Q3 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2019, I like financial earnings Conference call.
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Thank you operator, and we appreciate everyone joining us to review ally Financial's third quarter 2019 results.
Good morning, we have our CEO , Jeff Brown, and our CFO , Jim acquire on the call to review our results and to take your question your questions following prepared remarks.
You can find the presentation will reference during today's call on the Investor Relations Relations section of our website Allied dotcom.
I'll direct your attention to slide two of the presentation, where we have 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 GAAP and non-GAAP or core measures.
These and other core measure have used by management, we believe their useful to investors and assessing the companies operating performance in capital results. Please keep in mind, either supplemental to and not a substitute for U.S. GAAP measures.
Supplemental slides at the end include full definitions and reconciliations.
With that I'll turn the call over to our CEO Jeff.
Thank you Daniel good morning, everyone and thank you for joining our call.
On slide number four I'll cover highlights from third quarter.
Every weekend by saying that the Mets continued market volatility allies financial results were solid again this quarter, reflecting the ongoing execution of our long term strategy.
We remain pleased with performance across our auto and deposit franchise is what customer growth persisted.
Flows remain robust and pricing trends were accretive to results.
Progress in our ally home and Alpinvest offerings continued where trends from we're meeting the preferences and needs of our customers.
Adjusted EPS of one dollar in one sense increased 11% year over year, our highest quarterly result, since going public.
Core ROTC up 12.3% remains solid.
Revenues exceeded 1.6 billion up 7% compared to the prior year, while our risk profile remains steady.
And auto we originated 9.3 billion of loans and leases in the quarter, a 14% increase versus Threeq, you 18, and we decision 3.2 million applications.
Despite some slowdown in new light vehicle sales used vehicle sales remain robust shifting dynamic at the consumer level, our auto finance platform is well positioned to capture.
Evidenced by the higher year over year originated volume across all of our major lending categories.
Our originated yield on new retail loans was 7.51% essentially flat year over year, while average benchmarks declined 135 basis points.
Competition continues to ebb and flow and let's say in the space, but we remain we see rational behavior, we're underwriting standards remain thoughtful and balanced over all within our book trends remained steady in healthy when looking at indicators of the consumers' ability to pay including term FICO l.
TV de T I M P T I.
We stay diligent in managing our risk profile and as you would expect had priced accordingly.
Two fed rate cuts behind us and continued easing actions forecasted we would expect retail origination yields to trend lower overtime, but it beta is well below the 100% level, we observed as rates rose.
Ally scale and broad reach remains unparalleled across the industry evidenced by our market leading position.
Over 90% of franchise dealers in the U.S. now interact with ally, providing us with they added benefit of real time insights into consumer behavior and market trends.
Our dealer count has consistently grown over the past five years, leading to a record 3.2 million decision to applications in Threeq, you supportive unhealthy volumes and continued expansion of risk adjusted returns.
Credit performance remained in line with our expectations this quarter as retail auto net charge offs and 138 basis points, maybe modestly higher by six basis points compared to the prior year.
We continue to see a healthy U.S. consumer jobs are prevalent unemployment is at a 50 year low wage growth continues to outpace inflation in debt service levels remained well manage.
While consumer confidence recently moderated a bit overall levels are near the highest they've been over the past two decades.
Beyond the consumer we're monitoring business and manufacturing trends, including trade developments, but remain constructive on the GDP outlook, which continues to expand although at a slower pace.
In our insurance segment written premiums were 357 million in Threeq, you are highest level in five years fueled by sustained growth channel increases and ongoing expansion in our retail and wholesale product offerings.
Turning to deposits, we surpassed 100 billion and retail deposits this quarter ending the period with 119 billion in total balances and adding 72000 net new customers this quarter, surpassing the 1.9 million Mark.
With another quarter to go this year, we've already exceeded full year 2018 growth in balances and customers growing by 12.2 billion and over 290000, respectively.
Over the past decade, Allied has averaged 19% annualize retail deposit growth nearly seven and a half times the retail deposit industry growth rate.
We've done this by relentlessly focusing on the customer in being true to our brand with high value straightforward innovative digital offerings.
Customer loyalty is evidenced by a strong retention levels and consistent vintage performance, which John will provide more details on in a few minutes.
Two thirds of our customer balances are from mass affluent high net worth individuals while 60% of account openings are from the millennial cohort, establishing a banking relationship with us at an early stage in their financial journey.
This presents us with the opportunity to continue deepening the relationship overtime.
The increasing desire for convenient seamless products and exceptional customer service go hand in hand, with the core tenets of our philosophy. We're applying the same framework to the broadening array of consumer products, we offer and look to offer in the future.
Corporate finance posted another solid quarter with Hfive balances ending at 5 billion, a 16% increase year over year. The team remains focused on responsible growth and cultivating a diversified portfolio with compelling returns, while prioritizing credit and operate.
Total risk.
Ally home DTC originations were 800 million during the quarter, four and a half times higher than what we originated in the prior year period.
Partnership with better Dot Com has accelerated our ability to deliver a best in class digital experience for our customers.
During the third quarter Alpinvest accounts grew 21% year over year ending at 346000.
In early September we rolled out new product offerings, including a managed portfolio was zero advisory fees, along with over 500 Commission free Ts.
