Ally Financial Inc (ALLY) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the third-quarter 2012 Ally Financial Incorporated earnings conference call. My name is Janeida and I will be your operator for today. At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes.

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

Thanks, Janeida. And thank you, everyone, for joining us as we review Ally Financial's third-quarter 2012 results. You can find the presentation we'll reference during the call on the Investor Relations section of our website, Ally.com.

I'd like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The contents of our conference call will be covered 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. We'll also have some time set aside for Q&A at the end. To help in answering your questions, we also have with us Bill Muir, who runs our Auto business; and Ray Schrock from Kirkland & Ellis.

Now I'd like to turn the call over to Michael Carpenter.

Thank you, Michael, and good morning, everybody. And thanks to all the participants for getting on the call. I know for a lot of you based in New York, that the logistics aren't so easy these days. And we appreciate it.

I'd like to begin on page 3 to talk about the fact that there are two major initiatives that are underway, that will transform Ally into the preeminent domestic auto finance company and the leading direct bank, and also accelerate repayment of TARP funds to US Treasury. And those two initiatives -- first of all, the sale of our international businesses; and secondly, our withdrawal from the mortgage servicing business, which precipitated the ResCap bankruptcy.

Let me talk about progress on each of those. First of all, on the international sale. I think you've seen just in the last few days that we announced two significant agreements -- on October the 18th, the definitive agreement to sell ABA Seguros to ACE for $850 million. And on the 23rd of October, a transaction to sell our Canadian operations to the Royal Bank of Canada for $4.1 billion.

These two transactions, which account for about half of the assets in our international businesses, will generate a gain in excess of $1 billion pre-tax income. That will be obviously added to capital and to liquidity.

We are actively engaged in pursuit of strategic alternatives for Europe and Latin America, and have a high degree of interest from multiple parties. And we would anticipate making an announcement in November with regard to that. With regard to closing in these various transactions, it's really dependent on the regulatory environment, but we don't anticipate any unusual constraints in that regard.

On the second major initiative, on page 4, let me just update you on the ResCap situation. The bankruptcy case continues to move forward much as we anticipated. ResCap continues to operate in the normal course of business, and the bankruptcy court approved a stipulation under which ResCap will continue to be able to be a sub-servicer for Ally Bank. So, those are important under the heading of kind of normal course of operations.

In August, ResCap disclosed a draft of its Chapter 11 plan to the bankruptcy court. That plan is very consistent with a term sheet that was negotiated between Ally and ResCap at the time of the bankruptcy. And it contains a comprehensive settlement agreement between Ally and ResCap, which, among other things, seeks to release Ally from all debtor and third-party claims. That's the agreement that, if you recall, has a variety of assistance from Ally that includes a $750 million payment that Ally agreed to make in support of the ResCap bankruptcy.

Now let me be very clear. That $750 million payment was not in recognition of any liability on Ally's behalf. It was simply to facilitate a smooth and speedy resolution. If that does not come to pass, now that the estate's assets have been sold, Ally will not feel obligated to make that payment to the creditors. So we look at that $750 million as sound money for the creditors, which, if there is a speedy resolution, will be to their benefit; and if not, will not accrue to their benefit.

We're pleased to say that -- or to observe that ResCap's material assets have been auctioned to third parties. As we saw, Ocwen and Walter Investment have agreed to purchase ResCap's servicing and origination assets for $3 billion, and Berkshire Hathaway has agreed to purchase the whole loan portfolio for $1.5 billion. These numbers together are substantially above the stalking horse bid of Fortress and Berkshire that was initially proposed at the time of the bankruptcy.

Separately and quite independently, Ally Bank has initiated a sale process for its business lending group and also its MSR, which is on the books for around $900 million. We don't have to sell. We simply think that this is a good time to sell. And if we can get a good price, we will, and will further extricate us from the mortgage servicing business.

In terms of next steps, obviously, this is up to the judge and ResCap, not us. We're kind of spectators, really. The court has a hearing on the platform and asset sales scheduled for November 19, at which, hopefully, those sales will be confirmed. And as you also know, there is an examiner that has been appointed to look at all the various transactions that occur over many years between Ally and ResCap. And that examination is supposed to conclude in the first quarter of 2013. So we're optimistic that there will be a resolution on the I/O sales and the ResCap bankruptcy, certainly, by the middle of next year.

Let me turn to the operating performance of the Company, which we're very pleased with. The operating performance in the third quarter was very strong -- on page 5. Our core pre-tax income, which is, as you recall, pre-tax income, pre-OID of $559 million, and net income of $384 million.

On an operating basis, our core businesses did well. Our auto finance franchise saw originations of $9.6 billion, despite the fact that the subvented business with GM and Chrysler, is a lot more competitive. And we don't -- we're not doing as much share there as we once were. Our earning assets, which is what drives our earnings over time, are up 18%, and our financing revenue up 13%.

And then the other, I think, very good story is that it now is in our insurance business, where we've been attempting to reignite growth, we saw the strongest premiums written in this quarter since 2008. So the auto franchise in the US, which is how you should think about the Company going forward, is doing extremely well.

