Ally Financial Inc (ALLY) 2015 Q1 法說會逐字稿

Great day, ladies and gentlemen, and welcome to the first-quarter 2015 Ally Financial earnings conference call. My name is Katina 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's call, Mr. Michael Brown, Executive Director of Investor Relations. Please proceed.

Thanks, Katina, and thank you, everyone, for joining us as we review Ally Financial's first-quarter 2015 results. You can find the presentation we will 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 contents of our conference call will be governed by this language.

This morning our CEO, Jeff Brown, and our CFO, Chris Halmy, will cover the first-quarter results. We'll also have some time set aside for Q&A at the end.

Now I would like to turn the call over to Jeff Brown.

Thanks, Michael. Good morning and thank you for joining us. Before we get into the details for the quarter -- which I believe are pretty off the charts, by the way -- I want to highlight several key messages on slide number 3. These are the guiding principles for our Company. You'll hear a lot about these today and as we move forward throughout the remainder of the year.

First, I recognize there have been a lot of questions about our reliance on key manufacturer relationships and whether auto would be a growth business or not. Today's results show we are growing and diversifying within our auto finance franchise and I have full expectations this will continue. This is a business I've run for the Company and I know we have the best people and platform in the industry. The business is succeeding by growing dealer relationships, penetrating deeper with our existing dealer base, and originating a more diversified loan mix even as our lease portfolio declines.

The success we delivered in the first quarter was not by accident. Our auto team worked with a heightened sense of urgency and, quite frankly, did a phenomenal job responding to changes in the business environment and the effective loss of leasing in the GM channel. If anything, I think the GM dealers found more satisfaction by our expanded approach to help them capture volumes outside of lease.

We also took steps with the manufacturers to ensure they know we want to help them sell more cars, too. My hope is we don't constantly fight the headline noise any longer. I'm very supportive of GM at both the dealer and manufacturer level, and I'm supportive of a lot more nameplates, too. The primary goal is to simply be a great finance and service provider.

Second, we will expand our franchise to drive long-term growth. We have a tremendous foundation in the auto platform, deposit platform, but also with the customer base, a re-energized associate base, and an ever more recognizable and powerful brand. I see a lot of untapped potential; a lot of this is about driving a One Ally approach.

Third, improving shareholder returns. We've made nice strides and returned to solid profitability but we're focused on a number of additional efficiency opportunities that can drive real value. Capturing those efficiencies then provides prospects for reinvestment into the future, all with the focus on expanding shareholder value through time.

In addition to expanding the franchise, the CCAR results in March should validate we have the opportunity to re-deploy capital in ways that will drive shareholder value creation. So I'm excited about what I see at the Company and I believe we have the ingredients to be a better financial services company for our customers, our shareholders, and our associates.

Now on slide number 4 let's turn to the quarter. From a GAAP perspective, we had net income of $576 million and EPS of $1.06, which had the additional benefit of our China JV sale. Core pre-tax income of $490 million was the highest since going public. Adjusted EPS of $0.52 a share was up 53% from first-quarter 2014. Auto originations of $9.8 billion were up $650 million year-over-year despite the decline of the GM lease business. And if you strip out GM leases, originations were up 27% year-over-year, driven by a 54% increase in our growth channel originations.

Yesterday we also announced a new preferred lending arrangement with Mitsubishi. This is a great incremental piece to the business and we believe demonstrates the value proposition that we bring to all dealers and manufacturers to help them improve their sales. We will purchase and onboard in the neighborhood of $1 billion in assets as part of the deal. It's a great conquest for us but there is more out there.

On the deposits side, it's also a phenomenal quarter. We added over 45,000 new deposit customers and exceeded our expectations with $2.7 billion of deposit growth quarter over quarter. And as I mentioned, we received a nonobjection to the CCAR results, which I can promise you every bank celebrates with that result.

Chris will highlight the specific near-term actions we are taking in normalizing the capital structure, and once we are done with the preferred instruments, we will look at buying back stock and paying the dividend in the future to drive additional shareholder returns.

Let's look at some of the stats behind the auto finance franchise performance for the quarter on slide number 5.

Starting on the top left, note the accelerated momentum from the diversification process we started years ago. Our concentration and exposure to manufacturer-incentivized products has declined materially and we continue to have significant success in the marketplace, winning business by serving dealers and customers. Underpinning that success is the increase we've seen in our growth channel, shown in the top right, where we've grown significantly over the past two years and we're up 54% from the first quarter of 2014.

We are sourcing more applications from a broader universe of dealer relationships and driving improved penetration from these dealer customers. That dynamic is seen in the chart in the bottom right.

Over the past two years we have established 1,400 additional growth dealer relationships. We're getting better engagement and pullthrough at those dealers as we doubled the percentage where we buy more than five contracts per month from 13% to 26% over the past two years. But there is still an opportunity to do more.

Our market share is still behind our biggest competitors and our job is to continue to get deeper penetration at individual dealers as well as increase our presence in some brand channels. But all in, the auto franchise is doing great.

