Ally Financial Inc (ALLY) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Ally Financial Inc. earnings conference call. My name is Marcella and I will be your operator for today. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. Michael Brown, Executive Director of Investor Relations. Please proceed, sir.

Thanks, Marcella, and thank you, everyone, for joining us as we review Ally Financial's fourth-quarter 2010 results. You can find the presentation we'll reference during the call on the investor relations section of our website, ally.com.

I would like to direct your attention to the second slide of the presentation regarding forward-looking statements and risk factors. The contents of our conference call will be governed by this language.

This morning, our Treasurer, Jeff Brown, and interim CFO, Jim Mackey, will cover the fourth-quarter results. Mike Carpenter, our CEO, is making his way here through traffic delays given the weather. Those of you in the New York area I'm sure can appreciate that. He should be here for the Q&A portion of the call and we also have with us, Tom Marano, Head of our Mortgage Operations.

Now I would like to turn the call over to JB.

Thanks, Michael. Good morning, everyone, and thank you for your time and attention as we cover Ally's results from the fourth quarter and highlight the many successes the Company achieved during 2010.

For those of you that are looking at the presentation, I'm going to start on slide three. I am extremely pleased to report that Ally achieved our fourth straight quarter of profitability with core pretax income of $533 million and core pretax income for the year finished at approximately $2.5 billion. Jim will cover the details of financial results in just a moment but our performance in 2010 clearly demonstrates two things.

Number one, we are the premier auto finance provider and have a true franchise that can generate strong core earnings and asset growth. We are proud to continue lending to thousands of consumers and small businesses across the world and truly be a part of the economic recovery we are now beginning to experience. We are extremely well-positioned for organic growth.

Number two, we have validated the transformational steps taken in 2009 to streamline the Company and largely put the legacy issues in the past. Importantly, we have successfully executed on each one of the strategic objectives we laid out as a management team over a year ago.

On the auto side, as the number one auto lender in the US, we have demonstrated that we are uniquely positioned in an attractive and growing market. As you know, we have transformed from a captive to a market-driven independent company and we are leveraging our competitive advantages and diversifying our business mix.

Ally Dealer Rewards continues to be a hit with our dealers, which is resulting in the dealers doing more of their business with Ally and allowing us to reach a broader range of consumers as well. Our penetration of market shares remain high and we are now finding more dealers expanding their relationships with Ally.

On the mortgage side, we substantially de-risked the business through a series of deliberate strategic actions including most recently the repurchase settlement we reached with Fannie Mae. As you know, Fannie Mae was our largest counterparty for legacy asset sales.

The mortgage balance sheet has been streamlined and performance of the remaining portfolio has stabilized. The mortgage operations balance sheet is now below $37 billion, a decrease of over $100 billion since the end of 2006. And I should note that many of these existing assets are carried at fair value or have low economic risk.

We are now focusing on primarily an attractive agency origination and servicing business which we think will be well positioned as the economic recovery continues.

Our liquidity and capital has been bolstered throughout the year as we have demonstrated consistent and broad access to the capital markets. We completed $36 billion of new funding transactions across the unsecured, secured, and bank markets and $8 billion of that total was long dated unsecured issuance, so we believe we have made some great progress.

The recently announced conversion of $5.5 billion of MCP stock to common bolsters our capital position which will further improve our access to the markets and aligns much of our capital position to investment grade banking institutions.

We also demonstrated the strength of our Ally Bank franchise, which drove the lion's share of total Company deposit growth of $7.3 billion during the year. Ally Bank exceeded our expectations with nearly $5 billion of retail growth while pricing at approximately the 50th percentile of deposit gatherers across the US.

And on the expense front, we exceeded our cost reduction goals with $680 million of identified run rate savings. We will continue to be focused on expense reduction and efficiency in the new year but much of the low hanging fruit was captured in 2010.

Now turning to slide four, I would like to spend a minute talking about the unique position of our auto franchise, which is clearly the foundation of the Company. First, we are excelling in an attractive and growing market. Coming through the economic crisis, the auto asset has distinguished itself as a stable and low loss asset.

The manufacturers and dealer network we support have emerged from the economic crisis much healthier and are positioned for success, which will further help our performance. We are optimistic toward many opportunities for growth, not just because auto sales are projected to normalize over time but because we have a world-class platform that we are now leveraging toward a broader spectrum of the auto finance market including the used market and a more diverse set of dealer relationships.

Second, we will be successful in the market by serving our dealer customers and leveraging the competitive advantages we enjoy. We are uniquely positioned as the only auto-focused bank in the market and as Mike says, we are in and of the auto industry for over 90 years. We have a deep history serving our dealer customers with a superior nationwide scale and infrastructure and as our bank funding model continues to grow, it will serve to lower funding costs even more and allow us to be ever more competitive than a traditional captive.

Our broad range of product offerings allows us to have deep dealer relationships that are difficult to replicate. Ally is integrated into how our dealers do business.

And to expand on my earlier comments on dealer penetration, we have over 5000 dealer customers that use four or more Ally Finance products which range from retail loans, floor plans, working capital lines, insurance products, and our industry-leading SmartAuction online platform.