Ally Bank is also doing extremely well. We saw retail deposits growth of $1.7 billion in the third quarter and our deposits are up 22% year-over-year. And just to give you a clue, in October alone, our growth was around $1 billion. The number of Ally Bank retail customer accounts increased 24%, and we continue to get plenty of recognition from the press that is very focused on online banking and the Internet services that we provide, and so forth.

From a financial profile point of view, we're in very good shape. We have a balance sheet which I would hold up against anybody in the banking industry today. We have $26 billion of parent company liquidity. And as we look forward into '13 and '14, the unsecured maturities are going to decline quite significantly. And obviously, the asset sales -- the international asset sales will improve liquidity, and also our Tier 1 common ratio.

We're pleased to have repaid the FDIC loans -- $2.9 billion -- a couple of days ago. And we'll be paying another $4.5 billion back before the end of December, still leaving our liquidity extremely strong.

So, from the point of view of the Company overall, number one, the strategic actions are going according to plan. Number two, the operating performance is very strong. And number three, as you look towards the future of the Company, it will be built around these two incredibly strong franchises. And number four, the Company is in very strong financial condition, whether measured by capital ratios or liquidity metrics, or whatever else you want.

So to go into a bit more detail on the quarter, I'm going to hand over to J.B. and Jim Mackey.

Thanks, Mike, and good morning, everyone. On slide number 6, let me cover the financial results at a consolidated level.

As Mike mentioned, we had a strong quarter, and the fundamentals are all trending in the right direction. Business performance has outpaced our own expectations in every segment this year. Again, core pre-tax income of $559 million. This is highlighted in the upper blue box. We stripped legacy ResCap results out of prior periods, so you can get an idea of the stability of core earnings. The recent actions we've taken should also make the business's operating results fairly predictable, going forward.

Net financing revenue is up slightly year-over-year, with an increase of $14 million. So despite the sustained low interest rate environment, we've been able to continue maintaining earnings from the balance sheet. Largely, this has been driven by higher asset levels and a lower cost of funds that is trying to keep pace with declines in asset yields. The dip quarter-over-quarter is partially driven by higher cash levels in anticipation of TLGP debt maturing, and also lower asset yields. And I'll give you some more details in just a minute.

Total other revenue of $936 million this quarter was up meaningfully both quarter-over-quarter and year-over-year, due to very strong performance in mortgage servicing, and specifically with our MSR hedge results. Obviously, with the strategic actions we announced regarding the MSR, this is not something we would expect to repeat going forward.

Provision expense of $116 million was up both from a quarter-over-quarter and year-over-year perspective. You can see the provision line items has been a bit lumpy, as we released reserves in conjunction with balance sheet repositioning, and as legacy portfolios have been sold or wound down. We expect this quarter to be more indicative with expectations going forward, as losses normalize off of low levels and we continue to grow our earning assets.

Controllable expenses were up from prior periods at $719 million. The year-over-year comparison is impacted by an equity compensation revaluation made in third quarter last year, which caused that quarter to be unusually low. Quarter-over-quarter, we were impacted by an increase in mortgage origination expense from higher production relative to second-quarter, as well as additional advisory expenses. Controllable expenses will be a key area of focus for Mike, Jim and I in the coming quarters.

The Company is being streamlined and simplified, so we see a decent amount of cost rationalization to come in the back half of next year. This will obviously be a key contributor for profitability in 2013 and beyond.

Some of the additional non-core items are highlighted below. For the ResCap line item, just a reminder that second-quarter reflects a equity write-off in ResCap, as well as the $750 million settlement that we currently have agreed to -- again, for the sole purpose of expediting the resolution process. On OID, you can see it trended lower again this quarter to $76 million. Expect the fourth quarter to be closer to $56 million and about $250 million for all of next year. Net income of $384 million this quarter obviously covers preferred dividends, so it's nice to get back to organic common capital creation for the Company.

Turning to slide number 7, you can see the net interest margin was down about 9 basis points from prior quarter. As previously mentioned, we were holding more cash than normal in anticipation of TLGP debt maturing. Cost of funds was down 4 basis points quarter-over-quarter, which didn't quite keep pace with the decline in earning asset yields. But still at about a 5% earning asset yield, we are at about the top of most major banks, outside of credit card issuers. And we maintain very low credit risk with our assets.

Obviously, through time, you can see we felt the impact of a sustained low interest rate environment and higher competition for the auto asset in general. We do feel good, though, that the short duration of our assets won't leave us hung when rates eventually do revert.

Now, over the next couple of quarters, you can expect to see NIM decline, given the removal of higher-margin loans from the sales of our international businesses, and as we move those to discontinued operations and held for sale. At the same time, we expect credit trends to also improve, given the removal of those assets. Importantly, though, core fundamentals in the US are well-positioned for a substantial NIM expansion through time.

