Ally Financial Inc (ALLY) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2013 Ally Financial Inc. earnings conference call. My name is Lacey and I will be your coordinator for today.

(Operator Instructions) As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today, Michael Brown, Executive Director of Investor Relations. Please proceed.

Thanks, Lacey. Thank you, everyone, for joining us as we review Ally Financial's fourth-quarter 2013 results. You can find the presentation we will reference during the call on the Investor Relations section of our website, Ally.com.

I would like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language.

This morning our CEO, Michael Carpenter; Senior Executive Vice President of Finance and Corporate Planning, Jeff Brown; and our CFO, Chris Halmy, will cover the fourth-quarter results. We will also have some time set aside for Q&A at the end. And to help in answering your questions, we also have with us Bill Muir, who runs our auto business.

Now I would like to turn the call over to JB.

Thank you, Michael. Good morning and thank you for joining the call.

Before we get into results, I want to take a few moments to recap what an extraordinary year we had in 2013. As you can see on slide three, the list of achievements is quite substantial. We had strong performance in our core businesses with growth in auto earning assets of 8% and deposit balances up 23%.

We made significant progress in putting our legacy mortgage issues behind us with the confirmation of the ResCap bankruptcy plan. And we took a series of steps to strengthen our capital position and repay the US Treasury investment. For example, we raised an additional $1.3 billion in common equity, which enabled us to repurchase $5.9 billion of preferred stock from the US Treasury. We also received a non-objection to our revised CCAR plan.

We generated significant proceeds from the sales of our international businesses and reduced the amount of higher cost unsecured debt. We ended the year by being granted financial holding company status by the Federal Reserve, which ensures our first-class dealer coverage model will continue. And 2014 is already off to a strong start as well with the US Treasury beginning to monetize their equity holdings in Ally through a $3 billion private placement.

In summary, we made significant progress last year and we are now strongly positioned to drive towards improved shareholder returns and exit TARP.

Turning to slide four, you can see the progress that has been made thus far in returning the taxpayers' investment. Following all the recent actions, the US Treasury has received 89% of the initial investment in the Company and they currently hold 37% of Ally's common equity, which is down from 74% a year ago.

On a cash basis, $1.9 billion remains on the investment, which is all in the form of common equity. We are squarely focused on making a full exit from TARP and we believe we are well-positioned to do so this year.

On slide five, I want to highlight a few key metrics of performance for Ally. We continue to increase our US auto earning assets, and as you can see in the top left, earning assets have increased 27% over the last few years. This is amid an intensely competitive market and while we have transitioned the business from being a captive model to a market-driven competitor.

Ally Bank continues to be a bright spot and retail deposits have grown steadily, including another $8 billion this past year. Our net financing revenue continues to improve while our cost of funds declines, as we grow deposits and take other strategic liability management actions.

Now turning to slide six, Ally is a very different company today than it was a few years ago. We built the preeminent domestic auto finance franchise, a leading direct bank franchise in Ally Bank, and we are one of the few players that have fully addressed legacy mortgage issues. And we have obviously closed that chapter in our lives.

Our balance sheet is pristine and is comprised largely of low-loss auto assets. Our earnings are reasonably stable and we have a line of sight into ROE expansion opportunities. Our capital and liquidity positions are strong and, in our five years as a bank, we have greatly improved our standing with regulators.

Most importantly, there's a talented management team that has a proven track record of executing on our plans and getting it done regardless of the challenges. We continue to believe that the coupling of the leading auto finance franchise with the top direct bank is a winning combination.

On page seven, we outline our priorities and outlook for the next chapter. We have been successful with our auto finance franchise through a very competitive period and we see that competitive landscape continuing. We are focused on our strengths and the value that our platform offers to dealers.

We also are guided by profitability and asset quality as opposed to just growth and share. We want to engage in segments of the business that deliver an appropriate return, and that is how we will continue to approach the business.

We are also focused on continuing to grow our deposit base in a stable and consistent fashion. Ally is a well-positioned brand in the banking landscape and, when customers come to Ally, they generally stay with Ally. As we look ahead, we will look for opportunities to leverage the strengths of this franchise.

