Ally Financial Inc (ALLY) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen and welcome to the second-quarter Ally -- second-quarter 2011 Ally Financial, Incorporated earnings conference call. My name is Anne and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes.

At this time all participants are in listen-only mode. (Operator Instructions). We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed, sir.

Thanks, Anne, and thank you everyone for joining us this morning as we review Ally Financial's second-quarter 2011 results. You can find the presentation we will walk through 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 Senior Executive Vice President of Finance and Corporate Planning, Jeff Brown, and our CFO, Jim Mackey, will cover the second-quarter results. After the presentation portion of the call we will have some time set aside for Q&A.

To help in answering your questions this morning we also have with us Michael Carpenter, our CEO; Tom Marano, the Head of our Mortgage Operations; and Bill Muir, who runs the Auto business.

Now I would like to turn the call over to J.B.

Thanks, Michael. Good morning and thank you for joining the call and your interest in Ally. For those of you that have the earnings deck that Michael Brown referenced, I will start on slide number three, which contains a summary of our second-quarter results. Jim Mackey, our Chief Financial Officer, will then take you through a more detailed review of each of the businesses and other key topics.

Ally posted core pretax income of $466 million in the second quarter, up $38 million from prior-quarter. Net income was $113 million. This marks the sixth straight quarter of profitability for Ally, largely driven by strong results in the global automotive services business.

Ally maintained its leading position as the top US auto lender in the second quarter. Auto-related earning asset growth is up nearly $17 billion on a year-over-year basis, while assets in total are up only $2 billion. We continue to position the balance sheet and high-quality, low-loss and predictable asset.

Legacy mortgage assets continue to decline, which allows us to be more efficient in capital deployment, and continue supporting our primary growth initiatives in auto finance lending.

Credit trends continue to be extremely favorable in the auto book, and of course, Jim will cover more of those statistics in just a few minutes.

Our relationships with dealers and OEM partners continues to grow. We have the addition of the Maserati business in North America this quarter. A key goal for us has been to diversify our book and to prove to more dealers and other OEMs the strength of our auto-focused model.

Just last week we saw much improved results from the recent J.D. Power survey in how we are working with our dealers. As you know, the strength of our franchise centers on our relationship with the dealers, so we have relentless focus in this space and are committed to excelling in this area.

Ally Bank continues to demonstrate strong momentum. Consumer trends clearly support the direct banking platform. And total deposits across the Company grew $1.6 billion in the second quarter, with the lion's share coming from the Ally Bank platform.

The bank carries a total capital ratio of almost 19%, one of the safest banks in the US today. And during the quarter Ally Bank launched several new products, which we think will further help accelerate growth.

First, Ally Bank now offers IRA products. Second, our Ally Perks program, which is a debit rewards program. Third, the four-year Raise Your Rate CD, and fourth, Popmoney, an electronic person-to-person payment service.

We think Ally Bank is a tremendous bright spot for the Company. Inside the Company we have aligned key management capability towards continuing to build out the bank platform in a safe and effective manner. And we continue to focus on a unique and customer-oriented brand strategy.

Ally Financial's profile continued to strengthen again in the quarter. Parent liquidity increased by about $2.7 billion from prior quarter. We continue to be very active, opportunistic, and frankly, prudent in our funding issuance programs. We had over $12 billion in new funding transactions this quarter, and issuance is occurring at even more cost effective levels.

And we have been very clear that lowering cost of funds is a key priority. We saw our cost of funds decline by 35 basis points compared to the first quarter. This led to significant NIM, or net interest margin, expansion in the quarter. We know we still have a lot of work to do in this space, but we also see this as one of the future opportunities for our Company. Between more cost effective issuance and more assets being funded inside of the bank, we believe this will lead to future revenue expansion and, frankly, allows us to be even more competitive in auto lending.

Capital levels remain strong with a Tier 1 common ratio of 8.4%. And while Basel III's full implementation is years away, we believe we are well positioned to meet the new standards.

So in summary, we continue to make progress on transforming and strengthening the Company. The auto finance business continues to be a leader in the space, and I will touch on more of that in just a minute. The Ally Bank franchise continues to grow and offer consumers more products and services with our customer-friendly approach.

Finally, with respect to the mortgage business, we continue to be diligent in monitoring and addressing risk whenever possible. And Jim will touch on more of that during the segment discussion.

Now turning to slide number four, I mentioned earlier that Ally maintained its leading position as the top auto lender in the US, and on slide number four you can see more detail on our market position. We are pleased to lead both banks and captives in total marketshare as ranked by Experian Automotive, and here is what is behind the ranking.

In the upper-right chart you can see that Ally has the number one position in new vehicle financing, again, leading the captives and the banks. Moving to the lower-left chart, we mentioned earlier in the year that one area we would target for growth would be used vehicle financing. And you can see we continue to make progress in that category with the number two spot.

