Ally Financial Inc. (ALLY) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the Third Quarter Ally Financial Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call may be recorded. I would now like to introduce your host for this conference call, Mr. Michael Brown, Executive Director of Investor Relations. You may begin.

Thanks, Operator, and thank you, everyone, for joining us as we review Ally Financial's third quarter 2017 results. You can find the presentation we'll reference during the call on the Investor Relations section of our website, Ally.com. I'd like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language. I'd also like to note Slide 3 of today's presentation, where we've disclosed some of our key GAAP and non-GAAP or core measures. These and other core measures are used by management and we believe they are useful to investors in assessing the company's operating performance and capital measures, but they are supplemental to, and not a substitute for, U.S. GAAP measures. Please refer to the supplemental slides at the end for full definitions and reconciliations. This morning our CEO, Jeff Brown, and our CFO, Chris Halmy will cover the financial results. We'll have some time set aside for Q&A at the end. Now, I'd like to turn the call over to Jeff Brown.

Thanks, Michael. Good morning, everyone, and thanks for joining the call. We'll just hit the key highlights on Slide 4. This morning we announced adjusted EPS of $0.65 per share and adjusted total net revenue of nearly $1.5 billion, both the highest since our IPO was strong performance across our businesses. In Auto finance, credit continues to track as expected, our lease book performed favorably with a 6.9% yield and we continue to feel good about the risk adjusted profitability of new loans we're booking, particularly given the 6.3% yield on new originations. With the respect to the 1.45% charge up rate in retail auto, this was somewhat artificially low due to borrower relief efforts in hurricane-impacted areas. We would expect higher charge-offs over the coming few quarters due to the localized impact of the hurricanes, which we've largely provisioned for and you will see that in the coverage ratio. Aside from the potential hurricane dynamics, the book is performing within expectations and we're on target to deliver an annualized charge-off rate in the 1.4% to 1.6% range that we've been messaging since early this year. In general, we continue to monitor the cyclical dynamics playing out in the auto ecosystem and we're incrementally encouraged by some of the signs out there. Inventory levels are being rationalized; used vehicle prices are declining in a very manageable way; competition is strong but not irrational; and credit is under control - and then we couple all of that with a fairly supported macroeconomic environment including healthy labor conditions and stable employment trends. On the deposit side, exceptional performance again - $3.8 billion of retail deposit growth this quarter which is a record for Ally. Total deposits have now eclipsed $90 billion which is up over $14 billion year-over-year with fairly modest movements in overall deposit rates and you'll see the retail book priced up exactly as we messaged on the call last quarter. Deposit growth remains a significant long-term opportunity for Ally, driving higher deposits into our funding profile is a major contributor of future earnings growth and a key ingredient to unlocking more shareholder value over time. And as we announced in August, we received approval from the Federal Reserve to normalize our capital requirements to Ally Bank which ensures we can grow assets at the bank and more fully realize the value of that deposit growth. So I feel great about the quarter and we continue to execute along the strategic and financial path that we've been discussing with analysts and investors for some time. Let's dive deeper on the regulatory normalization theme on the following couple of pages. Looking at Slide 5, at the time of our IPO, the company was hindered by several legacy overhangs in incremental regulatory requirements. Over the past few years, these