You can see the results that we have demonstrated on the right-hand side of slide four as we've grown US consumer originations by over 72% year-over-year and we have diversified our business mix into more standard and non-subvented products that we win competing head-to-head with other lenders in the market every day.

Now turning to slide number five, we've included a recap of our recent MCP conversion that occurred on December 30. This conversion was a critical transaction for Ally, an important step to clear our path as we begin exploring ways to repay the US taxpayer investments over time.

Conversion has several direct benefits. First, as mentioned earlier, the common equity of the Company increased significantly and our Tier 1 common ratio aligns with investment grade bank comparables.

Second, it resolves GM's affiliate status and helps us continue to fund GM assets on the Ally Bank platform. And third, it will reduce the ongoing dividend by approximately $500 million per annum which will assist in capital preservation over time.

Our overall franchise value and financial strength of the Company is clearly enhanced by this transaction. So with strong capital, strengthened liquidity and a clean balance sheet, we believe we too have established a fortress balance sheet that compares favorably against other financial institutions.

Now with that, let me turn it over to Jim, who will walk through the details of the results in total and of the businesses. Jim? It's all yours.

Thanks, JB. So let's turn to slide six, where I will walk through the fourth quarter and the full-year 2010 results.

Core income was almost $2.5 billion for the full year, as JB mentioned. That's up significantly from a loss of $5.8 billion a year ago. That certainly reflects our steps that we have taken throughout the year to transform the Company.

Core income was $533 million for the quarter and that was down slightly from a strong third quarter. Fourth quarter is typically our seasonally weakest but there were a few items impacting the quarter that I want to highlight.

First, our net interest income and our NIM were down slightly again this quarter. As we've discussed throughout the year, we continue to reposition the balance sheet. We are liquidating higher risk, higher-yielding legacy assets and replacing them with higher quality, lower risk but of course, lower yielding assets. We continue to have strong loan growth, but we will continue to see lower NIM as we migrate our balance sheet.

Our provision expense was higher. That reflected the strong loan growth in the quarter. We also had some items in the third quarter such as our reserve portfolio recovery, which certainly didn't repeat this quarter.

Controllable expenses were elevated this quarter. However, we did achieve our full year expense cost-cutting goals. Fourth quarter is typically the highest of the year due to year-end invoicing activity. We also had foreclosure remediation expenses this quarter and we had year-to-date adjustments for our equity-based compensation due to a revaluation at year-end.

Other non-interest expense was down due to lower rep and warranty expense this quarter and we'll talk about that in more detail later on in the presentation.

On a net income basis, we had $79 million of net income. That's versus $269 million in the prior quarter, obviously up significantly from a year ago. Impacting net income were the items we just discussed plus our decision to mark-to-market our Venezuela subsidiary and move that to discontinued operations. We will look to exit that businesses as soon as possible.

Now, it's important to note that much of that loss, about $94 million, is due to FX revaluations, and that's already reflected in our balance sheet. So therefore, equity will not be impacted by the flowing of that FX loss through our income statement.

Quickly regarding OID amortization, 2011 will be the final year of such large amortization expense. We will have about $1 billion of OID amortization this year and it will drop to $300 million in 2012.

As JB mentioned, our capital ratios remain strong. Tier 1 capital is at 15% and our Tier 1 common is now at 8.6% reflecting the MCP conversion at year-end.

Turning to slide seven, spend a second on our results by segment. We will go through each segment in more detail shortly, but here I wanted to provide a summary of a few of the items driving segment results.

Our North American auto business had another strong quarter. Our results for the full year were $2.3 billion, up over $700 million from a year ago. International auto remained profitable but was down from what was a very strong performance in the prior quarter. Our insurance business reflected strong investment portfolio realized gain results.

And then turning to mortgage, you will notice some changes here. Beginning this quarter we will now show mortgage operations in a little more detail than what we've shown you before. Given our strategic decision to keep our mortgage origination and servicing business, we thought it was important to show you more details on how that segment is performing. So we have broken it out here between origination and servicing, and our legacy portfolio.

Now, the legacy portfolio is -- it really consists of loans originated prior to 2009 as well as other non-core activities that are in run off.

Mortgage volumes were strong again this quarter but we did have some losses related to hedging of our MSR due to extreme rate and implied volatility movements during the quarter.

The loss in the legacy portfolio improved this quarter to $164 million due to lower repurchase reserve expenses versus the prior quarter. Needless to say, all of our segments have experienced a strong turnaround in 2010 compared to a year ago.

On asset quality on slide eight, we provide a combined view of our asset quality numbers. As evidenced by the metrics here, you can see that we made significant progress cleaning up the balance sheet. The first thing to point out is our ending loan balance was up quite a bit over the prior quarter. We are at $101 billion. That's up from $96 billion last quarter. And importantly, auto-related assets now comprise 86% of our loan portfolio.

Our 30-plus day delinquency rate and our net charge-off rates are down on a quarter-over-quarter and year-over-year basis. Of course our ratios are impacted by the growing loan balance or denominator and you can certainly see that in the ratios, but it's important to note that both our 30-plus day delinquent loan balances, nonperforming loan balances, as well as our net charge-offs are down on an absolute dollar basis as well.