Lastly, in the lower-right chart, our lease volume is strong, and we have just under 10% of the marketshare, which is up over 150% from last year. So the franchise continues to perform well even in a highly competitive market for auto assets. We have some unique advantages in the industry with our geographic footprint, infrastructure, experience, and the priority we place on helping both the dealer and OEM be successful.

Now, with that, let me turn it over to Jim Mackey to take you through the details of the quarter.

Great, thanks, J.B. Let's turn to slide 5, where I will walk through the second-quarter results and hit some of the highlights for the quarter. We posted another strong quarter, our sixth straight quarter of profitability. We had core pretax income of $466 million. This is up from $428 million in the prior-quarter and down from $727 million a year ago.

In talking about some of the drivers between periods let's focus first on quarter-over-quarter. Driving the difference was a higher net financing revenue that J.B. mentioned, lower provision expense. And all of this was partially offset by higher noninterest expense, primarily in insurance and legacy mortgage segments. I will go into each one of these in more detail here in a second.

On a year-over-year basis the decline is due to a variety of items, all of which we have been discussing in previous quarters. We have been repositioning the balance sheet over the last year. We have been selling a large number of assets which have resulted in gains. And we have had strong gains on used vehicles as we right-sized our lease portfolio. And we also had the expiration of our auto forward flow sale program, which when we sold assets accelerated income through the income statement.

Looking at some of the line items specifically, net financing revenue was $965 million. This is down slightly year-over-year, but up over first quarter. As J.B. mentioned, our NIM was very strong at 2.5%. This is down 25 bips from a year ago, but up 25 basis points from the first quarter.

The year-over-year decline is due to -- a year-over-year decline in net financing revenue and yield is due to the balance sheet repositioning that we have been talking about. This is a runoff in sale of higher yielding, but higher risk legacy assets. And the quarter-over-quarter improvement is due to almost $5 billion in average earning assets growth. And margin is also seeing the benefit of lower cost of funds, as we have had progress in migrating more assets to the bank, where we can fund these assets more efficiently.

Going forward you may see some downward pressure in margin in the near term, as we continue to runoff the higher yielding legacy assets. And we certainly have fewer leases maturing, resulting in lower remarketing gains. But over the long run we expect NIM to expand due to the continued cost of funds improvement.

Other revenue was $1.1 billion, which is up modestly from last quarter and down $250 million from a year ago. While the linked quarter variance was modest there were several notable items to focus on. First, we recorded a gain of $121 million related to the resolution of outstanding amounts owed to us under the previous forward flow agreement. Certain of these agreements had loan performance assumptions that were built into the transactions.

Since performance was favorable compared to the original projections we were due additional payments in the future. These remaining future payments were finalized this quarter and it resulted in a gain. Partially offsetting the gain were various mark-to-market adjustments on our mortgage servicing asset and related hedges, as well as marks on various balance sheet economic hedges.

Provision expense is lower this quarter as a result of improved credit quality across the auto and mortgage portfolio. This was partially offset by an increase in earning assets, primarily in auto, where we booked credit provision on day one as we originate the loans.

Controllable expenses remained in line as we continue to manage costs. And our noninterest expense increased due to increased mortgage rep and warranty expense, and elevated insurance claims activity due to the severe weather this spring. I will talk about each one of these in more detail shortly.

Net income was $113 million. This is down from $146 million in the second quarter and $565 million a year ago. In addition to all of the drivers that I just discussed, the other notable item is in the tax line item where we -- in the first quarter we had a Canadian tax valuation reserve release and that did not repeat this quarter.

Finally, one last comment regarding the balance sheet. Total assets grew by $5 billion, and this is $2 billion growth year-over-year. And this is a result of strong auto loan originations, as well as the building of cash balances ahead of the upcoming debt maturities over the next year or so.

Turning to slide 6, just a few brief comments on the overall segment results, and I will hit on more detail as I go into each segment. But global automotive services produced another solid quarter, which was partially impacted due to the weather-related losses in insurance. But the underlying trends in the business remain strong, and we had improving credit performance across the segment.

Regarding mortgage, the origination and servicing volumes remained steady in the quarter versus last quarter; however, earnings were slightly down due to lower margins.

On the legacy portfolio the results remain steady, but were impacted by mortgage repurchase expenses.

In corporate and other, this is where you will see a fair amount of the funding cost benefit that we've been talking about and the impact of the gain related to the forward flow agreement.

So turning to slide 7 on the North American auto finance business, it had pretax income of $559 million in the quarter. This is up from the prior quarter; however, down from a year ago.

Asset growth continues to be the story with total earning assets of over $90 billion. This is an increase of almost $17 billion from a year ago. And we have not seen this level since before the crisis.

Debt financing revenue improved quarter-over-quarter and year-over-year. This is driven by asset growth in both retail and dealer floor plan, stable margins on new originations, and favorable net lease revenue resulting from continued strong used car values.

