Ally Financial Inc (ALLY) 2011 Q3 法說會逐字稿

Operator: Good day, ladies and gentlemen, and welcome to the (technical difficulties) Ally Financial Inc. 2011 earnings conference call. My name is Veronica and I will be your operator for today. At this time, all participants are in a listen-only mode. (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's call, Mr. Michael Brown, Executive Director of Investor Relations. Please proceed.

Thanks, Veronica, and thank you, everyone, for joining us as we review Ally Financial's third-quarter 2011 results. You can find the presentation we will 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 today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language.

This morning our CEO, Michael Carpenter, Senior Executive Vice President of Finance and Corporate Planning, Jeff Brown, and our CFO, Jim Mackey will cover the third-quarter results. After the presentation portion of the call, we'll have some time set aside for Q&A. To help answer your questions, we also have with us Tom Marano, the head of our Mortgage Operations and Bill Muir, head of our Auto business.

Now I would like to turn the call over to .

Great. Thanks, Michael. Good morning and thank you for joining us. We have a lot to cover and recognize there is a lot on your mind, so let's get right into the material starting on slide number three.

Ally generated core pre-tax income of $102 million; however, a net loss of $210 million this quarter. Our Global Automotive Services business posted a strong quarter but was unfortunately overshadowed by underperformance in the MSR assets net of hedge which had a negative pretax impact of $471 million. While we are classifying the driver as hedging ineffectiveness, specifically we did not have enough vol protection on and would have needed more long-dated swaptions to have hedged the severe decline in interest rates and curve flattening we observed during the quarter.

We are clearly not happy with the financial performance in our Mortgage Business this quarter. We know these results are disappointing and frankly not acceptable and we are responding with actions that I'll discuss shortly.

Now, with respect to the auto franchise we continue to maintain the number one market position in auto finance. Consumer originations increased on both a quarter-over-quarter and year-over-year basis and we continue building momentum in used, lease, and diversified business which are all key components of our growth strategy.

Ally Bank retail deposits continued to demonstrate steady growth in new accounts and very strong retention. And in fact, we had our best quarter this year with approximately $1.7 billion in net growth and I'll say we are already off to a strong start in the fourth quarter.

A no fee proposition and consumer acceptance of the direct bank channel continued to drive growth in our brand. Our No Nonsense, Just People Sense advertising campaign at Ally Bank is also being accepted quite well in helping promote our name in unique market positions versus traditional banks.

Liquidity and capital levels remain strong and we are well-positioned to support future balance sheet growth. And as it relates to the parent liquidity position, which is approximately $26 billion at the end of the quarter, we can fully fund the Company including projected growth in our auto operations for 20 months even without additional unsecured debt issuance.

However our plan is to continue to opportunistically access the market pending market conditions. And total capital is well above the 15% covenant with the Federal Reserve which I should note expires as of December 31 this year. And as we have stated, we plan to gradually deploy this capital as the balance sheet continues to grow in automotive finance receivables.

Now turning to slide number four, and Jim is going to take you through the segment results in detail in just a few minutes, let me start regarding auto. Global Automotive Services produced another solid quarter across the board with $747 million in pretax income which was up both quarter over quarter and year over year. Despite significant increases in competition, our unique dealer-focused business model remains strong and we are seeing good asset growth and robust credit performance.

Enhancing our credit analytics has been a key priority of the Company since converting to a bank holding company, and it is paying dividends as we have significantly improved our intelligence and underwriting and servicing all credit spectrums and improving legacy loan performance. Our auto results were impacted somewhat this quarter by normalization of lease gain revenue that we have been messaging would be a headwind against our results simply as less vehicles are coming off of lease.

Jim has a few more details on this dynamic during the segment review and will provide some perspective as the amount of leases that are expected to be terminated for the next four quarters, so you can factor that into your estimates.

Now regarding mortgage, Origination and Servicing was impacted primarily by the MSR performance and the hedged dynamics I discussed earlier. Legacy portfolio at ResCap held up well with favorable quarter-over-quarter and year-over-year comparisons due to lower mortgage repurchase expenses. And, again, despite some good core trends our results and total are not acceptable and we are taking action to better position the Company for profitable results.

So to further that point on our focus on profitability and the deployment of our capital toward our auto finance franchise, let's turn to slide number five.

We are announcing this morning actions to reduce our footprint in correspondent mortgage channels which will have a pretty significant impact on our overall mortgage origination levels. There are a number of factors leading to this decision and, obviously, we have seen several other market participants reach similar conclusions, given changes in the mortgage lending industry and environment today.

Clearly today's profitability and the outlook for profitability of the mortgage business in the future are very different than just a year ago. We are seeing reduced profitability due to increased costs resulting from regulatory requirements being imposed on an already low margin business. Basel III, which most banks are implementing ahead of schedule, makes the MSR asset less attractive to own and in Ally's case the MSR is already too large, relative to our balance sheet and the resulting earnings volatility is more than we believe is prudent.

We know there is a possibility for changes in the servicing model or a migration to fee-for-service business in the future, which we think makes a lot of sense, but we cannot be confident that change will come quickly. Therefore scaling back Originations is a must and reducing our least profitable Originations is the way to go.