Our overall allowance balance is down nearly $200 million reflecting the asset mix changes that I just discussed as we move to a higher quality mix.

Turning to slide nine, provide a summary of our largest segment, which is our North American Auto Finance segment. NAO earned a pretax income of $589 million this quarter. That's up slightly from the prior quarter. Net financing revenue was basically flat despite strong loan origination volume. Margins being impacted by the mix changes that I just discussed.

Other income was $47 million. That's up $24 million from the prior quarter. We did have a $900 million loan sale this quarter that was the last one under our forward flow agreements.

Provision expense within NAO was down $41 million. That reflects the improving credit quality and asset mix changes and of course that was partially offset by the strong loan growth as we began to build reserves as we originate the loans.

US originations for 2010 were almost $32 billion for the year. Now that's up 72% from 2009. This increase has been driven by a combination of stronger industry sales, higher penetration rates, and most importantly, growth of our standard or non-incentivized business.

Our emergence as a more diverse market-driven competitor has resulted in us seeing a broader application flow over the course of this year. While our GM and Chrysler channel applications have increased over 52% this year, our diversified channel, we've seen application increases of over 300%. Now, while the numbers of these applications are still modest overall, approximately 11% of our total applications, this growth demonstrates our strength and direction of our franchise.

In the fourth quarter, we originated $9.3 billion of new volume. This is up $1 billion from the prior quarter. This is our highest origination quarter since the beginning of 2008. Keep in mind in the first quarter 2008, SAAR was running at about 15 million units and now we are at 12 million to 13 million, so it speaks well to our results.

Now GM penetration was almost 50% and that's up from 34% in the prior quarter. Now it's important to note that subvented volume related to GM was only up slightly and our standard volume was up $900 million to $2.9 billion. Now this is a testament to our franchise value as dealers knew they could rely on us to handle significant year-end volume and holiday buying activity.

Chrysler penetration was down to 36% this quarter. That reflects lower manufacturer incentive programs. This penetration rate was not out of line with what we expected and obviously there can be some fluctuations based on the level and type of incentives that an OEM can offer at any point in time.

Finally, our lease, used car and nonprime origination volumes continued to grow modestly but steadily each quarter.

On slide 10, I want to touch briefly on our international auto business. You can see it earned $12 million this quarter. That is down from a strong prior quarter. Net revenue declined primarily driven by the impact of foreign exchange rates, as well as various items impacting us from our wind down operations.

We did have very strong originations for the quarter. China, Brazil, Germany, and Mexico were all very strong. Brazil was up over 100% for the year and China was up 97%. Now of course these strong and improving originations will impact us positively over time, but currently we are being affected by the repositioning. We've sold over 30 operations sold or wound down over 30 operations during the last two years alone.

On slide 11, I'll talk briefly about consumer auto trends. We show our overall, we had a tremendous rebound in credit quality throughout the year. Our performance is approaching more normalized levels. Excluding Nuvell, we had 30-plus day delinquency rate at 1.57% and our net credit loss was at 62 basis points.

We are benefiting from both frequency improvements as well as lower severity of losses and this is being assisted by the sustained trend of high used car prices.

Our liquidating developed portfolio continues to see positive credit trends as well. We are particularly focused on maximizing value in this portfolio as it winds down. And as JB mentioned, the auto asset class has proven itself to be one of the most stable, lowest risk consumer asset classes throughout the latest economic downturn.

On slide 12, we will touch quickly on our insurance business. This segment performed well again this quarter with results of $164 million. Our loss ratio and combined ratio improved again and we had strong realized gains in the investment portfolio that support this business.

It is a little challenging to compare written premiums on a quarter by quarter basis due to seasonality, but on a year-over-year basis, written premiums were up 15% and of course this will take time to flow through the income statement as we realize that income over the life of the contract.

Now, turning to slide 13, I will talk little bit about origination and servicing and mortgage. As I mentioned, we've changed the way we report the mortgage and we want to highlight our strategic focus on the agency origination and servicing business. We are currently the fifth largest servicer in the United States and the ResCap platform certainly plays an important role in helping us support this focus.

We reported another strong quarter of pretax income of $172 million. That brings us to over $900 million for the full year. Clearly we benefited this year through a strong refinancing market and good market technicals. Our gain on sale was strong again this quarter at $214 million. Other revenue was down due to the unusual high level of losses in our MSR hedges.

There was a sharp and volatile rise in the rate markets caused by some ineffectiveness in the hedge this quarter. Despite this though, our net servicing revenue remained positive at $125 million.

It's worth mentioning that it's difficult to look at the MSR at any particular point in time. We do see fluctuations in value at any quarter end. But over an extended period of time, we expect this asset and hedge to perform well. If you look at the third quarter, our hedge overperformed in the third quarter and it underperformed a little bit in the fourth quarter, so it all evens out over time.

Originations were strong again this quarter at $24 billion and I should note that as the mortgage rates spiked as the quarter progressed, we did see a drop-off in application volumes towards the end.

On slide 14, our legacy operations, we've broken out this segment in order to provide some additional transparency. As you know throughout the year we have taken deliberate and strategic actions to reduce the remaining risk associated with these legacy mortgage assets.