Even after the IO sales are complete, only about 65% to 70% of all assets will be funded inside the Bank. Gradually, we would expect to normalize to levels more in line with other US domestic bank holding companies that have an excess of 90% of assets funded inside their primary banking subsidiary. Further, the diversification strategy on the asset side will lead to some stabilization in earning asset yields. This is not all about credit expansion either. It's more so driven by our reentry back into lease and targeting a more optimized origination mix.

Turning to slide number 8, you can see the breakout of our results by each segment. Jim will go into more details in a minute on these trends. Now, GAS posted pre-tax income of $612 million. The decline from prior-quarter was simply a result of unusually low provision in the second quarter, driven by reserve releases.

We also took a $56 million impairment on certain equity positions in the insurance book. I should note the capital impact is negligible, given the unrealized losses on these positions were previously reflected in OCI impacting equity. You can see the mortgage line item, which I previously covered, was largely driven by about $200 million favorable results with MSR hedging. And again, we don't expect to see these results repeat in future quarters, especially as we target strategic actions with the Bank's MSR and business lending platform.

And finally, if you look at the corporate and other line item, you can see we had some unfavorable trends this quarter. The largest driver year-over-year was the equity compensation adjustment in third quarter that I previously mentioned. Quarter-over-quarter, there were several pieces going up and down, but the primary driver was some small recoveries we had within commercial finance last quarter, but did not repeat.

So, going forward, it's pretty clear we need to continue controlling expenses. We expect along-term NIM improvement as cost of funds comes down, and outpaces declines in earning asset yields after the completions of the IO sales. Auto originations will remain about $10 billion per quarter, but we're targeting more diversified and profitable mix; continued stable credit performance; continued optimized funding structure in the US. So we're well-positioned for the years ahead.

And with that, Jim, it's yours for the details.

Great. Thanks, J.B. Let's turn to slide 9 and I'll go through our North American Automotive finance, or NAO. NAO had pre-tax income of $510 million, which was down quarter-over-quarter and year-over-year. You can see the primary driver of the variances to both periods is higher provision expense of $102 million. The increase this quarter was driven by asset growth, normalizing charge-offs, and prior period reserve releases that did not repeat.

As we mentioned last quarter, the second-quarter provision number was unusually low, and we view our expense this quarter to be more in line with what we expect going forward in the segment. So while provision expense can obviously fluctuate over time, it's more important to look at the net financing revenue when analyzing the core business fundamentals.

The net financing revenue trends are shown on this chart on this page. You can see that we reached an inflection point back in the fourth quarter of last year, and have been steadily expanding since. Much of this is driven by our growing earning asset base and a more profitable mix, as our balance sheet has been successfully repositioned.

For example, while our US lease portfolio was declining in 2010 and 2011, that book of business has now rebounded and was actually up 49% year-over-year. We've also successfully implemented our used strategy, and those loans are up 45% year-over-year, providing us with more attractive risk-adjusted returns. You'll also notice that other revenue was lower this quarter at $75 million. And this is largely as a result that, in previous quarters, we benefited from gains associated with larger whole loan sales and off-balance-sheet securitizations.

So let's turn to slide 10 and spend a minute on some key metrics for NAO. The top charts illustrate our shift in originations to a more diversified and profitable mix. You can see in the top right that used, leased and diversified new, make up over 50% of our US consumer originations. You can also see that GM and Chrysler subvented originations, which we have grouped together in the gray portion of the bar, made up just 14% of our originations this quarter. Obviously, this origination mix is not an accident. It's the result of a deliberate focus that began several years ago to become more dealer-centric, market-driven, and a diversified competitor in the marketplace.

You can see in the top left that we had $9.6 billion in consumer originations this quarter. We feel really good about this level and it's in line with our recent historical experience. It reflected our ability to serve the needs of our dealers and our customers well, while maintaining a focus on profitability, prudent balance sheet usage, and risk management. And we certainly won't sacrifice these things for volume or market share.

The bottom charts show our consumer and commercial outstandings. The bottom left shows consistent growth in the consumer book, which is now up to almost $83 billion. And our average -- while our average commercial assets declined quarter-over-quarter by $1.1 billion, and that's largely due to seasonal factors, we were up $1.7 billion year-over-year.

Now let's turn to slide 11 and talk about our insurance business. The insurance business has consistently performed well. In this quarter, we had pre-tax income of $33 million, which is down slightly quarter-over-quarter. While there wasn't a big variance quarter-over-quarter in the bottom line, there were a couple large items that effectively offset each other.

First, you have the investment portfolio impairments that J.B. mentioned earlier. And this was offset by the fact that, last quarter, we had some large weather-related losses. And you can see that show up in our loss ratio, which is down to 40% versus 54% in the second quarter. If you recall, the second quarter is typically where we see an increase in weather losses, but we have reinsurance agreements in place, which covered most of our weather-related losses this quarter.

Lastly, I want to comment on Hurricane Sandy. Clearly, our thoughts and prayers go out to all affected. And we're currently working very hard with our dealers to help them through this tough time. We're currently evaluating our financial impact from the hurricane. It's a little early yet, but we don't expect to have a material impact on our fourth-quarter consolidated results.