Let's talk about our customers on slide number 6. On our February call, we talked about our customer base and getting more out of the existing engine. First, we have a growing set of over 17,000 dealer customers, many of which are newer and do less business with us right now. Second, we have 4.4 million individual auto customers. We service these loans, we send them monthly statements, but that's really about all. We don't currently offer them any more products or services. Great banks find ways to get more out of these customer relationships.

Looking at our growing application flow, we sourced 2.5 million apps in the first quarter for a run rate of 10 million annually, but we're only booking around 15% of those looks. Can we capture more of these customers is a key question we've got to address.

And on the deposit side, we have over 950,000 deposit customers and growing rapidly. We do a great job of providing these folks with attractive deposit products and providing great customer service, but we don't offer them any additional products or services that could drive revenue growth. There's a lot of untapped potential there as well.

And from a pure deposit customer lens, Millennials may always look the most attractive, but from an Ally customer lens you can deliver a very different return profile. So this, again, is opportunity.

So what are we going to do to tap into this customer base to drive long-term growth? We know we have to provide more definition around that over time, but let me share some of our vision for franchise expansion on slide 7. We have a great foundation as a company. In addition to the leading auto platform I talked about, we have a leading brand of retail banking; Money Magazine has called us the best online bank for four years in a row; we have an online platform driven by technology that is built for scale; and we are nationwide, not confined to any physical or geographical area; we have a growing and attractive customer base I just talked about; we don't have the same historic branch overhead that other banks do -- not to say that branch banking is going away any time soon, but we think we can be more nimble and flexible, given our operational efficiency. And finally, we have established a culture of innovation and superior customer experience.

For those that know us, you know that that has been the focus from day one of building out Ally Bank. Today's bank customers want transparency and they want to be treated well. That plays right into our wheelhouse and positions us well for the future of retail banking. So we need to build out on this foundation and establish a runway for adding more products and services over time to provide steady growth.

And as we explore opportunities we'll do it in a thoughtful way, in a way that is focused on prudent credit, capital, and risk management. We're having very active internal discussions and you'll be hearing more about this from us later in 2015.

And with that, I will turn it to Chris to talk more about the financial results.

Thanks, JB. Let's get into the details for the quarter on slide 8.

As JB mentioned, we had a great quarter. Core pre-tax income, excluding repositioning items, was $490 million, up $151 million or 45% year-over-year. Net financing revenue of $860 million was fairly flat year-over-year as strong originations and lower cost of funds offset lower lease revenue, which dropped about $54 million from last year. And despite two fewer days, quarter-over-quarter net financing revenue was up by about $26 million, driven by our strong originations and expanding net interest margin.

Other revenue of $440 million was up significantly, both year-over-year and quarter-over-quarter, primarily driven by a gain of about $65 million on the sale of some legacy TDR mortgage loans, which we moved to held-for-sale status in the fourth quarter. Provision expense of $116 million was favorable this quarter, driven by improving expectations on commercial auto losses as well as seasonally lower losses on retail auto loans. Total noninterest expense came in at $695 million, which is broken out between controllable and non-controllable. We continue to make progress in controllable expenses, which were down $18 million year-over-year, driven by lower technology and professional services expenses.

So overall, these results plus the China sale gain, drove $576 million of GAAP net income, which includes the $197 million charge for the debt tender offer we completed in the first quarter. When you normalize for those two items and add back the tax-affected OID, you get $0.52 of adjusted EPS for the quarter.

Core ROTCE of 9.1% was up nicely both year-over-year and quarter-over-quarter, and from an efficiency ratio perspective, we continued to make progress on reducing expenses. So overall, a great quarter across many fronts.

Let's turn to slide 9 and briefly look at the results by segment. Auto finance posted strong pre-tax income of $331 million. The favorability quarter-over-quarter was driven by lower provision and improved cost of funds. Insurance pre-tax income of $78 million was fairly consistent, both year-over-year and quarter-over-quarter. And as a reminder, the second quarter is typically when weather losses spike.

Mortgage results were driven by the TDR sale and the corporate and other continues to benefit from a lower cost of funds and lower centralized expenses on a year-over-year basis. We also had some favorable investment portfolio performance driving the quarter-over-quarter improvement.

Now let's turn to net interest margin on slide 10. NIM was up 12 basis points quarter-over-quarter, driven by a combination of lower funding costs and higher asset yields. From a cost of funds perspective, we continue to make progress addressing the liability structure and reducing the unsecured footprint, which drove funding costs down 21 basis points year-over-year and 5 basis points quarter-over-quarter.

The other piece of the equation is asset yields. We experienced a 7 basis point increase in our retail auto loan yields on a quarter-over-quarter basis, and our lease yields remain strong as used-car prices continue to perform well.

As JB talked about other opportunities, we expect both near-term and long-term NIM expansion. In the near term, cost of funds were reduced further as the full effect of our liability management strategy is realized. Over time, expansion of assets in Ally Bank will drive incremental NIM as we take advantage of our growing deposit base. Today, 68% of our assets are in Ally Bank, while most of our peers book closer to 99% of their assets in the bank. This is a real opportunity for us.

