Ally Financial Inc (ALLY) 2015 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the second-quarter 2015 Ally Financial earnings conference call. My name is Emma and I will be your operator for today. At this time all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. Now I'd like to turn the call over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed.

Thanks, Emma, and thank you, everyone, for joining us as we review Ally Financial's second-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 second-quarter results. We will 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, and good morning, everyone. Thank you for joining us today. Let me start on slide number 3, and by design, this is the same slide we shared last quarter that highlighted at a very high level our key strategic priorities. These include, number one, diversifying our auto finance business; number two, expanding our franchise so it is best positioned for long-term growth; and number three, improving shareholder returns.

Chris and I will share more details on our progress as we work through today's presentation and as you will see, we are delivering on each of them.

Turning to slide number 4, let me lead with two key points. First, we are fully on track with our financial targets. And second, credit continues to perform in line to better than expectation, and we are being prudent in new originations coming on the balance sheet.

Auto originations were very strong in the first two quarters of the year. We booked over $20 billion in originations in the first half of 2015. We are fully confident in delivering originations in the high $30 billion range for the full year. The strong start in originations will also allow us to be even more selective on what we put on balance sheet over the remaining five or six months of this year while ensuring we are generating appropriate returns on capital usage.

The business continues to be more diversified, including from a channel, mix and product perspective. And we believe this is a better mix of assets, given our macroeconomic outlook and auto-specific supply trend.

As I highlighted at one of the equity conferences during the second quarter, there was an uptick in allowance we booked, which is more of a function of the lease-to-loan product shift versus any meaningful change in credit expectations. We are committed to achieving the core return on tangible common equity target of at least 9%, and the capital actions we have already taken are important steps toward normalizing equity levels.

There is still more improvement to come. Specifically, we've been pretty vocal on addressing the remaining Series G in the near term and we are in discussions with the regulators about this matter. We are on target to drive the adjusted efficiency ratio to the mid-40%, even while we make critical investments that will enable us to grow and deepen customer relationships. But obviously, a disciplined focus on costs with a constant focus on return on investment also contributes to ROE expansion.

So high level, we are on track against each of these commitments for the year and we are very focused on the next stages of execution that can help surpass these initial targets.

Turning to slide number 5, let me touch on the quarter before handing it off to Chris. We delivered net income of $182 million in the quarter, including the $155 million charge related to the debt repurchases. Obviously, these capital and liability management actions are focused on improving financial returns over time. Core pretax income was $435 million for the quarter, which is an improvement from the prior year and while down from prior quarter, you may recall we benefited from about $90 million in one timers in the first quarter.

So, normalized, we feel very good about the linked quarter progression. Adjusted earnings per share was $0.46 up from $0.42 last year. Core ROTCE was 8.2% for the quarter, and the adjusted efficiency ratio was 46%.

We also continued to see net interest margin expansion to 2.58%, which is an increase of 11 basis points from the prior quarter. And we got it from both asset yield expansion and cost of funds contraction.

Obviously for this rate environment we are pleased, and we still see opportunities to come.

Auto originations were very strong at $10.8 billion for the quarter, which is relatively flat with a year ago. However, as you know, the landscape this year is very different than last year.

The second quarter was the first full quarter following the change to the lease business. And when you exclude all GM's submitted business, Ally's originations were up 36% year over year. In the growth channel, in particular, it was up 58%.

The auto finance franchise is a formidable competitor with the associate expertise, customer relationship and flexibility to adjust to new market dynamics. Results this quarter are another demonstration of it.

Now let me shift to our deposit business. We had retail deposit growth of $1.1 billion in the quarter, which is an increase of 13%. And equally important is that we welcomed another 35,000 customers to Ally. We are spending a tremendous amount of time understanding the existing customer base, thinking about emerging trends in financial services and focus on how we really change the landscape in the years to come.

So we continue to make progress on our financial targets, diversifying our business and expanding our customer base. This is a roadmap to improve shareholder returns and we are poised to build upon these.

With that, let me turn it over to Chris Halmy.

Thanks, JB. Let's start with the details for the quarter on slide 6.

We delivered another solid quarter with core pretax income excluding repositioning items of $435 million. Net financing revenue of $927 million was up both year over year and quarter over quarter. Strong auto originations are driving earning asset balances higher and these loans are coming on at attractive yields. Funding costs continue to come down and we continue to see used-car prices remain strong.

Other revenue of $368 million returned to a more normalized level this quarter. As you will recall, we booked a gain last quarter of about $65 million on the sale of some legacy TDR mortgage loans. Provision expense of $140 million was up, driven by our strong loan growth as well as some releases in prior periods that did not repeat.