requirements have been gradually addressed. In 2015, we received approval to take out $3.6 billion of preferred stock including the Series Gs that restricted distributions to common shareholders. Also in '15, the restrictions we had on deposit pricing and brokered CDs were addressed. In 2016, we received approval to become a Federal Reserve member bank to streamline our regulatory structure between the banking subsidiary and the holding company. We were also able to optimize capital deployment by initiating a common dividend in share repurchase program. Earlier this year, we achieved the ability to originate the full spectrum of auto loans at Ally Bank, regardless of FICO score. This has already eliminated the need to fund loans at the parent. This summer, we received a non-objection to our capital plan to increase the common distributions to around 9% of our market cap; and in late August, we got the green light to normalize our capital levels at Ally Bank. This will allow us to use excess capital at the bank to provide liquidity to the parent and allow us to make more efficient capital allocation decisions. So I'm happy to say we are now complete with this multi-year process and finally able to operate on a level-playing field with other banks. Let's look on the following slide to amplify some of the benefits of Ally Bank capital normalization. Now the Ally Bank is no longer held to a 15% Tier 1 leverage ratio. Capital at the bank can be managed to risk-based capital ratios, similar to the holding company. There are two major benefits: first, it creates liquidity at the parent company. This comes in the form of upfront and ongoing dividends from the bank to the parent, as well as the continued roll down of assets at the parent that can now be originated at the bank. That's a key point, I think, would be a little under-appreciated. The liquidity that is created at the parent over time will be used to bring down our more-expensive capital markets funding, most important being the $12 billion of unsecured maturities from full-year 2017 to 2020, and we don't expect to refinance any of that. Second major benefit is that we now have sufficient capital at Ally Bank to grow the bank's balance sheet for years to come. That will support new retail loan originations at Ally Bank that were previously being booked at the parent, as well as the growth in additional areas like the mortgage portfolio and the securities book. All of that allows us to more fully leverage the growing deposit base, manage the balance sheet in a much more efficient way and stay on our strong earnings growth path. Let's turn back to the financial trajectory on Slide 7. All these charts demonstrate the tremendous and consistent progress we've made improving the financial position of our company and we expect this progress to continue. Again, you can see adjusted EPS in revenue numbers at the top of the page that are the highest since the IPO. Deposit growth optimizing the retail auto book and efficient capital deployment all remain critical ingredients to this trajectory. As we said for a while now, this trajectory isn't going to be a straight line, but we continue to see a tangible self-help path to revenue growth and expect a 15% EPS CAGR over time. Again, a key driver is the growing deposit base you see in the bottom of the page, we saw record growth this quarter and an acceleration of customers coming to Ally Bank, which Chris will touch on later. We said that protecting a growing book value remains a key objective on behalf of our shareholders and you could see the strong growth trajectory there as well, up about $0.80 a share in Q3 and maybe even more impactful, over two bucks of growth already this year. We remain focused not only on growing book value, but also continuing to improve returns earned on that book value over time. Across these four metrics, I am very proud of the results the team continues to deliver and I am optimistic when I think about the opportunity on all of these metrics that we can deliver over the coming years. So with that, I'll turn it over to Chris to walk through more details on the quarter.