Lastly, but certainly very importantly, we can finally turn our attention away from managing a massive transformation of the Company and more towards improving profitability. We believe there are significant opportunities in the Company to deliver a double-digit return on equity over time and as you know, we are approaching it on three fronts.

Driving NIM expansion through lower cost of funds; we've made significant improvements on that front so far, but we believe there's further opportunity for improvement. Reducing noninterest expense this year and next as we look to streamline and right size our expense base to reflect the simpler business model that we have historically had. We believe there are significant opportunities in this area that will begin to be realized in the near term.

Lastly, we anticipate regulatory impacts to our business to normalize over time. We have several years of banking experience under our belts now and have demonstrated strong results toward a number of critical initiatives. And we expect to see this area normalize over time. In summary, we are singularly focused on our next set of priorities and we are confident in our ability to pursue these goals.

Now let's turn to slide eight and go through the financial results for the fourth quarter and full year 2013. During the quarter, we had core pretax income, excluding repositioning items, of $161 million, which is down from $271 million in the third quarter. As previously disclosed, the key notable item this quarter was the $98 million charge related to CFPB DOJ settlement, which we've broken out separately in the table on the slide.

Absent that charge, core income is down a touch from prior quarter and both Chris and I will give some perspective as we cover the remaining slides.

If you look at the full-year results on the right side of the page, you could see it was another year of transformation and transition, but obviously we now sit with a cleaner company and business model going forward. The majority of the legacy uncertainties have now been put to rest and it's all about executing the core strategy that I just discussed.

Net financing revenue crossed over $3 billion in 2013, which is up about 36% from 2012. The increase is driven by continued growth in consumer assets as well as lower cost of funds. But as you can see, there's an offset in the other revenue line item as we have fully exited the mortgage business. And while non-interest expense was down year over year, we still have some work to do on operating efficiency.

So while we were profitable in 2013 despite working through some significant legacy issues, the overall results for the year are clearly not where we want to be. We don't believe $850 million of core pretax income reflects the true earnings power of our franchises and we have some good opportunities to drive improved results. And while net income available to common is excluded from the page, avoiding over $530 million in dividends will also help build capital.

Now let's go through some of the quarterly line items in a bit more detail. Net financing revenue for the quarter was $841 million, which is up $40 million quarter over quarter and $174 million year over year. These improvements are primarily driven by lower cost of funds, which I'll discuss in a moment.

Total other revenue of $324 million was down from prior quarter due to lower investment portfolio gains and derivative activity. The large decline from the prior-year quarter is again a result of exiting the mortgage business.

Provision expense of $140 million is up from the prior-year quarter, primarily driven by the continued shift in our portfolio mix and the seasoning of older vintages. On a quarter-over-quarter basis we were down slightly as a result of some additional recoveries that came through from an accounting perspective this quarter, so the $140 million you see in the last couple of quarters is a bit lower than the run rate we expect in 2014.

Controllable expenses are up slightly quarter over quarter, primarily driven by the timing of marketing programs and higher servicing and repossessions expense. Controllable expenses have decreased year over year as we streamlined the Company to a significant degree.

We will continue to focus on opportunities to improve efficiencies and cut costs, primarily in the second half of 2014 and throughout 2015. Many of those reductions will come from lower global functions, reduced legal and consulting fees, and IT expenses with partial offsets by continued investments in the auto and deposit franchises.

Other noninterest expenses decreased quarter over quarter, primarily due to lower mortgage repurchase expense. On a year-over-year basis expenses dropped, mainly driven by the lower insurance weather losses. So our core pretax income, excluding repositioning items, was $161 million, which is down $110 million from the third quarter and about $150 million from the prior-year quarter.

The small increase in repositioning items this quarter relates to a charge we took in anticipation of streamlining parts of the organization.

Looking below core income you can see we have $25 million of income in discontinued ops, which is roughly equal to what we make per quarter from our China JV. Finally, net income is $104 million for the quarter, which is up slightly quarter over quarter due to the FHFA and FDIC mortgage settlements that occurred last quarter in the discontinued operations line.