Total non-interest expense came in at $724 million, which is broken out between controllable and non-controllable items. The increase quarter over quarter is driven by insurance weather-related losses, which are seasonally the highest in 2Q. We continue to make progress on controllable expenses, which were down another $10 million year over year, and $21 million quarter over quarter. These results, including the debt tender charge, resulted in GAAP net income of $182 million.

Adjusted EPS for the quarter was $0.46. Core ROTCE was 8.2% and our adjusted efficiency ratio continued to decline to 46% in the quarter. Both metrics are on track to meet our year-end targets. So, overall another solid quarter.

Slide 7 hits the results by segment. Auto finance had a great quarter, with pretax income of $401 million. Strong originations resulted in higher asset balances, which combined with favorable net lease revenue, drove the increase quarter over quarter. The year-over-year results were partially driven by higher provision expense and compression in commercial yields and lease revenue.

Insurance pretax income of $15 million was up from prior year. 2Q was typically the seasonal high for weather-related losses, but were favorable to last year's record high levels.

Mortgage reported $9 million of pretax income, but had some significant items in the comparative quarters that did not repeat. As we discussed earlier, we had the TDR asset sale last quarter. Corporate and other continues to benefit from lower cost of funds on a year-over-year basis.

Net interest margin is covered on slide 8. NIM was up 11 basis points quarter over quarter, driven by lower funding costs and slightly higher asset yields. In 2Q we made great progress on liability management and also benefited from some legacy debt maturities which we did not replace. Overall funding costs were down 32 basis points year over year and 8 basis points quarter over quarter.

For reference, there is a slide in the Appendix that outlines our progress on liability management and reducing the overall unsecured footprint which is down by almost $4.5 billion since the third quarter of last year. We expect further NIM expansion next quarter as the full effect of our liability management strategy is realized.

Longer term, cost of funds improvements will be driven by our ability to get more assets in the bank where we can fund with deposits. Currently, about 68% of our assets are in Ally Bank, but we did get approval from our regulators to start booking the 620 to 660 FICO loans at the bank, so that percentage will rise. This should get us closer to 75% in the near term, but obviously we are focused on eventually getting everything funded at the bank.

Turning the page, we've added a new slide outlining our sensitivity to changes in interest rates. This is a hot topic right now, so we thought it would be helpful to provide a little more context around some of the comments we've made publicly.

Keep in mind that Ally's balance sheet is pretty short duration, turns over quickly and is primarily funded with deposits and securitizations. One of the biggest drivers of our rate sensitivity is the re-pricing assumptions we use for the retail deposit book. While we have numerous inputs to our interest rate risk model, the assumptions we are currently using result in a pass-through rate of greater than 80% over time.

We do think this is conservative, relative to what historical data would suggest. You can see the sensitivities. But if you were to assume a pass-through rate of 50%, we become neutral to slightly asset-sensitive.

I will also point out that if you look at the stable rate scenario, we would benefit versus the forward curve, which has played out well for us as rates have stayed lower for longer.

The other area of interest rate exposure is the rate flaws we've historically had on our floor plan loans. As we previously noted, we've been migrating dealers off the floors. And as of June 30, approximately 80% of these loans will reprice directly with short-term interest rates. While that move may have cost us some near-term margin compression, it positions us much more favorably when rates do start to migrate up.

So overall, while we disclosed a liability-sensitive posture in the past, we believe this could be more neutral to asset-sensitive depending on pass-through assumptions and the progress we've made on the floor plan side.

Moving to slide 10, let's discuss deposits. Another solid quarter with $1.1 billion of retail deposit growth, up 13% year over year. We've experienced some better-than-expected deposit inflows in the first half and now expect to grow the retail deposit book by about $6 billion this year. We grew our customer base 16% year over year, adding another 35,000 depositors this quarter alone and we are quickly approaching the 1 million customer milestone.

We continue to invest in the brand by enhancing the functionality of our iPhone app with Ally Assist, which allows voice interaction and predictive analysis to help customers manage their accounts.

Let's move to capital on slide 11. Our capital normalization process is well underway, with capital ratios trending towards our targeted levels, primarily a 9% common equity tier 1 ratio. The drivers of capital this quarter were the Series G and Series A actions as well as about $4 billion of risk-weighted asset growth.

In the chart, we show our estimate for the Basel III fully phased in common equity tier 1 ratio of 9.3%.

The key messages here are: we are still running very comfortable levels of capital. We expect to continue to generate excess capital through earnings and DTA utilization, and we will continue to normalize our capital structure as quickly and prudently as possible, so we can initiate a dividend and consider share repurchases.

On the bottom right of the page, we show our adjusted tangible book value which adjusts for tax affected bond OID and the remaining Series G discount. It was flat quarter over quarter as financial results were impacted by the liability management actions and OCI adjustments, but up over $2 per share year over year.