Thanks, JB. On Slide 8, we provided overview of some dynamics related to the hurricanes. First, with respect to floor plan insurance, the financial impact was limited to our planned losses in the quarter of $19 million, due to the reinsurance we have in place. We experienced around $23 million of claims from Harvey and $3 million of claims from Irma, and that was well-covered by the available reinsurance. One reason that the $26 million of claims wasn't higher was due to actions dealers took to move vehicles out of areas of potential flooding and to higher ground. This is why historical hurricanes haven't been as impactful for us versus hailstorms - they are less predictable and could pop up very quickly. So weather losses were $19 million, which was the attachment point for reinsurance in 3Q and we now have about $34 million left of reinsurance above our attachment points for earnings in 4Q and 1Q '18. Second, the impact on credit. Realized retail auto losses for 3Q were actually lower than we would have expected since we instituted an auto repossession moratorium and offered borrower relief to our customers in the hurricane-impacted areas. As we lift the moratorium and temporary relief programs, this will likely shift $10 million to $20 million of net charge-offs to the next few quarters as servicing practices normalize. We obviously feel for all people impacted by these natural disasters and in particular we want to help our customers work through the disruption to the extent we can. At this point, it's difficult to know exactly what the hurricane impact will ultimately be, but we have reserved a total of $53 million for our auto and mortgage portfolios for those future higher expected losses to our allowance balance. As we move through time, we'll continue to monitor the impact on credit and try to be transparent on the incremental losses that are coming through and we'll adjust our allowance balance accordingly. Third is GAAP insurance. We offer insurance to cover up the unpaid principal above the collateral value the traditional auto insurance customer carries - yet a pretty minimal impact there, around $2 million. And finally, a silver lining that many analysts have been pointing out is the impact on used vehicle prices. Even the vehicles being scrapped due to the hurricane, we have seen an increase in demand for quality-used vehicles and you're seeing that come through the market data, as well as our lease performance numbers. We'll see how long that lasts, but it provided some favorability late in the third quarter and we're seeing that continue in October. So let's turn to the overall 3Q results on Slide 9. As JB mentioned, overall, a great quarter. Net financing revenue of $1.1 billion, up from 2Q given some lease favorability. Auto revenue was pretty consistent at $381 million. Provision of $314 million was impacted by the allowance build for the hurricanes and non-interest expense of $753 million was in-line with our expectations. We also had favorability in our tax rate, which was around 29% this quarter. We still see the natural run rate around 35%, but we continue to explore ways to bring that down. We continue to carry some valuation allowances against our gross DTA, but we may have some opportunities to release or realize some amounts of those allowances from time to time like we did this quarter. And we, like others, anxiously await changes to the tax code from Washington. So in general, some impact from the hurricanes and the tax rate, but the core fundamentals are developing as expected and we feel good about the path we're on. Let's turn to net financing revenue on Slide 10. Year-over-year, we're up $88 million with a strong combination of NIM expansion and balance sheet growth. Yields on the retail and commercial auto portfolios continue to move higher. In particular, you see nice expansion on our $37 billion floating rate commercial auto portfolio, where yields are up over 60 basis points year-over-year as we see benchmarks move higher. The least yield of 6.9% was better than expected, given the strength in used vehicle prices. We continue to grow the securities portfolio, given the strong growth in deposits, plus having resolved the bank's Tier 1 level requirement, we now have flexibility to build the portfolio as we see market opportunities. On the funding side, our unsecured debt came down as we repaid the temporary credit facility we had in place. We'd expect a more meaningful decline in Q4, given some large unsecured maturities in December. Secured debt also continues to decline as we replace that capital market's funding with deposits. Let's turn the slide to talk more about deposits. JB mentioned the record-growth this quarter, bringing the retail deposit portfolio up to around $75 billion and the total deposit portfolio to over $90 billion which is now over 60% of our funding base. We saw some increase in consumer demand for our CD products, which drove strong growth this quarter. This wasn't much of a surprise as industry growth in CDs started to pick up around June where banks have seen declines in this product over the last six years. We continue to remain disciplined on deposit interest expense and our rates moved up in-line with our previous guidance of 11 basis points quarter-over-quarter. This is really the first move of any significance since the tightening cycle began so deposit beta has been well-managed so far. And as a reminder, we still plan for the medium-term beta expectation of 30% to 50%. So in general, a growth pace of $14 billion year-over-year and at deposit beta still running less than 30% is well within our expectation. Customer growth also continues to be a great story, up 52,000 customers this quarter and we'll cover that more on the next slide, so let's turn the page. We're providing additional deposit information on Slide 12, so you could see more of the underlying dynamics of the business. From a market share perspective, the secular shift towards direct banking continues. The overall deposit market is growing and direct banks have gained about 2.5 points of market share over the past seven years and it continues to march higher. The digital evolution of banks and improved online functionality continues to make it easier to bank outside of a branch. And within the direct bank space, Ally has gained share year-after-year. We've done this without significantly changing our rate positioning, we continue to offer competitive rates, but we're not a top-rate bearer. Looking at the bottom left chart, one tailwind we had is the growth from both new, as well as existing customers. As an early mover in digital banking, we've captured a loyal customer base that has been sticky and continues to put more money on deposit with us. You could see the deposit vintages in the top right. Very steady