In the other revenue line item, this is where you see the impact of the reduced gain on sale compared to last year due to the expiration of the forward flow agreement. And remember the final forward flow true-up that I just mentioned is in the corporate and other segment, not in this segment.

Credit provision is up slightly quarter-over-quarter and down year-over-year. This is impacted by a couple of offsetting factors. First, we had growth in our average earning assets, which naturally drives up provision expense as we record the provision at time of origination. This is being partially offset by the improving asset quality mix in the portfolio and overall improving credit performance trends.

So on auto originations in this segment on the slide 8, you can see they were $9.5 billion this quarter. This is up $1.5 billion or 18% year-over-year. This growth reflects the focus and success in diversifying our origination mix by growing diversified new, lease and used origination volumes. For example, our used volume is up 74% year-over-year and our lease volume is up 155% year-over-year.

Now as I mentioned last quarter, our fourth-quarter 2010 and first-quarter 2011 GM retail originations and penetration rates were abnormally high due to various marketing programs that drove especially high volumes during these periods.

Our GM subvented business benefited from APR incentives and our GM standard business benefited from certain cash rebate programs. These were available to all lenders, but we garnered the lion's share of that volume. As a result, retail penetration rates at GM have returned to more normalized levels in the low to mid 30% range.

Our volumes will fluctuate somewhat quarter-to-quarter based on timing and size of manufactured marketing programs. Our overall growth trajectory is positive, and we have been able to maintain attractive margins despite increased competition.

Regarding floorplan assets, penetration rates remain strong at 79% for GM and 68% for Chrysler. Despite slightly lower floor plan penetration levels with both OEMs, our average outstanding balances grew to $25 billion. This is up $1.5 billion quarter-over-quarter and $4 billion year-over-year. This growth as a result of first adding more diversified dealers and higher dealer inventory levels.

Regarding international auto finance, you can see this on slide 9. It had another strong quarter, $71 million of pretax income. This is up $31 million from last quarter and down $24 million year-over-year.

We continue to see asset growth in our key markets, which is helping modestly improve financing revenue. Provision expense improved over last quarter and was in-line with a year ago. We had built reserves last quarter.

Origination volume was strong, $2.3 billion in total originations. Notably Germany was up 70%. We benefited substantially from a successful Opel subvention program. And in China we benefited from higher GM marketshare due to less Japanese competition. And also the first quarter was negatively impacted by the Chinese New Year holiday and a tightening of the Chinese Central Bank.

Overall, after streamlining this business in 2009 and into 2010, we are finally seeing asset growth, solid quarterly results, and we certainly feel good about the direction of this business.

In insurance, on slide 10, you can see we earned $73 million this quarter, which is down from the prior quarter and a year ago. As I mentioned earlier, we experienced unprecedented weather-related losses due to the unusually damaging spring weather throughout parts of the United States. In fact, April was Ally's worst single month ever, with over $42 million in losses due primarily to hail and tornadoes. This year's tornado season had over 1,000 tornadoes, which is double the amount in a normal year. All this and the high losses drove the combined ratio over 100% this quarter.

Now we will see some benefit later in the year, as we have reached our reinsurance caps that we put in place to manage risk. And these caps will result in fewer insurance losses in the third and fourth quarter.

Our investment income, again, was steady this quarter. We earned $71 million despite the volatile capital market conditions. And our written premiums increased to $429 million in the quarter. This is an $18 million increase driven by GM Protection Plan Vehicle Service contracts, as well as increased gas insurance at DP&S, where we saw the highest premium levels in almost 3 years.

Now turning to mortgage for a minute, we will start on slide 11, discussing our origination and servicing business. We had another profitable quarter in this segment with pretax income of $47 million. This is down from the first quarter, and certainly down from very strong results we had a year ago.

Margins were down somewhat this quarter. That was due to two things. First, we had increased competition. You have an overall smaller mortgage market and so that drives margins down.

We also chose to change the mix of our originations. We had less FHA and VA loans that we originated and focused more on Fannie and Freddie production, and those tend to have lower margins.

Our loan reduction this quarter was $12.6 billion. This is up slightly from the first quarter, but obviously down from a year ago as the overall mortgage market shrank.

We have made good progress in diversifying our origination channels. Non-core fund and originations were 17% of total originations this quarter. And this is up from around 11% a year ago, as we continue to build out our virtual retail channel and our wholesale channels.

Net servicing revenue was down slightly from the first quarter. This is due to lower servicing fees as we sold some excess servicing assets last quarter. And we had normal mark-to-market adjustments on the MSR asset.

We did submit our consent order response to the Federal Reserve and other regulators on July 12. And compliance with this order is estimated to be approximately $30 million to $35 million per quarter for the remainder of the year.

Touching quickly on the legacy portfolio on slide 12, you can see this had pretax loss of $174 million. And this is primarily the result of $184 million in mortgage repurchase expense that I will discuss in more detail in just a second.

