Good day, ladies and gentlemen, and welcome to the Ally Financial First Quarter 2019 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] And as a reminder, this conference call may be recorded. I would now like to hand the call over to, Mr. Daniel Eller, Executive Director of Investor Relations. You may begin.

Thank you, Amanda. We appreciate everyone joining us this morning to review Ally Financial's first quarter 2019 results. You can find the presentation we'll reference throughout the call on the Investor Relations section of our Web site ally.com. On slide two of the presentation, I direct your attention to our forward-looking statements and risk factors. The contents of today's call will be governed by this language. On slide three, we've included some of our key GAAP and non-GAAP or core measures. These and other core measures are used by the management, and we believe they are useful to investors in assessing the company's operating performance and capital measures, please keep in mind these are supplemental to and not a substitute for U.S. GAAP measures. The supplemental slides at the end include full definitions and reconciliations. Today, we have our CEO, Jeff Brown; and our CFO, Jen LaClair on the call to review our operating and financial results. We have time set aside after the prepared remarks for Q&A. And with that, I'll turn the call over to Jeff Brown.

Thank you, Daniel. Good morning, everyone. We appreciate you joining our call. Jen and the entire finance organization have done a terrific job focusing on efficiency opportunities across the company, including in our financial close process. So you're now seeing our cadence shift about a week ahead from where we’ve historically announced results, and that's a big win for us inside the house. On slide number 4, let me cover the first quarter highlights. We had a very solid quarter across the company, but I believe stellar execution in our auto and deposit franchises. Performance this quarter keeps us on track with our long-term strategic objectives and 2019 financial outlook. The adjusted EPS of $0.80 was up 17% year-over-year. Core ROTCE of 10.9% increased 37 basis points compared to the prior year period. Revenues exceeded $1.5 billion in the quarter, a 5% increase year-over-year, while our risk profile was consistent. We remain the market leader in auto finance, a position we’ve maintained through our constant and unrelenting focus on our customers. We leverage our expertise we've built over the past 100 years to continuously focus on how to adapt the business to a variety of operating environments. We partner with more than 18,000 dealers across the US, offering a full suite of finance and insurance products across the entire credit spectrum. Over the past few years, we focused on digitization at the dealership level, increased auto-decisioning, while expanding relationships across a broader universe of dealers and emerging players. This approach resulted in 3.2 million decision applications during the quarter, the highest on record for us. We originated 9.2 billion of loans and leases at attractive levels during the quarter. Newly originated auto yields exceeded 7.5% in the period, compared to 6.5% in the prior year, an increase of 108 basis…

Thank you, JB, and good morning everyone. Let's turn to slide six for review of our detailed financial results. As JB mentioned a few moments ago, results this quarter position us well against the 2019 financial outlook provided on our last earnings call. At this point in the year we're trending in line with expectations across every line item. Net financing revenue excluding OID was $1.139 billion linked quarter down $25 million and year over year up $70 million, increased net interest income was driven by burning asset growth across our business lines and in capital efficient categories, optimization in auto where portfolio yield left continues to migrate toward our new volume pricing and robust growth in our deposit book which allows us to fund asset expansion while also reducing higher cost alternative funding sources. We expect NII growth throughout the rest of 2019. Adjusted other revenue of $396 million increased modestly compared to Q4 in the prior year period, provision expense of $282 million increased by $16 million quarter over quarter and $21 million year over year. The increase versus the prior year period was primarily due to higher asset levels, lower reserve of leases related to hurricane activity and reserves in our corporate finance portfolio related to Q credits. Importantly within auto our net charge offs were lower in the linked quarter and year over year comparison. For performance here affirms that consistent and disciplined underwriting and collection strategies we've been executing for some time now along with a consumer that continues to have a solid financial profile. We'll cover more detail on credit in a few moments. Non-interest expense increased by $26 million in linked quarter and $16 million compared to the prior year, increases versus Q4 were largely due to compensation seasonality that occurs in Q1.…

Thanks, Jen. On slide number 16, our priorities for 2019 and key themes remain consistent with what I've laid out on prior calls. We take great pride in being a comprehensive, adaptive and digitally focus consumer in commercial finance provider and believe our dominant franchises are well-positioned for the long-term. In 2019, we will pass several milestones across our businesses including our fifth year since becoming a publicly traded company, 10th year since launching Ally Bank, 20th year in corporate finance and our 100th year in auto finance, demonstrating our deep industry experience, the resiliency of our franchises and the ability to take advantage of future market opportunities. We are focused on leveraging expertise and our history to build a stronger company for the future, including discipline, risk management and purposeful capital management. At the Center of Culture is a do it right mentality, which our more than 8,000 Ally teammates applied at every interaction with our customers within our communities and on behalf of our shareholders. We thank you for your interest and support. And with that I think we can now head into Q&A.