Looking at our year-over-year variance, you can see that primary drivers are the investment portfolio impairment this quarter. And our insurance premiums earned this quarter were down due to lower volumes of our vehicle service contracts that were written a few years ago, which are now just entering their earning period.

But you can see in the chart at the bottom right that written premiums have come back nicely, which positions us well as we move forward. I'll draw your attention to the purple segment of the bars that represent the premiums from our dealer products and services business. DP&S is the business that provides floorplan insurance, vehicle service contracts, as well as other value-added F&I products for our dealer customers.

So this is a key product line for us, and it provides us with a competitive advantage as we provide a full suite of products for our customers. You can see here that DP&S wrote $285 million of premiums this quarter, which is the highest level in four years.

Let's turn to slide 12 and talk a minute about international auto finance. We had a solid quarter in IO and were pretty much flat quarter-over-quarter and down slightly year-over-year. Net financing revenue of $166 million was down $5 million from last quarter, and about $1 million from the prior year. And all of this was largely due to the impact of FX rates.

Provision improved slightly from the second quarter to a more favorable loss outlook, primarily across Latin America; but was up year-over-year, due to reserve releases that we had in the third quarter of last year. Total assets increased by almost $750 million for the quarter to $16.2 billion. And this was due to the impact of FX rates as well as strong originations in Brazil and the UK.

Originations were relatively flat for the quarter -- versus last quarter, and down almost $500 million from a year ago. But this year-over-year decline was largely driven by FX and a decrease in industry volumes across Europe. And obviously, you know we're in discussions regarding the potential sale of these entities. And it's important to note that we continue to operate these businesses as usual.

Okay. On to mortgage operations on slide 13. Now, we had a great quarter here with pre-tax income of $354 million, which is up $244 million from last quarter and $341 million from a year ago. This is driven by a couple of key items.

First, we had strong gain on sale revenue of -- with 39% higher production volume versus last quarter. And we also had positive net servicing revenue, which is driving the other revenue increase that you see on this page. We had strong MSR hedge performance, as the value of our hedges increased at a greater rate than the value of our MSR asset decline.

As you know, while the servicing business has been profitable over the long-term, the MSR asset can fluctuate over time, which can impact our financial results in any given quarter. And as Mike and J.B. mentioned, we're exploring the sale of our MSR asset, which will mitigate the earnings volatility in this segment going forward.

On the originations side, we've been maintaining our production levels to support the ResCap platform during the bankruptcy process, and we -- but we would expect to see that decline materially after the closing of the ResCap sale. So as you think about our mortgage business going forward, you can expect that we will have a pretty minimal amount of originations, generally just as a balance sheet management tool, and possibly little or no servicing business if we indeed sell the MSR.

Clearly, we have steadily derisked and de-emphasized the mortgage business over time, and we continue to take steps to do so. This will allow us to focus more of our energy and resources on our US auto businesses, where we have core competencies and provide a more stable earning stream going forward.

On slide 14, let's talk about Ally Bank's deposit franchise. We've been very stable and consistent in our growth in deposits. This quarter, deposits grew $1.7 billion to $42 billion. All of our growth has been from retail deposits, not brokered deposits. And recently, we've seen strong growth in savings and money market account balances. We've been steadily building on the Ally brand and expanding our customer base. The number of Ally Bank retail customers increased 24% year-over-year. And we found that once a customer tries us, they like us, and that's contributed to a consistently high retention rate of around 90%.

In this quarter, we also received a strong endorsement from Money Magazine, as Ally Bank was named Best Online Bank.

Regarding funding and liquidity on slide 15, as we mentioned earlier, with $26 billion of parent company liquidity. Our time to required funding remains strong at over two years. And this metric assumes no unsecured debt issuance and no change in our balance sheet growth projections.

On the bottom right, you can see our long-term debt maturity profile. After the $7.4 billion of TLGP maturing in the fourth quarter -- and, as we mentioned, $2.9 billion of that was repaid last month -- maturities become much more balanced. As a result, you can expect our excess liquidity levels to come down, which will help profitability as we have less negative carry from cash on the balance sheet, and it will allow us to be more opportunistic in the unsecured markets going forward.

The capital markets continue to be very supportive of the Ally name and the auto asset class. And we have completed around $6.3 billion of new funding transactions in the quarter -- $4.1 billion in global term securitizations, which includes our inaugural public lease securitization at Ally Bank; a $522 million sale of auto whole loans; $600 million of unsecured debt; and $1.1 billion of incremental capacity at the parent through new and upsized credit facilities. We also launched a new Ally Retail Term Note Program, similar in nature to our earlier Smart Note Program, which will provide incremental liquidity going forward as well.

Regarding capital on slide 16, our capital ratios remain relatively flat to prior quarter, as the positive impact from net income is offset by risk-weighted asset growth, due to strong auto originations. Tangible common equity increased organically by approximately $400 million from the second quarter. And looking forward, if you assume the full sale of our international entities, you will see a reduction of around $30 billion of risk-weighted assets, which will increase ratios and create excess capital for us.