Moving to asset quality on slide 12. In the upper left corner, consolidated charge-offs declined seasonally to 39 basis points and is primarily driven by our retail auto charge-offs shown in the bottom right. Retail auto losses declined to 65 basis points this quarter and should be the seasonal low point for the year.

In the bottom left, our 30 plus day delinquency rate increased to 2.29% as seasonally expected. The first quarter is typically the low point for the year, so you should expect delinquencies to continue to increase throughout the rest of the year.

We thought it would be helpful to provide additional information on our provision expense, so we added the chart in the top right to help explain some of the dynamics. A couple key points I'd make.

First, over the past year, we had some releases and recoveries in commercial auto, mortgage and corporate finance that have affected our consolidated provision expense.

Second, retail auto provision is up, due primarily to higher loan balances. As you can see in the chart, our coverage ratio has been pretty consistent. But auto loan balances are up over $2.6 billion year over year and $3.3 billion quarter over quarter. Remember, as our origination mix shifts to more loan versus lease and our loan portfolio grows you should expect this trend to continue.

So, to reiterate what we've been saying for several quarters, we feel very good about where we see credit trends and asset quality continues to perform well within our expectations. I would expect annualized charge-offs in the retail auto portfolio to approach 1% this year and drifting up further next year.

Let's turn to slide 13 and go deeper into the segment results. Auto finance reported $401 million of pretax income in 2Q, and we've already covered the drivers of the financial results for auto, so let's focus on originations. We had a great second-quarter at $10.8 billion with strong performance across all non-subvented channels. These originations, combined with stable floor plan balances, resulted in asset growth of around 3% year over year.

Looking at the walk in the bottom right, you can see how our origination mix compares on a year-over-year basis excluding GM subvented products. We grew this business 36% year over year, which is a testament to the breadth and depth of our auto franchise, including our dealer relationships and the capability of our associates.

On the credit front, about 14% of our 2Q originations were nonprime, which was up from a little over 9% a year ago. This is consistent with our recent focus on capturing more profitable loans in this segment and we continue to be very comfortable at these levels.

Year-to-date, our $20.6 billion of originations is up 3% year over year and puts us well on track to achieve our target of high $30 billions of auto originations in 2015.

Turning to slide 14, you will see that the growth channel made up 32% of our first-quarter originations. We continue to see nice gains in Chrysler and, for the first time in our history, GM made up less than half of our quarterly originations. From a product perspective in the top right, you can see that the strength in standard rate new and used loans is offsetting the decline in leases. We fully transitioned away from the GM lease business and, since subvented loans are such a small portion of what we originate, we expect this origination mix to be more representative of our dealer channel and product composition going forward.

The bottom two charts summarize the balance sheet. Continued consumer asset growth and pretty consistent commercial balances.

Let's turn to insurance on slide 15, which reported pretax income of $15 million for the quarter, up $38 million year over year. The driver of the quarter-over-quarter decline was weather-related losses, which are seasonally the highest in 2Q. This year, we recorded $67 million of weather-related losses which are up seasonally quarter over quarter but significantly down year over year to a more normalized level.

Written premiums in the second quarter totaled $263 million, relatively flat year over year and up $24 million quarter over quarter, primarily driven by higher retail volume.

On slide 16, we show the results for both mortgage as well as our corporate and other segment. Mortgage reported pretax income of $9 million. The mortgage loan portfolio was up this quarter to $9.1 billion, reflecting bulk purchase activity. And again, these are primarily high FICO jumbo loans, which we view as part of our standard balance sheet management process.

In corporate and other, we had core pretax gain of $9 million. Results in this segment continue to show significant improvement year over year, driven primarily by lower funding costs. So overall, we had another solid quarter and a great first half of 2015.

With that, I will turn it back to JB to wrap up.

Thanks, Chris. Again, let me sum up by saying that we remain focused on driving improved shareholder returns and long-term growth. We continue to be successful in diversifying our auto business, and we are comfortable with the assets we are generating. Our credit performance continues to be in line with expectation. And, while we have modestly increased appetite, you have to put that into perspective, relative to GM lease residual exposure that is rapidly coming off balance sheet.

The deposit business continues its strong and steady growth, and we are getting more efficient in gathering deposits. We have a very competitive offering and believe there are still a lot of runway to grow this franchise. The opportunities we have in front of us include looking at the broader customer base and focusing on them as Ally customers, as opposed to just a consumer of one type of Ally product.

That is really what we mean when we say One Ally, looking at our 5.5 million customers holistically as Ally customers. By doing that, we can more effectively explore opportunities to serve them better, deliver products of value to them and, of course, expand our base of business over time.