We will be focused on maintaining correspondent relationships with clients that produce the highest quality collateral, that use our full-service capabilities, and that produce the most attractive prepayment and credit characteristics. And we'll also continue with our focus in the retail and broker channels.

Now switching gears, let's turn to slide number six. We are seeing very strong performance in the core business fundamentals. At the bottom of the slide you can see the year-over-year change in three major areas. First, on a year-to-date 2011 versus 2010 basis, US consumer auto originations are up nearly $9 billion or roughly 40%. Second, Ally Bank retail deposits are up nearly $6 billion over last year and, third, the net credit loss ratio continues to decline.

I should note, however, the credit loss trend does also have an adverse impact to the margins. But we think you really have to take the margin and the loss trend together. Higher-yielding and legacy assets are running off, but the balance sheet continues to get ever more pristine from a credit loss perspective each quarter. So on a risk-adjusted basis returns are pretty good.

And given our high cost of funds, we know we can't simply be doing all top-tier business; and as we have mentioned in the past, we have started gradually moving a little further down the credit curve. Obviously the evolution of our auto credit strategy has been by design. We needed to be much better with our underwriting intelligence before we could gradually begin getting back into a broader array of products. But results are clearly showing we have good command of the credit trends and we are much better servicers than just a year ago.

Moving to slide number seven, we have highlighted again our statistics and market position in automotive lending. We maintain a dominant number one position in the total market, again despite an increasingly competitive environment. And we recognize we are not always the low-cost provider versus many other banks and captives that's out there, but the strength of our model remains our world-class platform in constant focus on serving our dealer network and OEM partners. And we are unique in our total offering. Most credit spectrums new, used, lease, smart auction, multiple, OEMs, large and small dealer franchises -- it's obviously not an easily replicated or de novo model for someone to simply create.

Now turning to slide number eight, before Jim goes through the financial details let me make a few comments about our macro outlook. As I mentioned before, competition is growing in the auto finance space and we will do all we can to defend and grow our number one position. And the reality is that the competition has driven us to be better.

With the curve as flat as it is combined with competition getting ever more aggressive and try to capture business, returns particularly on the balance sheet will be under pressure. Fortunately, our primary asset, auto, is really unmatched in terms of credit performance.

Capital markets volatility is something we cannot control and we are fortunate to have taken aggressive action sourcing liquidity in 2010 and 2011 that have us in a much better position to run the business as usual even under a sustained environment of market stress.

Mortgage continues to be a cloud and we are not ignoring this, and are focused on continuing to derisk the business as evidenced in another step forward today with our announcement on scaling back correspondent. I know both Jim and Mike will go into more details as we get further into the deck and cover some of the hot topics on your mind.

Our philosophy right now is simply control what we can and by that I mean keep doing all we can for our dealers, keep diversifying and growing, be active and prudent in our diversified funding strategy, aggressively manage risk and make business decisions when and where returns aren't acceptable, and focus on lowering the cost of funds to keep pace with the declines in asset yields. And further we know we have work to do on expense levels in general.

So with that I'm going to turn it over to Jim to take you through the details.

Great, thanks JB. Let's turn to slide nine and I will walk through the third-quarter results in a little more detail. As JB mentioned, the pretax and income was $102 million this is down from $466 million in the prior quarter and $635 million a year ago. That's driven by a few notable items and those are all highlighted at the bottom of the page and I will walk through each one of them for you.

Net financing revenue excluding OID was $815 million down quarter over quarter and year over year. And NIM was also down about 50 basis points over the same periods. As we just discussed, most of this decline is driven by the dynamics in our lease book right now. Because we scaled back leasing during the financial crisis a few years ago, we now have fewer leases coming due and, therefore, our lease remarketing gains are dropping. And you can see our lease remarketing gains drop $90 million quarter over quarter, which obviously flows through the margin.

Also when we ramped back up following the disruption, the credit quality of the new originations are migrating to a lower yielding, higher quality book and you can see our lease financing revenue also dropped. In addition to these lease impacts, our NIM was also somewhat affected by the continued runoff of our other higher yielding legacy assets as we continue to work out of those portfolios.

The flat yield curve will continue to pressure the NIM over the near term; however the long-term NIM should expand due to continued cost of fund improvement trends. Total other revenue excluding OID was $601 million was down significantly quarter over quarter and year over year. The main driver is the MSR valuation that JB discussed just a second ago.

Keep in mind that the market is projecting pre pays to increase significantly. And this is due to the possible large government-sponsored initiatives that have been in the press and, of course, if this occurs we are well-positioned to benefit through higher origination volumes in our retail channel. And while we can't predict the future, we could also benefit if higher levels of prepayments don't materialize as we could get some of the economics back through the mark on the MSR asset.

Provision for loan losses was $49 million and that was relatively flat quarter over quarter as our coverage ratios are holding pretty steady.

Regarding controllable expenses, we remain diligent in managing our cost base and notably the significant decline this quarter is primarily due to changes in compensation and benefit accruals which we have highlighted at the bottom of the page. And finally, non-interest expense declined significantly due to lower mortgage repurchase expense and lower weather-related losses in the insurance business.

Before I get into a more detailed description of the segment results, let's take a look at slide 10 which shows some of the longer-term drivers impacting our earnings. On the top left you can see cost of funds continues to decline as we migrate assets to the bank and take advantage of deposits and other cost-efficient funding. And on the top right you can see that OID expense drops dramatically next year which will help our bottom line results, causing our core income concept to effectively converge with net income as we move through 2012.