Decline in net income year over year is driven by the prior year's quarter deferred tax asset valuation allowance release and income from discontinued operations that have since been sold.

Now turning to slide nine where we breakout results by segment, and Chris will take you through the full details in a minute, so I'll just briefly highlight the year-over-year variances, which again reflect the transitional nature of earnings this year. Auto finance with $305 million of pretax income if you exclude the CFPB DOJ charge decrease year over year, primarily due to the higher provision expense driven by the continued shift in our portfolio mix and the seasoning of older vintages as well as a reserve release in 4Q 2012.

Insurance is up year over year mainly driven by lower weather losses due to Superstorm Sandy that impacted 4Q 2012. The decline in mortgage is obviously due to our exit from the originations and servicing business and the decreases in auto finance and mortgage are somewhat offset by progress made in our corporate and other segment, where you see a meaningful improvement due to our cost of funds reductions.

Now let's move to slide 10 and talk about NIM. We reported net interest margin of 2.39% this quarter, which translates into 5 basis points of NIM expansion quarter over quarter and 48 basis points year over year. Earning assets increased due to higher seasonal commercial auto balances, which translated into slightly lower average asset yields.

Our cost of funds is down 17 basis points quarter over quarter and 50 basis points year over year, driven by the redemption of some of our callable high-cost legacy debt and continued growth in deposits. We expect to see NIM expand further, driven by its liability management process which is covered on the next slide, so let's turn there.

Highlighted here on slide 11 is the breakdown of our funding profile, which helps show the progress we've made quarter over quarter in reducing our cost of funds. We called approximately $8.1 billion of unsecured higher cost debt in 2013 and an additional $700 million year-to-date in 2014. We also have an additional $900 million that we plan to take care of later in the first quarter.

We reduced our long-term unsecured debt interest expense another $80 million this quarter to just over $420 million, improving our unsecured cost of funds by 36 basis points to 5.6%. This drove a reduction in our total cost of funds to 2.21% for the fourth quarter.

The call program has resulted in some fairly steep drops in our cost of funds over the past couple of quarters, which has driven the NIM expansion. And while the pace of improvement could slow to some degree as we get into 2014, we have plenty more room to run as additional unsecured debt rolls off and we continue to grow our deposit base.

Certainly when you think about overall full-year results for 2014 versus 2013, you can expect a meaningful benefit to net financing revenue from the debt calls that were backend loaded this past year. So with that I am going to turn it over to Chris to take you through the details.

Thanks, JB. Let's take a look at our funding and liquidity highlights on slide 12.

Our total parent company liquidity declined versus last year as we utilized excess liquidity to repurchase MCP and call legacy debt. With current parent company liquidity of around $13 billion and less than $11 billion of unsecured debt maturities over the next two years, we continue to maintain comfortable coverage levels as our time to required funding remains strong at more than two years.

We benefit from a diversified funding strategy with a mix of unsecured and secured debt as well as deposits. Our deposit base represents over 40% of our funding mix and provides a real advantage over market-based funded finance companies, particularly in a rising rate environment or in periods of market disruption.

With the strength of our deposit growth in the secured market funding transactions, unsecured debt now comprises just 23% of our funding mix. That being said, we will continue to be an opportunistic issuer in the unsecured debt markets, as you saw at the recent five-year fixed transaction we issued a few weeks ago. And to give you a little perspective, we priced that deal at a 3.5% coupon while we're calling current debt about roughly double that rate.

Turning to capital on slide 13, in the fourth quarter we obviously had some significant actions which allowed us to largely normalize our capital structure and, as JB mentioned, eliminate $530 million of preferred dividends per year by repurchasing the MCP. The Tier 1 common ratio increased 90 basis points this quarter to 8.8%, primarily due to the additional $1.3 billion common equity raise and the closing of our Brazil sale.

On a pro forma basis for the pending China sale, our Tier 1 common ratio moves to 9.3%. Our total capital and Tier 1 capital ratios declined with the MCP repurchase, but still remains at very strong levels. As we previously mentioned, Basel III is not that significant for us and we expect it to have a real de minimis impact on a fully phased-in basis.