The auto finance franchise will continue to be a key focus and a cornerstone of our Company. We have a strong heritage and expertise in this business and no plans to divert our focus. And obviously, the adaptability we have demonstrated is quite powerful.

So with that, let's turn it back to Michael Brown and discuss what's on your minds.

Okay, thanks, JB. As we move into Q&A, we request that you please limit yourself to one question plus a single follow-up. If you do have additional follow-up questions after the Q&A session, the Investor Relations team will be available after the call.

Emma, if you could please start the Q&A session.

(Operator Instructions) Sanjay Sakhrani, KBW.

This is actually [Tai DeMaio] in for Sanjay. I just had a question on expenses. You saw good expense reduction in the quarter despite the diversification strategy. You're almost at your efficiency ratio target.

How should we think about the efficiency ratio long term? And how much is -- of the runway is left in controllable expenses? And how much will come from scale?

Let me address, I guess, the first half of the year. We had taken out about an additional $30 million of expenses over the 2014 run rate. We expect that expense will continue to be reduced over the next three or four quarters to really hit what I would call a consistent run rate of efficiency ratio in the low to mid 40s.

Beyond that, we are very focused on the investments we need to make, particularly to keep the deposit franchise to be the real leading digital franchise out there, as well as the ever-changing dynamics in the auto business. So, we will continue to invest in the franchise and, at this point, I would guide you towards that mid-40s efficiency ratio going forward.

Okay, and just a quick question on re-marketing gains. They were pretty strong this quarter. Anything to call out specifically?

No, I would just mention that 2Q is always usually the strongest for used car originations and used car prices. So you normally see a tick up in the second quarter on used car prices, which really drove some of the re-marketing gains on the cars coming off of lease.

So you usually start seeing it drop off in the third quarter and the fourth quarter. So I would expect a decline for the remainder of the year.

I would say that has been an area that has sort of pleasantly surprised us and the used car prices for the first half of the year has held in very strong, stronger than we initially expected coming into this year. But I think as Chris points out, we think at some point that has got to normalize and we will start seeing lower levels of gains.

All right, great. Thanks.

Cheryl Pate, Morgan Stanley.

I just wanted to touch upon the origination's guidance. And obviously, the front half of the year has been very strong. I'm just wondering how we should think about maybe the competitive environment or sort of the pricing that you are seeing out there that would maybe drive some deceleration on the back half of the year, or is there something else we should be thinking about there?

No. I would say that, once again, 2Q and even going into kind of early summer are really the strong quarters for originations. So you tend to see higher originations really in the first half of the year more so than the second half of the year. But on the competitive landscape, it continues to be a very competitive environment whether it's in really the super prime where a lot of the big banks play or right down to the subprime where there's obviously a lot of finance companies out there driving competition in the subprime space.

I wouldn't say the competition from our perspective has ticked up in any meaningful way on the origination front. If anything, where we see the biggest competition and compression in yields is really on the commercial or dealer floor plan balances. And that's where we've seen really the heavy competition, I would say, over the last few quarters.

So, we are sticking to our high $30 billion's origination number for the second half of the year. We obviously had a pretty successful first half. That hopefully will provide us some leverage from a pricing perspective going forward. But we will have to see how it plays out.

Yes, and Cheryl, I would just add, the other thing -- application volume exceptionally strong right now. I think we saw north of 2.7 million apps in the second quarter. To the extent that we continue to see looks like that, we like the business flow and we like the profitability. Could we surpass the upper 30s and get into the 40s? Yes, it's very possible.

But I think Chris is right to point out we are going to balance that with a little bit more pricing discipline, if needed, in the back half of this year.

Thanks, that's really helpful. And just one follow-up, if I may.

I appreciate the commentary on the 620 to 640 FICO is now going to the bank. Can you just maybe help us think about what does it take to get that sub 620 FICO band to move through the bank -- to be originated through the bank over time as well?

Patience. I think it -- in all seriousness it's an ongoing dialogue that we have with our regulators to make sure they are comfortable with the quality of loans. But I think as we point out and you look at some of our large regional bank competitors that book everything inside of the bank, we don't think there's any reason why, through time, we won't get there.

So, as Chris pointed out, migrating down from 660 to 620 is an important milestone. But clearly the long-term game is to get everything inside the bank.

The average FICO that we are doing in non-prime space is 580, so you've got some skew on both sides of that. But we are not all that far off from being able to put everything in there. But it will just continue to work through with your regulators on what makes sense and, through time, we believe we will get there.

Okay. Great, thanks.

Don Fandetti, Citigroup.

Don, we can't hear you if you are speaking.

Can you hear me now?

Yes, got you.

Got it. So, Jeff, can you -- it was good to see your GM commercial market share holding. I was wondering if you could talk about your competition from GM Financial in that segment and what are some of the reasons why a dealer would not want to go with GM Financial, assuming they are coming in at better pricing?