And on the bottom left, you can see over the last six quarters our earnings have benefited from the historically high used car values as leases have matured. But since we cut back on leasing significantly during the financial crisis as we just mentioned, we are now seeing fewer leases coming due and therefore fewer lease disposal gains over the coming quarters. And on the bottom right, as always, the legacy mortgage portfolio continues to impact our results as this segment has continued to work out.

Moving to slide 11, let's talk a little bit about our North American auto finance business. Our NAO business earned pretax income of $551 million in the third quarter, which is essentially flat over last quarter and last year. Excluding the impact of the lease termination gains, pretax income would have been up 21% quarter over quarter due to lower provision and non-interest expense.

Net financing revenue declined $123 million over last quarter and $45 million over a year ago, again largely driven by the impacts of the lease portfolio that we've been discussing. Credit provision expense of $25 million was favorable to both periods, driven by improvements in performance especially in our riskier assets such as the Nuvell portfolio which is in run off.

One of the strengths of our NAO business is the ability to generate attractive earning assets. You can see we are up 17% year over year. Now we did have a slight quarter-over-quarter decline in total assets and this is driven by typical seasonal factors in our commercial book as model year inventory transitions, and I'll talk more about that in just a second.

So, turning to slide 12, we concluded some additional details on these business metrics. The chart on the top left, you can see US retail auto originations were up $10 billion this quarter, our second highest production since 2008. We are up $1.7 billion or 21% year over year. Growth is being driven by used, which was up 94%, and lease, which is up 74%. And this certainly demonstrates our strong value proposition to dealers.

On the top right, the chart highlights our success and our diversification strategy over the last few years. For example, you can see our used as a percentage of originations has been growing while our reliance on subvented volume has been reduced.

On the bottom left, our consumer serviced assets grew to almost $75 billion, which is up almost $2 billion quarter over quarter and over $7 billion from a year ago. And on the bottom right, to highlight the commercial trend that I mentioned earlier, you can see assets were over $30 billion for the quarter which is up, close to $1 billion year over year, however down quarter over quarter. And as I mentioned the quarterly decline is due to typical seasonal patterns at this point in the year where production slows down and dealers clear out their prior-year model inventory.

So if you look at third-party inventory data sources such as Ward's Automotive, you can see that average dealer inventories declined 9% this quarter which is right around the decline that we saw in our commercial book. Now last year was a little unusual in that we did not see the typical seasonal drop as OEMs were ramping up inventories as they emerge from the impacts of the economic and financial crisis.

On slide 13, let's talk a little bit about our International Auto business which had a solid quarter earning pretax income of $82 million which is up $11 million from last quarter and $8 million from a year ago. Origination volume was strong with $2.6 billion in total originations, which is up 16% from last quarter and 32% from a year ago and we saw gains in all five of our key markets. And we increased the number of dealer relationships in China by about 30% to over 2,000 and most of this growth is in diversified dealers.

Total assets in the International segment are down to $15 billion and this is largely due to FX impacts as the dollar strengthened during the quarter. Provision expense has been abnormally low because of very strong loan performance, and we certainly don't expect provision to maintain these current levels and we certainly could see an uptick in the coming quarters. Credit performance has remained very stable despite the European economic concerns.

And on slide 14, with Insurance, we earned $114 million this quarter which is up $41 million from last quarter and flat to a year ago. While investment income moderated somewhat this quarter, total underwriting income improved $66 million from last quarter and $43 million from a year ago. We benefited from fewer weather-related losses and we also benefited from the reinsurance arrangements, which I mentioned during the last quarter's call. We continue to generate strong written premiums, for example, our DP&S written premiums are at the highest levels in three years.

Okay, let's switch gears and move over to Mortgage Operations on slide 15 and talk a little bit about Origination and Servicing. As we discussed earlier, it was a tough quarter for Origination and Servicing business with a pretax loss of $311 million. And as we discussed, this loss was driven by our MSR asset performance that we discussed.

But if you take a look at total net servicing revenue across this year, and this is the combination of our MSR asset performance along with the servicing fees earned, year to date, we have earned nearly $300 million, even despite this quarter's volatility. Our production was $16 billion, which is down almost $5 billion year over year and up $3 billion from the second quarter, both of which are consistent with general market trends.

Despite these higher volumes, gain on sale was somewhat lower this quarter due to pipeline hedging impacts, due to the severe rate volatility in the quarter. And we continued to differentiate ourselves as a quality mortgage servicer. We received the highest rating in all seven HAMP performance categories and we are one of only three servicers are set to receive both three-star servicer rating from Fannie Mae.

Now on slide 16, I will make a few comments regarding our Legacy Mortgage Portfolio. Again, we had a pretax loss this quarter -- $111 million -- but this does compare favorably to the $174 million loss we experienced last quarter and the $271 million loss a year ago. And we are benefiting from lower repurchase expenses.

Not much of a story here this quarter. Performances and valuations are fairly stable, and we expect this portfolio to continue to liquidate over time.