vintages and we continue to add more quarter-after-quarter. In the bottom right, you could see we've had some nice acceleration over the past few years in customer growth and would expect to end the year with over 1.4 million customers. And the customer base is more diverse. We have the older generation high balance purposeful savers that have been around for years and we have a growing population of affluent millennials that are very comfortable with digital banking. Deposit growth is a huge driver of earnings growth and future value and we have some solid fundamentals that provide a long runway. Looking at capital on Slide 13; we're generating capital organically through earnings as well as the reduction in the disallowed DTA. We are deploying that capital heavily towards share repurchases. In 3Q, we bought back on this 2% of our outstanding share with around $190 million of capital utilized. We'd expect to continue at that pace in the coming quarters. Turning to asset quality on Slide 14; consolidated charge-offs were up around 10 basis points year-over-year to 85 basis points. Looking at provision expense of $314 million, a big driver there were the additional $53 million we put aside for estimated future impacts from the hurricanes. That brought our retail auto coverage ratio up to 160 basis points, which is on the higher end of what I'd expect going forward. Looking at the retail auto charge-offs in the bottom right, we're at 1.45% this quarter, which is somewhat lower due to the impact of the hurricanes we mentioned earlier. We continue to expect charge-offs to run in the 14% to 16% range on an annualized basis. Let's discuss some of the segment details starting with order finance on Slide 15. Net financing revenue was up $17 million year-over-year despite a $79 million decline in net leased revenue, that's driven by the portfolio optimization progress we've made as well as margin expansion in the retail and commercial business. Production was up this quarter from the prior year due to the $48 million reserve we booked for the estimated impact of the hurricanes and higher net charge-offs as the portfolio continues to normalize the mix shift to higher risk-adjusted loans. Net leased revenue of $162 million this quarter was supported by a rebound in gains per vehicle. Used vehicle prices were down about 3% year-over-year in 3Q but we anticipated a decline when we set our residuals three years ago. We also had some benefit from replacement demand from the hurricanes late in the quarter. So for 2017 while we've recently been calling for a 6% to 7% decline in used vehicle prices, it looks like it will probably settle out closer to 5% decline for the year which is actually what we would have expected a year or so ago. We continue to expect similar declines in vehicle prices over the next couple of years due to the increase in supply of off-leased vehicles. Looking at asset levels, average retail loan balances continue to offset lease and the drop in asset is driven by the expected decline in the commercial auto portfolio. We've been expecting that based on messaging from the OEMs and you can see on the chart in the bottom left that GM in particular has delivered in rationalizing their days inventory. That causes a decline in our floor plan loan balances with a healthy sign for the auto ecosystem as well as vehicle values. On Slide number 16, originations were $8.1 billion this quarter. While volumes were down, we continue to originate at a very strong level and we feel really good about the risk-adjusted returns on what we booked. We remain dedicated to this space being a source of strength for our dealer customers and see good opportunities to book profitable loans. We continually adjust underwriting and pricing strategies around the edges and the market backdrop always move around which results in some quarters being a bit higher volume and some a bit lower. We continue to have a resilient and diverse mix of originations. We're doing a lot of both new and used, super prime down to subprime and continue to have a good amount of lease next [ph]. All this is in the context of our expectation to keep the order balance sheet pretty flat as loan growth offsets the lease decline and we continue to feel great about the overall trajectory of profitability of the book. On Slide 17, insurance reported a pretax income of $69 million, up $13 million from the prior year and $90 million from last quarter. As I discussed earlier, the dealer forward plan reinsurance agreement minimized our weather losses and we added a breakout in the bottom right of the slide. Looking at the financials, earned premiums grew to $255 million, up from last year as we increased dealer inventory insurance rates. The reinsurance premium recognized last quarter drove the quarter-over-quarter increase. Written premiums were upto $272 million as we benefited from higher dealer forward plan insurance rates and increased VSC volumes as we continue to diversify the business. Also note in the quarter, the team was awarded a long-term commitment to continue as the preferred VSC provider for GM Canada, this was a great win for both parties. On Slide number 18, our corporate finance business or on pre-tax income of $22 million, up $7 million from the prior year. Net financing revenue was up as we continue to have strong loan growth and recall; we did have a one-time interest recovery in the prior quarter. The portfolio continues to grow and was up 16% from last year as a couple of our new lending verticals like healthcare, real estate and technology have been adding deals. Although revenue was down from the prior quarter as we earned less syndicate in fee income versus the deals we executed in 2Q. This continues to be a growth business for us but we're watching competitive dynamics in the space and are maintaining strong credit discipline. On Slide number 19, our mortgage finance business are in $2 million of pretax income which was down $5 million from last quarter driven by the hurricane related reserve. Asset balance was up 10% from last quarter and 23% from the prior year. We executed $1.2 billion of prime jumbled bulk purchases in the quarter which will continue to drive higher net financing revenue for the segment overtime. Specifically, now that we have Tier 1 leverage normalization at the bank we would expect to grow this capital efficient portfolio at a better pace. Non-interest expense was up as asset balances grew and we continue to invest in the build out of Ally Home, our direct-to-consumer product offering. Originations have started to ramp from a small base as we continue to build customer awareness around Ally Home. So overall we had an excellent quarter with strong adjusted EPS, topline revenue growth and expanded margins. And with that, I'll turn it back to JB to wrap up.