There are two primary buckets that we want to talk about here. First is the held for sale portfolio, which is held at ResCap, and the held for investment portfolio, which is held at Ally Bank. The held for sale portfolio has a carrying value of about $1.8 billion, gross carrying value, and it is marked at around $0.45 on the dollar.

Year-to-date, we have sold approximately $2.5 billion in UPB at a gain to book value of $358 million. This quarter we sold another $596 million UPB at a gain of $79 million. Now it is important to note that we are selling a broad spectrum of these assets. We're selling both performing and nonperforming loans as well as first and second lien assets.

The HFI portfolio has approximately $8 billion of gross carry value and has a reserve associated with it of about $524 million. If you recall, we cleaned up this portfolio in December 2009 and since that time, performance of the portfolio has been in line with our expectations. Total assets in this segment are down to $12.5 billion. This compares to $16 billion last quarter and almost $19 billion a year ago.

Turning to slide 15, we will begin our discussion of mortgage repurchase reserves. We've made significant progress mitigating this exposure through settlements with counterparties as well as building our loss reserves. As you know, we've settled with both Fannie Mae and Freddie Mac and this significantly limits our remaining exposure with the GSEs.

We've also settled with five counterparties relating to whole loan asset sales and if you look at the chart on the upper right, you can see our reserve balance roll forward presented over the last five quarters. We started this quarter with $1.1 billion in reserves and we ended the quarter at $830 million in reserves. So if you were to adjust for the $462 million settlement with Fannie Mae -- and you can see that in the loss experience line item, it is part of that number -- our reserve balance actually grew this quarter by $164 million.

Given our GSE settlements, the majority of our remaining reserves relate to potential non-GSE related claims.

In the middle chart, you can see our outstanding claims this quarter are flat to the prior quarter. Our GSE claims have obviously come down while our monoline and other has increased slightly. I would note that we have reviewed the majority of the outstanding claims and we believe our monoline and other claims, the vast majority are ineligible for repurchase.

As always, we will continue to monitor claims activity very closely. Of course we will defend our rights and we will adjust reserves as necessary.

On slide 16, I'll spend a second talking about a little bit more detail about the Frannie and Freddie settlements. We settled Freddie in the first quarter of 2010 and it covers all ResCap serviced loans sold prior to January 1, 2009. We settled Fannie Mae in the fourth quarter. The Fannie settlement was even more comprehensive than Freddie. It covered all ResCap serviced loans sold prior to June 30 of 2010. In addition, it covered private label MBS securities purchased by Fannie Mae.

It is important to note that our settlements with both Fannie and Freddie cover existing and future claims activity, and this does differentiate us from other settlements that have been announced in the marketplace as they have not covered -- some have not covered future claims.

Now our settlements with the agencies do not cover Ally Bank loans. These were not part of the settlement discussions. Many of these loans were sold during and after we implemented significant quality control initiatives several years ago and our underwriting processes, and we certainly hold reserves against this population and the methodology is the same that we used to determine the settlement population.

You can see from the table at the bottom of this page that we had a total of $382 billion original UPB of loans that were covered by these settlements. $191 million relate to the 2004 to 2008 vintages, and many consider these the most problematic vintages.

Our total GSE loss experience from 2004 to 2008 was $1.42 billion. This includes both repurchase activity as well as the settlement amounts that were paid. So our loss as a percentage of original UPB was approximately 74 basis points.

Now on slide 17, I would like to spend a minute talking about private label securitizations. As many in the industry have commented, this is a complex issue and there are several important and notable differences between GSE sales and private label securitizations. So one cannot necessarily draw conclusions on future private label exposure based on historical GSE experience.

I would like to focus on a few of the differences that are highlighted on the bullets at the top of the page. First, our collateral was segregated into different programs based on risk characteristics. You can see that in the chart at the bottom of the page. It was very clear to investors the types of loans that they were buying and the risk profile associated with each loan.

Underwriting exceptions were disclosed in the offering materials. Breaches must be proven to be material and adverse before a claim can be made. And reps and warranties in these transactions were not as comprehensive as the GSE transactions and fraud standards were often different. In addition, there are many logistical hurdles, costs, and a very extended timeline associated with this issue.

Now, we did stop issuing private label securities back in 2007 and so from 2005 to 2007, we issued a total of $172 billion in securities, $26 billion were wrapped by monoline insurers and $146 billion were not. Outside of monoline claims, which we've already talked about, we haven't seen much if any activity related to private label securities.

We will continue to monitor this exposure carefully. We will vigorously defend our contractual rights and interests of our shareholders.

On slide 18, I'll talk a little bit about our leading position in loan modifications as well as an update on our foreclosure remediation process. Since the industry's foreclosure issues were identified last year, a lot of clarification has been provided to the marketplace on this issue and we have certainly spent a lot of time educating our constituents about our overall philosophy on home preservation.

Ally is very focused on keeping borrowers in their homes as much as possible. It's not only good for the customers, but it is 7 times more expensive for us to foreclose rather than modify or work out the loan. We have completed more than 600,000 workouts since 2008 and this comprises about 22% of the loans serviced during that period.

While competitive data is often difficult to get to, our internal analysis shows that this percentage, 22%, is likely industry leading in this area.