Moving to slide 11, let's discuss deposits. We had a great quarter and hit yet another milestone at the Bank, with the retail deposit surpassing the $50 billion mark. This was driven by strong retail deposit growth of $2.7 billion, up 12% year-over-year. And while the first quarter is typically the strongest for deposit growth, balances did come in better than anticipated.

Focusing on the customer base, about 45% of this growth came from existing depositors, so we continued to capture more out of the current customer base. But much of the growth came from new customers, where we added over 45,000 depositors to the Ally family.

We are attracting a very diverse customer base at the Bank; not only the purposeful savers that drive some of the higher balances, but also the younger demographic as well. We have over 300,000 Millennials that are currently deposit customers, which provides us a great opportunity to expand our financial services relationship with these customers over time.

Let's shift the focus to capital, starting on slide 12. Common capital levels were up in the quarter, driven by the closing of China but also due to the continued strong net income and DTA utilization. We also show both our Basel I ratios for the quarter as well as our estimate for the Basel III fully phased-in approach, which results in a common equity tier 1 ratio of 10.4%, or 9.5% if you pro forma for the $1.3 billion Series G redemption which occurred in April.

And as you know, we received a non-objection from the Fed on our capital plan, allowing for a meaningful capital redeployment.

So let's turn to slide 13 and recap the plan. Our approved capital plan provides for the reduction of $2.8 billion of high-cost capital securities, including half of our Series G, all of our Series A, and $500 million of the Trust Preferreds. The capital structure normalization process is well underway, which was the key to the third leg of the ROE enhancement story we laid out at the time of the IPO.

Moving forward, we will continue to address the high-cost debt and will prioritize taking care of the rest of Series G. Once the Gs are gone, we'd expect to become a dividend payer and will look to optimize excess capital deployment between growth initiatives and buying back shares.

While additional actions obviously require regulatory approval, hopefully this year's CCAR results validate a few points. We're running with very comfortable levels of capital. We will continue to generate excess capital for earnings and utilization of our DTA, and we have attractive ways to deploy capital over time to further improve returns.

Now let's turn to slide 14. We know there's a lot of discussion around how to look at our book value, so we thought we would provide some context on how we think about it. This is a very simple calculation, starting with GAAP shareholder equity. After adjusting our preferred equity and goodwill, you get the tangible common equity of $14.7 billion, or a little over $30 a share. Next you can back out tax-affected bond OID and the Series G discount, which gets you to about $23.70 per share.

We think this is a solid way to look at the value available to common shareholders if you accelerate these items, especially since we have begun redeeming the Series G.

Over the past year we added $3 per share to this adjusted tangible book value, which we fully expect to continue to grow moving forward. This is a little different than the way we presented our core ROTCE denominator calculation in the IPO plan, where we deducted the deferred tax asset and normalized the tax rate. Our attempt is a simplified approach, adjusted just for a couple unique aspects of the capital structure that will normalize over time.

Moving to asset quality on slide 15. In the upper left corner, consolidated charge-offs declined seasonally to 61 basis points, driven by our retail auto charge-offs shown in the bottom right. Retail auto losses declined to 93 basis points this quarter, in line with seasonal expectations.

As a reminder, you should expect charge-offs to seasonally decline in the first half of the year but trend modestly up on a year-over-year basis.

In the bottom left, our delinquency rate decreased to 1.87%, again as seasonally expected, as the first quarter is typically the lowest point of the year. You should also expect to see delinquencies increase from here throughout the rest of the year.

Year-over-year delinquencies were up 28 basis points, which is consistent with our expectations and normalization of our portfolio.

Finally, our commercial auto book is shown in the top right, where we actually had some slight net recoveries for the quarter. As we've said in prior quarters, the takeaway here is that we continue to feel very good about where we see credit trends, and asset quality continues to perform slightly better than expected.

Now let's turn to slide 16 and go through the segment results, starting with auto finance, which reported $331 million of pre-tax income. Strong origination levels and lower funding costs continue to drive healthy net financing revenue. Net lease yields normalized on a year-over-year basis but were up slightly quarter-over-quarter. And provision was down due to reserve release in our dealer floor plan book, driven by lower loss expectations as well as the seasonality in retail losses.

We continue to see steady asset growth, which was up 3% year-over-year, despite executing $3.6 million of retail loan asset sales since the third quarter of 2014, including a $1 billion whole loan sale in the first quarter.

Moving to originations, as JB previously noted, we had a strong first quarter at $9.8 billion, which puts us well on track to achieve the high $30s billion we're targeting for the year, particularly given the new Mitsubishi business we'll be bringing on. Looking at the dealer channel in the bottom right, you can see that the decline in GM, driven completely by subvented lease was more than offset by healthy gains in both Chrysler and growth channel dealers, improving 44% and 54%, respectively. And on the credit side, about 12% of our 1Q originations were nonprime, which is up from 9% a year ago and is consistent with the messaging from our investor call back in February.

We are very comfortable at these levels of nonprime, and even with the progress we made in the first quarter we continue to be underrepresented compared to the precrisis levels and to the market as a whole. I will point out that while our total originations were up 7% year-over-year, our application flow was up 19%.