Assets continue to decline steadily. We ended the quarter with a $11.3 billion in assets. This is down $500 million. The held for sale portfolio remains marked at about $0.45 on the dollar, with about $1.7 billion in carry value remaining. We did sell $71 million of net UPB out of this portfolio during the quarter.

Our held for investment portfolio at Ally Bank declined $267 million this quarter, and we ended with $7.4 billion in assets. Performance has stabilized on the held for investment portfolio, and delinquencies have remained in-line with expectations. Our allowance coverage increased during the quarter, while provision expense continues to improve and was only $38 million. Over time we expect these portfolios to continue to liquidate at a measured pace.

Turning to slide 13, and before I get into more details on repurchase activity and reserves, I thought it might be helpful just to spend a minute or two giving some context by reiterating a few points about our servicing philosophy.

We believe that we have distinguished ourselves positively as a servicer in the industry. We have a philosophy of trying to keep customers in their homes whenever possible, and are a big supporter of the Home Preservation Outreach programs.

In fact, since 2008 we provided relief to over 700,000 customers, or 26% of the loans that we serviced during that time. We completed over 2 times as many loan modifications as foreclosures. Not only are loan modifications in the best interest of homeowners, but they are also -- it is also more expensive for a servicer to foreclose versus modify.

As you can see in the chart on the top right, our performance in the HAMP program is best-in-class. We have the highest percentage of modifications per servicing volume. And we are also best-in-class in addressing third-party escalations. The HAMP program has a goal of resolving escalations in under 30 days, and as you can see in the chart on the bottom-right, that we're the only servicer achieving that goal.

Regarding PLS portfolio performance, you can see that on the chart on the bottom-left where we show the 90 plus day delinquency statistics. Our 90 plus day delinquencies for PLS are second only to Wells Fargo and among the biggest servicers, and we are much better than the industry average.

So on slide 14, regarding mortgage repurchase reserves, specifically you can see that we had $184 million in expense that I mentioned. Much of this related to the payment of approximately $150 million to securitization trust related to our ongoing review of mortgage insurance rescissions. We had mentioned that previously in our S-1 filing.

This resulted in $120 million charge for the quarter. The rest of the expense was related to some modest losses across monoline, whole loan and GSE claims. The reserve balance ended the quarter essentially flat to the last three quarters at $829 million.

Now since we have been repurchasing loans to various degrees -- varying degrees over the last few quarters, most of which have been reserved for, the fact that the ending reserve balance has remained steady is an indication that we have, in essence, been building reserve coverage. As previously discussed, the majority of the reserve is held primarily for potential non-GSE claims.

The chart on the bottom-left shows the claim activity for the quarter. New claims were $382 million. The majority of this activity this quarter related to monolines. The GSE activity has remained modest, given the majority of our GSE exposure was covered by the previous settlements.

Now keep in mind that we operate a large, ongoing originations and servicing business, and there will always be some level of repurchase activity with the GSEs related to newer production.

Overall our year-to-date claims are down from 2009 and 2010, given the settlements with the GSEs and other counterparties. Now you could continue to see periodic spikes, depending on activity with any one particular counterparty. For example, as we have discussed previously, some counterparties, such as the monolines, will indiscriminately make claims request that result in high rejection rates and related rescission requests.

This phenomenon is illustrated in the chart on the bottom-right. Of the $1.1 billion in total claims outstanding the vast majority are from the monolines. You can see that in the purple portion of the stacked bars.

Now we have added another stacked bar to this chart. This is the one that has the dark and light grey colors. That shows the magnitude of the claims that have been rejected and a rescissions request has been submitted to the counterparty.

So for 2Q, for example, while $1.1 billion in claims are outstanding, over 70%, or $785 million, have been rejected, and the remainder of the claims are still under review. And to the extent we agree with those claims they would be expensed or covered by our reserves in future periods.

Now before I leave mortgage, just a few comments regarding legacy mortgage risks on slide 15. Just to remind you, we have been very proactive in addressing this legacy risk. We reduced our mortgage balance sheet from $140 billion in 2006 to $31 billion today. We have marked some of the riskier portions of our assets down to about $0.45 on the dollar, where they sit today. And we have been aggressively dealing with remaining mortgage repurchase risk over the last year or two.

As you know, we have reached comprehensive settlements with both Fannie and Freddie, which cover past, present and future claims under their covered pools. And we have also settled with five major counterparties.

And when it comes to addressing the foreclosure affidavit issue we have been as aggressive and proactive as possible. We have consistently been a leader in helping homeowners stay in their homes. And we have also been a leader in helping work through -- work with our various constituents to improve overall mortgage servicing processes.

As it relates to private-label risk, and some of the headlines that have been out there, there are variety of factors to consider. Keep in mind reps and warranties and PLS were different than the GSEs. And certainly the disclosure around the collateral was very different. We segregated collateral into various programs, specifically to get a better indication of the risk underlying the assets being purchased.