Thanks, JB. So operator, we would ask that you begin the Q&A here in a moment. And before doing so, we'd ask participants to limit yourself to one question and one follow-up. Amanda, if you could start the Q&A please?

Absolutely [Operator Instructions] The first question is from the line of Chris Donat of Sandler O'Neill. Your line is open.

Good morning. Thanks for taking my questions. Jenn, I wanted to ask one just on the -- on the originated yield, and I think it's pretty clear that we're expecting the average yields in the portfolio to rise with those, but can you just remind us on some of the seasonality there because the benchmark rates did look like they decreased quarter-on-quarter, but then you saw a nice pickup in the originated rates quarter-on-quarter. So I'm just trying to understand the dynamic there and expectations going forward?

Sure. Thanks, Chris, and good morning. So, you're absolutely right. We do have seasonality that runs through our origination yields and think about it by the first half of the year we typically have a higher percent of used which drives our yields up a bit. And in particular, as we go into Q2, you'll see that shift in our mix -- our originated mix to the used segment. So we are running around 7.56% in Q1, we'd expect that level to continue into Q2, and for full-year, we're expecting to be kind of in the low-to-mid 7% range on full-year originated yields. In terms of the benchmark, we obviously had just a terrific quarter in terms of total auto originations at $9.2 billion. We're expecting with applications up 9% year over year to continue to see constructive and strong flows which has helped to just support pricing overall across our business. So while benchmark rates have come down, we've been able to maintain our pricing so far this year. And to your last point about the portfolio, we were at 5.80% in 2018. The portfolio yield on retail was about 6.14% last year, so as we continue for two years in a row to have the yields above 7%, you're absolutely right, we would expect the total book portfolio yield to continue to migrate up over the next couple of years.

Okay, thanks so much. And then as a follow-up and related to this, as you're able to maintain pricing and grow your applications, can you comment on the competitive environment here, it seems like if you're growing applications, I would expect some degradation in your pricing, but is it a more benign environment than you saw, say a year ago or can you just give us some comparison on where we are on that?

Yes, sure. It's really been steady as you go. We haven't seen any major changes in the competitive environment. I think what you're seeing in terms of the application increase is really just continuing to focus on the dealer, continuing to lean in where there's opportunities in the market, and as JB mentioned in 2017 and 2018, used it at an absolute all-time high as far back as the data goes, and we've got a model that allows us to lean into use when there's opportunities there, so that's really what you're seeing in terms of our success, it is just the diversification of our distribution channel, the full product spectrum that we offer to our dealers as well as just being able to lend and find opportunities across the market.

Got it. Thanks very much.

Thank you, Chris.

Thank you. Our next question comes from the line of Betsy Graseck of Morgan Stanley. Your line is open.

Hi, good morning.

Good morning, Betsy.

Two questions; one, just wanted to ask about the increased buyback announcement that you made during the quarter, and you did that with an expectation for CET1 to be in range, so I just wanted to get a sense as to how you are managing the average earning asset growth, the loan growth, do you think that it's going to slow down a bit as we go through the next four to eight quarters, or are you expecting that just the improvement in returns is going to be able to keep the CET1 where you want it, just if you could talk through that a little bit?

Yes, sure. The buyback announcement I think underscores our consistent focus on repurchasing, especially as our stock continues to trade below book value. So, no surprises there in terms of our strategy to continue to lean into buybacks. Relative to the CET1 ratio at 9%, we're not going to pull back on opportunities across our businesses to grow assets. You saw just the robust growth we've had in retail auto, continuing to lean in on corporate finance; and with our better.com partnership announcement, we think we can accelerate our lending in the home lending and mortgage space as well. So we're not expecting to pull back at all-on prudent and high ROTCE asset growth. The way that we're going to continue to build capital is exactly what you said it's continuing to get better returns. We've been focused on ROTCE organic earnings growth. And then, we'll also look at opportunities across our balance sheet to just continue to optimize.

Okay. And that's helpful. Yes, go ahead.