Another indication of our home preservation focus is our leadership in the HAMP program. The December HAMP report just came out and you can see in this chart on the upper right that our conversion rate is 73%. That clearly differentiates us from other large servicers in the marketplace. And also we have the fewest aged trials that have not been converted to permanent status.

Now turning to an update on the foreclosure process, of the 25,000 foreclosure affidavits that were identified for review at the end of the third quarter, all but about 2500 have been remediated and relate to activity in three states. Those remaining we will certainly move forward in a timely manner once we receive clarification and guidance from those states on how they want us to proceed.

On the lower right, we provided some statistics for your reference related to foreclosures. 21% of our foreclosures are non-owner occupied and of those that are owner-occupied, 31% are vacant at the time of foreclosure. And most importantly as we said before, our review continues to show no evidence of inappropriate foreclosures to date.

Now I'll turn it back to JB.

Thanks, Jim. Turning to slide 19, our third key franchise in addition to auto finance and mortgage origination and servicing is our deposit franchise at Ally Bank. The momentum and brand recognition we achieved in such a short period since we launched the Ally Bank brand is pretty remarkable. Consumers have really appreciated the approach. Our brand strategy is simple. Talk straight, do right, and be obviously better has helped accelerate our reach for new customers.

We strive for excellence in interacting with our customers and try to differentiate the customer experience. You have 24/7 access to a live human being. We have one of the best websites with easy navigation, and there are no hidden fees and penalties. We have received numerous accolades through the past year or so from some major publications, but the best recognition we receive is the customer growth and retention that we are experiencing in our deposit franchise.

And while we offer competitive rates, we have maintained a steady rate of deposit growth without offering any rate advantage against the broader market. Pricing on our products are largely middle of the pack.

Now turning to slide number 20, you can see some of the data about our deposit performance. The chart in the upper left shows how our CD book continues to extend in maturity while rates migrate lower. Consumer demand has been strong for two-year and five-year CDs.

The chart on the upper right shows CD retention where we maintain rates in the 80% plus range, which we believe is well above industry average. Again, our focus on growth and retention of our customer base.

The chart on the lower left shows the total deposit book of $39 billion. The growth is stable and consistent and being driven by retail consumers in the US and Canada.

Turning to slide 21, which covers liquidity, we continue to maintain a very conservative liquidity posture with total parent company available liquidity of nearly $24 billion. In essence, we have proactively pre-funded many of the unsecured maturities that we will face over the next two years. In fact, meeting all upcoming debt maturities will be very manageable even with limited required unsecured issuance over the next two years.

That being said, we will continue to look for ways to be opportunistically -- to be opportunistic and prudently access the markets. We will continue to be active issuers in the ABS markets and had a very successful transaction to kick start the new year at Ally Bank.

The progress we achieved in 2010 and the investor work we have conducted gives us confidence in the quality of our ABS issuance platforms. We will continue to work with the banks on our large credit facilities, ensuring we keep significant liquidity available and on hand to support the needs of our customers.

Now turning to capital on slide 22, you can see where we concluded the year after the MCP conversion we previously discussed. Our tangible common equity now stands at nearly $13 billion with a TCE ratio of 7.6%. The Tier 1 common ratio at 8.6% also compares favorably. We are confident the capital base will allow us to continue driving robust asset growth.

Now before we conclude and take Q&A, I would like to turn it over to Michael Carpenter, our Chief Executive Officer, for some concluding comments. Mike?

Thank you. Let me just summarize on page 23, at the beginning of 2010, we told you our investors that we had six objectives that we wanted to accomplish and we certainly have achieved those objectives. We told you we wanted to strengthen, grow, and diversify our auto franchise. By being dealer focused and a good partner to the OEMs, we have done that successfully, although I don't expect 50% shares going forward necessarily.

Secondly, we said we would de-risk the mortgage business, which we have done through asset sales and being very proactive on rep and warrant settlements with the GSEs.

Thirdly, we said we would access the capital markets. We talked about $36 billion and obviously at lower costs during the course of the year. Fourthly, we said we would grow our deposit base and strengthen Ally Bank and the momentum of the franchise JB just talked about briefly.

Fifthly, we said we'd get our expenses down, which we've done over $650 million of expense reduction. And lastly, we said and very importantly, we would make sure that the regulators, the Fed and the FDIC, thought we were a bank holding company in high esteem, and we've made good progress in that regard as well.

So we feel very good about 2010. We achieved all of our strategic objectives. We were profitable in each quarter in each entity and we reestablished Ally as the preeminent auto finance company.

We did diminish legacy mortgage risk and most importantly towards the end of the year, we achieved a conversion of MCP which remedies substantially the problems with our capital structure that we've had historically.

So as we go into 2011, it's all about paying back the US Treasury. It's all about improving our cost of funds, and it's all about making our auto franchise even stronger, while exploiting the opportunities of the mortgage market and building the bank.

This is a Company that's gone through a tremendous transformation in the last couple of years and I think it's an interesting business school study in many ways. I'm not going to go into it at great length, but we have transitioned from being a captive in which 70%, 80% of our business came as a result of incentives from GM. To a market-driven Company where today 20% of our business comes from incentives from GM. We are increasingly a market-driven competitor.