Thanks, Chris. I'll reiterate our plan for driving strong shareholder returns. Hopefully you recognized a consistent message that we've communicated each quarter this year and we remain on-track. We feel great about the position of our auto-finance business, the commercial book is performing well and margins are expanding, particularly given about 99% of this book has migrated the LIBOR Index [ph]. The retail order book is demonstrating improved profitability as well. We continue to adjust underwriting and pricing strategies as needed to ensure credit remains in check and we deliver a resilient profitability through the cycle. We remain relentlessly focused on our customers whether that's our auto dealers, our deposit customers, our corporate finance clients or our newer mortgage and wealth management clients; this is foundational at Ally, a relentless focus on our customers and also on our culture. If we get those ingredients correct, it delivers for all constituents we serve, notably, our shareholders. We continue to develop new areas as part of the strategic direction of the company to unlock even more value from this great banking franchise we've developed. We're diversifying and creating a long runway for growth, our financial path continues to track to a 15% EPS CAGR over the medium term as we look to deliver a core ROTCE of around 12%. So in general, we feel great about the quarter and happy to move forward with Q&A.

[Operator Instructions] Our first question comes from [indiscernible].

Good morning, two quick questions. One on the used car prices, you know, you indicated the dealer inventories coming down as positive, as well as the hurricanes; could you just give us a sense as to how -- do you think the dealers are right-sized now? Do you think there is more that they are going to be shrinking the floor plan from here?

I do think that the floor plan balances are pretty right-sized. I know GM had publicly said they wanted to be somewhere around 70 days but even in a recent earnings release, they are more focused on the overall units [ph] at the dealers and they still want to bring those units down a bit. But from a materiality perspective I think our floor plan balances will probably stay pretty flat, we normally see a rise in the fourth quarter but my expectations were probably say pretty flat from here.

Okay, and that's partially a push with the used car, with the hurricane impact I'm guessing?

Yes. Obviously, the hurricane impact has created some demand, we think about this as a real temporary phenomenon. So I think over the next couple of months that will work its way out, and by the time we get to the end of the fourth quarter you would see much effect from that.

Okay. And then Chris, just a follow-up question on deposit pricing; obviously you called out the slight shift towards CDs, could you give us a sense as to how much of that is driven by the consumer deposits or is it more proactive on year end to attract that type of deposit?

Yes, I think its natural when rates decline that people move out of CDs into the demand deposit products, and now that rates are rising again you're seeing that reverse a bit. So over the last six or seven years we've seen a lot shift into things like money market and online savings account. You're starting to see that shift back and in conjunction with that, banks look to price CDs to attract new customers versus really us pricing their whole demand book. So from that perspective, I would expect there to be further migration out of demand accounts in the CDs and it's really more cost effective for the banks to do that.

Got it. Okay, thanks so much.

Our next question comes from Jeffrey [ph] with Autonomous Research.

Good morning, thanks for taking the question. Maybe same with the net interest margin, it sounds like there is a few puts and takes there including deposit pricing, what's happening in terms of retail, also yields and so on. Could you talk us through the moving parts and then give some thoughts about how that all ties together in terms of how NIM moves going forward?

I always thought on the yield side, so we're going to continue to see the portfolio yields move up, particularly the retail order book because we're pricing our originations today somewhere around 6.3%, the portfolio is around 5.8%. So overtime you will see the yields really migrate up and obviously help the overall net interest margin. When we look at the liability side, while deposits will continue to kind of move up from a cost perspective, keep in mind that we're replacing real market based funding with that deposit growth; so I expect that there will be a real muted effect on the overall cost of funds overtime, so we should see margin expansion over the next couple of years as unsecured debt rolls down and while deposits come on even at a higher cost, it's much more efficient than what we have on the books today.

Great, thanks. And then maybe quickly on originations, still tracking pretty meaningfully lower year-on-year; what are the take for those to start to come back to growing again?

Yes. You know, our focus is really to keep the capital allocation to orders pretty flat and it's a pretty efficient market today and we're always going to have some quarters that are higher, some that are lower but it's a pretty efficient market and we really like the assets we're generating today, we really like the risk-adjusted margins of what we're generating but we're really dedicated to our dealer customers and really providing support to them. Now there are certain quarters like this quarter where you will see things like incentives move out and subvention move up for some of the OEMs and when those things happen, you know, the captives will do more business than the banks and we've shown a little of that this quarter but it's always a give and take, we feel like the $8.1 billion was a very strong number and it keeps our retail balances growing, really replacing the overall lease decline.

Great, thanks very much.

Our next question comes from Sanjay Sakhrani with KBW.

Thanks, good morning. I had clarification on the remarketing and used car trends that you mentioned. When we think about the OEM rationalization in your outlook, it doesn't seem like -- I guess the question is, how much of that's impacted in your long-term view? And then also, it doesn't seem like the hurricane impact is expected to have more than the short-term benefit; how much visibility do you have in that?

It's a good question. I think the hurricane impact is something that will continue for a few months but when you really see an equilibrium and like I said, I think we expect that over the next few months we think it will really normalize. But Sanjay, we definitely saw an impact in September, we're seeing that continue in October, but our expectations at this point is that that will stop to dwindle as you get into the first quarter; so we don't think there is a long-term impact. The long-term impact really comes on the rationalization by the manufacturers of their inventory levels and their ability to keep the prices high and incentives low and we're really encouraged by what we've seen as some of the manufacturers and what they've done to really rationalize the inventories pretty quickly. They've shed a lot of production down and they've been able to really manage the crossover of the '17 to '18 vintage of car. So we're pretty encouraged by that really helping used car values and new car values overtime. You know, there is always going to be and we all know this, the pressure of supply coming off of leased vehicles over the next couple of years, so we still think used values will come down but we think that it's going to be pretty manageable, particularly given a lot of the inventory today has shifted towards the SUVs and trucks which really are, from a value perspective are holding up much better.