So on slide 17, regarding mortgage repurchase reserves, again not much of a story this quarter. It is very similar to last quarter. Our mortgage repurchase reserve stands at $829 million which is effectively flat to the last four quarters. Our loss experience improved during the quarter due to the fact that we had fewer mortgage insurance rescission payments that we experienced last quarter, and that did not repeat this quarter. Therefore, our expense also improved to $70 million.

And on the bottom left, you can see new claims trends. They were $153 million and that was down from the spike that we saw in the second quarter. Again, that was related to the mortgage insurance rescission payments that I just mentioned. Now, claims can be lumpy, but year to date we are down from both 2009 and 2010, due to the settlements that we reached. And outstanding claims are largely the same quarter over quarter, as you can see on the chart on the lower right.

So let's turn to Ally Bank and deposits on slide 18. As JB mentioned, we continue to benefit from the shift in consumer preference away from the branch banking networks towards direct channels like Internet, mail, and the phone. The American Bankers Association data which is shown on the chart on the top right shows that in 2007, 34% of consumers preferred direct banking channels and now that number has more than doubled to over 72%.

And of course, the direct banking model also avoids the overhead burden of a branch network. And as JB mentioned, our customer-friendly approach is resonating and this is evident by the 8% quarter-over-quarter increase in retail accounts.

On slide 19, continuing with the discussion on deposits, you can see our deposit base has grown steadily and it is primarily in our retail deposit book. In the quarter we added $2 billion in deposits, reaching $44.3 billion, and we certainly have seen good momentum as we moved into the fourth quarter. We have had positive response to our expanded product offerings which are driving customer loyalty with a 91% retention rate.

We have had the second best quarter for retail checking growth in the quarter and we have had strong demand for our new IRA product which we launched in July.

On slide 20, we will talk a little bit about liquidity and as we mentioned, we have had a very proactive approach over the last couple of years in building a robust liquidity position. We have been planning for the wall of debt maturities coming in 2012 and we have always planned for periods of market volatility, where we may not want to access the unsecured markets.

Here you can see our parent company liquidity is $26 billion which, relative to our debt maturities, has improved during the quarter. As JB mentioned, liquidity gives us a lot of flexibility to be opportunistic in accessing the unsecured markets.

We have a diverse strategy, including not only bank deposits, but also the auto ABS markets which have remained attractive sources throughout the recent period of market volatility.

And slide 21 gives you a little bit more detail in our funding diversity. You can see we have raised nearly $32 billion year to date with over $12 billion of that coming in the third quarter. Our diversified funding strategy has spanned across many markets. In addition to the numbers on the table, we have also renewed $19 billion of existing revolving credit facilities across the globe. Obviously, it helps that we are generating low-risk, attractive auto assets which are very efficient to fund.

Regarding capital, -- on slide 22, our capital ratios remain robust versus the risk profile of assets and versus industry peers. We did see a slight drop in our ratios this quarter driven by the GAAP net loss. Our Tier 1 capital remains high at 14.3% and an 8% Tier 1 common ratio. And we are very well-positioned to achieve Basel III capital requirements in advance of the proposed timelines. Our pro forma Basel III Tier 1 common ratio is 11.2% which is on a fully converted basis and is up from last quarter, despite the net loss, and it is primarily due to the decline in our MSR asset.

Now let me make a few comments regarding asset quality before I turn it over to Mike, on slide 23. You can see we have had a lot of positive credit trends in our portfolio this quarter. We've made significant progress working through the impacts of our legacy portfolios and our metrics are stabilizing with our total portfolio net losses of about 45 basis points which is flat to last quarter. And we think it is notable that our allowance to be over 3.3 times our net charge-off rate which you can see in the chart on the upper right. We believe this compares favorably to others in the industry.

The charts on the bottom show similar trends in our auto portfolio and losses in delinquency have been stabilized at low levels.

And with that, let me turn it over to Mike to make some comments before we open it up to Q&A.

Thank you, Jim. I know that a major focus of all of you that follow the Company is the contingent exposures related to the Mortgage business in ResCap and I would like to give you my own perspective and shed some light on these exposures. As I've said for several quarters it has been one of my key priorities since joining the Company to derisk the Mortgage business over the past couple of years we have sold legacy assets and operations, reached settlements with the GSEs and refocused the business on lower risk Origination and Servicing.

The environment for the mortgage business today has changed dramatically and not for the better. And I want to share with you my candid thinking on the contingent exposures that analysts are understandably focused on.

First, there are the foreclosure-related matters in the discussions with the DOJ and the attorneys general group. We deeply regret the sloppy operational practices that led to this. And we care deeply about people losing their homes. But we have contractual obligations as a servicer to foreclose when we must.

In any settlement, you weigh the cost of settlement versus the cost of fighting it out. Importantly in servicing, one size does not fit all servicers -- each servicer is quite different. One from another. So to share with you a little bit of information on us, GMAC Mortgage examined 25,000 files as a result of the Robo-signing affair and did not find one instance where the borrower was not seriously delinquent. And I don't mean three months, I mean 12 months and 24 months. And we pay their property taxes and their insurance.

We have remediated the sloppy paperwork in almost all cases with the support of the court system. We have had a long-standing commitment to mortgage modification under Tom Marano's leadership for two reasons. One, it is economically better for us and for the investors and, two, it is the right thing to do.