Secondly, we made an enormous transition from being a finance company and having run two-thirds of GE Capital at one time, I am completely aware of how different running a finance company is from a bank holding company and it requires a whole set of disciplines and approaches that are quite different. I am pleased to say that I believe that in both of these very important transitions we are very close to having declared success on both of them.

So with that, we are very optimistic about 2011. We have a lot to do, we always seem to have a lot to do, and let me throw it open to questions.

Marcela, we are now ready to take calls. Please inform our callers how to queue up.

(Operator Instructions). Eric Selle.

Good morning. Thanks a lot for this detail on the rep and warranty side. If we are looking at slide 17, there's $59 billion of unpaid balance. How much of that reduction from the $146 billion is due to default and refi?

We have not disclosed that amount. Obviously there is some portion of that that is default-related, but we haven't disclosed that at this point.

Okay, then just generally speaking, I get a lot of questions on this of the GM exclusivity agreement and I guess I get questions of what was the status? What has changed and currently is in place? And then what will change in 2013? Maybe I can preface it to my interpretation of it is that now there is exclusive subjective price, thus if a customer comes in and GMAC doesn't have the best price out there in the retail side that they can go to banks. So a lot of the exclusivity in my belief has gone away and there's not much of a change in '13, but if you could characterize that or correct me, I sure would appreciate it.

Let me comment. This is Mike. The GM exclusivity agreement applies only to subvented business and that means that when it comes to floor planning, retail, leasing, insurance, auction products, insurance products, etc., etc., we are competing heads-up in the marketplace and the dealer is our customer. It's not an OEM decision.

So the subvented business, GM's subvented business is about 20% of our new volume last year in 2010. The contract essentially gave us 100% exclusivity in 2010. In 2011, that goes down to 75% and then 50% and then 25%.

But let me be very clear, when I said we have transitioned from a captive to a market-driven Company, that is exactly what I mean. Today we are not dependent on that agreement for our success in the marketplace and two to three years from now, it will be a complete nonissue.

Now, I just want to make one other comment, which is we had an extraordinary fourth quarter with GM. We did 50% market share in the fourth quarter. Now the reason for that is the degree of service that we provided to the dealers with a flood of volume. Literally in the last seven days of the quarter, we had 93,000 applications from the combination of GM and Chrysler and that is about equivalent to a normal month. And I will tell you the rest of the industry was unable to process that volume.

So I don't expect that share level to sustain going forward. I fully expect that GM is going to diversify sources of financing, but as I said a moment ago, it is only in the subvented business that we have any kind of contract. At the same time, we are going to be diversifying our financing.

Just to give you an interesting statistic, in the fourth quarter, non-GM and Chrysler was 20% of our business, up a factor of 4 from the first quarter, just to give you an idea of the momentum of that part of our business. So GM is an important partner. We are very committed to a relationship and we are going to compete heads up with everybody else.

Just to be clear, and I really appreciate that, because you are solving a lot of -- you're answering a lot of calls that I get. But the 100% to 25% is of that 20%, so it's not obviously of your total business. So basically you had 100% of the subvention and that's 20% in 2010. So the hits to that over the next three years are very minor in the scheme of things?

Correct, because we are growing -- and we believe there's obviously growth in SAAR. We believe we are going to grow share in general, and so we believe that even if GM were to choose to diversify fully in the context of the contract, that we still have a growth opportunity.

And then in regards to that, you guys are grabbing retail share, a steady increase I guess it was on slide four. Who are you guys grabbing share from? Is that credit unions, banks, other captive FinCos? In light of the decline in the subvention business, who is that coming out of?

It's basically everybody. I think the thing to understand and this is hard -- it's easy for me to say, but it's hard to understand unless you actually get in the field. We are a dealer-centric Company, and believe it or not, the dealers would rather do business with us than they would with Tom, Dick and Harry. And the reasons for that are several fold. One is because in the financial crisis, we kept them in business while the other banks walked away. I'm talking wholesale. That's why our wholesale share is so high. It's not for any other reason. It's because the other banks walked in the crisis.

And secondly, we have a series of incentive programs that encourage dealers to do as much business with us as possible. There was an interesting stat on the chart earlier on which I would like to reinforce. Those of you who follow financials know that Wells Fargo is always talking about how many products they sell to a customer. Well, a one-year CD and a two-year CD, that's two products by their definition.

By our definition, we're talking about distinct products and we sell four of those to every one of our dealers. So an insurance product and a wholesale product and a retail product, etc. So we are embedded in these dealer relationships. They would rather do business with us than Joe Blow's corner bank.

That is great color, because you anticipated my question. And then on allowance, it did come down I believe by $180 million sequentially. Is that going to grow in 2011? And I know it should grow with overall sales but as a percentage of assets, is that going to grow or is the consumer trend kind of continuing to improve? And I will jump off the call. I really appreciate your time.

We would say the consumer trend continues to improve. Offsetting that is certainly the growth in our loan portfolio. If you remember, last year we were selling quite a bit of loans into our forward flow sales and now we have a balance sheet approach, so as we build that loan book, we will have to book reserves against that.

Eric, you've got to teach your auto analysts why captives don't make sense.