Okay. Final question for JB; you mentioned early in your comments about the competition of being irrational, I was wondering maybe you could just talk about -- how long has -- do you feel like it hasn't been irrational and over that period of time, have the trend sort of been better over that period of time or have they got a little bit worse overtime? And then has that sort of unmarked anymore potential in the OEM channel?

Well Sanjay, I mean, I guess I'd say -- and some of this with hindsight, I mean '15 was a pretty aggressive year and probably the peak year of competition across the board and I think all lenders in the space would probably confirm that comment. Things I think have rationalized or started to rationalize better in '16 and certainly across '17. So for us what we've seen today is some names have backed out of the space for a variety of round reasons but most of the people would have been dedicated, been in the space for quite some time, they remain very rational in respect to competitors and the universe is big enough for all of us to get our luck and get our good quality loans. I think to tie back to Chris' last point, what we have seen maybe the past couple of quarters and maybe some of this is tied into the OEMs kind of rationalizing their production levels. You have seen higher incentives, so certainly more of the flow in sub-branded retail lending and retail leasing has been directed more to the captive players from the banks, but that doesn't bother us. I think we're completely comfortable with the $8.1 billion we put. That $8 billion, $9 billion arrange for us keeps us relatively flat and constant and that has been the overall objective for the auto book for Ally.

Okay, great.

Thanks, Sanjay.

Thanks.

Our next question comes from Richard Shane with JP Morgan.

Hey, guys. Thanks for taking my questions. One of the common questions we get is what's your intentions are with the troops [ph]. Historically, given the huge discount to book value for the stock, we realized that you've seen it as so accretive to buy back shares. But now the stock starts to move closer to parity and you think about the potential earnings impact of buying in some of those troops. Does that calculus changed at all for you?

Keep in mind the trops is a very efficient instrument for us. It's grandfathered from a capital perspective and we get the tax deductibility on it. While it slipped to floating, it's got some variability in the floating rate, but we feel pretty good about the efficient - this in turn being pretty efficient from ta capital perspective, at a cost perspective. Keep in mind also that to take trops out, that had to be a part of our CCAR process and we've obviously been pretty silent about trops around our CCAR, so you can take that [indiscernible] that we really didn't have that it in the plans for this CCAR cycle. I get your point that as the stock price moves up and moves closer to book value or hopefully through book value, we need to really evaluate our capital allocation strategy and honestly, we continue to do that. At this point, we still see buying back the common equity as the best use of that capital, but we'll continue to reassess that as the equity price changes and it's not only just about the trops, it's also going to be about other dead instruments that we have out there, as well as just overall growth in the portfolio.

Okay, Chris. Thank you so much.

Thanks, Richard.

Our next question comes from Moshe Ari Orenbuch with Credit Suisse.

Great, thanks. Hey. Good morning, guys. I guess I was sort of wondering. Putting aside the lease residual gains, but just the core spread, the yield less depreciation, it's been declining pretty steadily, it's been a drain on net interest income, but now you're 900 million of originations is probably the highest percentage of your balance than it's been since GM took that stuff in-house. When does that start to normalize and no longer be a drag on the revenue stream?

Yes. I think probably as you get it to first or second quarter of next year, we start to hit a normalized balance. We're obviously still doing leasing for Chrysler, we do it for Mitsubishi and others. Our balance continues to decline, but that steady state is coming pretty close. Most of our GM cars will be thrilled by the second quarter of '18, but we're obviously putting on a healthy amount of originations and like we say, we like leasing, we're comfortable with the residuals, it's still very profitable business for us, but we'll probably hit that equilibrium somewhere around that $8 billion type balance.

Great, thanks. And maybe on a big picture level - congrats on achieving a double-digit return on tangible common, but your goal, JB, what you said was 12. Maybe can you outline how you get here from 10 to 12, what you think the big steps are and how much of those you've already got and what else you've got to do between now and then?