So when looking at legacy PLS one really has to distinguish it from both the GSE experience, as well as experience of other originators and servicers across the industry.

Quickly on slide 16, a few comments regarding deposits. As J.B. mentioned earlier, we added nearly $1.6 billion in deposits, the majority of which were retail deposits at Ally Bank, where accounts grew over 850,000 during the quarter. Our brand recognition is continuing to expand and our direct banking model is benefiting from a shift in customer preference. And as J.B. mentioned, we have expanded our deposit products suite and that is helping drive our growth trajectory.

Early response rates to the various products that we have introduced this quarter have been strong. And our CD retention rates remain high at 88%. And our overall deposit rates continue to decline, helping cost of funds, and while our average maturity of our CD book has grown to over 25 months.

Regarding liquidity on slide 17, as we mentioned before, we maintain a conservative liquidity posture, especially as we look to pre-fund our large unsecured debt maturities that we have through 2012, but also to support the asset growth that we are having.

Total parent company liquidity ended the quarter at almost $25 billion. This is up from $22 billion last quarter. This compares to the $16.7 billion on unsecured debt maturities that we have through 2012.

In addition, we also have $12.2 billion of available liquidity at the Ally Bank level to support continued asset growth at this subsidiary. We stayed active in the capital markets in the quarter, issuing $1.5 billion in unsecured debt, along with $6.3 billion of asset backed securities across various asset classes and markets.

We also executed a $1.3 billion loan for -- auto loan portfolio sale. And we will continue to look at asset sales from time to time as we use this as a funding and balance sheet management tool.

On the credit facility side we added $3 billion of new revolving credit capacity. And a large portion of this was put in place to support originations internationally.

On capital, on slide 18, we remain among the highest in the industry and virtually unchanged from last quarter, despite the asset growth. Ratios were slightly lower, only 1 basis point due to higher risk-weighted assets resulting from the asset growth. Tier 1 capital remained at 14.6% and Tier 1 common at 8.4%. These ratios are particularly notable given that our net charge-off rate of our loan portfolio is less than 80 basis points per annum.

As J.B. mentioned, we are well positioned to achieve Basel III capital requirements in advance of their proposed timelines. And on a pro forma basis our Tier 1 common ratio is 10.8% on a fully converted basis.

So while I conclude here on asset quality, slide 19 and 20, make a few comments, the trend continues to move in a positive direction as it has for several quarters now. Simply put, our higher-quality loan production is exceeding the runoff of our higher-risk legacy portfolios. The mix towards pristine credit on a growing asset base is driving improved credit quality numbers.

We ended the quarter with a loan balance of almost $110 billion, which is up from both last quarter and the second quarter of last year. Our 30 plus day delinquencies, nonperforming loans and net charge-offs all continued their downward trend.

Provision expense is also down $62 million from the last quarter, and down $167 million from a year ago. And we continue to maintain allowance balances that are still very strong relative the level of nonperforming loans and charge-offs that we are experiencing.

Regarding the auto business specifically -- you can see this on slide 20 -- our credit quality continues to improve here as well. Our 30 plus day delinquencies ended the quarter at 148 basis points. Now this is up 6 basis points from the first quarter, but it is down 151 basis points from a year ago. And it is certainly not unusual to see a slight uptick in delinquencies in the second quarter of the year, which is primarily a seasonal impact more than anything else.

Actual credit losses saw a significant reduction this quarter to 41 basis points. This is down 64 basis points from a year ago. This is driven by both improvement in frequency and severity of loss.

And we continue to be pleased with the performance of our Nuvell subprime portfolio as we continue to liquidate it. It is quickly becoming a nonstory here, as losses were down 48% from last quarter, and the remaining assets are at $1.7 billion.

Overall, the credit quality of our auto portfolio remains strong. This is certainly a characteristic of the auto asset class, as it is one of the most stable and low-risk consumer asset classes out there.

While it is not on the page, I would like to make one comment on our commercial portfolio; it is performing well. And year-to-date losses on that $37 billion book of business is running at less than 10 basis points per annum.

So with that, I will turn it back to J.B. for some concluding remarks.

Thanks, Jim. I am just going to refer to slide number 21. Just a few final points about the quarter. First, we continue to see solid trends in the global automotive services business. We are seeing growth in our earning asset base, as origination levels have been strong in the first half of this year. And we are optimistic they will continue in the second half as well.

Second, the mortgage balance sheet is stabilized, and we continue to manage risk as appropriate. Third, Ally Bank continues to gain momentum and has expanded its product offerings and customer base. Fourth, capital and liquidity remain strong and support future growth.

Now our priorities and our outlook are really on five key areas for the rest of this year. First, being continuing to expand the balance sheet with earnings, auto assets.

Number two, leveraging the strength of our auto franchise to grow in both the used and diversified segment, while continuing to do what we do best with our dealer network and our retail originations as well.