That not only shows the expansion of our franchise but also that we're continuing to be diligent on the pricing of credit. And we continue to see good risk-adjusted returns in the market where we play as we saw some more diverse application flow.

Continuing on originations, if you turn to slide 17 you will see that the growth channel made up 28% of our first-quarter originations. We've made great strides here already and you should continue to see that increase as we execute on our strategy.

From a product perspective in the top right, you can see that increases in used and standard rate new loans are offsetting the declines in lease. The bottom two charts summarize the balance sheet. Continued consumer asset growth and pretty consistent commercial balances.

Now let's turn to insurance on slide 18, which reported pre-tax income of $78 million for the quarter. We continue to see vehicle service contract losses coming down, which is the main driver of the year-over-year favorability. Lower floor plan inventory levels impacted premiums earned on a quarter-over-quarter basis, and written premiums in the quarter totaled $239 million, down slightly both year-over-year and quarter-over-quarter. This was driven by the commercial side as we have been proactively managing our risks in higher weather loss areas.

Over on slide 19, we show results for both mortgage as well as our corporate and other segment. Mortgage reported pre-tax income of $69 million, up both year-over-year and quarter-over-quarter, driven by the sale of the TDR loans, which had a carry value of around $470 million, as well as some additional reserve releases this quarter.

The mortgage investment portfolio was up slightly this quarter as we purchased some additional high-FICO jumbo loans to offset amortization in the book and the TDR sale. Again, this is just part of our standard balance sheet management process.

Looking at corporate and other, you can see that we had a pre-tax gain of $12 million, which has improved significantly year-over-year. Results in this segment were primarily driven by improved performance in our investment portfolio, reduction in our cost of funds, and further reduction of our expense base. So overall we had a really great quarter and a great start to 2015.

And with that I will turn it back to JB to wrap up.

Thanks, Chris. So just to wrap up very briefly, we think this was a great quarter to lead off and really set the tone for 2015. The auto business is demonstrating its strength and successfully diversifying to offset the decline in lease and drive the business forward.

Our deposit base continues to grow nicely, with 45,000 new customers added in the quarter. We had a strong quarter from a financial perspective, with continuing to prove our earnings potential as we address capital structure and drive towards our year-end financial targets.

And we're focused on positioning the Company for steady, long-term growth. I'd just say auto finance is always going to be at the heart of Ally, but I do believe there are smart ways we can get more out of the existing customer base and platform, so we feel very excited about the opportunities that lay ahead.

And with that, we're happy to take questions with Michael. I'll turn it back to you.

Great, thanks. Katina, we're ready to take questions from analysts, if you could just remind everyone how to queue up to ask a question.

(Operator Instructions). Kevin St. Pierre, Sanford Bernstein.

A question for you that I frequently get about your potential growth outside of GM. Can you talk specifically, tactically, how you are taking share and how you are gaining that non-GM or in the non-subvented business? Is it price? Is it the product offering? May be a bit more tactical on how you are gaining share.

Yes. Kevin, thanks. It's JB. I'll take a stab at that question. I guess for us particularly, as we think about capital deployment and the lease book beginning to come off, we booked about $1.1 billion in lease this quarter. We wanted to continue putting capital to work in the auto business, and so for us it starts with a message to my team and my troops that we got to go out and get more aggressive with the dealers.

Obviously you can see a significant uptick in just pure application flow. And I think over the past four quarters combined we have done about 9.5 million, 9.6 million applications. As we point out today, we are on pace for 10 million.

So part of it is just you're getting more looks at the business. You're getting our sales team more focused in going to ask the dealers for more. And it's not just coming from the growth channel; we obviously -- strong results there, up 54%, but I think you also saw a rebound in what we did in the Chrysler channel as well. I think we booked about $2 billion in originations this quarter in Chrysler.

So it's really -- it's a combination, but I think we've got great teammates out there in the field. The dealers really respond to our model. They like that we're kind of full-service.

We're a broad spectrum of credit. While we're not doing any of the deep subprime, we have widened the buy box a little bit, and I think that's just resonating and it's enabling us to get more flow. So it's really a combination of all of the above.

Great. And just separately, it's good to see you focus a bit and tap the Bank results a bit more this quarter. You've had really solid deposit and customer growth. Can you share with us any competitive metrics in terms of how your share is trending versus other direct deposit gatherers, other competitors in the channel?

Yes, this is Chris. Today we're performing great, I would say against our competitors, and particularly a lot of the online banks. And you are seeing some of the online banks really compete a lot out there from a price perspective.

Given the investment that we've made in the Ally brand over the years and the recognition today that we have in the market, we've been able to compete really from a service perspective and not have to be the highest price out there. That's really helped us from a cost of funds perspective and it's helped us really capture additional share within the deposit space.

We're reaching a great point where the brand is starting to carry itself a lot without necessarily competing from a price perspective. So I would say that we are seeing our share of growth greater than a lot of our competitors, and we're doing that based on a brand and service.

And the only thing I'd add, Kevin, is -- maybe to tie to one of the points Chris made earlier -- is for us, we continue to produce solid asset growth every quarter. We want to book more of those assets inside of Ally Bank and we are basically underutilizing the Bank today. So for us we have appetite for the deposit growth, we have appetite for the customer growth.