And we recently announced commission free trading and industry trend, we had increasingly been anticipating.
Invest springs enhance value to our customers in increases deposits stickiness year to date around 40% of account openings had been from existing customers and retention levels for these multi product customers is higher overall.
We close the HCS transaction earlier this month and we welcome 85, Charlotte base teammates to ally.
We look forward to building upon momentum the team has established leveraging the growing desire of consumers to use alternative digital payments sources in a seamless manner.
And we were pleased during Threeq you to receive an investment grade rating from Fitch and acknowledgement of the significant progress we've made in the strength of our enterprise.
Let's turn to slide number five to recap some of our quarterly metrics.
Across each of the four measure shown here, we continued our strong progression in Threeq you, while not always linear the long term trend of improvement has been consistent.
Adjusted EPS in the upper left of one dollar one cents per share increased from 91 cents a year ago.
In the upper right adjusted total net revenue increased by nearly 100 million year over year.
While deposits grew 18% to 119 billion compared to Three Q2 018.
On the bottom right. We continued building tangible book value increasing to $34.74 per share up 21% versus prior year.
I'm confident we have the right business strategy and the right people to continue building on our momentum rather a mine remaining mindful of potential risks on the horizon with that I'll turn it over to Jan to walk through the details on the quarter.
Thank you and good morning, everyone. Our strong results in Q3 continued to reflect that consistent progress of our business model grounded in a relentless customer focus and operating discipline.
Let's begin our review of our detailed financial results on slide six net financing revenue, excluding I'd of 1.195 billion increased 31 million linked quarter and 67 million year over year. The steady expansion of Eni is driven by auto optimization we're portfolio.
Leo yields continue to move higher and new origination pricing remained above 7.5%.
And the dual benefit a growing the deposit book, where rates move lower and continuing to replace higher costs wholesale funding.
Despite the volatile rate environment, we expect eni to grow on a year over year basis over the next several quarters.
Seasonality will drive some linked quarter fluctuations, which we expect in Q4.
Adjusted other revenue of 424 million grew 31 million quarter over quarter, and 32 million year over year, driven by solid investment gains and revenue growth from insurance.
Provision expense of 263 million increased 86 million quarter over quarter, reflecting normal seasonal trend and 30 million year over year as asset levels grew and net charge off new modestly higher.
Oh, no net charge offs increased by six basis points year over year remaining consistent with our expectations.
As we've discussed in the past, we have been originating and pricing to a 1.4% to 1.6% net charge off range. We expect to outperform this range for full year 2019, due to strong used vehicle prices and macroeconomic factors at or near historically strong levels.
We remain confident in the overall performance of the portfolio and our outlook remains the same losses will continue trending towards the stated range of 1.4% to 1.6% overtime, which is fully accounted for and our underwriting pricing and collection approaches.
Noninterest expense declined 43 million linked quarter, reflecting the seasonally lower weather losses, and increased 31 million compared to the prior year.
We generated positive operating leverage again this quarter something we've done every quarter this year as year over year revenue growth of 7% outpaced expense growth of 4%.
Efficiency gain are a direct result of leveraging our scale and the investments we've made over the past few years in opportunities aligned with our long term strategy.
We expect to continue prudently investing for the future, which will <unk>, which will result in expense growth with a parallel objective of driving improved efficiency over time.
Looking at our key metrics for the quarter GAAP and adjusted EPS were 97 cents and a dollar and one cents per share core ROTC, he was 12.3%, including elevated OCI, reflecting declining rates since yearend.
Adjusted efficiency ratio of 45.3% improved 70 basis points year over year.
Given our progress year to date, we remain on track to achieve the full year 2019 guidance we provided in January .
This is despite the significant shift in raid and expected Q4 impacts related to be HTS acquisition of 25 to 30 million not included in our original outlook.
Turning to slide seven I'll review balance sheet and margin.
We generated revenue expansion again this quarter through continued balance sheet growth and optimization like most banks, we prefer a steeper curve, but we are positioned to deliver expanded net financing revenue over the near term as we are not overly dependent on rates.
Average, earning assets grew 6% year over year, primarily in capital efficient category.
We expect earning assets to modestly grow moving forward to Remeasured audio expansion and consumer loans.
Ongoing diversification and capital efficient mortgage assets prudent corporate finance growth and continued but slower investment portfolio growth as we near 20% objective.
On the funding side average deposits grew nearly $18 billion year over year financing, earning asset growth of 10 billion. The roll down of 2 billion in unsecured and 9 billion lower secured funding.
Net interest margin, excluding I'd of 2.72% increased five basis points linked quarter and was essentially flat year over year.
As we've said for sometime now we expect NIM to stay relatively stable for full year 2019, compared to 2018 and as we move into 2020, we expect balance sheet dynamics to drive NIM expansion.
The retail auto portfolio yield of 6.66% increased eight basis points quarter over quarter, and 46 basis points year over year, resulting in another quarter of improving portfolio yield.
As JB touched on earlier, we're monitoring competitive dynamics and benchmark activity, but continue to expect increasing portfolio yields as around 10% of our retail auto Buck reprices each quarter.
Keep in mind, we've generated six consecutive quarters of new retail origination yield above 7%.