GMAC Mortgage has already modified 25% of our managed book. That is three or four times our leading competitors. We are not 10% better, 20% better, we are five times better. We are acknowledged leader in HAMP and have been from the early days. We have never, unlike our competitors, profited from forced placed insurance. Unlike our competitors we have not sought to recover deficiency judgments and our turnaround times on modifications are superior.

In addition to the merits of our truly superior performance as a servicer, and our demonstrated success in loan modification, we also believe that our defenses against any theoretical legal actions are very strong. So, while we would prefer to settle with the AGs to make this cloud go away than have a multiyear litigation, we will not do so at a cost which is out of proportion to a realistic view of our exposure.

Some analysts including some on this call understandably -- because there is no better way to do it -- have taken this $25 billion number that has been thrown around, applied our market share and come to some number $1 billion, $1.25 billion, $1.5 billion, whatever it is. We see our exposure as a small fraction of that number and simply would not settle for the kind of numbers being bandied about.

Second area, securities law claims. Let me offer some perspective on securities law claims. They are currently 22 securities lawsuits filed against ResCap and we are closing in on the statute of limitations on these types of cases. So we don't expect the numbers to increase dramatically. There are a few things to note in this area.

Firstly ResCap disclosures were comprehensive and accurate and segmented by collateral type. Investors were sophisticated and aware of the risks related to their investments. Loan files, individual loan files were made available to investors and we have fulfilled our servicing obligations to those investors. And importantly, we have been successful in defending cases to date.

Based on these factors, of fact, we are very confident in our legal defenses related to these claims. And especially the FHFA lawsuit, which happened recently, which we see as being tactical and completely without merit.

Let me touch on the third area which is rep and warrant. As you know, ResCap has reached settlements with both Fannie Mae and Freddie Mac in 2010. With Freddie, we settled for whole loan claims not PLS because, frankly, PLS is was not a big issue at the time. With Fannie, we settled for both whole loans and PLS claims.

In the case of these two GSEs, we thought their claims were legitimate under our contracts and sought a settlement. We have not pursued settlements with others. Fannie and Freddie account for about two thirds of origination and the average settlement was about 75 basis points of UPB. ResCap currently has $829 million of reserves for rep and warrant claims and we believe that is adequate based on the claims and issues that we are aware of.

Now let's talk about the 800-pound gorilla in the room. I should say the theoretical and imaginary 800-pound gorilla in the room because we haven't seen him yet. And that is the exposure to PLS rep and warrant claims.

This is very hard if not impossible to estimate beyond amounts reserved. ResCap does not have PLS rep and warrant claims other than monolines. We do believe there may be some possible exposure at Freddie Mac. And as we said in our quarterly filings, we may have other claims in the future, but it is not something we can estimate now.

Again, we believe we have very strong defenses in this area and importantly, I can't underline this enough, we would encourage analysts not to extrapolate from any one company's experience to the industry. Each company is different. Facts and circumstances are different and one size does not fit all.

In our case, ResCap's disclosures have been extensive and were segmented by collateral type. ResCap gave investors the opportunity to examine loan files, reps and warrants are not as for the GSEs and we have routinely repurchased problem loans voluntarily and by contract and we have a strong track record of quality servicing, including care over investors' funds or investors.

So, in short, this is a situation we are monitoring. We have no claims or suits today and we believe ResCap would have substantial and factual defenses should claims arise. And I should point out as our experience with MBIA indicates, which we have been in litigation with four years, when claims do arise, if they do, it will take many years to resolve.

Finally, to be clear -- and this is very important -- all of these contingent exposures we have been discussing would, if they emerged, be obligations of ResCap and its entities which includes GMAC Mortgage. While Ally owns 100% of ResCap, ResCap has operated as a clearly separate legal entity.

For example, ResCap has its own Board of Directors including independent directors. It has a rigorous operating agreement that governs its interactions with Ally. Historically, ResCap has filed its own SEC disclosures and for every significant transaction they have had their own advisers and fairness opinions related to those transactions.

So while Ally has and continues to be supportive of ResCap, and has invested in ResCap from time to time, most recently in 2009, that should not be interpreted to mean there is a blank check from the parent. It has been a top priority of ours to aggressively manage our risks related to the mortgage business. I told you that the day I showed up and, even though perhaps the challenge has grown in certain areas, it will continue to be a priority for as long as it takes.

So I am anxious to move to questions and so I am just very quickly touch base on page 25.

Obviously like every bank, we have a challenging operating environment with a flat yield curve and increased competition. We are in one of the few businesses where there is growth where there are assets, so was it any great surprise we have competition. No it is not.

Our core fundamentals, however, continue to be positive. The mortgage issues are a cloud. There are three clouds. The ones I described, I don't think they are as black as many analysts think they are, but that is my view. But importantly they are being addressed and managed. And our exposure is that if they develop will take place over many, many years.

We are focused on continuing to expand and strengthen our auto finance platform in every way we can. The Ally Deposit franchise is doing incredibly well. I just wish all their competitors had not dropped their $5 charges quite so quickly. But you can't get everything you wish for.

As JB and Jim had described, we have a very conservative capital and liquidity posture. We try to prepare ourselves for the worst and hope for the best. And we are very focused on paying US Treasury in a timely fashion. We have already paid back almost $6 billion and over time we will try and do our very best to get the US taxpayer their money back.