We're seeing that, and I think that provides for us as we think long term how do we get more of those assets into the Bank. That 68% going to 99% represents a pretty massive financial opportunity. It's not going to be cracked overnight, but I think through time that's a big opportunity for shareholders.

Great. Thanks very much.

Eric Beardsley, Goldman Sachs.

Just on the point in terms of your ability to transition from funding some loans at the parent to the Bank, how much excess liquidity do you have at the parent today? And how much do you expect to generate there over the next year?

What I would say is the liquidity at the holding company is really where we need it to be today, and it has come down over time, particularly given that our unsecured debt profile has come down so we face less maturities as we move forward. From our perspective, as we move assets into the bank, the real opportunity is that we can avoid having to go to the unsecured debt markets in the future to really acquire incremental liquidity.

So, I don't think about it as having excess liquidity at one place over the other. I think about it as really shifting the focus from the holding company to the bank, and therefore the holding company does not have the need to really to go to the capital markets to fund itself at higher rates.

Got it. So in terms of your ability to pay down unsecured debt other than your contractual maturities, how does that outlook look over the next year?

You saw in the capital plan that we did receive some ability to continue on our liability management structure to buy out some high-cost debt, so that's something that will continue in 2015 as well. We also have some big debt maturities coming in the second quarter of 2015, and most of our debt maturities will not be refinanced in the capital markets, so that's a real positive and another driver of continued cost of funds improvement.

Having said that, when we do take out capital instruments, we expect as we take out those capital instruments we do need to replace that liquidity. So we will be present in the unsecured debt markets, but really not to roll over maturities as much as to replace capital.

Okay, great. And then just lastly, how should we think about the sustainability of the investment gains you've been booking? It's been pretty stable around that $50 million level. Are those fixed income or equity gains? And where could we see that go over the next year?

Yes, a majority of those have been equity gains coming from our insurance portfolio. And we been pretty consistent over the last few years to book pretty healthy gains there. And we feel pretty comfortable that that will continue. We periodically will take gains on the debt side, particularly when we see moves in interest rates that we think are a bit overdone. And to the extent that the volatility, I would say, in the interest rate market continues, we will continue to take advantage of that.

If we don't book the gains, however, keep in mind that the debt securities just remain on your books and it will really flow into the net financing revenue. So I look at it both as an offset either to net financing revenue or to other revenue. So, I do think that the sustainability, though, is there.

Great. Sorry, just one quick question. In terms of the diversification opportunities as you look at expanding the franchise, how do you expect that to impact your controllable expenses moving forward? And is this more of a build versus buy strategy?

Yes, one of the things we're seeing obviously is that expenses overall for the Company are coming down. And my expectation is that they will continue to come down. We will redeploy some of those expenses, however, in some of the growth initiatives through real investment. Some of that comes from a people perspective, some of it comes from a technology perspective, but overall what you should think about is that we are on track for our expense reductions and I expect that will continue throughout the year.

Great, thank you.

Chris Donat, Sandler O'Neill.

I wanted to ask first on Chris's comment about 12% of the originations being nonprime in the quarter. Can you give us some color on which channels that's coming through? Should I assume that that's mostly on the used side, or is it spread across your originations?

Yes, it's coming from both, but I would say that it does get skewed towards the used side of the channel where you tend to see more of the nonprime originations. But it's coming across all channels.

Okay. And then just to be clear, you are not stretching down to the bottom rungs of subprime, you are pretty much near prime, right?

Yes, we're still really focusing on the top end of the spectrum, where majority of the loans in our nonprime book that really get originated, are between the 580 and 620 FICOs, correct.

Chris, obviously you've got to again keep it in light of what's going on with the decline or the expected decline in the lease portfolio. So we booked about $1.1 billion in leases this quarter. The lease book, I think, had amortized down about $500 million, but you'll see that amortize fairly quickly over the next 2.5, three years.

And so for us we don't think at all there is a risk entree; we think it's redeployment of capital and risk-taking in the Company. And I think, as Chris pointed out, relative to our peers and relative even to the overall market, we had been underserved in what we were doing in nonprime, so I think this is just another step forward in natural expansion.

Got it. Thanks, JB. And to follow up on that and some things you said back in January, maybe to put a number on it, with 12% of your originations being nonprime, do you have a goal of getting to, say, 20% or 25%, or do you have a goal out there that you want to share?

I think it's still a little early to have a fine-tune goal, but I'd say I was happy and pleased with the progress we made this quarter. I think there's still a little more room to run. And for us, we just got to make sure we're capturing good, profitable loans. And if we feel good about the risk/return dynamic of the loans we're booking, we're going to continue to book them. And we'll obviously balance that in perspective of what we think is going on in the macro environment, but we are well-experienced with nonprime lending.

As you pointed out, we are -- or as you asked, we are concentrating more in the near prime sector and we're staying out of deep subprime lending. So as long as we can price appropriate for the risk we will continue to be booking loans.

Got it. Okay, thanks very much.

Sanjay Sakhrani, KBW.