The lease portfolio yield was 6.24% for the quarter are used car index remains essentially flat year to date outperforming our 3% to 5% expected decline for the year.
While industry off lease volume of 4 million plus units is that the highest level in 20 years and consumer has continued to exhibit strong demand for used vehicles.
We see this as a reflection of their healthy overall financial position improved quality and durability of used vehicle and an increasing difference in average transaction price between new and used cars, which recently exceeded $13000, a 50% increase versus 2011.
The commercial auto portfolio yield declined 16 basis points linked quarter and increased 19 basis points year over year keep in mind. This is a floating rate asset closely tracks one month LIBOR trends on a lag.
On the funding side deposits grew to 74% of overall funding on secured balances declined to 8%.
While we expect to periodically issue for parent liquidity purposes. Overall balances will continue to decline as another 3 billion is scheduled to mature by the end of 2020 with an average coupon of 5.8%.
On slide eight will cover some deposit highlights in the upper right total deposits ended above 119 billion driven by retail growth of 2.7 billion well customer retention levels remain strong at 96%.
Q3, Q3 marks the 39th consecutive quarter of.
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Had a technical difficulty, but we're going to pick up where we left off.
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So all resume on slide eight where we're covering deposits highlights.
The upper right total deposits ended above 119 billion driven by retail growth of 2.7 billion, while customer retention levels remained strong at 96%.
Q3 marks the 39th consecutive quarter of double digit percentage growth in our portfolio on a year over year basis.
Good day around two thirds of balance growth has come from new customers. While the remaining third was sourced from existing customers, adding to their balances.
We've seen an increasing array of competitive offerings from both traditional and emerging players in the digital space, but our customers and balances continue to demonstrate strong loyalty to ally reinforcing our value proposition and the long term stability of the platform.
From a flow funds perspective, the majority of net inflows continue to come from traditional banks, where there is around four trillion dollars of balances, earning under 50 basis points.
In the bottom left retail deposit rates declined eight basis points linked quarter, reflecting pricing actions over the past several months.
As the fed continued sticky we expect the cumulative data to be higher than what we observed as rates increase.
Positive catalyst for the overall NIM trajectory.
But our pricing decisions will remain balance as we focused on maintaining that trust and loyalty, we burned with our customers over time.
On the bottom right. We added 72000 net new deposit customers during the period, which was our strongest third quarter and resulted in 23% year over year growth.
The strategic value and customer and balanced growth aligns with our strategy and positions us well as we remain mindful of our 75% to 80% deposit funding target.
On slide nine we've included a chart demonstrating the stability of our deposit vintages over the past decade, our customers consistently keep their money with us and grow their balances.
Our industry, leading growth has been achieved even as we have widened the gap to top rate payers.
On our online savings product, which you can see at the bottom of the chart.
On the pricing action, we took last week positions us as the lowest among large direct banks, while our rate remains competitive in the broader context of the deposit industry.
Let's move to capital on Slide 10.
One of 9.6% increase linked quarter and year over year, reflecting earnings growth and our disciplined approach to managing risk weighted assets, which grew by 2% year over year compared to average, earning asset growth of 6%.
We continue repurchasing shares during the quarter, reducing shares outstanding by 20.7%.
Mid 2016.
And we close H.C. asked earlier, this month and expect and associated capital impact in Q4.
As it pertains to see so we currently estimate Dajuan reserves will increase by 105% to 115% driven by consumer auto.
We have then proactive in planning for C., so given the phase into the capital position of 25% annually over the next four years.
Following Cecil implementation, we expect increased volatility and go forward earnings as we move to life of loan reserving and have potential fluctuations in macro economic assumptions.
Even at this represents a material increase your existing reserves the underlying risk profile of our balance sheet has not changed.
We plan to absorb gay won and navigate the ongoing impacts of Cecil through prudent balance sheet management, while we continue to prioritize strategic capital deployment, including investment in accretive growth opportunities share buybacks and dividends.
Let's turn to slide 11 to review asset quality detailed.
Salivated net charge offs were 83 basis points this quarter, an increase of eight basis points year over year, primarily driven by retail auto.
On the top right.
Native provision expense with 263 million, an increase of 30 million compared to the prior year due to higher asset balances and moderately higher auto net charge off.
In the bottom left the retail net charge off rate increased six basis points year over year to 1.38%, reflecting dynamics I discussed earlier.
30, plus and 50 plus delinquencies in the bottom right increase year over year by 26, and nine basis points respectively.
Right and delinquencies this quarter reflects the increase next and seasoning of our U.S portfolio purposeful change in our servicing efforts that have increased delinquencies, but consistently resulted in improved flow to loss trends.
And dynamics around closing out the quarter on a Monday, which impacts consumer payment timing.
On Slide 12 auto finance pretax income of 429 million declined 30 million linked quarter due to seasonally higher provision and increased 46 million compared to prior year.
Net financing revenue growth was driven by retail auto asset growth and increasing portfolio yield.
We experienced the 22nd consecutive quarter of expanding dealer relationships in Q3, leading to our strongest third quarter ever and application volume Decisioning over 3.2 million App.
7% year over year increase.