And so with that, let me pause and throw it open to questions. Michael.

Thanks, Mike. So, Veronica, we are ready to take calls from investors. Please inform our callers how to queue up to ask a question.

(Operator Instructions). Kirk Ludtke from DRT Capital Group.

Good morning. I guess we are -- I'm trying to digest the comments on ResCap and I guess one question is, do you -- are there any events or is there any kind of a timeline that or points on a timeline that you would -- that you think are important in terms of making any decision with respect to ResCap and steps that you might take to contain the mortgage liabilities there?

Look, there are a number of potential things that could be happening over the next several months. I mean, Tom Marano has been telling me that the DOJ settlement is two weeks away from the last six months something like that. We are not holding our breath on that one. Other than that, I'm not aware of any likely events in the near term, but -- that change much of anything.

And it sounds like you're willing to opt out of DOJ settlement. Are there any -- is there any downside to opting out of it?

If we do not think that settlement is in the best interest of our shareholders, which is the US taxpayer, we will not participate. I think the downside frankly is more aggravation over an extended period of time and legal fees than anything else.

And you mentioned that you do feel like you may have some exposure on that front. Could you talk a little bit about what would have caused you to have any exposure here?

You heard me say that you think we have significant legal exposure?

No, no, some (multiple speakers).

Financial implication, the answer to that is no. I would describe it as nuisance value.

Great. I did want to touch on the core business for a second as well and you had telegraphed everyone that net interest margin would be coming down and I'm curious if you could maybe give us a sense for when you think it will bottom and when do you think it will start turning up again.

Rough projection, we won't get into specifically, but we have probably got another quarter to two at most before the margin would bottom. And then, we see the margin improving throughout 2012. Basically, you have got a little bit more to go on the asset yield dynamics that we've talked about. But, cost of funds, our outlook continues to come down. And so net, net, we think margin is going to floor between fourth quarter and first quarter and grow from there.

I want to come back to your previous question. I want to make one other addendum to that question which is, every one of these services is different. I said to you we don't think we have huge economic exposure if we don't settle. I am not speaking for the other players. They may have a very, very different profile than we do.

Understood. And then I could just sneak in two others.

In the past, you've provided your market shares wholesale market shares with GM and Chrysler. I was curious if you could maybe comment on at least the trends there. And then, if you have a target size for your MSR portfolio? If you could share that, that would be great.

You want me to take the -- I'll take, this is Bill Muir. I'll take the market share number. As we -- yes, you're right -- as we focus on building a diversified auto finance business, we've not focused on the GM and Chrysler penetration data alone. We don't think you should either. So we are not like focusing on presenting those statistics quarterly, but they are in the press release and the backup material. So but if you look at wholesale penetration like from second quarter to third quarter GM wholesale penetration is down slightly from 79% to 75%. Chrysler is down a little bit from 68% to 66%. And -- but -- and overall outstandings are down a little bit due to seasonal factors as Jim kind of took you through that. Now but if you take those seasonal factors out and look at what is going on in the business, we have gained as many diversified wholesale accounts as we have seen GM and Chrysler accounts go up to competition.

So despite the intense competition, we are holding our own and that is, I think, the message you should take away from it is that looking at the GM and Chrysler wholesale statistics alone doesn't tell you kind of what we are trying to accomplish in the business which is the diversification. And I can give you the same story on the consumer side as well.

Okay.

With respect to the MSR, the MSR ended the quarter at approximately $2.6 billion and we are really not interested in seeing the MSR grow from that size. We are very supportive of the FHFA proposals out there that talk about a fee for service business. So we really are not interested in seeing the MSR get substantially larger.

I appreciate it. Thank you very much.

Doug Karson from Bank of America Merrill Lynch.

This is [Neil Sangupta] actually standing in for Doug. First of all, congratulations on the positive auto retail trends in what is a tough environment. And I know you guys touched on this a little bit, but I know that you cited that for the $471 million charge in the MSR valuation, you know we saw a similar charge back in April from a competitor citing increased costs in the rates environment. We're wondering if it was possible for any kind of reversal for you to take gains in the future on this business or is it -- I mean that I'm sure that is something that you guys have thought about thoroughly already, but if there is any kind of reversal in terms of the rates environment, what could possibly happen with the valuation there?

There's really two components to that that I think are most relevant. First of all in our MSR value, we include the increased cost of our business and those costs have been going up dramatically due to the activities of the government entities both regulatory and the DOJ and so forth. So we are definitely seeing the cost go up there.

I think the other thing that makes us somewhat unique versus our peers is that we, in the process of valuing our MSR and hedging it, we benchmark it to trust I/O securities in the marketplace. Even though it is a Level III asset, many people do not hedge and benchmark to a visible security. And we use a basket of trust I/Os as part of our valuation process.

The cost of the efforts to refinance, commonly known as refi.gov, those I/Os widened dramatically over quarter. As those tighten, we should make some of the value back that we lost.

Fantastic. That's great color. Just switching gears a little bit. In terms of your IPO and I'm not sure if this is the right environment to talk about this or you comment on this, but it has officially been on hold. Mortgage changed significantly since you filed your initial S-1 earlier in the year and the market has not been as receptive to any activity, really, if you look at the backlog in the general market.