Moshe, it's a great question. I think the big drivers continue to be while we've had a number of the regulatory victories. Those really start to come to fruition in terms of earnings contribution and obviously, the $12 billion of debt let [indiscernible] maturing at the start of this year and how that works its way through the margin and you're talking about replacing 4.5% to 5% cost debt with a 150 basis point deposits. That becomes pretty meaningful for earnings accretion through time. So all of that still has a lot of room to run in terms of working its way through the balance sheet that's probably point #1. Point #2 is we're still in what I would call the infancy stages of the launch of our mortgage product, as well as our wealth management capabilities. The scale up of those businesses over the next 12-24 months becomes pretty important as well and we're obviously going through our planning process and putting a lot of focus and attention on how do we start ramping those businesses up primarily in 2018. So that's another driver. A couple of other little tidbits. I think the corporate finance business that Chris talked about continues to be a great source by balance sheet growth, revenue growth for the company, very comfortable with what we're doing there and I think all that business is kind of approaching $4 billion now, I think through time, that book of business could double in size over the next three years, so we like that space as well. And then ultimately, the dynamic that Chris talked about, we've been booking new auto yields at kind of the 6.3% range. You look at the overall portfolio, it's still around 5.8%, so you got 50 basis points of room or margin expansion that you're going to get on the asset yield side just as old ones run off the new book is replaced there. So you got a variety of drivers, but all of that gives us confidence that over the next two to three years, we can be achieving that 12% target.

Great, thanks very much.

You got it. Thank you.

Our next question comes from Aaron Slodowitz with Citi.

Thanks. Just looking at the credit quality; there are some comments from some of the card issuers highlighting just segments of the market where they're seeing a little bit of stress in pulling back in some lines and a little bit in terms of personal loan underrating. Are you seeing any segments of your book on the retail side there showing any kind of over-extension from a customer's perspective?

Yes. I think we've been pretty transparent that some of the 2015 vintage which had some lower FICOs and some higher LPD, meaning customers who used OEMs incentives really as down payments in the new car segment was one of the vintages that was performing weekly. But we really tighten that underwriting up as we got through 2016. So we haven't made a lot of dramatic changes. We're making changes on the edges here, but as the book is performing today, we feel pretty good about our book and keep in mind, it's a pretty prime book. It's a secure book. So it's a little different, parallel to an unsecured line of credit or a credit card. So right now, I think the book is really performing pretty much within our expectations.

Okay. And in terms of the outlook for the charge-offs in the retail side, I think you previously said just modest increases over time would be your expectation. Is that still excluding the hurricane-related impact you highlighted? Is that still the trajectory?

Putting the hurricane aside, we haven't provided a specific guidance for '18 and '19. We'll look to provide some later guidance probably later this quarter or early next quarter. But the originations we're putting on have pretty similar loss content over the last few quarters, so I would expect that the range of the 1.4% to 1.6%, which was really our 2017 guidance wouldn't change dramatically.

And then Aaron, on that point, I think just be mindful of the seasonality that plays out in 4Q typically being the highest quarter of losses and that's why we try to keep coming back to the consistent story since really first quarter this year of targeting the 1.4% to 1.6% range on an annualized basis. Now, the hurricane, I think we're trying to be pretty transparent to ship that a little bit here and there, but I think for the most part, we still feel very comfortable on an annual basis that we're going to be managing within that range.

It's helpful. Thank you.

Thank you, Aaron.

Our next question comes from Chris Donat with Sandler O'Neill & Partners.

Hi, good morning. Thanks for taking my questions. Chris, just wanted to ask on the yield on retail auto loans of 582 basis points. It picked up only 2 basis points quarter-on-quarter and I know you're putting on new loans at 6.3%. I guess mathematically, I would have expected maybe a little bit of more upper pressure on the loan yield. Am I missing something there? Because it looks like the origination mix has been pretty stable over the last few years and I'm imagining you're having loans drop off like 5.5%. Anyway, just anything...

There's nothing unusual there. I think about the book turning over somewhere 8% to 10% each quarter. If you're putting on loans that are 15 basis points higher, you're going to have a 4 to 5 basis point increase on a quarterly basis. It was only to some of it is roundings, some of it is just noise, but there's nothing in there that you should read into. I would expect that you're going to see a similar decline and I wouldn't get caught off in one quarter over the other when we're just looking at yields. Some of it probably has to do with just the amortization of the old book, might have just had some higher yielding loans for this quarter. But nothing really unusual there and I would expect that migration to pick up in future quarters.

Okay. And then I appreciate the color on the reinsurance contract. Just to be clear with looking forward, you'll renegotiate this contract every year and you're tapped out at some amount of reinsurance? Is that how to think about it?

Yes. We're tapped out at basically $90 million and you could see that on the insurance slide. We put that on there. This reinsurance goes through the first quarter of 2018 and honestly, we're talking to the reinsurers right now about obviously extending that. We like to look at it as a longer term commitment with them. They would like to look at it that way as well, so we're getting those conversations today.

Okay, got it. Thanks very much.