No comment, no comment.

Great. Thanks, Eric.

Kirk Ludtke.

Good morning. On slide nine, there's some really helpful information here. Particularly this breakdown at the bottom right-hand corner about -- which shows how the US consumer originations break down. Could you talk a little bit more about where these as a percentage of total originations where these -- certain of these categories might be like lease, used, nonprime? Do you have target levels for those or anything you could share with us?

No, I mean obviously internally we have certain targets, but it's really market-driven in our case and we are very focused on -- I think relatively uniquely, we are crossing the whole credit spectrum and crossing the whole product line spectrum. That is one of the reasons that dealers do business with us.

So as the market shifts, for example in the last six months, it's moved more towards leasing than it was. It's moved more towards subprime that it was, and we've moved with it. And so we don't have specific targets in that regard.

We have said previously as we went through the economic cycle we definitely were cautious on using liquidity. And so we've said we have overshot as far as some of the percentages on nonprime and used and other. So we have been trying to grow that segment in a very prudent and cautious way.

Okay, thank you. That's helpful. Do you have any sense that GM Financial is starting to pursue wholesale business?

No, haven't seen any evidence of that, and so in the subprime we do 75% to their 25%, which is kind of where it was before they bought it.

Fantastic, and then switching to slide 15, which is the mortgage repurchase, one of the mortgage repurchase slides, I noticed that the new claims in the post-2008 vintage increased sequentially. This must be all GSE, right? I'm just curious, do you have any thoughts on why that would be increasing?

Yes. Well, I believe if you look at the box above, you can see the Other line item increase. During 2010, we sold some whole loans out of our non-core portfolio that we talked about. And those contracts had, I think, a six-month period for them to exercise their rights for any putbacks for bridges or reps and warranties. So that was up at the end of the year, so we saw a lot of -- a couple counterparties throw a lot of stuff back right at the end of the year.

We've been looking through it. We certainly don't think there's much, if any, that we would have to pay out on, but that's the cause for the increase.

Okay. And then it sounds like the reserve expense is going to drop pretty dramatically now going forward. Is that a fair assumption, given that most of this $830 million is attributable to non-GSE and that seems like that's got quite a long time to play out?

Well, first thing I would say is we certainly believe our reserves are appropriate at the end of the year. I'm not going to give any forward-looking statements now where the expense will be but as we've said, we have settled with our two largest counterparties, Fannie and Freddie. So I'll just leave it at that.

Okay, then I just wanted to clarify. I think Michael mentioned that the conversion that the Treasury has already done has put you in good -- certainly better -- you're in better shape in terms of your capital structure.

Do you think you are good to go in terms of your capital structure in terms of a --?

Take a look at our capital structure relative to other banks, including those that describe their balance sheet as fortressed, okay? And you will see our capital ratios are actually very, very strong.

Having said that, I think our biggest strategic issue is that we need to get our cost of funds down. So we are going to be continuing to work on the right-hand side of the balance sheet throughout '11 and '12. That's a long-term project for us.

And there's a lot of pieces to that puzzle, right? It gets to be investment grade, it gets -- our capital ratios are still at levels that are reflective of a distressed company as opposed to an established bank. We need to get our deposit ratio up.

There are a whole bunch of different things we've got to do. But if you look at our ratios today, we are an extremely well-capitalized bank, but we need to get our cost of funds down. That's our game over the next year or so.

Great, thank you very much.

Doug Karson, Bank of America.

Great, guys. Thanks for all the comments. If I could just kind of follow up on Kirk's question on slide 23, the MCP conversion clears the path for taxpayer repayment. Really all eyes are on a potential IPO, and I know it's hard to kind of discuss on the call, but have you accomplished all the major steps needed for this kind of potential IPO?

And if you can kind of help us frame, is this in the next three months; is this in the next year? Is this still on the table? Just kind of help us think about that.

Well, first of all, we obviously can't comment on IPO/non-IPO. That we can't do. However, the comment I would make is we believe that we have accomplished the business objectives that we set out to accomplish in 2010, and that sets the stage for us to begin being very focused on how do we repay Treasury?

By the way, for those like BofA that have been in the TARP program, you know that management has a great motivation to get Treasury out ASAP.

Agreed. Okay, so that makes sense.

The rest you can figure out.

You got it. Thank you for that. Separately, the settlement with Fannie Mae versus Freddie Mac, it seemed to me when that number came out for Fannie it was a little lower than I expected because I believe Fannie had more loans sold to it relative to Freddie.

So was the performance of those loans improving relative to where they were a year ago? If you can kind of help us understand the success of that settlement.

This is Tom. There were a number of differences in those two settlements. You are on the right track, though. The Fannie Mae settlement covered a broader group of loans, to be quite honest, and there were quality differences between those loans, so I think we did get a fair deal for both parties and that's the most I can say at this point.

We don't agree got -- we didn't get an easy deal. It took nine months to negotiate that transaction and there was a lot of pushing and [throwing], so I think it was a toughly fought negotiation that we weren't a pushover and they weren't a pushover.

I am not implying that Fannie kind of rolled over on it. Just seemed the numbers were better than I expected. Kind of on that theme, the non-GSE risk, the whole market is feeling less worried about that, still a big concern to companies that have big non-GSE situations. But do you guys feel better about it now than you did three months ago?