Yes, thanks for the question. So I would say to tie-in to the competitive environment point, I mean I think where we are facing the most competition right now is out with GM floorplan dealers. And we've lost some accounts there.

I think what we tend to focus on is the overall levels of floor plan balances, which has remained in check in the kind of the $33 billion-ish type of range there. But while we lost some GM accounts to GMF, we have benefited by what we are doing in the growth channel and picking up growth floor plans dealers as well. I think we had migrated about 275 dealers there, relative to a year ago. So we are making good progress on that front.

But why people stay with us, I think it's the comments that we try to make about the experience of this associate base and the adaptability of the associate base. And even we've obviously talked in the past about Ally dealer rewards, in a key way, we get dealers to keep their business with us, while we have adjusted dealer rewards and we've worked with the dealers to make sure we can get a better look or a better mix of origination. So, while lease, for example, has now completely gone away what we have seen is an uptick in the amount of the standard rate business, the used business, the non-prime business that our GM dealers have given us.

So it comes back to just the dealers, for the most part, know what to expect. And yes, while we are a premium price, they get a level of associate expertise and the ability to book a lot of loans very quickly and very efficiently. So, I am not going to deny that we haven't lost some accounts to GMF but I feel overall very good. And obviously GMF continues to still build out. They are still hiring folks. And so, through time, we will see what it all leads to.

But the GM dealer relationships we have are exceptionally solid. I was on yesterday with about 10 of our best GM dealers in the US as well and, you know, talking through a lot of the open dynamics that are at play here. But, through time I think people stick with Ally because they know what to expect. They know we have the best people in the industry. And that is worth the premium loan price.

And is it still your hope that you would be able to take out some or all of the remaining Series G this year?

That absolutely is my hope and, as mentioned, we are in dialogue with our regulators on that topic.

Thank you.

Rick Shane, JPMorgan.

Thanks for taking my question. Really looking for a little bit of a clarification on what you said for charge-offs on auto into the remainder of the year. You're not guiding towards a 1% loss rate for the year. You are saying that, in the second half of the year, losses will gravitate back towards the 1% range.

I'm actually guiding for the year. My expectations would just be under 1% on an annualized basis. So, (multiple speakers)

Got it (multiple speakers)

Second quarter is the low point, so we will start ticking up in third quarter and fourth quarter, and when you average it for the year, you will be -- my projection is somewhere in the high 90s right now.

Got it. And the way we look at it is, on a year-over-year basis for the first two quarters of this year, you are about 7 or 8 basis points above where you were last year. And again, given the seasonality, I think that's the right way to think about it. Are the metrics in the second half of the year going to be in that sort of band, plus or minus 10 basis points over where they were in 2014?

Yes, I think so. So if you look at the asset quality chart on slide 12, you will see that seasonal dynamic and I would expect that the tick up in third quarter and fourth quarter will be -- let's say, 10 or 15 basis points higher than the sequential quarter in the prior year. To give you a little bit more context, even when I said for 2016 it's going to drift up from there, the loans we are putting on in both the first quarter and the second quarter have what I would call an annualized loss rate projection of somewhere around 110 basis points.

So if you think about that's what we're putting on the books today, the whole auto finance book will migrate up to somewhere 110 kind of range. Then if you look at the coverage rate, the coverage rate we are holding right now at about 126 basis points. So we feel pretty good about our coverage rate and where our provision balances really stick today. But you will see us just kind of drift up from here.

Great, well, that's helpful in terms of the mix shift. Just so we have apples to apples comparison, if you think that the book you are putting on today is about a 110 loss rate over time, where do you think the legacy book was? So that way we can sort of recalibrate, is this 10 or 15 basis points below that?

Yes, I would probably say that. Yes. I think the legacy rate is probably around the 1% range.

Okay, great. That's helpful, thank you, guys.

Eric Beardsley, Goldman Sachs.

Just to follow up on that point, as you have your mix shift, are you comfortable with the current level of subprime origination today or could that continue to expand? And, if so, what impact would that have on that charge-off rate?

Thanks Eric, it's JB. Look, we've kind of seen growth year over year from 9% deployment to about 15%, 14%, 15% where we are at today. And I think that was sort of the near-term goal. I don't expect us go meaningfully beyond it. So I think what Chris is pointing out on direction of kind of charge-off trends is pretty much consistent with assuming we stay at about that 15% level.

I don't see us pressing far beyond that. But again, I think it's being done with a couple of things. In perspective very simplistically, we look at macroeconomic trends, think about where unemployment is trending. We may crack through the 5% level even early next year at some point. So while unemployment levels are very strong and solid, we think credit is going to hold up quite well, again keeping in mind this is a relatively short asset. So, two- , three-year asset turns quickly. So we are comfortable there.