Which resulted in $9.3 billion in originated volume in Q3, 14% increase versus prior year.
In the bottom right a risk adjusted return trends reflect improved new origination yields.
Yes benchmarks have meaningfully declined.
Turning to slide 13, we originated 9.3 billion of consumer loans and leases in the quarter growth originations of 46% declined as a percentage of our total volume in Q3. The dollar originated volume increased compared to the prior year period.
Seasonally higher new at least volume resulted in U.S volume near 50% of total originations.
Non prime of 11% remained consistent.
Well the percentage of use was lower year over year, the dollar amount of originations increased.
And the bottom left consumer assets grew to 81.5 billion as lease balance balances increased slightly and retail continued to grow.
And on the bottom right average commercial balances of 33.3 billion declined year over year quarter over quarter as dealer inventories normalized.
On Slide 14 insurance reported core pre tax income 66 million in the quarter, an increase of 70 million linked quarter and 17 million versus prior year.
Earned revenue increased 23 million year over year, reflecting the strong written premium trends over the past several quarters.
We wrote 357 million of premiums in Q3, the highest level since becoming a publicly traded company with increased volume and right across our product offerings.
And during the quarter, we were pleased to receive an upgrade to aim on as from Am best Our first upgrade in 10 years at Alley insurance.
Slide 15 has our corporate finance segment results.
Core pre tax income of 45 million was down 2 million linked quarter and increased 9 million year over year.
Portfolio credit performance remained strong and inline with our expectation.
Collateral based lending increased to nearly 60% of new originations in the period when compared to prior year, ending HF I assets grew 16%.
Our origination activity reflects focus from our experience cycle tested team, who continue to execute through competitive environments.
On slide 16 mortgage pretax income of 11 million was relatively flat versus prior quarter on prior year period, reflecting increased premium amortization as rates declined and prepayment activity increased.
We originated nearly $800 million of direct to consumer loans, the fourth consecutive quarter of increasing origination volume and our highest level since launching.
We continue to see strong deposit synergies with 55% of direct to consumer origination sourced from existing ally depositors.
Our partnership with better Dot Com like you a series of best in class improvements, including App to fund turn times declining to approximately 30 days and industry, leading NPS scores.
The all digital platform and streamlined customer experience will drive a 40% improvement in the cost per funded loan overtime.
In closing we had another successful quarter with solid pretax pre provision income growth and operating leverage gain that created ongoing progress against our 2019 full year financial objective.
These results demonstrated this demonstrate the strength of our core businesses and our focus on delivering for our customers and driving sustainable long term value for shareholders and with that I'll turn it back to JV. Thank you John wrapping up on slide number 17 or the priorities for our company.
Common thread running through each of these objectives as our prioritization of culture at ally.
Sure, we're driving our company in the right direction.
Simply put we're working to bring increase value through comprehensive and innovative consumer commercial offerings and has established leaders in auto insurance and deposits were looking to seize upon untapped opportunities that will further enhance the way we meet our customers' needs.
Our 8500 ally associates are striving to do it right and every interaction with our customers within the communities, we serve and on behalf of our shareholders.
It has been a grade three quarters of a year and we're focused on finishing strong over the months ahead and well into the coming years.
With that we can now heading into Q in AG.
Thanks, Jamie.
Go ahead operator, thank you as a reminder to ask a question you will need to press star one on your telephone we ask that you. Please limit yourself to one question and one follow up question. You May then returned to the can't.
To withdraw your question. Please press the pound key.
Please standby, while we compile the acuity roster.
My first question comes from Moshe Orenbuch with credit Suisse.
Great. Thanks, and congratulations really strong results I wanted to kind of drill down a little on deposit pricing them, you talked a little bit Chen about.
Being.
Being able to lead in the downward direction and just talk a little bit about your strategies, there and how you think about that times in particular, given you've had such strong results on the asset yield side.
Sure Good morning, Moshe and a and thank you so no change.
Changes overall for our deposit strategy I mean, it as we look across the business. We're really pleased with the customer growth we're seeing.
The deposit flows were seeing in fact through Q3, we've had the highest levels of customer and deposit growth that we've had in any full year.
In the history of the company so really pleased there.
And we'll continue to.
Have a strategic focus on growing customers as well as deposit.
Relative to pricing I mentioned, we're getting close to our target funding rate of 75% to 80% and as we do so we do feel that we're in a really good position to continue to focus on margin and to be thoughtful as we balance.
Heating priorities, we want to continue to grow our business. We also wants to optimize the margin will just be really thoughtful about that as we go forward.
So you've seen over the last couple of months since June we've dropped I will say rates around 40 basis points Cds have come down around 35 basis points, and and we think that positions us exceptionally well from a financial trajectory as we go into 2020 and position ourselves for NIM expansion.
Overall for the customer relative to the most bank rates with four trillion dollars out there getting paid under 50 basis points. We think we're really optimizing not only for allies margins on optimizing for the customer as well.
Gotcha and it's in a somewhat related I mean, you talked about the.
Yet you have that comes due by the end of next year.
The impact that would have.
At 5.8% coupon.
I guess the question that I have relates to operating leverage how does that make you kind of think about few ability to kind of continue to deliver on the operating leverage as you go through 2020.