I think with respect to the non-GSE risk, I think it has consistently been a very complex challenge for a private label investor to actually successfully make a claim. The reps and warranties that went into those transactions were different. The disclosure was different. Personally, I have done this a long time, so I was never particularly concerned about it. However, we are constantly monitoring it and if the situation changes, we will take the appropriate reserves as we see fit.

Of course it received market notice over the last three months but it's been something that we've been focused on for a while, so --

That's good. Last and final question and I will turn it over to somebody else. The whole ResCap saga that seemed to have cleared up over the last few years did close to $24 billion in originations in Q4, which was a great number. Just for kind of people looking at this that aren't as close to the mortgage side, are things kind of largely fixed now in the mortgage/ResCap legacy business? Do you have everything where you want it?

Saga is clearly the right choice of words. I often think of Homer's Odyssey, actually. What I would say about the business is the business is largely a correspondence business and we have a number of initiatives in place to really transform the business from being predominantly correspondence to also include retail and wholesale.

When I came into this in 2008, those two businesses not only for us but for the industry were a disaster. The key was to really rebuild what we were doing that was effective and that was correspondent. We provided tens of billions of funding to homeowners across America and we were critical in providing warehouse funding. Those were the two businesses that needed to be tightened up and we did that and now the team is working very aggressively to work on the retail and wholesale business. And we intend to do that with the same discipline and success that we have done it with wholesale -- pardon me, with correspondent and warehouse.

Okay, great. Thanks for the question answered.

Operator, I think we've got time for one more call.

Jim Henry, Automotive News.

Can you flesh out a little bit how are you going about cultivating the non-GM and non-Chrysler business? Is that -- are you approaching other OEMs? Are you doing it through dealers? Are you doing it through dealers with whom you are already affiliated, or are you signing up entirely new dealers?

All of the above. It begins with many of our dealers we have a very close relationship with have other stores with other OEMs, so that's one area of focus. We do have a number of strategic relationships with OEMs. Saab, Fiat are examples. And I would anticipate as the Company's financial condition as we get to be investment grade, that that will accelerate.

There are a number of brands that I'm thinking of Kia and Ford particularly where we've grown very dramatically even without a relationship with -- a strategic relationship with the OEM. The fact that we have been more aggressive in the used business, which was never a focus for the Company, has given us a bag of tricks that dealers find appealing. Anything they do with us in other brands is additive to our Dealer Rewards program.

So there is -- it is a multipronged approach and I would say dealer track is another piece of it for example where we entered into a relationship with Dealer Track earlier in the year. But the thing I would say is the foundation of all of this is the notion of we are in and of the industry. We are embedded in the industry. We are known to understand the industry. We don't just do prime retail loans. That's not who we are.

And so we have tremendous credibility in the marketplace. It's just that as normally as a captive for completely understandable reasons, there was never any focus on building those other relationships or building the used business. And so we have found that the dealer community is very receptive because we are a very well known, very committed player in this market place.

And one last thing to get you to state the obvious, which is sometimes a hard thing to do, what's the benefit of the lower cost of funds? Is that so that you can pass it on to consumers so that you can improve your margins both maybe only stating the obvious but it bears asking, I think.

Well, it's a great question. I think long term we will be much more competitive both in terms of dealer floorplan and in terms of retail then we would be -- would have been if we were a captive. That's the important point. Today we are a junk credit, Jim, but we have a cost of funds advantage over Ford Motor Credit of 50 basis today.

If you look at our plan two or three years from now, that cost advantage will be 200 basis points, 300 basis points potentially as we become investment grade, we get the right capital structure, we get more deposits, and essentially we will be untouchable in that environment.

If you are a dealer, you can be confident that we will be one of the most competitive players out there as well as being one of the most knowledgeable. And if you are an OEM partner, you know that you are partnered with the low-cost provider and you are going to be able to be as competitive as you can be with your subvented business or anything else that you want to do. No OEM captive can ever get there.

And the silver bullet in that regard that gets the most attention is deposits, but what I hear you saying is it's not just deposits (multiple speakers)

It's the fact that you can operate a bank with leverage and we've seen the movie of what happens when a manufacturer with the operating leverage that a manufacturer has, has a finance company that's $100 billion on its balance sheet. It's formula for disaster, right? So this is the winning formula and I will tell you my view of the world is you look forward three or four years and you're going to see an industry where a bank-owned company is providing financing with strong strategic partners with OEMs is going to be much more the model than the captive. The captive is yesterday's model. It's not cost-effective long-term.

And by the way, most of the analysts that follow -- most of the auto analysts that follow -- it's interesting -- you talk to these Wall Street firms that we are going to have on the phone today, their auto analysts don't understand us. Their financial services analysts do understand it. It's fascinating.

Yes, well, I would say it's not original to the auto industry. Everybody always fights the last war.

That's true. Thank you for your questions.

Okay, great, that's all the time we have this morning. If you have additional questions, please free to reach out to investor relations. Thanks for joining us this morning and thanks for your interest in Ally. Thank you, Marcella.

You're welcome. Ladies and gentlemen, this concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.