And then obviously, the other big point is when you think about the amount of residual exposure that is coming off balance sheet, this is a way to redeploy it. As we sort of step back and think about supply dynamics and levels of used cars, us dialing back on residual exposure for a little bit more credit exposure, we think, is a pretty smart trade at this point in the cycle.

Got it, thank you. Just as a follow-up, with the 1.1% charge-off rate, what is the consumer loan yield of the new originations that you are putting on?

They are ranging right now about 5.58%, so somewhere between, say, 5.5% and 5.6% right now, which is up. So, if you see, we even disclose on our auto finance results page on page 13 that the retail loan portfolio is about 5.3%. So, we are seeing about what I would call a 20 to 30 basis point increase in yields that we are putting on versus the portfolio today.

Got it. So, over time, the whole book should migrate there, presumably?

Should migrate up. Obviously the rise in interest rates will affect that as well.

Great, thank you.

Moshe Orenbuch.

Most of my questions actually have been asked and answered. I think it's -- you talked a lot about the job you did on the -- defending your market share and the floor plan. Could you talk a little bit about what you can and will do, with respect to the yield on that portfolio as things go forward?

Thanks, it's JB. And Chris, feel free to dive in as well. I think more or less you sort of bottomed out now, and the page that Chris just referred to, I think it was slide number 13, and we disclosed the net commercial portfolio yield. You can see it's down to 2.9%, which is consistent with last quarter. That is net of the Ally Dealer Rewards, as well.

So we sort of stabilized, so despite it being very competitive and certainly there are offerings out in the market, and in fact I saw one yesterday at 1.25%. So I mean, there are some low rates in the market. But for the most part, I feel like we have kind of normalized where we are at and the overall portfolio. I don't expect much drift from here.

And then obviously, given the move of accounts off of the prime rate floors into LIBOR puts us in a much better position when rates do start rising. So, part of the margin compression -- and you will see it on that chart -- we've lost about 30 basis points of margin year over year. And that has been the result of when we moved accounts over to LIBOR and to floating-rate indices. We've given up some near-term margin, but obviously it's a much better rate posture going forward.

Great. Thanks so much.

Eric Wasserstrom, Guggenheim Securities.

I just wanted to take a moment, if you wouldn't mind summarizing all the puts and takes that are going to be moving through the net interest margin. On the asset side, it seems that the -- it's an overall bias towards higher pricing with an increased mix of nonprime. Is that the basic dynamic?

Yes. I mean, I think commercial yields will be pretty flat. So you should hopefully get a little bit of lift with -- you're going to get a little bit of lift on the retail side. But keep in mind, we still have a lease book that is rolling off and the lease yields have been higher than we expected.

The lease yields were actually almost 6.5% this quarter, which is because of the higher re-marketing gains. So you have a dynamic going on a bit where retail should have better pricing, but the lease book coming off will lower some of the margin as well.

So I think overall, I would guide you that it would be pretty flat on the yield side. But we will still see cost of funds improvements, particularly as we get into the third quarter and we are just -- continue to run through the book.

And the cost of funds improvement derive specifically from the continued deposit growth? Or is there additional reduction in the debt footprint that you anticipate?

Yes, well, what I would say, in the second quarter we had a pretty significant reduction in the debt footprint and that happened both from maturities -- as an example, we had a very big Eurobond that matured in the second quarter. We also did some of the debt tenders. So we didn't have a full quarter effect of that. So the biggest driver of the decrease in cost of funds from 2Q to 3Q will really be the unsecured movements coming down. So you'll see that.

Now, when I think about it longer term, it really has to do with the growth of the deposit book and the continued asset migration into the bank. Today, deposits have about 115 basis points cost of funds and we are funding a lot of those loans at the holding company through securitizations and unsecured debt that runs at 4%.

So, as you migrate those loans over time to the bank, you will have further cost of funds reduction. So I would just guide you to say 3Q will be a pretty nice move down and then there will be kind of a steady move, depending on the asset migration.

Great, thanks very much.

David Ho, Deutsche Bank.

Just wanted to clarify on the asset pricing migration. Are we still relatively in the early stages in terms of the nonprime being priced at Ally? And does that imply, as you get toward the second half of the year, that if things become a little more competitive that your buy rates can still remain competitive even in a rising rate environment?

Listen, we look at the risk-adjusted spreads, okay? So, the yields we are getting on these loans versus the risk we are taking. And that's a dynamic that we look at on an ongoing basis when we decide to play in this space. So our view of things like the macroeconomic environment and where we see losses migrating to where we see the competition and what the spread we can get over what our assumed losses are going to be is a decision that we make on a pretty ongoing basis.