I guess first question is, obviously the headwinds from GM's loss will increase over the year. Is the expectation to turn up the dial a little bit on these other growth channels that are doing well?

Yes, I think that's -- Sanjay, it's JB -- I think that's exactly what happened. I think as we showed in the deck, really, lease, we booked basically $1.1 billion of GM lease in the quarter. You should expect that to basically be zero going forward. We are effectively done there.

And I think a strategy that we have but the numbers we're doing in the growth channel are pretty impressive: up 54% year-over-year. I think you should expect those types of gains in the near term. We will continue to make progress in what we're doing in the diversified channel.

So for us, we just looked past the loss of the leasing business and focused on taking care of our dealers and making sure our dealers understood we want more of their overall business. And so, I think from a headline perspective, we are still very comfortable saying, we're going to be in the upper $30 billions of originations.

Obviously Mitsubishi is going to help. While we are going to onboard roughly about $1 billion between retail and floor plan, it's an incremental $500 million, $600 million of originations that we'll do the rest of this year.

So there's a number of offsets we have where I'm not really bothered by it. And I think as you get into one of the charts that was in the deck, you really see the incentivized volumes we're doing today, I think, are roughly 5% of the origination flow. So there's only so much more of that could really happen. I think that was on slide 17.

But today it's really -- we're all out competing with the market and we think the franchise is doing quite well.

Okay. And then just a follow-up. Obviously there's some assets in the market for sale, and you mentioned that you are open to expansion into other areas. Maybe you could just flesh out that discussion a little bit more. And then maybe Chris could just comment on whether or not, if you were to go out and buy something inorganically, that would impair or impede some of the progress you could make on capital management. Thank you.

Sure. You've got it, Sanjay. I think our primary focus right now is continuing to build on existing strengths and pursuing opportunities to do more with our existing customer base, and obviously a growing customer base. I still think there are a number of opportunities in-house.

If we were to consider any type of acquisition in the future it would have to be something that would strategically fit with overall core competencies and further drive shareholder value. I am not all that focused on any type of major diversification strategy at this point in time.

I think, again, we've got a great franchise, we've got great customers, we've got all the trends that I would want to have.

And so for me, if there's adjacencies that we could add on to the model, maybe we would consider that. But really no specific actions are on the horizon at this point in time. But obviously as CEO, you've got to stay open, you've got to look at things as they are presented to you.

Yes, and Sanjay, I think from a capital perspective we are obviously very comfortable with where our capital levels really stand. When CCAR was announced and our results came out, we had a pretty sizable cushion with those results.

We're going to continue on our plan that was approved for the year, but to the extent there are opportunities in the market to grow our balance sheet elsewhere, we're comfortable redeploying some of that capital. And obviously any of those conversations would have to really be had with our regulators around what the right level of capital would be for the institution, but right now we feel pretty comfortable with excess capital levels.

Great, thank you.

Cheryl Pate, Morgan Stanley.

Just a couple questions. First on the deposit opportunity, I know one of the things that we have talked about for some time is building out more of the low-cost checking opportunity. Just wondered if you could give us an update on maybe how that growth is going, relative to the other products, and through the opportunity on cost of funds improvement perhaps within the deposit channel specifically.

Yes, the checking product is not a very big product for us, and it tends to be a very what I would call expensive product for us as well and tends to attract what I would call transactors that usually drive up from a fee perspective. Now having said that, we like to have the checking product from a stickiness perspective, and it continues to grow but I would say that it's not our -- really our largest focus.

From a cost of funds perspective, the big opportunity we think is that when rates start to rise that we're able to really lag, even what we have planned in our interest rate sensitivity models.

So the opportunity on the cost of funds will be during a rising rate environment, we'll be able to really get a cost advantage over a lot of the finance companies that really set out there today. That's about it.

Just to follow up on that point, I know in the past we've talked about some liability sensitivity initially, but as you continue to grow the deposit franchise and clearly have ability to lag rate increases, can you maybe talk to how that rate sensitivity may be changing?

Yes, so it's a great question, which is -- and there's been a little bit of a change this quarter where one of the unique aspects of our interest rate risk sensitivity is that we have a lot of floorplan dealers that were on prime rate floors, and that created a liability-sensitive posture within the book.

One of the things we started doing in a more aggressive way during the quarter is to take people off of the prime rate floor and put them on to LIBOR. And while that has created a little bit of margin compression in the dealer floorplan book, in the short term, what it is doing is it's making us much more asset-sensitive.

So our overall position remains in a liability-sensitive position, but it's a lot less this quarter than it was in the past. And I would expect that would continue. So one of the overall postures is, as we get closer now to a Fed move, you should start seeing that our balance sheet will become more asset-sensitive over time.

And Cheryl, we've given up -- on the dealer floorplan side, we've given up a touch of margin in the short term as we move accounts to LIBOR. And I think it's -- we're approaching 55%, 60% of the book has now moved to LIBOR indexed. It costs you a little bit today but I think to the point, at some point, and I guess it's still now debatable whether it's going to happen in the back half of this year, we are going to see the Fed move rates upward. And I think it's going to lead to a much better position on the way up than where we sat previously.

Great. Thank you very much.