Yeah, I was just going to add, Betsy, keep in mind that the products that were leaning into are capital efficient, so think about mortgage for example has a 50% RWA versus 100% in retail auto, so that helps to manage our CET 1 ratio as well.

Right. Actually that leads into the second question on the announcement that you made with the partnership around mortgage originations, and you indicated that you thought you could get an improvement in efficiencies on a relatively quick path. Could you just help us understand how you will migrate your current origination process to the online, and over what kind of timeframe you think you're going to be able to migrate that and how much…

Yes.

How much uptick in margin you're expecting to get as a result of this partnership?

Yes, sure. So we currently outsource our origination platform so the transition that you'll see and we're going to work through this over the summer and should be ready to go back half of this year. But the transition is really from one vendor to another. It's not like we have any substantial build around. Now it's really just a vendor management shift. The way that I see this is there're two things we want to optimize against. One is just a differentiated exceptional experience for our customers and we think through Better.com, we are going to achieve that. If we look at the experience and you go through just how quickly and easy it is for our customers, it will be truly a differentiating factor for us. And then the second thing is to be successful in this business and to drive ROTCE higher. We have to have an incredibly efficient front to backend digital operating platform and we believe with Better and some of the other vendors that we've selected that our operating platform is unique in the industry in terms of the efficiency it provides. And you couple that with the fact that mortgage requires half the RWA as other asset classes and we think we'll be very accretive in terms of the returns that will get pretty much out of the gate here with this new partnership.

Okay. And you're going to be unique in the industry because you're going to be fully digital whereas others aren't, is that your point?

Yes, the point is fully digital, very selective in terms of how we piece together our front to back office, operating platform, and that's going to take down. We've been very careful about how we've invested in the space. We will have some costs coming down internally just based on our old originating platform and as we move over to better we'll shed those costs and move into a much more efficient operating platform.

Okay. Thank you.

Thank you, Betsy.

Thank you. Our next question comes from the line of Sanjay Sakhrani of KBW. Your line is open.

Thanks. Good morning. I have a question about used car prices, obviously those remain fairly strong despite persistence strength recently, could you just talk about what's driving that strength and if you expect that strength to continue? And then maybe just how that would affect remarketing gains going forward?

Yes, sure, and good morning, Sanjay. So a couple of dynamics there, one is if you look at new vehicles the price of new vehicles has continued to escalate and we actually saw new vehicles sales coming down about 5% coming into the first quarter here and so as new vehicle sales have come down there's been an increased demand for used, it's got a great value proposition for customers, dealers actually make substantially more from a used vehicle sale versus new and then that's true for Ally as well. So think about it kind of the trifecta of benefit to the customer, benefit to the dealer and benefit to our Ally as well. We've been guiding towards kind of a 3% to 5% decrease year-over-year in used vehicles, we've been outperforming that we're down 1%, I will say if you look linked quarter used vehicle prices were down about 7%, so we kind of peaked in Q4 and came down a bit. And so we continue to model into our residuals as well as into our provision expense, this assumption around the 3% to 5% decline. Now you've got to keep in mind the market has outperformed but we will have the peak lease, off-lease vehicles coming into the market this year at about 4 million units and as you see that increase in supply we'll just have to manage the dynamics around demand and so far demand has outpaced the supply, but I think with the off lease vehicles and the peak we're going to hit here in 2019 we just have to be watchful, but we've been conservative both in terms of the residuals as well as in our provision expectations.

Thanks. Second question just on capital return under the new regulatory paradigm and like of C-car maybe you could just talk about how you think about capital adequacy and the associated buffer in relation to CECL as well. So it was very strong share buyback program you guys announced. Is that something that's indicative of the new paradigm or something else? Thanks.

Sure. I mean I think let me go to our announcement I think our announcement is just continuing our strategic priority around share buybacks in light of the fact that we trade under book value we think that's a very accretive risk free use of our capital, and so, no changes there in terms of our strategy to lean into share buybacks. As we look out on the horizon and we revisit our target and goal framework and the 9% that we put out there we revisit that all the time relative to financial health of the company. Our risk appetite and now with CECL on the horizon and potentially some changes with SEB it is something that we're going to consider. We do think that 9% at this point in time is the right level for us. But to your question there could we may continue to revisit and see under CECL or SEB effect gives us an opportunity. Now on CECL and I mentioned this in my prepared remarks we do have an opportunity to phase in the additional capital and as you've got cut off it's a three year phase in and but you've got to take 25% for four years. We do think that that new pre impact in it gives us an opportunity to really fee impact in it gives us an opportunity to really fold that into just our normal capital management processes. So a lot in there, I'd say no significant changes in our strategic focus around buybacks, we think the seasonal impact is manageable and we'll continue to revisit the 9% target.