With respect to Basel III, Ally is well-positioned to achieve the enhanced Basel III capital requirements in advance of the proposed timelines, given our current capital levels and planned asset sales. Basel III will have a more limited impact on Ally's capital ratios, given our simplified balance sheet and overall asset quality.

So let's turn to asset quality on slide 17. In general, our overall balance sheet loss numbers continue to be very low versus other banks. While losses were down year-over-year, they did tick up somewhat on a quarterly basis. And you can see that on the top left chart.

This is driven by a few factors. First, as we've discussed before, losses last quarter were a recent historical low, driven by some large recoveries we had in our commercial book last quarter. Secondly, you typically see seasonal factors playing into the numbers in the second half of the year versus the first half. And third, we're starting to normalize off our very low loss levels in our consumer auto book, which you can see on the bottom right chart.

As we've been saying for over a year now, we swung the pendulum too far on credit quality in '09 and '010, and so we've seen some unusually low loss experienced from those vintages. While we don't expect anything dramatic, we do expect to see losses tick up to more normalized levels from here. We feel very good about our more balanced credit mix that we're originating, and of course, that will result in higher profitability on a risk-adjusted basis.

On the top right, you can see our reserve coverage. And it's begun to moderate -- or beginning to moderate, as we expect to remain strong, with an allowance balance of 2.9 times that of net charge-offs. We've been cautious about bringing our reserve levels down. And so what you're seeing now is, effectively, we're growing into our allowance balance. And we will continue to maintain very healthy coverage against our portfolio losses.

Now before I hand it back to Mike, I want to make a couple concluding remarks. And I want to provide some forward guidance on a few notable items that you can expect to see over the coming quarters.

First of all, obviously, as we enter into definitive agreements to sell certain international legal entities, you will likely see those entities classified as held-for-sale, and moved from continuing operations to discontinued operations during the fourth quarter. And until the closing of the sale of these transactions, which are expected to be completed in the first half of 2013.

So our discontinued operations results could be meaningful for a few quarters. Any gains that we book on these sales will not be recognized until the closing. Prior to closing, these businesses will be reflected under a LOCOM model for held-for-sale assets as required under GAAP.

Secondly, we're currently discussing with our regulators the accounting treatment of certain customer accounts that, although current, have been discharged in a Chapter 7 bankruptcy and reaffirmed by the borrower. This relates to the guidance that the OCC gave their regulated banks with respect to Chapter 7 bankruptcies in recent weeks.

As you know, we're not regulated by the OCC, and our primary regulators have not given us similar guidance. If we were to implement similar treatment -- this similar treatment, this would result in our increase in our reported charge-offs and NPAs. We wouldn't expect a material P&L impact, since Chapter 7 bankruptcies make up a fairly small portion of our loans, and we've already contemplated them in our reserve methodology to some extent.

Third, we expect to take a nonrecurring charge in the fourth quarter related to the accelerating of some future pension liabilities, as a result of purchasing an annuity contract to pay all future payments to retirees, and offering a voluntary lump sum distribution to terminated employees, with vested benefits for individuals covered by our frozen defined benefit pension plan. This is just a proactive risk mitigation strategy, and we've seen this similar approach taken by others recently. That charge is expected to be around $90 million to $120 million.

And fourth, as you know, we have a fairly substantial deferred tax valuation allowance. Right now, we're looking at the treatment of that valuation allowance, and we could see that released as early as next quarter, to the tune of around $1.1 billion to $1.4 billion in gains. I should note that the impact of the valuation allowance release would flow through P&L and increase the net size of our DTA. But from a regulatory capital perspective, a significant amount of the DTA will be deducted, so the rate capital impact shouldn't be material.

And with that, I'll turn it back to Mike for concluding remarks.

Now before -- I think after I do my concluding remarks, we'll have an accounting test. (laughter) Just a couple of comments.

I would like to encourage our investors to begin to think about Ally as it will be after the completion of the IO sales and after the final resolution of the ResCap bankruptcy. And I think if you think about what the Company will look like at that point, it will be very well-positioned for the future and it will be a lot simpler in certain ways.

We will have the preeminent auto finance franchise, which, as Jim said, will have improving profitability of its origination mix over time. We'll have a leading, growing direct bank franchise. And we will have a very strong credit profile, with assets that are characterized by low-loss, short-duration auto loans, and a more stable earnings profile, particularly as our exposure to mortgage servicing and the MSR declines.

So, it's a very, very attractive story, I think, on a going-forward basis. And I'd just encourage our investors to start thinking about the Company as it will be after these two transformations have occurred, and we end up with a winning combination of a premier US auto franchise and a leading direct bank.

So, with that, that's the end of our prepared remarks. I'll hand over to Michael for Q&A.

All right, great. Thanks, Mike. Janeida, we're ready to take calls from investors, if you want to remind the callers how to queue up to ask a question.

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

First of all, good job on the core business. I think a lot of my questions are going to probably focus more on the strategic things you've got going on; but I don't want to lose sight the core business did a -- had a nice quarter.