So let's move to asset quality on slide 14. Our consolidated net charge-off rate in the top left, as well as our retail auto charge-offs in the bottom right, are pretty flat quarter on quarter and year over year. As JB mentioned, we did have the benefit of additional recoveries that were recognized this quarter, which helped keep that number lower from the typical seasonal increase that you would expect to see in the fourth quarter.

In general, we continue to expect to see charge-offs follow seasonal patterns on a quarterly basis and continue to increase somewhat on a year-over-year basis, driven by the same things we have discussed on previous calls, such as the shift to a more balanced and profitable credit mix, particularly compared to 2009 to 2011 vintages; larger vintages with a more balanced credit mix entering their peak loss periods versus the vintages entering their peak loss periods a year ago; a slowing portfolio growth rate; and we do also expect used car prices to continue to moderate.

Some of those dynamics are witnessed in the delinquency chart in the bottom left where we were up 35 basis points year over year, but again this is completely as expected and performance is right in line or better than the assumptions we used to price the loans. Let's turn to slide 15 and go through the segment results starting with auto finance.

Excluding the CFPB charge, we reported core pretax income of $305 million, which is down both quarter over quarter and year over year. Effectively what you have in auto finance this quarter is higher net financing revenue that is being offset by higher provision year over year and higher noninterest expense quarter over quarter.

On a quarter-over-quarter basis, noninterest expense was impacted by some increases in servicing, marketing, and personnel expenses, which tend to be a bit higher in the fourth quarter. As JB mentioned, while we are focused on taking out global expenses given the streamlined company, we will continue to reinvest in the core businesses.

And while the fourth quarter is modestly higher than the run rate we expect to see going forward, the more meaningful noninterest expense savings will come through the corporate and other segment. Let me touch on some other of the financial line items briefly.

Looking at net financing revenue of $809 million, you can see we were up quarter over quarter and year over year, mainly driven by higher earning asset balances. On a quarter-over-quarter basis, revenue from our commercial book was strong, although it was offset to some degree by lower lease remarketing gains. Provision expense was up year over year, driven by some portfolio mix change as well as the fact that we had a fairly sizable reserve release in the fourth quarter of last year.

With respect to the auto finance balance sheet, we show the overall trends in asset growth in the bottom right of this slide. Not only have we grown our earning asset base, we have been able to increase the percentage of our assets that we fund at Ally Bank, where we fund primarily with deposits and cost-efficient secured debt. I will cover originations in the next slide, so let's go there.

In the top left of slide 16, originations declined to $8.2 billion this quarter from $8.9 billion in the fourth quarter last year and $9.6 billion last quarter. If you look at the year-over-year comparison, much of that decline was driven by lower subvented volume through the Chrysler channel, given the emergence of Chrysler Capital. Much of the decline quarter over quarter was driven by lower sales going through our dealer customer base and normal seasonal factors, but can also be attributed to the current competitive environment.

We continue to see some players pricing aggressively in the super prime space and have chosen to let some of that business go. And we continue to focus on profitability and asset quality over market share.

In the bottom left, you can see that this level of consumer originations allows us to continue to grow our consumer portfolio quarter over quarter as originations still outpaced amortization. And in the bottom right we show our commercial portfolio, which can have a natural hedge effect versus lower consumer originations as we still finance the cars on dealers' lots.

Our commercial loans averaged $31.6 billion this quarter, up from $28.1 billion last quarter. The ending period balance was closer to $34 billion as we saw dealer stocks increase towards the end of the year. We expect that to moderate to some degree, though, as we head into 2014.

Now turning to slide 17, let's talk a bit about our insurance business. As JB mentioned, we were obviously very pleased about being granted financial holding company status at year-end. The importance of the insurance business shouldn't be underestimated as it's a key component of our overall dealer relationship offering and differentiates Ally in the marketplace.

Looking at the financial results, our insurance business reported pretax income of $67 million this quarter, down $16 million from last quarter but up $40 million from a year ago. The quarter-over-quarter decline is driven primarily by lower realized investment gains. The increase year over year is driven by a $58 million improvement in insurance losses, primarily due to Superstorm Sandy in the fourth quarter of 2012.