So, as we look forward, we do not see deterioration in credit. So we feel pretty good about the credit environment. And, when it comes down to the competitive environment, it's something that we have to weigh on a month-by-month basis. Who are the competitors and what are their prices?

Keep in mind we see lots of applications and when I think about the applications we book, we only book like 13% of the applications that we see. So we are pretty selective and we make sure that we are going to get paid for the risk we take.

Yes, and obviously maybe the only thing I would add is some of the banks -- some of the competitors have sort of said they backed away a little bit from nonprime space. And part of that, I think, is us getting a bigger appetite and kind of forcing others out of the channel.

But if you start to think through who do we compete with in the nonprime zone, more of the captives, more of the non-bank financials.

Obviously as rates do start rising, whether that is later this year or whether that's into next year, they are going to see their cost of funds reprice up pretty much basis point per basis point. So from our perspective, having $52 billion of retail deposits that can get lagged, I think, puts us into an even more competitive posture whenever we get to rising rates.

That's helpful. And then separately, on the Series G potential redemption, what are the main regulatory hurdles in your mind at this point that get you there? Obviously another quarter of good results probably helps, but what are those that you think of?

You obviously go back to the CCAR submission and our financial performance tracking against our baseline plan and the CCAR submission, which is obviously -- it has actually been better than we had originally planned. So that is obviously a positive.

So I would say it comes down to really the regulator's view of the overall capital levels of the institution and versus the risk we have on our books. So we are obviously in close dialogue with our regulars on an ongoing basis and right now we're talking about Series G. But we'll see.

Elimination of preferred is a good thing as well.

Yes.

Great, thank you.

Chris Donat, Sandler O'Neill.

I had a question about your deposit franchise, because I read press reports this month that for Ally Bank for the ATM fees, that there had been unlimited reimbursement. Sorry, unlimited reimbursements for ATM charges outside of the network, and I understand that that has changed. Can you talk a little bit about that? Does that reflect that your deposit franchise is strong enough now that you are willing to let some business kind of go away? Or is there something else going on there?

It's a good question. To clarify what we've done, it's still consumers can get -- use free ATMs through the Allpoint network, which I forget how many thousands and thousands of ATMs are across the US. But we still have a wide range of ATMs that are free for our consumers to access.

But we basically -- what we've done in the policy is shifted to first $10 of ATM charges in any month are reimbursed and then beyond there, there is the normal ATM fee associated with it. I don't think it's necessarily a function of us changing our appetite. But clearly, as we comb through the customer base, as we look at profitability by customer accounts, this was just the change that we felt made sense to make.

And by the way, the offering that we still have out there, we think, competes even more favorably against any other bank, direct or brick and mortar, with what's out there today. So it was a small subtle change. We have thankfully not experienced really much negative customer feedback on it.

We monitor the situation closely. We fielded a number of calls just to clarify to consumers, but once they understand they can access thousands and thousands of ATMs still without incurring a fee, I think generally speaking, customers are just fine.

Got it. Part of the reason I asked the question is the bank's brand is so strong, and viewed as so customer-friendly, I didn't -- any change, is curious to me.

And then sort of related to that, it looked like on a year-on-year basis, the number of your deposit accounts grew a little faster than the value of deposits, which I assume reflects your picking up some smaller size deposits. Is that sort of typically how you grow? Someone starts with a smaller amount and then it grows over time? Or is there something else going on in that trend? Or am I reading too much into it?

Yes, that's exactly right. That's exactly right. And one of the big emerging trends we've got in the book, I think, north of 35% of the existing base is more a millennial customer, and that becomes very important to us as we start thinking through future strategies.

So, again, back to how we think through One Ally, from the pure deposit lens, some of these folks may not appear to be the most profitable deposit customer. But as you start thinking through how that customer is going to go through their life cycle, and potentially need an auto loan, maybe they need a mortgage, maybe they need a credit card. And you can start to imagine a lot of other products that you can deliver to these consumers through time.

So we think we've got really solid trends in the customer book. And yes, it starts in smaller balances in deposit land, but when you think long term, it's a great opportunity ahead of us.

Okay. Thanks very much, JB.

John Hecht, Jefferies.

I guess a little bit more color on your tactics in gaining share and competition and so forth. I mean you've obviously done a good job both in the Chrysler channel and in the used car channels, gaining share. You mentioned a few things. You mentioned some of the bigger lenders pulling back potentially.

You mentioned some of your own tactics to push others out. I'm wondering if you can give us a little color. I mean, is the tactics, are they pricing? Are they terms? Are they just relationship-driven?

And then on the large lenders pulling back, I wonder if you could give us some color there.

I would start with saying that it's -- the dealer relationships are extremely important, both our existing relationships and the new relationships that we are forging. As an example, when you think about the growth channel, we've added over 900 dealers this year to our growth channel.