But we were wondering what you're looking for in terms of proceeding. Is it the overall market improving? Is it the S&P hitting 1300? Is it a major settlement or just any sort of benchmark you can share with the market especially from a credit perspective. People are looking to see when you guys go public with the equity and we were wondering if there is any kind of detail you could share with us with what you are looking for to make your Company comfortable with proceeding?

I think there were two things that would trigger us to move forward. One would be that we are effective with the SEC. Which we are not at the moment. And the other one is that the market doesn't think the financial stocks are the absolute worst thing you could possibly own.

We see that here, too. So -- and switching gears, one last quick question. When GM acquired Americredit a few quarters ago, more than a few now and turned it into GM Financial, it's a smaller unit and he can't really compete with Ally across the board in any significant fashion yet, but the word was that GM was looking for a suitable way to finance a subprime as you guys moved away from that and potentially in the future expand its use to hit the prime level customers as well.

So can you comment on the competition you have seen from the GM Financial? Has it been significant and maybe as a backdrop, how you see the relation between GM and Ally Financial continuing from the next few years?

I'll be happy to take it. This is Bill Muir. Interestingly enough, as Americredit has become GM Financial and they've focused on bringing up their participation in the GM channel, what we've seen is that they have been successful and actually have complemented our presence in the channel very effectively, as we focus on the higher end of the subprime and the near prime, and they have been more focused on the lower end. Between the two of us, we have managed I think to considerably consolidate the business that's taking place in the channels there.

But I don't want to give you the impression that like we've -- our presence has declined in the lower credit tiers. In fact we have gone from about 15% or so of our business being below [660] to about 24%, 25% in this quarter and so we have actually while we have kind of consolidated the channel and worked effectively together in GM, our overall presence in the near prime space has grown over the past year. And we expect it to continue to grow a little bit.

I would make one other observation. I think Bill is essentially saying that Americredit has grown, we have grown and other players have been pushed to the side. So that's the result. I would say the working relationship with GM, at least since the time I've been here, has never been better.

Great. That's fantastic color and congratulations again on maintaining the strength in the auto and the retail business and looking forward to staying in touch.

[George Brigfield] from The Seaport Group.

Good morning. Just looking in your last 10-Q, you have language in there regarding that Ally Financial provides a guarantee to Ally Bank for coverage or liability in reference to any reps and warranties on mortgages that they sold to ResCap. Can you comment on how far back in terms of timeframe that guarantee -- what timeframe that guarantee covers?

We've been as you know we've been originating mortgages over the last few years, we have been growing the MSR at the bank, so in essence you have been seeing MSR migrate from at the ResCap entity to the Ally Bank entity as volumes are booked there. And so, as we have been doing that as part of our capital agreements with the banks, etc., we have covered them. We guarantee some of the performance and it is very similar to what you would see with any types of affiliated regulated entities.

So does it cover the time period before 2009 or does it start in 2009?

It starts as we have been originating MSRs there, and I think it started around really growing in 2008 into 2009. I'm looking at Tom, making sure (multiple speakers).

Yes. The bank originations really started late 2007 and I would say the majority of the risk would be 2008 and 2009.

Great, that's very helpful.

And basically that guarantee that we the parent provide to the bank is really designed to protect it from market volatility and basically will hold it at the other entities.

Thank you. The second question, the 15% capital ratio requirement you have that expires at the end of this year, is that an automatic expiration or do the regulators have the ability to extend that further?

Well the agreement was put in place when we converted to a bank holding company December 24 of 2008 and it's specifically stated that it is a three-year agreement. And so, we don't want to specifically comment further on what direction the regulators would go. Our belief is that the agreement expires in full at the end of this year.

Thank you. And final question. Any update you can give us in terms of conversations with the Treasury about the MCP, any talks about converting that over to common, to cut out the dividend payment or do something else with that piece of paper?

We would love to convert, Treasury likes the dividend. We haven't had any recent conversations.

Miguel Crivelli from Barclays Capital.

Good morning. I wanted to follow up on the question on ResCap. Specifically as it relates to housing mortgage business will involve going forward. So my question is in this new business small one when you are pulling out of correspondent lending, what would be the role of ResCap within the mortgage business?

And also related to this point, I wanted to ask you, you mentioned that ResCap does not have a blanket check from Ally. But there's still some valuable assets there. For example the MSR on some advances. So I was wondering how you think about those assets and if, at any point, you might take any action to move those assets out of ResCap? Especially because I'm not sure whether you have to keep any level of minimum at that ResCap to be a servicer of mortgage assets?

I'll talk about the business. We began a process of expanding our activity in wholesale lending and retail at the beginning of this year. We found those businesses to be more profitable and businesses where we have more control over the consumer, which is extremely important today and will continue to be extremely important as the role of the CFPB becomes more relevant. We have determined that the profitability of the correspondent channels does not justify the increased costs associated with generating good-quality paper that has attractive prepayment characteristics.

As a result we have begun a process of identifying the least attractive customers and will be reducing our capital commitment in the correspondent area much like our competitors.

On the issue of transferring assets, it kind of goes back to what I was saying earlier on about ResCap being 100% owned, but operating separately entity. We don't move assets around between ResCap and the rest of the Company at will. If ResCap decided for whatever reason that it had let's say a mortgage portfolio it wanted to sell to the parent then we would have an arms length negotiation. We would have external advisors. We would have a fairness opinion and we would have both Boards of Directors.