John Hecht, Jefferies.

Just with respect to the yields that are running off from the leasing portfolio versus the yields you are putting on as you are redeploying that into near prime and increased composition of used cars, can you give us a sense for what those yields are that are running off that you are putting on?

Yes. Today the lease book is running -- it was 5.7% for the quarter and that includes what I would call some strong used car prices which obviously fuel some of the gains. The new yields we're putting on are about 5.5%, so the yields are pretty stable today from the lease running off to the new business that's coming on.

I would point out, however, that when you put a retail loan on, you also need to really post the provision. So, from that aspect, from a day one aspect, it's less profitable, but over time you obviously don't have to deal with the used car volatility and the volatility, really, in the residual values of the leases. So we feel pretty good that the profitability of the new business is offsetting the leases that are running off.

Okay, that's good color. And then, I think in Q3 2014 you guys put out some expectations for residual values, and as you step through the next couple of years is there any change to that? Or are you still pretty comfortable with that trajectory?

The trajectory stays the same, which is we expect a continued softening of used car prices over time. And we were calling it 5%, 6% a year over the next couple of years. But having said that, even the projections we put out in the third quarter of last year, we have exceeded those expectations meaning the prices are running higher today than we had originally modeled. But we do expect that to continue to come off over time at a pretty similar rate.

Okay. And then final question is, you guys had some elevated insurance expenses that were weather-related last second quarter, and I wonder if you can just give us some inter-quarter commentary on how the weather has stacked up so far this quarter?

Yes, what I would say is that last year was a record year of losses, so the second quarter of 2014 was the worst losses that we have ever experienced. Now having said that, we forecast to have pretty healthy losses within the second quarter in that book.

And as you are seeing on your local news, we are seeing some tornadoes and hailstorms already starting in April, so we're seeing some losses. I would say they are, today, on expectations, but we'll see how the quarter goes. It's very unpredictable.

Okay. Thank you very much.

Ken Bruce, Bank of America.

I'd like to tackle a question that was asked earlier, and maybe a little differently. I think, as it relates to increasing market share within the dealer community, it's fair if you are expanding your credit base and going out and telling dealers that you are more interested in increasing volume to drive a little bit of that, but I think in the past you have suggested that you've got a model that you think is ultimately going to gain share.

And I guess I'd like to better understand how you are thinking that that's working in this environment. I mean, I think it's easy to -- everybody has a floor plan program and I think tried and true methods of expanding credit or decreasing price are obviously very effective, but what do you think is working in this market?

Yes, I think your comment on the floor plan book, we have been running consistently sort of $32 billion, $33 billion of floorplan lending. Floor plan lending ends up being the gateway to capture other volumes, and I think within the floorplan space, we got our bundled dealer rewards offering, which enables us to capture more from the dealers. And we also have an incredible service model.

The thing that I consistently hear from our dealers is the way our people understand their business, understand how it works inside the dealership, and we enable them to get business done.

And the auto environment is automated as we'd like to make it be, it often requires a human to help get a contract closed, get a deal booked. And so we got great people, we invest in the people, we invest in the technology. So I think a lot of it is we dedicate a lot of time and energy towards taking care of our dealer customers. I also think we are engaged with a number of manufacturers on how can we help them with their initiatives of selling more cars.

And I think, relative to the growth channel, for us it was, first, get inside the dealership and get a look at the business. And I think some of the stats we showed is we're seeing better flow, but there's still penetration. I think of the 10,400 growth dealers, still about 22% of them, we're only doing applications only. And we've made progress in all of the buckets of how many dealers are giving you 10 or more contracts or five to 10, but there is still a lot of opportunity there and part of that just takes some time.

It takes let the dealers know you are committed, know that you want the business, know that you're going to be a good service provider. So, I mean for us, I think there's been a number of comments this quarter for some of the competitive banks and finance companies that say they felt increased competition, and I think we likely drove it.

We were more aggressive in the space, we took some share, and we're very proud of that. And again, I think that's going to continue. But again, it's partially a function of as that lease book is coming off, we want to continue deploying capital and we went out and got more aggressive.

But I think as Chris pointed out in his remarks, it's not like we're out really with a different type of risk entree. We were underrepresented in what we were doing in nonprime. We made a few percentage point increases there. We will continue to make some increases going forward, but still in a very safe spot in the credit curve and with the risk profile.

So, I see a lot of things working that drove the increases in the strength of the relationships with the dealers.

Great, thanks. And then you point out that the used car values have been coming in stronger that you had expected, though you are still anticipating some weakness there on a go forward basis. Can you maybe describe what dynamic is supporting the used car values beyond what your expectation was, and what dynamic you think is going to put pressure on them coming forward?

I think one of the major things that really is helping the used car prices is that there's a lot of discipline on the new car prices. Okay, so when you see the lower incentives or what I would call more disciplined OEMs out there today in regards to their capture of market share, they are keeping the new car prices pretty stable or even increasing. And that really helps the used car prices.

The dynamic really is from the supply side where we do expect that the what I would call robust leasing market over the last couple of years -- a lot of those cars will continue to come off now over the next year or two in greater volumes than we've seen in the past. So that should put pressure on the supply side that will bring prices down.