Number three, continuing to diligently address legacy mortgage issues. Four, improving on the cost of funds as we transform the business. And, five, and a key priority of all of management and all, really, the entire Company, is repaying the US taxpayer in a very timely manner.

So with that, Mike Carpenter, Jim Mackey, myself are happy to take questions. We've got Tom Marano and Bill Muir available as well. And Michael Brown, I guess, I will turn it back to you.

Thanks, Anne. We are ready to take calls from investors at this point. If you can inform our callers how to queue up.

(Operator Instructions). Doug Karson, Bank of America Merrill Lynch.

I have a few quick questions. I guess I will relate to slide 13. The GMAC mortgage 90 plus day delinquency rate of 7.2, it seems so much lower than the peer group. And, frankly, lower than I had in my model. I am wondering does that relate to the ongoing portfolio, excluding the legacy book, or could you just give some more color around that?

This is the entire service book from 2005 to 2007. And I will tell you it in the work we have done with various servicers as part of the DOJ settlement, it also was surprising to me to see how much better we had done. But these numbers are accurate. And as you can see, they are broken out by the various product types.

The reason they are so much better is that the effort and focus on modifications and sticking within the timelines as measured by Fannie, Freddie, HUD statistics for GMAC mortgage has been something we have been aggressively focused on since early 2008.

How big is that book from 2005 to 2007? So I'm looking at the S-1, it said $62.8 billion as of 1Q. In the call you mentioned something about $31 billion. I know I am confused with that. If you could help clear that up for me.

2004 to 2007 we issued a total of $226 billion, private labeled securities. This statistic is coming from LPS, that is we why used their data.

But the unpaid principal balance, it says $62.8 billion, if I am reading that right. Am I clear with that? I guess we could talk about that off-line, but the numbers (multiple speakers).

No, you're right.

So you issued $220 billion and we are down to $62.8 billion.

That is approximately right.

And the 2005 to 2007 originations would be one year fewer, so I could think there is like $50 billion outstanding that is governing that 7.2?

It is approximately 73, if you use the date range you're referring to.

Okay, [70].

Again, we can help you with that off-line.

Okay. I just will bring this up. I know you won't be able to answer much about it, but some of the non-earnings related topics that are floating around, the IPO and returning taxpayer money, the market has been terrible over the last couple of months. Is there any kind of window where you guys are thinking of re-challenging the market on that IPO?

Obviously, we can't say much about the IPO, but we are -- we're working through the normal process with the SEC, and when we're done with that we will see where we are.

Okay. That's fair. I think that is it for me. Thank you.

Kirk Ludtke, Ally Financial.

Good morning everyone.

I didn't realize you joined us. I thought you were with CRT.

I have a couple of different questions. One is with respect to the wholesale penetration rates you did, it looks like they did decline a little bit sequentially. I am just curious if maybe you could talk about -- and I know there's a lot going on in the marketplace, and I'm just curious if you could give us an update on the competitive situation in the wholesale market. And then I have a couple other follow-ups.

Bill, do you want to respond to that?

Sure. After pretty much everybody leaving the market at the depths of the crisis of 2008, 2009, everybody is back, and so we are starting from a peak level. If you talk in terms of like GM penetration of being around 80%, it has now just dipped below 79%.

So as we kind of fend off competition, I would say we have lost a few dealers at both the GM and the Chrysler channel, given our very large shares. But we have made up for it. Actually, up to this point in time we have more than made up for it in terms of picking up non-GM, non-Chrysler dealers, so that our total dealer count is actually maintained and actually are outstandings have grown.

So it is little bit of a mix shift, and we're having to give up a little bit from the traditional GM and Chrysler markets in terms of price defense, but we are more than making up for it with the diversified dealers. So so far, so good.

Then with respect to the pretax income comparisons, I guess there is some -- the decline year-over-year in North America it looks like was attributable to the absence of gains in the whole loan forward flow sales, and the decline in gains on the off-lease vehicle terminations. And then on the international side, it looks like you had absence of gains on derivatives and some payroll tax loans.

I am just wondering, and I know that you don't break all that stuff out, but is there a sense you could just give us a feel for how much all that was going to be in terms of a headwind in the second half of the year, year-over-year?

Internationally you have to keep in mind that over the last year or two we have been selling businesses in various countries that weren't strategic, so there has been a lot of noise for sure.

But I think you're reaching a level now where assets are starting to grow again, so you're sort of at numbers now that start to be -- look more like the run rate.

And domestically you have sort of the same thing. You're starting to see -- I think the big headwind going forward and domestically is really the lack of a lease disposal gains -- you know, you have less vehicles coming off of lease. Our lease book has sort of stabilized here at current levels, and you're certainly not going to see gains at that level.

So I think if you start looking at a quarter-over-quarter trends they are starting to be more in-line with where you're going to see going forward. And looking at year-over-year comparisons is not as relevant.