But that type of transaction would likely be initiated by ResCap for its own reasons. So we don't have any plans to be moving assets around and certainly ResCap has not asked us to consider any transactions of that kind.

I see. Do you have to keep any minimum level of equity at ResCap to be in good standing as a servicer?

We have a minimum net worth covenant of $250 million.

That is for the MSR assets?

That is across the Company for a number of requirements, but the minimum net worth requirement is $250 million.

For the ResCap legal entity.

Yes, that is for the ResCap legal entity.

Sounds great. And then wanted to ask you on the Fannie Mae settlement [reordering] and PLS securities, I wonder if you could discuss what was the amount of securities involved in the PLS packet with Fannie Mae and what was the settlement amount related to that bucket?

We were bound by a confidentiality agreement at the time that was done. So we really can't address it other than to say that we settled the PLS as well as the TBA or hold on exposure.

Okay sounds good. And last question now on the auto side. I saw your launch into the new Ally-buyer's choice program. In terms of volume you expect to generate through that channel, what we should be looking at in terms of origination?

It's going to take quite a while, I think, for it to ramp up to become a significant portion of our volume in the US. I wouldn't look for it to be more than 5 or 10% of our origination going out on a text.

And it really just launched in five.

(multiple speakers) just launched in five stages. It's piloting. It is not going to be a full national rollout until sometime probably next year.

And what percentage -- it was a big percentage in Canada.

-- it's about 25% or so of our volume currently in Canada. Because in Canada there is much less leasing available. Here in the US, leasing is pretty much available and this is somewhat of a lease hybrid product and so we don't think it is going to steal as much, but it is a unique product. Something that we are the only ones to have it. It's something that is going to provide a lot of options for dealers to that we work with to -- I think grow their business versus the competition.

Eric Selle from J.P. Morgan.

Good morning. Looking on slide number 17 in the southwest corner, looking at the trend in new claim activity. It has been kind of lumpy and just logically should these claims go down over time? And then my question is is if you X out the amount that you free purchase, you have reified, that you reserved against and that you paid, how much of these mortgages are left and then, when do you think this claim activity will die down?

I'll answer the first question. I mean the trend has been a downward trend, that's for sure. The second-quarter 2011 was due to a mortgage insurance rescission payment that we made. And so that was sort of an anomaly, but if you look at the overall trend, it has been coming down. I can't predict ultimately where it will go, but that is the trend. And maybe I'll let Tom -- .

No, I think you answer that correctly. It tends to be lumpy. The further away you move from the origination date the less the probability or likelihood that a loan had a defect associated with it that would've caused a loss. So time is obviously advantageous here.

Under the heading of lumpy. We get in particular the monoline and a lot of big numbers over it at any one time. Now as you can see from the chart, we reject 90% of what the monolines throw at us. But it could be -- those could be pretty big numbers in a quarter.

And Eric, I think some of your other questions regarding some of the components I guess I don't have that breakout. That's not something that we really provided.

Do you disclose your legal reserve and if so where does that stand now versus June in last year?

We don't break out the legal reserve specifically but there's been no material change over time.

And the next one is 50 gives us some direction on lease income? It looks like it is declining away. When is the new issuance going to kind of couple that, because it looks like the new income is falling towards zero.

You're at the low point, I guess the fourth quarter of this year is going to be the low point and then it starts to come back the other way, but it is not going to get to be material probably until 2013.

So I'll refer you back to page 10. You can see that this is lease terminations but it certainly shows the fact that we exited and that you are not having -- you have this dip as far as maturities. So that certainly impacts change but not to get into a detailed accounting discussion on lease accounting, but certainly when you start originating in the early part of the life of the lease, your yield tends to be lower and it is higher towards the end of the lease and so you have the mix of that dynamic was plus it is higher credit quality, lower yield in paper to begin with.

So it will take a while as we ramp back up our originations, which I think we are getting there and rebuilding that. And then you'll start to see it in future quarters start to normalize again.

That's great. Finally I know a lot of people have taken a shot at this, basically everybody wants to know what your plans are for ResCap and obviously we have had that question for about three years. But given the litigation drag, Michael, I think you said that you made it clear that this is clearly a separate entity, a legal entity. And we obviously knew that when it was only [ResCap] back in the day when the bonds were done. But then you said there is a goal of -- a long-term goal of settling mortgages as long as it takes.

It sounds like right now this is in the realm of acceptability. We are going to continue to support this right now. What out there could change your view?

Well, that is a very, very speculative question which I can easily dock. I could also give you a very speculative answer, right. If I was sitting here today with the BofA settlement, which we are not and we don't have claims like that, then we'll probably do something fairly dramatic, right? So I'll answer a hypothetical with a hypothetical.

That is fair enough.

And but -- you know, let's be very clear. We are focused on what is in the best interest for the shareholders.

All right. I appreciate your time.

Ladies into a disc includes a question-and-answer session. I would now like to turn the call back over to Mr. Michael Brown for closing marks. Please proceed.

Thanks, Veronica, and thanks everyone for joining us today. If you have additional questions please feel free to reach out to Investor Relations.

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

Entire transcript due shortly.)