What does that really translate into? It translates into incremental applications. I know JB mentioned we had 2.7 million applications in the quarter alone. So, when we think about incremental flow of applications, even at a very similar approval rate and even a lower what I had called that book to look rate, we are generating incremental originations because of that. So that becomes very, very important to us.

Now, incremental to that, then we get into the penetration of the dealers to how we are penetrating these new relationships. We didn't put it in this deck, but if you remember last quarter, we had a deck on kind of penetration and one of the things we monitor is how many dealers give us 5 plus loan applications, where we do five plus loans, what I should say. And last year in this quarter it was 22%. This year it was up to 30%.

So what does that say? It says the penetration we are getting in our existing and new dealers is really starting to grow. So that is driving, once again, incremental originations. And now we've established a better foothold in our dealerships in the nonprime segment, so they know are open for business and they are giving us more applications on that side.

So a lot of it has to do with the depth and breadth of these dealer relationships.

That's great color. And then, a follow-up question, just thinking about capital and liabilities, you've done a lot addressing your capital structure. So I'm just wondering, should we start thinking about repurchases and dividends as part of the 2016 CCAR or part of the 2017 CCAR? Just maybe give us a sense of the pace for that type of modification.

Yes, I think our feeling at this point in time is that 2016 CCAR submission, which if you remember now, will be a second quarter submission, our expectation is that we will have some level of dividends or share repurchases in that submission. So obviously we're balancing series G and how long it takes us to take out the series G, but the next phase for us really would be to become a dividend payer and have that ability to do share repurchases. So your expectation is that we should have it in that submission in 2016.

Wonderful, thanks very much, guys.

Ken Bruce, Bank of America Merrill Lynch.

I appreciate your comment on the competitive landscape and the like, and was hoping to understand; you mentioned in the commercial area that you have had some wins and losses and just on the loss side, what it is that tends to be kind of the thing that might swing a dealer either towards GM Financial if in fact, in that flag flying space or otherwise. On your losses, what tends to be the factor, pricing or otherwise?

Ken, this is JB. I think it's very rare and I don't say that to be arrogant. But it's very rare that we lose a dealer to service. Service levels, I think, generally speaking across the board in the bank space, Ally is really top of the list. And in fact, the JD Power survey that was just released, I think, reiterated that for all the bank players.

So it's never really about service. It gets down to price. And again, as I mentioned earlier, I saw a 1.25% floorplan rate out there. So, for us we never want to lose a relationship, but obviously we have a responsibility to our shareholders to balance appropriate economic return. So if we've got to let a floorplan account go, so be it. But we won't chase uneconomic rates.

We try to work very hard with the dealers, work with them and that is part of the reason we have some market compression. And we've had, as I pointed out, the 30 basis points year over year that commercial yields have come down. Part of that has been to the competitive environment, but at the same time I think we have positioned ourselves better for a rising rate environment.

So, there are a lot of aggressive rates out there but again, I think for us, when we think about the number of dealers that are floor planning with us, who are basically on a year-over-year basis, I think who are flat to slightly up. And so we have shifted out of some of the GM space and into more of these growth channels and Chrysler dealers.

Okay, thanks. And then in terms of the move into nonprime, I guess I'm curious as to how you think about that particular segment. There's been a lot of focus on some of the deterioration in underwriting standards in that sector. And I guess, if you look at it, used-car prices have been very strong. I think that has helped credit performance in that space as well. And you kind of mentioned this trade-off of residual risk to credit risk and I guess I kind of look at that as maybe one and the same in the nonprime sector.

So if you could just maybe kind of talk about what you're seeing in terms of the assets that you see, and whether you accept or pass any general level of quality trends that we could maybe get your insights into.

And keep in mind, we make loans even in the subprime space, or in the nonprime space, to customers who we expect to pay back the loan. We don't expect ever to go get the car, which is why we pay -- we play on really the top half of kind of that nonprime space mostly. And because of that, I know that used-car prices are more meaningful in the nonprime sector then they are in the prime sector. But the sensitivity to a lease versus nonprime is much greater on the lease side.

So, what we really look at as a much bigger factor is unemployment. And if people have jobs, they are going to pay their auto loans.

So we are playing in a nonprime space. We are being, what I would call, more aggressive from the standpoint of we are open for business there. But we are paying close attention to really the macroeconomic environment and what that will mean to us, and we are making sure we are getting paid for that risk.

Well, congratulations on another great quarter and appreciate all your comments.

I would now like to turn the call over to Michael Brown for closing remarks.

Thanks for joining us this morning. If anybody has additional questions, please feel free to reach out to Investor Relations. Thanks, Emma.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect and enjoy the rest of your day.