Written premiums, which you can see in the chart on the page, declined somewhat quarter over quarter driven largely by seasonal factors. The $11 million decrease from a year ago was mainly due to lower loan origination volumes this quarter and an increase in our reinsurance participation program.

Now turning to slide 18, let me make a few brief comments on mortgage. We reported a pretax loss of $8 million this quarter, which is down $2 million versus third quarter and $107 million year over year. The quarter-over-quarter decline was driven primarily by gain on sale favorability in the prior quarter due to a positive mark on our HFS portfolio.

With respect to the year-over-year results, obviously the driver there is the exit from the mortgage origination business earlier this year which affects a number of line items. The remaining HFI portfolio has declined to about $8 billion as of year-end and the credit characteristics continue to be fairly stable, as you can see on the slide.

Let's turn to slide 19 and talk a moment about the corporate and other segment. Our net financing revenue turned positive this quarter at $4 million driven by lower cost of funds, so the big remaining line item in this segment is noninterest expense, much of which relates to the unallocated global function expenses. This is clearly an area of focus for us and our goal for this segment is to get fairly close to breakeven as we exit 2015.

Now turning to slide 20, you can see our deposit base continues to grow very steadily. Our $1.5 billion of retail deposit growth in the fourth quarter contributed to total annual growth of $8.1 billion, which is the highest level since 2009.

We continue to attract and retain customers through Ally Bank's enhanced consumer-centric value proposition with over 784,000 primary customers and over 1.5 million accounts, growing Ally Bank's customer base 26% year over year. We saw strong growth in our money market and savings accounts through 2013 and you can see those more transaction-related products now make up around 37% of our total deposit book, which is up from 23% in 2009.

While we have grown consistently, we have also been able to steadily bring down our average interest rate over time, which has effectively been cut in half since 2009. We continue to improve functionality for the consumer and in the fourth quarter we launched a third generation of our mobile banking app.

Ally Bank continues to set the bar for the direct banking industry, winning awards from the likes of Money Magazine and Kiplinger's. We really believe the deposit franchise and the Ally brand has a long runway and will continue to give us flexibility as we grow deposits in the future.

With that, I will turn it to Mike to wrap up.

Good morning, everybody. They gave me somewhat a reduced speaking part this morning. I get to do the last page.

The last several years have been years of significant transformation. A lot of it has been a slog and we are very pleased to have all of that in the rearview mirror and we can say that the major transformation of the Company is indeed complete. And so the question obviously from an investor point of view is so what are you going to do for an encore?

I thought it would be just a good idea to tell you what our priorities are in the near term. Very much at the top of our list is to exit the TARP program. As we said a few moments ago, we are at the point now where we have repaid the government 89% of the money that they put into the Company that saved the Company, and the auto industry as well, by the way.

We are at the point where Treasury's ownership is reduced just in the last several months from 74% to 37%. And we believe that it is perfectly possible to exit that program, certainly before the end of the year and hopefully before that.

Second objective is to do what we know we need to do to improve shareholder value over time. If you look at the Company, while we can be very proud of what we have accomplished and we can be very proud of the strength of the business franchises we have, we are not proud of the returns on equity that we have. We have a three-part plan to achieve an improved return on equity, which we have discussed before.

As a general observation, our cost of funds has been high relative to what the market -- what we need to be competitive in the marketplace. We've made a tremendous amount of progress in that regard and will continue to do so in the months and years to come.

Secondly, the Company is a lot simpler now than it was and that gives us the opportunity to really rethink our cost structure and rethink the way we run our business. And so we think there's a tremendous opportunity for reducing our noninterest expense, which we are very aggressively embarked on. And you will begin to see the results, I think, in the second quarter.

Thirdly, as a result of being owned by the government, we have really not been on a level playing field with regard to our regulators. They have held us to a higher standard. We believe that over time that that relationship will normalize as the government exits its ownership position. And those three legs of the stool we believe will drive us towards a double-digit return on equity over the next couple of years.