The Canadian and Mexican businesses sold for a nice percentage of book, a little higher than I thought. And I think you're kind of at run rate of $5 billion for proceeds there. And if we include Europe and Latin America, you could be in excess of -- I'm going to make up a number -- $8 billion, $9 billion of proceeds. That's a significant amount. Can you help us with priorities of where you want to deploy that capital? I know the MCP from the government was a potential target. If you could talk maybe about some strategies around that cash?

Sure. Doug, I think the -- first of all, we're very encouraged by the sale process. Obviously, the gains realized to date are attractive. And we're very encouraged by the high level of interest in Europe and Latin America as well.

Assuming all goes according to plan, and we end up with the kind of numbers that you're suggesting, our priority really is to find a way to channel as much of that capital back to U.S. Treasury. Because we don't really need it operationally in the business. Now that really is not solely a management decision. That is a conversation between us and the Federal Reserve, and the Federal Reserve is to opine on what they think our capital adequacy is, and what amount of capital they're comfortable with us repatriating to the American taxpayer.

And that's obviously a conversation that we are engaged in. But it's a conversation until we have, at a minimum, signed agreements for all the various assets, is a little bit premature.

Right. That's helpful. If I can just extend onto that. The conversations you've had with Treasury, have they commented anything along the lines of we, the Treasury, need to be paid back in full before any of your other liabilities get paid back? Because people are looking at different preferred securities like the Series G, and kind of exploring options of maybe those getting taken out with some of these proceeds, based on some of the indenture language. I know it's hard to comment, (multiple speakers) but can you comment on any of that?

I think with regard to that particular question, it is actually impossible to comment. Beyond making the point that we're very well aware of what our obligations are to all of our securities holders, and we will be abiding by those obligations. Now, we have in Treasury an entity that would like to see as much cash, as fast as they can get it. And so, that is what we're focused on. But we're also focused on doing -- living by the covenants and requirements of all of that various security.

Fair enough. Thank you. Just one or two more and then I'll pass it on. Discussion earlier in the call about the $750 million that was kind of, I think, planned for the ResCap bankruptcy, and I think it was the first time I heard that that was potentially -- and I don't want to get controversial here -- going to get taken away if this process wasn't speedy or wasn't going along with plan.

Is there any sense of, like, what would it look like to have that taken away? Would it have to be something that we didn't reach a settlement to 2014? Or just give us a little color on that, because I think that would be pretty good news.

You know, I don't really want to speculate on it, because when we entered this agreement with ResCap with the estate with the Board of Directors, it was very heavily negotiated. And there were many aspects to the agreement -- subservicing agreement, supporting ongoing origination, transition services, as well as the $750 million payment. I mean, all of those things were part of the package that we put on the table to assist ResCap in its bankruptcy.

The issue that I would raise with you is this. We're now at a point where the principal assets of the Company have been sold. The proceeds of $4.5 billion are on the horizon. It is now up to the creditors to agree among themselves as to what -- where the proceeds will go. And we certainly hope that they do that expeditiously. And if they do that expeditiously, we're 100% committed to our agreement, and we will go forward with our agreement.

The only point that I was trying to make on the call was, we didn't agree to $750 million because it was an admission of guilt. We agreed to it for the purposes of facilitating the bankruptcy. If it turns out not to be a facilitator of the bankruptcy, we have to reconsider. But as of right now, we're 100% committed to what we agreed to. But it's beyond our hands. It's up to the creditors, really, to have a conversation among themselves as to now that there is cash on the horizon, how does it get divvied up between them?

Right. Okay. That makes sense. And then final question. As you help us picture how the Company will look when these asset sales are done and it's a kind of pure-play US auto company with a bank -- is the IPO strategy back on again at that point? Are there any other strategic directions? Have you had massive interest, 30 bids for your international business, I'm wondering if you had any interest for the US core business from some of those -- some players?

Well, we actually, you know -- I mean, obviously, we are, you know, we're beginning to think about what happens next. And we have a lot of your competitors knocking on our door telling us that an IPO is perfectly possible. And certainly, that would be something that we're going to give active consideration to in the coming weeks.

Great. All right, thanks. That's it for me. I appreciate the time.

Thanks, Doug.

Kirk Ludtke, CRT Capital.

With respect to the quarter, I think you mentioned that the hurricane -- you don't expect your hurricane to impact the Company's results. And I thought -- is it that you don't feel that you have any exposure? Or that you've been able to mitigate it, and if so, how?

And then with respect to corporate, you know, you mentioned that the trends were negative, and I was just curious if -- are there ResCap-related costs in there that are driving that up? Is that part of the reason that they're going up?

Well, first, related to Hurricane Sandy, I mean, I think we've said we don't expect a material impact to the quarter. I think there will be an impact. We will take some weather-related losses for sure. Hurricanes, because you do know they're coming in advance, we do start working with our dealers to help them prepare for the hurricane, move vehicles to safety, et cetera. So there are options to mitigate exposure there, as well as we do have reinsurance and other things.

So, I would say we expect some impact, just nothing material. And related to corporate, I think there's a variety of things that are causing the increase in the expense. I mean, some of it is just some -- some of it is ResCap-related; some of it acceleration of Comp and Bens, and things like that. (multiple speakers)

Expenses to separate.