Thank you.

Thank you, Sanjay.

Thank you. Our next question comes from the line of Kevin Barker of Piper Jaffray. Your line is open.

Good morning.

Good morning, Kevin.

Just a follow-up one more time on capital, have you given any consideration around your tangible common equity ratio in addition to the CET1 especially with the addition of mortgages or the growth in mortgages on the balance sheet, it appears you combine that with the buyback and your TCE ratio may go sub 7%, which would be probably one of the lowest amongst the peer group as we go into late 2019/early 2020?

Yes. I mean it is something that we look at and we are mindful of kind of it's going below 7%. We know that's a metric that the industry looks at, for us we've been much more focused on CET1 as our binding constraint. And we'll continue to just focus on growing earnings, growing capital organically, making sure we're getting the right returns and we do think that we'll continue to grow both the TCE as well as our CET1. Keep in mind, we do have a fully secured balance sheet and so we like to remind everybody that our returns may be a bit lower but we do have just a very valuable collateral.

Okay. Great. And then, as far as the operating efficiency and some of the moves you made in improving efficiency especially in this quarter do you expect the expenses to continue to drive lower as overall percentage of the asset base given with the deposit you've made so far.

Yes. On expenses, we don't have a specific target. What we're focused on is growing revenue faster than expenses to drive that operating leverage. We're very mindful of our level of investments but we see big opportunities for expansion across all of our businesses and we don't want to trade short term earnings for a long term opportunity to expand our returns and so we're going to continue to lean in growing our business. There is some variable cost attached to that. We're going to continue to grow new product adjacencies like that continuing to lean in on Ally and best opportunities ally home and just continuing to build out of a consumer franchise in all of our dominant businesses. So short answer is we're focused on positive operating leverage and we'll manage expenses within that.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Moshe Orenbuch of Credit Suisse. Your line is open.

Thanks. Good morning. This is actually James [indiscernible] on for Moshe. We were surprised at the strength of origination yields and we're wondering what role higher loan applications and active dealer growth might be playing in origination yields and strong credit. Can you talk about what we might expect for growth in active dealers and applications over the next few years and what impact that might have on the origination yields.

Sure. Our whole strategy is around growing applications and that's all about continuing to look for diversification opportunities and distribution. JB mentioned the metrics around continuing to see five-plus percent growth in our growth channel coupled with the fact that we're focused on further engagement within each of those dealers and I shared the metric around the percent of dealers giving us five or more apps has continued to grow over time. So, you're absolutely right. We're going to continue to see the drive, higher applications through our distribution network and the engagement of our distribution network. While we grow applications, we also grow our flows and that allows us to be very picky about which applications we have proven, what we put on our balance sheet. And so the comment was made earlier, underlying benchmark yields have come down, but your pricing hasn't. It's just continued flow of new applications has allowed us to maintain that yield. As we go through the year, we're going to continue to focus on making sure we get the right flow. We expect to have origination yields in the kind of mid to low 7% range, and that will continue to drive up our total portfolio yields over time.

That's good color. And on the gross dealer channel, you said you're always working to drive engagement which makes sense. How much more runway do you think there is? I mean, we know it's a competitive space, but you guys have a rewards program. So can you talk to what we might expect there?

Yes. I mean, I'd say two things. One is we're going to continue to grow the number of growth dealers. And that's as we look at that growth channel, it's traditional dealerships, but it's also some of the new players in the market, the Carvana, the DriveTime and the CarMax, we're going to continue to be leaders in this space and continue to evolve our model and diversify within, but within the growth channel. And then second to that and this is where the team has really focused over the last quarter is within those dealerships just making sure that we're getting the right amount of flow, and you're absolutely right, our Ally Dealer Rewards programs helps us not only to bring in the number, but also to bring in the engagement level that we need and we're going to continue to focus on both of those. And I think the trajectory that we've demonstrated over the last couple of years we're going to continue.

That's helpful. Thank you.

Thank you.

Thank you. And that does conclude our question-and-answer session for today. I'd like to turn the call back over to Mr. Daniel Eller for the closing remarks.

Great. Thank you. So, thank you for joining our call today. If you do have any additional questions please feel free to reach out to the Investor Relations. That concludes today's call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.