Thirdly, we have in our auto franchise and our direct banking franchise and our auto insurance franchise three very, very strong businesses. Three businesses that are very well positioned, three businesses which are in growth environments, and we really need to make sure that we are maximizing the opportunities that those key franchises deliver to us.

As JB said a few moments ago, we are at the moment less focused on growth and less focused on market shares -- which are, by the way, very strong -- and more focused on profitability. But we also are aware that there are real growth opportunities in these franchises as well.

The last phrase I put on the page I think very much conveys the change in attitude in the Company, which is we are very much moving from defense. We're moving from cleaning up the sins of the past, if you will, and the structural problems associated with the mortgage industry and we are very much moving from defense to offense at this point.

So I have a great management team. This team has got a hell of a lot done over the last several years. We usually get done what we say we will. So we are very optimistic about the future and we appreciate the support of all the folks on the phone.

With that, Michael, we are going to take questions.

Lacey, if you could just remind folks how to queue up to ask a question.

(Operator Instructions) George Brickfield, Jefferies.

Good morning, everybody. A question for you on the General Motors relationship. Now that they have exited their stock position and as I understand it, the subvented contract expired on December 31, 2013, can you comment on the status of your contractual relationship with GM on the subvented business?

We will let Bill Muir, who runs our auto finance business, answer that question, George.

Good morning. Actually Ally and GM have extended the existing agreement for a period of time, so it actually didn't expire at the end of last year, and we are finalizing a new agreement which we expect to have in place soon. So it actually hasn't expired.

But having said that, it's not -- I don't want to speculate on anything that's going to be in it, but it should not really change at all or have any impact on the nature of our business and how we approach the GM dealers and work with GM.

Okay, great. Thank you. And then, maybe I missed this comment. Was there a comment made on the corporate and other segment that that will be breakeven by 2015? Did I hear that correctly?

Yes, you did. At this point, that would be our expectation as we continue to take costs out of the global functions and drive down the noninterest expense.

Is that breakeven excluding OID amortization or including OID amortization expense?

That excludes the OID.

Okay, thank you. Then finally, just on the provisions levels. How should we think about what is a normalized provision ratio or expense rate for this business going forward?

Listen, we obviously have changed some of the portfolio mix a couple years ago, so as those vintages start hitting their kind of season peak loss periods, we expect the provision to continue to go up. So I would expect, while we have a provision I think about $140 million this quarter, you should expect that to gradually increase as we go through 2014.

Okay, great. Thank you.

Order of magnitude sort of 10% to 20% higher than current levels would be a normalized expectation.

We've said on previous calls that our charge-off rate will exceed the 1%, so --.

[Scott Cavanagh], [APG Asset Management].

Good morning, guys. Just a quick question on the Treasury ownership stake. The sale of the Treasury stake, could you break down who bought that or at least the larger owners? Because it appears to be an activist fund that -- at least per the Bloomberg headlines, that have taken a large stake.

We are not allowed to disclose that information, unfortunately. But we actually -- on each different round of fund raise the ownership group has expanded significantly and we are very pleased with the investor group.

The first financing we did, $1.3 billion, we had 12 investors and the one that was just done by Treasury had I think 25. And that list has also migrated initially from quite aggressive hedge funds to what I would call more traditional institutional investors at this stage.

So when I think about --

I can't give you any names unless -- there is at least one investor who has publicly issued a report on their investment in Ally. You probably have seen that. Beyond that, I can't say anything.

I think about it another way and we think about traditionally activist funds. Is that -- should we think of them 20% or more of the shareholders? How do I think about it, given the current environment, which is more activist-friendly?

I frankly look at our investor base, by and large, the folks that came in with the first 12 and the folks, many of whom have increased their positions, I would call them smart money.

I think they all categorize themselves that way, but thank you very much for your answer. Have a good day.

David Lapierre, Loomis Sayles.

Congrats on all the strategic progress this year. Big year.

Just a question on the maturities, the $10 billion. Any color on the average coupon of those or -- also what would your target mix for funding be going forward as your deposits now 40%? I think you may have touched on this.

As I look at -- I think the $10 billion you are referring to is probably the $10 billion that matures over the next two years.