Expenses to separate. We did have some advisory fees in there related to some renewal of facilities and whatnot. There was also some hedging effectiveness in the prior quarter that lowered that number. So when you're looking at it on a relative basis, that impacted. And there were also some recoveries impacting the delta as well. So, it's (multiple speakers) a hodge-podge.

(multiple speakers) Kirk, I want to make two clarifying comments. First of all, if you look at the expenses on an operating basis, i.e., each of our business lines and each of our cost centers globally, we're actually ahead of plan, both on expenses and in terms of headcount. And so, the things that are driving the negative variance are either unusual positives in Q2 or unusual negatives in Q3.

And the one thing I did want to point out just to be clear, Jim said there were some ResCap-related things. The ResCap-related things fall into two buckets. One bucket is, obviously, we're spending a fair amount of money on advisory fees. That was not part of the original budget that is associated with ResCap. And the other one is, we are spending some money to potentially buy ourselves insurance for an effective separation from ResCap.

Let me give you an example of what I mean. We and ResCap today share data centers. We made the decision three months ago, because we didn't know -- we didn't really know who the owner was going to be, whether for them it was going to be a consolidating acquisition. And we simply said, look, we can't take the risk of being dependent on ResCap's data centers. And so we made the decision to start up two brand new data centers.

And that is obviously an expensive decision that we made, but we did it from the point of view of risk mitigation. So those are the kind of things that Jim was talking about when he talked about ResCap-related.

Got it. No, that's helpful. I just wanted to touch on the divestitures and the use of proceeds for a second. And you're obviously making some very impressive progress toward monetizing some of these non-core businesses. And you mentioned that the timing, the actual timing of the sales are somewhat beyond your control. Is there any way that you can put a time-frame, like any kind of range of when you would expect to receive -- start receiving proceeds?

Yes, I -- look, I think each country is a little bit different. But I would be -- I'd be very surprised if much of this rolls beyond the end of the first quarter, I would be. But could we end up with country X rolling from Q1 to Q2 because of unique regulatory framework in that country? Yes. But as a general -- do I think Canada is going to roll into the second quarter? No, I don't. So, I think we expect most of it to happen in the Q1 time-frame.

Excellent, thank you. And in the past, you mentioned that you don't expect that the asset sales will be contingent in any way upon what's going on at ResCap. And I just -- is that still the case?

Yes -- no. Completely unrelated. Our -- the agreements that we have with buyers to date are very clean agreements, you know, what you would expect in a sort of plain vanilla M&A transaction. Nothing at all unusual or contingent in any respect.

Okay. And then, lastly, I appreciate your patience, but you mentioned that the Fed needs to opine on the use of proceeds, which makes sense. Does that -- should we take it that you have a deal with the Treasury as to how and at what price you're going to take the MCP out?

No. I don't think you should assume that at this stage of the game. We obviously have had extensive conversations with Treasury. But it's really a three-way dialogue. I mean, it's the Treasury, the Fed and ourselves together. And the Fed is going to need to, for sure, look at the stress test in the first quarter before making up their mind. At a minimum, they'll look at the stress test in the first quarter.

And I think there's a question which I don't know the answer to, which is, how far do they need to see into their crystal ball beyond that? So I think the Fed is going to have to determine how much capital they think we need, and then we obviously have to have a conversation with Treasury.

Okay, thanks. And you mentioned that the examiner -- you still expect the examiner's report in the first quarter. I thought -- I was getting the impression listening to some hearings that it was slipping beyond that. Is that -- is there any kind of update as to when you expect that?

You know, my sense of it is kind of like yours -- which is, it has a feel to it that it's slipping a little bit. But I don't want to be definitive, because I'm not in the courtroom. But that's my feel as well.

Okay. I appreciate. Thank you very much, guys.

Thank you. Thanks, Kirk.

Eric Selle, JPMorgan.

Looking at Europe, upon the European asset sale, how should we think about the euro-denominated notes? Are they going to travel with the assets, i.e., to the new buyer?

We -- you know, that's a subject of obviously negotiations. Since we haven't identified a buyer, we haven't negotiated what happens with the notes. But I think our thinking is likely the notes will stay behind.

Stay behind with you guys?

Yes.

And then while we're in Europe (multiple speakers), can you --?

(multiple speakers) Jeff, do you want to add to that?

Yes -- no, you got it. That's exactly right, Mike. We would expect to retain this. Yes.

Okay. And then before we leave Europe, could you guys give us kind of some color on the ground application, loan application volumes, consumer trends, residual performance in Europe? Is there any, like, discernible trend going into the fourth quarter versus the summer months?

Hey, Bill? Do you want to take that one?

Sure. Well, the overall volume that we're seeing in international operations, and particularly in Europe, is down year-over-year, reflecting just general weakness in the marketplace. So, it's just what you think. You know, business in Germany and the UK are both down, because both the auto industry and both those leading countries are suffering.