And going forward you have offsets, I guess, as well. You certainly have SAAR, which dipped down in the middle part of this year due to the Japanese disruption and other economic factors. And, I think, most industry experts would say SAARs should be going back up.

And, as well as new products come online, and as Japanese ramp back up you would expect to see more OEM marketing programs, which we will get the benefit of as well. And as well as our used and diversified business continues to grow. So I think I would focus you more on near-term quarters rather than year-over-year comparisons.

It sounds like -- I know you don't provide guidance, but it sounds like you're -- directionally you would say the sequential comparisons will be positive in the core auto business?

We haven't provided any guidance, but I would just leave you with some of the qualitative comments I just made.

Then just to clarify, the early settlement of the [lost whole back] provision, that was about $110 million in the quarter?

$121 million.

Okay, thank you very much.

That would have been income that we would have gotten over the period of the next couple of years.

Okay, thank you.

Miguel Crivelli, Barclays Capital.

I just was wondering if you guys could elaborate on the expense associated with the rescission of mortgage insurance during this quarter? I was trying to get a better understanding on what is that related to and how to think about it on a going forward basis in a sense of whether we should expect continued expenses on that line?

And that was my first question. My second question was on what sort of trends you are seeing in terms of putbacks from the monolines? There was a spike in this quarter in new claims, so I was wondering if you could elaborate what you expect going forward? Thank you.

Sure. First of all, this particular situation was not the result of any particular claim being made. We have done ongoing reviews of our legacy portfolio and in essence in the process of those reviews, we determined that, given that the mortgage insurance had been rescinded, that we felt it was an obligation of ours to purchase those loans out of the trust. We think we have this largely boxed. We think it is pretty much a one-time event.

As far as just claims that come in in general, again, as we have said before they are lumpy. There are times when the claims are much lower. It tends to alternate between the various monolines. And as we get the claims we review them and we make every effort to rescind them where appropriate -- we're fairly successful at that -- and then we move forward.

I don't really feel that there is anything on this one-time event that you can use to project forward for future claims. It just -- it was an isolated situation.

And just one last quick follow-up. You mentioned that out of the total claims roughly 70% have been rejected by you. Historically what is the success rate you have when you reject a claim?

Again, it varies between the monolines, but it can be anywhere between 70% and north of 80%, depending upon the monoline. Some of them are more organized than others, and we just -- we do our best to review each and every loan. And if we have to buy it back, we honor our obligation, but if we don't, we're not going to buy the loan back.

I think it is important to understand there are dramatically different behaviors among the various parties here, which is in dealing with GSEs where we have in large part settled, we and they have very similar information.

And there is a negotiation, but the magnitude of their claims is not kind of off the charts relative to the end result, because we and they have the same data and motivation.

In the case of the monolines you have a different situation going on. Which is their motivation is sell everything they possibly can over the transom because -- you're all analysts -- if you look at their net worth they don't have any net worth except for these claims. So their incentive is to maximize the number of claims and therefore the kind of screen of is it reasonable doesn't -- they don't care about that.

So the fact that we reject 80% of those claims, and that by and large stands up, I think is indicative of a completely nonselective process. So what we were trying to show you on page 14, just to go back to that page again, is that we have -- of the $1.079 billion -- I don't know the numbers off hand, but probably 75% of the claims are monoline. But they are qualitatively -- quantitatively very, very different in the likely outcome. And you can see that in the reject rate that is shown there. I think importantly the need to understand why it is, they're just throwing everything over the transom they can possibly throw.

Great, understood. Many thanks.

Bruce Harting.

It sounds like you are indicating that the margin still has a fair amount of room to go. Are you able to add any more specificity to that for coming quarters from the 2.5 second-quarter result?

Then on page -- given that it is coming from both shifting assets into the bank, as well as more low-cost funding issuance.

Then just the other question I had was on the really excellent decline on page 20. It looks like delinquencies in the top graph on page 20 flattened out 1Q to 2Q. You had that really sharp drop in credit losses in the bottom graph. Can you give us any sense of a normalized credit loss number for second half? Thanks.

Then, I guess if I could come any comment you might want to make on the AG, or maybe you can't really comment on that. Jamie Dimon's conference call a few weeks ago, he mentioned that if he could resolve this immediately, he would.

I am just wondering what is the best strategy there? Is it to just get that overhang out of the way or could this be a long process in trying to negotiate that? Thanks very much.

It is J.B. I will start with NIM, and then we can let Jim and Tommy address the other question. So I think the near-term reality is NIM will be under some pressure. And while we're making great progress on cost of funds, we are -- see that as an opportunity going forward. And you should hold us to the standard that cost of funds will continue to come down.

I think the reality is on the asset side there is tremendous competition in auto space, and so there will be some near-term pressure as I would expect asset yields will decline faster then we will be able to get the cost of funds down over the next few quarters.