Our next question comes from Jack Micenko with SIG.

Hi, good morning. If my math is right, it looks like you're growing deposit dollars at a faster clip than account number. To just larger relationships, is that the CD dynamics you spoke of in the prepared commentary or maybe converting some of the early wealth customers, or is there something going on? My thought is if one of those two is arguably should continue, just trying to think about deposit trajectory and what's making those relationships assumingly larger over time?

Yes, Jack. The relationships are not getting necessary. It's not necessary -- we're tracking [indiscernible], it will actually attract the more millennials and the average balance which is around $53,000 per customer is pretty steady. But what you are seeing, which is a great dynamic for our [indiscernible] with some of our competitors is you're seeing existing customers continue to put more and more money on deposit with us, which is why we gave you a little bit more color on one of the slides on deposit trends, but one of the reasons our vintages over time has been very steady is people come in, they try the online digital banking, they really like our customer servers, they like our steady consistent rates and they put more and more money on deposit with us. What you're seeing is you're seeing the dynamic where you're continuing to attract new customers and as those new customers come into the door in future quarters, they continue to put more and more money on deposit with us.

Okay, thank you. And then given the storms are sort of back half of the quarter, is insurance impact here fully ring-fenced into third quarter or can we expect some potential noise into the fourth quarter on the insurance side?

No. I think we're pretty well through all of our claims and inspections at this point, so I don't expect any things to really lag into the fourth quarter on the insurance side. Obviously on the credit side, we expect that will play out over the next two to three quarters, given just the borrower relief efforts that we have in place. And we've obviously put provision aside for that, so we feel pretty good about that.

Alright, great. Thank you.

Thanks, Jack.

Our next question comes from John Hecht with Jefferies.

Good morning, thanks for taking my questions. Just I guess conceptually, Chris, you have highlighted that depreciation curve, re-lease portfolio, you might have modeled the 5% to 6% rate of decline. It sounded like that was through next year. If residual value changes next year, say, drop to a 3%, year-over-year decline, does that mean that the margins could improve next year despite having ongoing modest core values?

It could. Obviously, the lease portfolio, the overall yield in the lease portfolio is affected by the used car values. I don't expect it to be necessarily that material though.

And then John, tied into that is just simply obviously a lease portfolio continues to widen down to terminal level. So just sheer size of the book is decreasing, so the impact ultimately, the financials wouldn't be as significant as it might have been year-to-year.

Yes, absolutely. But I guess the question, if the case of decline stabilizes, that would be a potential net positive to that declining portfolio as margins. Is that an accurate statement?

Sure. If you use car values on it on 3% instead of the 4% or 5%, there will be a net benefit to us.

And then the second question, just so I'm clear, do you have an ALL build or provision tied to the expected losses from the hurricane? Would we expect an offset in that for Q4? Or is that just sort of the permanent increase for the side for the incremental losses out of that? I'm just wondering if there's an offsetting benefit at some point in the next couple of quarters?

We have to see. We always evaluate our coverage rate on a quarterly basis depending on what vintage we put it and how we see charges over the next years. I'm not sure what that coverage ratio would be in the fourth quarter. I think it's on the high end. It obviously rolls because of the hurricane-related effects we're expecting, but we also expect that will play out over two or three quarters -- not necessarily just one quarter. So we'll have to see, but I feel pretty good about what we have at side right now for that.

Wonderful. Thanks very much, guys.

Thanks.

Thanks, John.

Our last question comes from Ken Bruce with Bank of America.

Thank you. Good morning, gentlemen. My question really relates to the topic of deposit beta. You referenced maybe a modest rotation towards CDs. I'm wondering, that shift, is that envisioned in your view around deposit betas, or does that have any material impact on the potential for funding costs going around? I'm sure it does. But how would you think that any kind of a mixed shift that that continues has an impact on funding cost?

Yes. We did expect and have expected a migration back as interest rates was. That's natural for all banks to do. So when I think about our beta assumptions moving forward, that's baked in a bit that people will move back out to the cities. Keep in mind, CD products are good for banks, as well as they provide longer term liquidity as well. So it's a good thing that from a stickiness perspective, a liquidity perspective, to have customers move out on the CD curve. It's expected in the estimates we've given on deposit betas and overall costs, so it's built in that.

Okay, great. Well, nice to see you having a good quarter. Thank you.

Thanks, Ken. Appreciate the support.

And I'm not showing any further questions at this time.

Great. Well, if you have additional questions, feel free to reach out to investor relations. Thanks for joining us this morning. Thanks operator.

You're welcome. Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.