holding company in order to retain your insurance business and the smart auction business. Can you give us an update on where that process is?

Yes. First of all, this is something that our two Boards, both of Ally Bank and Ally Financial, have been very focused on. It is something that we have, at the Board level as well as management level, an ongoing dialogue with our principal regulators. And I would simply say that we're not allowed to disclose regulatory information, but we're essentially meeting all the hurdles that have been put in front of us. And I have every reason to believe that we will retain financial holding company status by the end of the year.

And is there any impact on the business from capital ratios or lending standards or anything like that that being a financial holding company would have on you guys that would be disadvantaged -- disadvantageous versus your current structure?

No. The only real issue with financial holding company status, which we're told by our regulators we are now, the question is will we remain so. It's simply the issue of inadmissible activities. And insurance and our smart auction business are inadmissible activities. We have received -- we are allowed to have three extensions. We're on the third of those extensions. And so the financial holding company status has to be retained in order to retain those otherwise impermissible activities. Beyond that, it doesn't have any implications for ratios and things like that. It does and may have implications for things like acquisitions and sort of general expansion of various kinds. And I also think it also has an implication for the regulatory relief that I talked about earlier on. Obviously the higher our GPA, as far as the Fed and the FDIC is concerned, the more they are going to be willing to cut us some slack in terms of some of these regulatory constraints that have been imposed upon us for the reasons that I've described.

So I think, as we head in that direction, it's actually very beneficial. And I think that's a good example. We were talking earlier on about being able to do some liability management. Well, we didn't just wake up in the last month and decide we've got $10 million of callable high-cost debt we would like to refinance. We have been in that position for about a year or more. And but what we lacked was the approval of the regulators. And so, as we have put ResCap behind us and as we've dealt with the regulatory issues that the regulators have, they've become increasingly confident and begun to allow us to do some of the things we need to do. So, it's less a question of capital structure and so forth. It's more a question of increasing regulatory flexibility which, as I discussed earlier on, directly translates to our ROE.

Okay thank you. And next question. On the -- you mentioned on the call, I believe you said that you would look to repurchase the MCP from the treasury. If you repurchase the MCP, does that mean you're not going to trigger the equal and ratable protection on the series G 7% preferreds?

Well, you know we understand what our alternatives are, and we believe that repurchasing is the best approach.

And in the 8-K that you guys filed on July 16 regarding the CCAR, you mentioned that you would need regulatory approvals, which you discussed today. And you also said you need other approvals. What other approvals would you need potentially there?

Well, the main one is -- if we were to do anything on the equity side of things, we obviously need Treasury support for that. We obviously need our Board of Directors as well. But the one I would refer to is if we were to do anything that had an equity element to it that's something that treasury as a 74% shareholder might have a view on.

Okay great. Thank you very much for your time.

Hey Angela, I think we've got time for one more call. Do we have one more call?

Brian Monteleone, Barclays.

So, Michael, just maybe to follow up on George's last question. You've kind of made this point of distinction between redemption and repurchase. And I think most market participants think about those two words kind of interchangeably. Can you may be just clarify why you think there is an important distinction there?

I'll tell you what. I think I've been pretty clear. If it's something that you are very interested in, I would just suggest reading the public documents. And I think the public documents are pretty clear.

Yes, we are very clear on contractual rights that exist and what our options are.

Okay. Thank you.

Okay, I'd now like to have the call back to Michael Brown for closing remarks.

Okay great. Thanks a lot Angela. If anybody else has any additional questions, please feel free to reach out to investor relations. Thanks for joining us this morning. Thanks Angela.

Very welcome. Thank you ladies and gentlemen. That concludes your call for today. You may now disconnect. Thank you for joining and have a good day.