Yeah. So I mean, all of that's really positions us.
Continue to grow net interest income and NIM as we move into 2020, which is going to be a big driver around revenue overall revenue growth and operating leverage.
I'd have to the unsecured debt rolling down, it's a little bit lumpy, but we've got some really high cost debt coming down and the first quarter, it and an 8% coupon and so.
The rolled out of the unsecured we'll just continue to lower overall deposit costs and again, it's an input into eni and trajectory.
Operator, you there.
Yes, I'm here, Okay Moshe you so on the line.
Okay, we were getting to sign up for technical difficulties. So.
My questions have been answered thanks, Okay, great. Thank you so much Moshe.
Thank you. Our next question will come from Sanjay Sakhrani with KBW.
Thanks, Good morning suggest I appreciate the commentary on C., so and sort of related impacts, but I guess, when we're thinking about EPS impacts you mentioned the variability of volatility it'll bring but is there any rough estimate assuming macroeconomic conditions are stable, what the EPS impact might be.
Okay.
Yeah, and we'll be providing a bit more guidance as we finalize our 2020 plan, but I mean, essentially when you look at day to Theres a number of drivers around.
That volatility and I'll, let me just outline a couple of those the first is if you're growing your portfolios you're going to see an outsized increase in your reserve levels, because again, you're going from a 12 month incurred loss model to life of loan.
It will depend to some degree on the growth in each of your portfolios.
Second and it's going to be tied to your mix and that's the mix of your assets across your book, but also just the risk content within each of those asset classes, and then last but not least it'll depend to some extent on your macro economic forecasts. So we need to settle down our overall forecasting when we do so.
Provide.
Yes trajectory overall for the company and give you some sensitivities around seasonal.
Okay, Great I guess, a follow up related to credit quality.
And some of the comments you had on the delinquency rate.
Obviously, you guys had very solid performance on credit quality this year, but when we look at the delinquency rate that was a little bit higher than the normal in the third quarter and there was a pretty decent pick up year over year was that all related to timing or is it a little bit indicative of next year being a run rate charge off level, that's more consistent with what you guys are targeted at this.
Here thanks.
Yeah sure so on to link wouldn't see yeah, I'd say overall performance is well in mind with with our expectations and kind of three drivers city increase year over year. One is just the normal unexpected seasoning of the this portfolio we've talked for some time around the fact that use tends to have slightly higher risk on.
Keep in mind, we get paid three to four times that in the yield. So we're really pleased with the risk adjusted returns in that segment.
But it does drive some higher frequency and we're just seeing that coming through here in Q3 again well in line with our expectation and then there's a couple of just what I would say operational impacts one is.
We launched some new collections and servicing strategies over the last.
For eight quarters, and some of that's just pushing out repo timing and increasing the delinquency levels.
Its improving foot a loss there were pleased with overall performance of these strategies, but it does result in some slightly higher delinquencies and then there's just nuances in terms of a day in which the quarter closes that can drive some volatility and your delinquencies and I'd say almost a third of that increase with.
Just to the fact that the quarter closed on a Monday instead of a Friday, so overall inline with expectations to your question on where we're going we would expect to at some point migrate up to that 1.4% to 1.6% retail net charge off ratio simply because that's where we're originating.
Okay and.
And so as to use portfolio continues to see then as a used vehicle values started to migrate down and we're still expecting that to occur we'd have some increased severity and so over time, we'd expect to be more in line with that one for them, 1.6% range keep in mind, we get where pricing that's where we drive.
Adjusted returns in our sweet spot.
Good with that.
Great. Thank you. Thank you. Thank you. Our next question comes from and they can't events with Citi.
Thanks, I was wondering if you could just comment on the decision to changed commission triggers the industry's moving that direction and then what the potential impact would be from a from and revenue perspective for you.
Yeah sure good morning, everyone and maybe just I'll take the second question first that the impact is extremely small for us.
As a percent of overall.
Well I revenue it's it's.
So from a financial perspective, it's pretty much in non event from a customer perspective, we feel very much like this business its capital light JV mentioned it increases the stickiness in the retention levels of our deposit portfolio and that we see value there and overtime as we moved to more of an end device centric model and.
The process of building that out we think that this can be accretive from an orderly perspective, but I mean, the bottom line here is when the industry moves you have to move with it otherwise.
We lose some valuable customers and we didn't want to put ourselves in that position JV I don't know if you Wanna purposely coverage.
Thank you for the question Aaron.
Sure.
Just as a follow up there was a few weeks ago. There was an article on the Wall Street Journal talking about.
Middle class not being able to afford a car loan these days and rolling over a kind of underwater loans into new purchases and extending the terms.
Are you seeing any anything from a competitive standpoint, where you're concerned about the trends that you're seeing within the non unfinanced were not obviously, we're not seeing that in your and your charge off rates or anything of that nature. Just just curious what your comment would be about though.
Yeah look I mean, there's always going to be attention.
Paid to the fringes and that's really how we view that commentary on the overall business you know if we look at our visit nothing has changed in terms of the way in which we originate and JV mentioned in his comments that we see extremely consistent FICO scores payment to income score is low.
The value.