And then speaking to consumer delinquencies, is there any discernible trend that's bucking the seasonal traditional September (multiple speakers) kind of, you know, weakening?

(multiple speakers) Other than seasonal, no. I mean, it's an extremely high-quality book. And historically, especially like consumers in Germany are very thrifty and pay their bills. And so it's always been pretty much a high-quality book.

Sounds good. And then another way of asking the asset proceeds sale that I think the first two guys in the call were trying to ask, but if you look at the TLGP retirements, do those require asset sale proceeds? Or could you do those out of existing liquidity and new financing?

No, TLGP, as I think J.B. mentioned, we basically have kept substantial excess liquidity on the books throughout the year, and could have repaid the TLGP in whole any time during the course of 2012.

So, the reason we're sitting with $26 billion of liquidity just because we're expecting to write a [$5 billion] check in December. And so the proceeds have nothing whatsoever to do with TLGP. They do have something to do with MCP. And the reason simply put is, TLGP -- A, we've got liquidity, but more importantly, TLGP doesn't affect capital; whereas MCP affect capital. And the Fed, as you know, is vitally concerned about the banking system conserving capital. And so, in one case, it's simply repaying a debt that you owe, and then the other case, it is that, but it's getting regulatory approval because of its capital impact.

Understood. Understood. And then, finally, looking at the MSR sales, are you guys selling Ally's MSRs with ResCap? I mean, are those going to be tagged along with the Ocwen sale?

No. The two things are completely unrelated. In fact, we had a dialogue with ResCap and their advisers as to -- at one point, a number of the potential buyers indicated they would like the opportunity to buy the Ally Bank MSR on the advice of their advisers, ResCap's advisers. We chose not to go in that direction.

Now that the sale of the ResCap platform and MSR has been announced, we are free to proceed with the sale, you know. And so we have embarked on that process just in the last few days. We've just kicked it off. Barclays is representing us on the sale. There seems to be a pretty high level of interest.

We're not a forced seller in any way. We don't have to sell. If we get a good price, we will. If we don't, we'll keep managing it. As J.B. and Jim pointed out, our team has actually done a hell of a job of hedging that asset this year. And we have every confidence in our ability to continue to manage it in any scenario.

But frankly, it is a consumer balance sheet. It's a consumer of capital, and it's a very volatile asset in terms of our earnings. My preference at the right price would be to say goodbye.

Agreed. It'd make my job easier, but I know you don't care about that. (multiple speakers)

Well, I think it would make our job easier too, because it'd make -- you know, we'd be able to give you an earnings -- well, we'd never give you earnings forecasts any way; but we would be -- we'd be looking at quarterly forecasts, so it would be (multiple speakers) easier for all of us. (laughter)

(multiple speakers) Well, I -- it speaks to how steady the core business is, and I think that's something you guys have been saying for a while. And it obviously proved out in results.

Before I leave Q&A, we've heard from several major financiers over the last month that, obviously, financing supply of funding has not been an issue. It's kind of been the demand of -- for these loans. A couple have spoken to a pretty noticeable drop-off in loan applications in October versus September. There's obviously a seasonal impact there. But what are you guys seeing from the consumer here in the United States? Is there -- was there a big pop in September and it's kind of fading into the back half? Or -- I mean, has there been any -- are you guys seeing that similar trend (multiple speakers) that we're hearing from others?

(multiple speakers) Well, you know, I mean, I'll let Bill comment, but I think our view, because we're so focused on the auto space, is the auto space has been very robust. I think October was a little softer than September, but our expectation is that the year is going to end pretty strong.

Bill, do you want to contradict me or add to that?

Yes -- no, no. (laughter) Yes, well, we -- it's obvious we don't rehearse. But (laughter) I would say, yes, we do expect the year to kind of end strong. And October got clipped a little bit at the end because of the storm. And it's also been a little bit of a selling day, kind of a -- it's hard to do the accounting.

But no, business has been steady. I mean, the way we look at it, and from our standpoint, our applications are up almost 20% in this -- in the third quarter versus what they were a year ago. And they're relatively flat to the second quarter. So I mean, that kind of gives you a sense of the flow of demand -- the final opportunity that we see coming our way, so.

You know, let's sort of go back to the fundamentals, because I know the banking industry as a whole is struggling to make loans. But we have a particular dynamic going on, right? Which is, dynamic number one is, the average car is 11 years old. So there's tremendous replacement demand that is flooding into the marketplace. And interest rates are at an all-time low for all assets, especially for automobiles as well.

And so people look at -- are looking at used cars and say, gee, as long as I'm reasonably confident I've got a job, I can afford a decent new car in this environment. And the old one is 11 years old, I've had enough. But there's a lot of fundamentals driving the business that will continue to do so, at least for a little while.

Well, as always, I appreciate your color on all aspects of your business. And a solid quarter, guys.

Thank you, Eric.

Thank you.

All right. Great. Operator, that's all the time we have this morning. If anybody on the phone has additional questions, please feel free to reach out to Investor Relations here. Thanks for joining us this morning. And thank you, Janeida.

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

Thank you, everybody.