Yes, I think on Chris's point, too, on the manufacturer's side on less incentives in the marketplace, too. Affordability is becoming a bigger issue. Average monthly payment on a new car loan, I think, is a $483, so overall consumer debt load is pretty high. That drives a number of consumers to, instead of looking at that new car, consider a used vehicle that's more affordable, and so it's part of the reason why you've seen some strength in the used values.

Got it. Well, nice to see such good execution in a number of dimensions in the quarter, and congratulations on the Mitsubishi win.

Thank you very much, Ken. We appreciate it.

Don Fandetti, Citigroup.

Jeff, you had mentioned in your remarks about share repurchase. Obviously it's early, but is that something we should think of as more of a 2017 CCAR? Or is it a possibility for 2016?

Yes, I think Chris and I will both tag team this one, but I think back half of 2016, it is something that could be possible. Obviously some of this depends on how much of G that we could go out and address in the back half of this year, and we're in constant dialogue with the regulators. Is that something that could actually be done this year? Does that have to go in to the first part of 2016?

So I think step one is finish off what we're going to do on G front, and then that affords you the other opportunities of either paying a dividend, share repurchase, or other growth areas of the balance sheet you'd rather retain the capital and do something there.

So, I think back half of 2016 is probably leaning slightly on the aggressive side, but it's not out of the question.

And I think -- just to reiterate what JB said, I think in the 2016 CCAR submission -- which should be, you remember now, is going to be in the second quarter of 2016 -- we will be contemplating something in that submission. The timing will go out for the nine quarters.

Yes, and then I guess, Jeff, on your comments, so you are saying the remainder of the Gs, you could go back and ask to take those out in 2015, just to be clear?

I mean I think it depends if we continue to see strong results, continue to have a constructive tone with our regulators, we will remain in dialogue with them. And so, I don't want to say it's not possible; it's clearly -- as I look forward and think about what the Company needs to get strength and get the stock price moving, get more long only investors in to the stock, I think the dividend is something that's symbolic and important.

And so, in order to get there I got to get rid of G. And so I want to get rid of G as soon as I possibly can. I also think it just simplifies capital structure.

So, I will lean on the aggressive push in this area. If it happens this year, great. If it has to go into 2016, then we'll deal with it.

Got it. And then one last question. You have said a lot about the commercial floor plan, so I appreciate that. I just wanted to make sure I understand. Does GM Financial want to do more floor plan? And if so, what is your competitive advantage to defend that business?

Look, I'd say ask them, but they are in the market, they've taken some of our dealers, they've been more on the smaller scale, lesser quality dealers. But for us, the big advantage, I think, is twofold.

One, overall cost of funds for us today, and then particularly as we think forward, because we're funding -- the floor plan book we do fund 95%, 96% of that inside the Bank, so it takes advantage of our best cost of funds. And then particularly as you think towards a rising rate environment, being Bank funded, having the ability to lag on the layup is going to be very important.

And then the second part of this that just -- the relationship component, which I can't emphasize enough. They know our people. You got a number of these dealers that generational -- I mean, two to three generations, and they know what to expect from us. And I would admit we're not always the lowest price, and accounts can typically probably trade away from us at a little more cost-effective level, but with us they get the service, they get the consistency.

And that's part -- we even rolled out a new ad campaign in the first quarter, which really is resonating with the dealers. Which is, again, we're more than just a bank, we are more than just a finance provider, we're a partner. And I think that matters in the eyes of the dealers.

So for us I think there's a lot of advantages that we have. We're still in the GM channel, so with the dealers, we're still running the floorplan book. About 63%, 64% penetration, so we've lost some accounts but we still have a quite good share there, and I would expect it to more or less stay about the same.

Okay, thank you.

Katina, we have time for one more question if there's one queued up.

David Ho, Deutsche Bank.

One last one on the partnerships with additional OEMs. Congratulations on the Mitsubishi win. Is there an active pipeline for that? Or is that just opportunistic throughout the year and as you go about the business?

It is opportunistic more than an active pipeline, but having said that I'd say we've got another one that's imminent. It's smaller, but I would hope in the next week or so we're out with another name we're bringing into the umbrella. So I think it's really shown the power of the franchise.

But we've got a dedicated team that's out talking at the manufacturer level and saying even, how can we be supportive behind where they have a captive. And I think that's really working at both a dealer level and even at a manufacturer level today. So, more to come, but we remain very opportunistic there.

Great, thanks. And one more on the rising rate question. In terms of rising rates making subvented business more attractive, do you really think that your funding cost advantage will offset your competitiveness there in terms of ensuring that your buy rates are still competitive, and particularly within the GM new retail standard channel?

Sure. The aspect that we have a large deposit base today will really ensure that we'll have the cost of funds going forward in a rising rate environment to really remain competitive. So, I think that really helps us.

Okay. Great, thanks (multiple speakers).

Great. Okay, that's all the time we have this morning. If you do have additional questions, please feel free to reach out to Investor Relations and thanks for joining us this morning. Thanks, Katina.

Thank you, Mr. Brown. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.