We're not seeing any kind of deterioration in terms of time et cetera, and if you look at the consumer I think just right and and contrast that consumer right. Now is performing extremely well, we've got 50 year low unemployment debt servicing levels are actually at a 39 year low other under 10 per.
And so ability to pay continues to be strong and I think you see that in our year to date credit performance as well as just an incredibly robust application flow. We had record applications. This quarter continuing to be able to put price in the market. We're just not seen.
Thank you.
Thank you.
Thank you. Our next question will come from John Hecht with Jefferies.
Oh.
Hey, guys. Thanks, very much in congratulations on a good quarter.
You touched a little patents in the last question, but I'm, just wondering kind of thinking about incremental loan volume where are you.
Not new new loan not new car loan, but new loan terms smoothing in terms of durations and yeah I guess.
Yield margins and.
Where where do you see the competitive market going.
Yeah, I mean on retail auto our time has not changed at all and we've been very consistent year. After year. It just around 70 month term and that has not changed so I guess that's answered question. One I'm just in terms of yield really robust field.
Our sixth consecutive quarter of putting new origination yields on the books over 7% and with the portfolio yield at 6.66% were very well positioned to continue to see portfolio yields migrate up to those new origination yields and I think that performance. This quarter really speaks for itself in terms of ability.
Generate flows continue to drive upward expansion on on the asset side from a yield perspective.
And that John anything on the competitive front I'd say I'm very consistent obviously I'm sure you saw one large bank talked about increasing share live.
Okay.
But we really didn't see it and didn't feel in the third quarter I think our flows were exceptionally strong.
Added to the point lunch uncovered for six consecutive quarters of where we've been bringing in new loans that we've been very.
Very pleased with the margin were capture in there so.
I'd say competitive environment remains very rational and we haven't seen nothing big shifts.
Structure or appetite.
Okay appreciate that color and follow up question as you guys. It's been working a diversification you talked a lot about new business sides and that's a positive commentary with the better Dot Com partnership and I think you've also mentioned historically that you're you're in order for capital management, we might see incremental mix toward mortgage.
And so forth I went just wondering what do we think about kind of business mix as we enter next year, you're focused on ongoing diversification.
Oh, Yeah, Yeah, I'd say at high level, we see opportunities to grow all of our portfolios and that's auto it's it's a mortgage as you're mentioning as well and specifically in the mortgage space and the key to that business is managing operating expenses and we'll see a partnership that we have with better dot com, we see an opportune.
Needs to be able to accrete are a week over time, because we're able to bring down those operating expenses. Yeah. We just closed the transaction with HCR. That's another opportunity we have to drive diversification. It's a it's 130 ish billion dollar market growing at 20% a year.
Drives are always in the 3% to 4% and so we see a really nice opportunity to continue to diversify.
Through point of sale lending with our HTS acquisition as well.
Great. Thanks, guys.
Thank you John .
Thank you. Our next question comes from Betsy Graseck with Morgan Stanley .
Good morning, this is actually Jeff Adelson on for Betsy.
And I just want and good morning.
Just wanted to dig into the other revenue lines of it I think this was the first quarter, you've actually seen you adjusted fees exceed 400 million in several years and then the not too distant past you kind of talked about that being a range of 375 to 400 million quarter to quarter. So you're obviously seeing some good results in the insurance business.
Got some good gains the last couple of quarters, and you're layering in <unk> and bus Oh, I invest business over time so.
I guess my question is it too early to think about the 400 million plus that's kind of a new normal or how should we think about that going forward.
Yeah, I mean, I would say, we're absolutely focused on growing our fee income and our noninterest income a you know I I'm not ready to give you guidance quite yet I mean, we do see a lot of opportunities to continue to grow our fee income insurance, we saw had record levels of of written premium and your.
Seeing that a record levers and continued momentum overtime show up in lead in the earned premium and we see opportunities across all of our businesses in that space inventory insurance via the insurance, we provide which by the way, it's becoming more and more critical the dealer margins.
I would just seem a lot of opportunity to continue to expand our insurance business and.
And that's not only the earned premium it's also gains that we take on on the assets in that portfolio. So insurances is absolutely a growth engine for us I'd say second we grew our investment securities portfolio as rates were rising and so we were in a really strong position relative to.
Of harvesting some gains around our investment securities portfolio as well.
And then as you mentioned Alpinvest overtime are still bullish on this business, we think that there's opportunities to growth grow, especially the advisory space.
It is supported by secular trends did digitization and we think we're very well positioned to capture those growth opportunities as well.
Thank you Ed.
Thank you. Our next question comes from Kevin Barker with Piper Jaffray.
Thank you your expenses ticked up a little bit <unk> third quarter compared to the group that we've seen first there.
You mentioned that this could occur but can you just talked about the trajectory for expenses over the next few quarters and some of the things that are driving increasing expense growth.
Yeah, sure and I do want a couple that with revenue growth. So we are focused is really around driving positive operating leverage and we've been driving positive operating leverage every quarter. This year and that is our intention as we move forward.
But relative specifically to the growth in expenses, it's really been around the same thing that we've been discussing one is continuing to invest in our core competencies around marketing and digital.
Technologies and platforms and you'll continue to see some growth relative to a continuing to evolve both marketing and digital and technology capabilities.