Yes.

The 2015 maturities come at a lot higher coupon rate, closer to 6.5%, 7%. The 2014 maturities are a little smaller because some of those were three-year issuances that we did at better rates. So what I would say is the overall $10 billion that is rolling off is rolling off at significantly greater rates than what we will be able to put back on to the books.

The other point that I would just make is that we do not expect to refinance the entire $10 billion over the two years. Given the growth in our deposit base, and really the growth of Ally Bank, we just don't need to refinance that whole $10 billion of maturities.

When I think about a funding mix going forward, today deposits represent over 40% of the funding mix. My expectation is that will grow over time to over 50% and you will see the decline mostly come out of the unsecured debt profile.

Okay, great. Thank you.

[Daniel DeYoung], Columbia Management.

Most of my questions have been answered; however, I will kind of just throw this out there. From a rating agency perspective, just curious what the milestones, given you've reached most of them, what you need to do at this point to try to achieve an investment grade rating at least from Fitch and S&P. I know Moody's stance is a little more reticent to bring you up.

Since I am not the Chief Financial Officer or the Treasurer, I'll give you an answer -- wait. And the reason I say that is it's very clear to those of us who don't spend all day mucking around in financial markets that the rating agencies are late to the party these days. And we expect them to be late; the only question is how late?

Fair enough, thanks.

(Operator Instructions) George Brickfield, Jefferies.

Sorry about that. Can you hear me now? Great, so just one question on slide 20, on the deposit mix, where you are certainly gaining share of checking accounts versus CDs. Can you give us some color on what is driving that mix shift?

What I would say is most of it is actually not coming from the checking account, but it is coming from the online savings and money market accounts. And I think that's just more of a shift of what's going on a bit in the industry, where we are seeing just bigger money flow going from CDs into the money market accounts.

Traditionally, we've been a lot lower in those type of transaction-related accounts in the past, so we are pleased to see that proportion grow.

Okay, great. Thank you very much.

Charles Geizhals, Seaport Group Securities.

Good morning, thanks very much for taking my question. I just had a question on some of the ways that we might get a little smarter about thinking about the SG&A line item reductions. This may be wrapped up in one of the answers that was given earlier, but could you help us understand what metrics management is focused on in terms of pulling that lever and getting those line items down over the next couple of years?

Let me give you a response, which is there are a variety of different metrics that we are focused on and obviously we have gone through the Company from top to bottom, set some interim targets. Most of the cost reduction in the near term is going to be in the area of corporate overhead. So in other words, it's not going to affect our deposit business or our auto finance business significantly, although they certainly have taken part.

It's really going to affect every one of our global functions: IT, HR, finance, and so forth. And so that would be the first observation I would make.

The second observation I would make is if you look at our efficiency ratios today, our efficiency ratios are significantly higher than a captive finance company in the auto space. I don't think as a bank we are ever going to get to a level which is consistent, which is around 30%, by the way, as I recall. We are never going to get to that level because there is a certain amount of cost associated with being a financial holding company, significant regulatory cost.

On the other hand, there is no reason why we shouldn't do a good bit better than the average regional bank. So as we think of it from a macro point of view, if you look at the operating efficiency of a regional bank and you look at a stand-alone captive finance company, those represent bookends for us where we would try to be somewhere in the middle.

I see, thank you. Could you help us maybe understand a number that you have is a target or is there nothing that you can disclose at this time?

Charles, I don't think we are in a position to disclose. What I would say is, look, first quarter you will see a little pop relative to fourth quarter and that's just normal year-end things -- compensation, other benefits that get accrued and paid out in the first quarter.

So it will be a little higher this quarter than we were and then you see a pretty nice downward trajectory going forward. And that's what Mike had pointed out. In the second quarter and beyond you are going to really start seeing expenses come down, but we are not at the point that we are going to commit to a hard number for controllable expenses.

Okay, that's very helpful. Thank you very much.

Great. Thanks for joining us this morning. Lacey, that concludes our call.

Thank you for your participation in today's conference. This concludes your presentation. You may all disconnect. Good day, everyone.