I think long term we continue -- we think asset yields will eventually bounce and will accelerate faster than our cost of funds increasing whenever we eventually get to a rising rate environment. So near-term pressure, long-term, we're optimistic, but we will continue chipping away from all the different fronts on the cost of funds angle. It is just trying to balance how competitive things are on the asset side.

On credit quality I think we're approaching more normalized levels. These levels are very good. So I don't think you could expect dramatic improvement going forward like you have seen over the last year. That would be unrealistic.

So I think I would be thinking of these levels more where they are going to be going forward. You also -- and some of that will depend on asset mix. As you know, we have been improving the mix.

And on delinquency -- I mean, on net losses, keep in mind it is both frequency and severity. Used car prices are at all-time highs. And so as you -- if you have to repossess a car and liquidate it that is certainly helping your severity. And we have seen no sign of moderation yet, but if it were to moderate that could impact it a little bit.

So we are not providing specific guidance, but I don't see anything dramatically changing from here.

With respect to the DOJ settlement talks, we obviously can't comment in significant detail on those talks. But what I would say is there is a very broad group of dedicated men and women here who are focusing on trying to get to resolution with the DOJ and the AGs. We have been very active with the AGs independently since the very beginning of the robo-signing incident.

And the debate has really moved to establishing national service standards and facilitating mods. As you can see from our performance numbers in modifications, this is actually one of our real strong suits as a large servicer. This is also borne out in the HAMP statistics and in recent J.D. Power ratings.

In essence we would like to get this behind us, but we would like to get a deal that is fair. We would like to see national servicing standards that apply to all of the servicers. And we would like to see as many modifications that are sustainable and affordable done as possible.

All that said, as we have differentiated ourselves, we also want a fair deal -- a fair deal for us and a fair deal for the consumers, and one that moves the entire industry pass this particular phase of the mortgage crisis.

I would like to add to Tom's comment just a little bit, because I think this is important. Whether you're talking about a mortgage settlement or you're talking about the BofA settlement, both of which would be on your mind, the principal point of the chart on page 13 is to say to you that all the servicers are not created equal. And we have historically, under Tom's leadership, specifically at his direction we have emphasized mortgage modification over the last several years as a priority.

In addition of the comments on page 13, we don't see forced place insurance profit from that. We don't do deficiency judgments. There are a lot of things that differentiate us materially.

And so with regard to the settlement, I would reiterate Tom's point, that we would like to settle, but we actually think the case against us is weak, and we're not going to settle at any price.

Thank you.

Doug Karson, Bank of America - Merrill Lynch.

I just have a follow-up on slide 13, as I thought about it. I think you may have just kind of touched on it. But can we take the 7.2 and think about what ultimately gets put back or charged-off? Because that 7.2 of a $70 billion portfolio only leaves $5 billion that is delinquent. And a small proportion of that typically gets charged off. Is there something different in the numbers, given that a lot of those got converted, or is that kind of we could use the math that way?

I think where you are headed as in the right direction. You've got the modifications in here, and that could be part of the differences from your numbers. But I do think this is actually something that would be more effective for us to get with your numbers and our numbers side-by-side, so we are comparing exactly the same populations, and exactly the same balances.

So years, balances and also product type. I am not sure if you've got the product type in your numbers broken out in the same way. If you would like to arrange for a call to do that separately, we can assist you with that. Most of this data is publicly available.

Great, all right, thanks. We will do that later.

Just to add to Tom's point also. We say on this slide that 26% of our serviced loans during that period have already been modified. We don't -- we are not able to show you competitive data, because it is an estimate as opposed to a public source. But we think that if you take the other major competitors that that number is typically 5%, 6%, 7%. So we are not 10% better or 20% better, we are 3, 4 or 5 times better. You've got to factor that into your thoughts also.

The other thing you might want to consider which sets us apart from some of the others and could be playing through these numbers, is our 12-month redefault rate on HAMP modifications is approximately 21%. Our 12-month redefault rate on first lien modifications is 36% that are non-HAMP modifications. And our 12-month redefault rate on non-HAMP second lien mods is approximately 28%. So that is another part of the component of this whole pie here, which we will be glad to go into with you in more detail.

Okay, great. Thanks, guys, for your time.

I think you got it, but back to your original question, the 31 that I quoted in my prepared remarks, that is the on-balance sheet mortgage -- mortgage operations balance sheet. And the 70 that we're talking about related to the this chart on 13 is a service number, not an on-balance sheet number.

So total unit.

Got it. Okay, perfect. Thank you.

Ladies and gentlemen, there being no further questions, that concludes our question-and-answer session. I would now like to turn the call over to Mr. Michael Brown for closing remarks.

Okay, great. Thanks, Anne. If you guys have additional questions, please feel free to reach out to Investor Relations. Thanks for joining us this morning and for your interest in Ally. Thank you, Anne.