Second there, there's just a variable costs tied to just a terrific amount of customer growth, we've seen across all of our businesses and so a big chunk of that is just related to a two growing our business and as I mentioned, there's revenue that comes along at an accelerated pace against that variable gross.
And then last but not least just continuing to look for ways to grow long term value for the company in for customers and the each the US transaction is a perfect example of that and we will have some expense that hit in Q4 relative to the closing about acquisition, but those are the key themes.
Okay. So do you expect the year over year growth rate the marine consistent with what we saw you in third quarter to persist or do you think accelerate given HTS transaction.
Yeah, I mean Q4, we have some seasonality and expenses relative to attack marketing and engaged so close which is kind of about half of that 25 to 30 million pretax impact in Q4.
And for overall 2019 were expecting to be well within our guidance of you know kind of flat to down a person on efficiency ratio.
Okay. Thanks for taking.
Thank you Kevin.
Thank you. Our next question will come from Chris doing it with Sandler O'neill.
Good morning, Thanks for taking my questions just wanted to.
Ask about the the full year guidance.
You made the comment in your prepared remarks at your.
On track to meet it I just want to flush out sort of.
Other piece of that with the because it seems like you've got them up.
Based on the prior three quarters, there should be some upside bias to the as part of the guidance.
Your commentary around the health credit services acquisition in the 25 to 30 million.
Is that onetime in nature related to the closing the transaction or.
There are their losses with that acquisition that will persist into 2020.
Yeah, So sick of mine and Chris a couple of things. So first of all on Q4.
There is some seasonality in the quarter and I I just mentioned some of the expense impacts there a we do have some impacts from an anti perspective lease gains can be a little bit lumpy and we're still expecting used vehicle prices come down a bit so little bit of pressure in terms of the sequential quarterly impact.
I mean year over year, we will be up on that.
But it's not always on linear path and then on provision we tend to have seasonality there no different than we've had in any fourth quarter and kind of the history of the company's so just keep in mind, there's a seasonal element, which is putting us back on track with our overall EPS guidance.
And then relative to H.C.S., we closed the transaction and first quarter. We've got some operating expenses. Obviously that are part of that transaction. They are not onetime in nature. We would expect that expense roll forward into 2020, and then second as we.
Acquired portfolios, we've got about 250 million in balances.
Well a build.
Q4, and then as we continue to grow that portfolio. There's some provision expense around it those are really the two big drivers like taking a long term view really pleased again with the opportunity to to drive earnings.
And accretive.
<unk>.
Overtime.
But I do want to keep I do want to emphasize one more point here and that's the fact that we are sticking with our original guidance for this year. That's in spite of then incredibly volatile interest rate environment. In spite of that Weve grown eni inline with expectation were hitting that flat number that we've been guiding towards and.
Taking a longer term view, we're incredibly well positioned to have continued growth and NIM expansion as we head into 2020.
Okay, and then had one question too about the insurance business and the written premiums that if I'm looking at the trend correctly. They tend to be you have higher written premium in the third quarter of each year.
Explain what's going on there yeah, I understand that earned premium component of it but just want to extend why written a stronger but seasonally going on there yeah. I mean, there isn't really any key driver of growth. There I will say as you look at both written and earned premiums Chris.
There's some lumpiness just relate it to reinsurance costs and so we mirror the reinsurance expenses with when we have weather losses, and so you typically do see some higher reinsurance cost and the high whether quarters, but other than that so it's been a pretty pretty linear growth trajectory from a permanent written and earned premium.
Perspective.
Okay. Thanks, very much and thank you Greg.
Thank you. My next question comes from Eric Wasserstrom with CBS .
Thanks, very much Gen. I'm, just trying to think through the the capital walk on C. One into next year.
But maybe does the preface to my main question is.
I think I'd tell you guys did a little bit of securitization in the in the period is that correct and what was the the C. One benefit of that.
I Yeah. So short answer is yes, we did have some kid securitization activity just business as usual, there's not any big CP, one impacts related to that.
Okay.
And just on your C. E. T. One question I mean, it we are being very thoughtful just in terms of continuing to gross easy one and you were up about 50 basis points since fourth quarter and that's really.
Position us well to absorb the day one impact from T cells. So we've got 25% of capital impact hitting in 2020, we're very well positions.
Or bad in addition for that so we have the H.C.S. transaction that closed here in Q1, so that'll be in Q4, and then a and then above and beyond that we are positioning ourselves very well to continue to look for strategic opportunities to deploy capital. We've done all of that in spite of distributing over $900 million in cap.
Total.
Year to date in the form of repurchases and dividends and so we'll just continue to organically accrete capital be very thoughtful in terms of RWD grows and balance sheet management to position ourselves not only to absorb Cecil but also to make sure that we can stay focused on our strategic priorities.
Great and so if I can just maybe just follow up on that.
You know my quick arithmetic on the on the day, one seasonal impact is about 90, bips with a with the fees as well and then you know I guess a quarter that a phased in pro rata is that is that ballpark correct. Yeah. I mean think about it kind of in that 80% range overall, and then you take 15% to 20% of that.
One of in any given year pick a quarter of body in any given year, the kind of tax effect that reserve impact take 25% of that over the next four years.
Got it and so then it sounds like that the other dynamics is just the accretion which is typically about 30 to 40 basis points and then a little bit of impact from HTS does that does that GAAP basic yeah, well done.
Alright, thanks, very much I appreciate you Eric.
Thank you know next question comes from Dominic keep building Oppenheimer.
Hi, Thanks, so much for taking my questions.
When we look at the deposit mix and your targets and where we are today and we saw some nice.
Funding relief this quarter quarter over quarter, when you think about.
The interest rate pass going forwards that the implied.
Can you talk about us the quarter over quarter change in deposit costs and total funding costs could accelerate on a downward trajectory from here. Thanks.
Yeah, I mean, it's not a perfect formula we as I mentioned earlier, we want to balance strategic focus on customer growth balance growth I, but we do feel we're well positioned we're approaching our target funding level of 70, 580% you know I mentioned in my comment.
This morning that as the fed continues to use we could continue to see opportunities to take down rates.
They have gone already 40 basis points, a and that beta on the downs will be higher than the beta on the opposite I think that's probably the best way to think about it.
Okay, great. Thanks, and then when we think about you did mention about the.
The beat is on the yield side can we talk a little bit more about where you think that may be in and the ramp there.
Overtime and on the auto yields yeah take EULAR and you actually saw some really nice uplift in the lease yields this quarter, what's what's going on there. If you don't mind talking about that thanks. So much yeah sure maybe I'll start with retail auto and then we can go to lease but.
If you go back to the tightening cycle, we've passed on over 100% of the increase in the underlying benchmark rate the two to three or swap and you know as we passed on that increase in the benchmark rate. That's when we really started to originate above that 7% Mark now if you look year to date the underlying.
Two to three or benchmark is down on average 130 basis points and debate on that has been you're right. I mean, because we've just continue to put in pricing in the market about that 70% now there's a number of dynamics. There. One is healthy consumer has sustained car purchases high demand.
On a as well is the fact that while the rate is up compared to a couple of years ago were well below the average from a historic time series and so the overall interest rate on the car relative good payment to income and debt to income levels continues to be absorbed so we're not seeing a lot of overall price sensitivity from the consumer.
At this point now as we go forward and fed funds is top of mine and we see fed funds potentially coming down or we could see some pressure on rate, but we're just not seen not at this point.
And then relative to leave you know.
We can have some lumpiness, there, especially related to lease gains we had a really strong leasing quarter. This quarter. That's then sustained by very strong used vehicle prices. We are as I've mentioned several times affecting used vehicle values to come down at some point, but the overall.
This quarter, we had a really nice pick up because of lease gain a sustained by used car performance, which continues to be very strong.
And then if I may just one more on the mortgage business, we saw year over year loan growth kind of slow bed is that from one of the sales there of why the growth slowed or is there maybe a different strategy taking place or was this a one off and what do you see in the the mortgage market today given the.
You know increased mortgage application spike more recently, thanks, so much I really appreciate it.
Yeah, No sure we have maybe I'll separate and DTC versus Balkan the DTC side, we absolutely see a lot of growth and I mentioned, we hit that 800 million in originations, which is a record quarter for us and puts us well on the path to originate you know up to that 3 billion dollar Mark that weve set for ourselves so on that.
He sees side really bullish on the product offering we have the opportunity to continue to grow originations, especially as rifai.
Volume has peaked here and so we'll continue to grow DTC and with the better Dotcom partnership. We think we can get really great returns on that business as well you know on the bulk side, you're absolutely right. We have brought down the balances and up a little bit of a shift in strategy. There just as we've seen a pretty early pre.
Payments and amortization expense increase we've just been really thoughtful about the way in which we grow that book and we did have a loan sale part of that was just conditioning around the library transition, but part of that was just exiting some of the lower yield and Oh portfolios that were in the money because of the rate dropped so we'll continue to be.
Incredibly thoughtful as we allocate capital to ball, just making sure we get the Reich yields and that are accretive to the book.
Thanks, so much for taking my questions.
Thank you.
Thank you, ladies and gentlemen, I am showing we do have time from one last question and one last question will come from Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my question. This morning, a jet I actually had a lease question and I thought you were going to touch on it but I'm a little bit yeah, I'd like to I'd like a little bit of clarification.
On the lease yields were up nicely year over year, but if you look at the gains from vehicle sales. They were actually flat. So I'm curious if this is a mix shift.
In terms of the new vintages is there more pricing power in the lease business or was there actually a change to the odd depreciation curves that you guys are using.
Yeah.
I mean, the short answer to all of that doesn't know we did see strong origination slowed this quarter and and we were up about a couple hundred million in terms of Buffalo, but yeah, we've been guiding towards kind of ex gains of low 5% yield and I think weve been trending kind of right in line with that.
And then anything above that 5% is related to the gains in the trajectory round the gains, but no no real trends.
Just in terms of our overall lease portfolio.
Okay, great. Thank you so much and thank you rack.
Ladies and gentlemen, thank you for participating in today's question and answer session I would now like to hand, the call back over to Mr., Daniel Heyler for any closing remarks.
Thanks, Operator, I'll say is if you have additional questions. Please feel free to reach out to Investor Relations and we thank you for joining our call. This morning.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.