Good day ladies and gentlemen and welcome to the second quarter 2014, Ally Financial earnings conference call. My name is Steve and I’ll be your operator for today. At this time all participants are in a listen-only mode. We will conduct a Q&A session towards the end of this conference. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Mr. Michael Brown, Executive Director of Investor Relations.

Great, thanks Steve and thank you everyone for joining us as we review Ally Financial’s second quarter 2014 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 content of our conference call will be governed by this language. This morning our CEO, Michael Carpenter, and our CFO, Chris Halmy, will cover the second 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 Jeff Brown, the CEO of our Dealer Financial Services business. Now, I’d like to turn the call over to Michael Carpenter.

Good morning and thank you for joining the call. Let me take you on page three through an overview of our results in the second quarter, as well as some key updates on our three point plan to improve core return on tangible common equity. We had a very strong quarter with net income of $323 million and earnings per share of $0.54, which represents a substantial improvement from this time last year when Ally recorded a loss of $927 million. It also represents about a $100 million increase in that from the first quarter 2014. Core pre-tax income excluding repositioning items was also strong at $417 million, with adjusted earnings per share of $0.42. So we’re very pleased with the continued momentum in earnings thus far. Results were driven largely by favorable credit trends and performance in the Auto Finance operation, where we experienced strong lease gains. We also continue to improve our cost of funds, which resulted in an increase in net financing revenue of 32% compared to last year. This was partially offset by unprecedented weather-related losses in the insurance business. The Auto Finance business had a terrific quarter, with the second highest quarterly originations in Ally history at $10.9 billion. This is up over $1 billion from last year. We posted a record quarter in used originations and continue to see strong growth in originations from non-GM, non-Chrysler dealers, which were up 48% year-over-year and now account for 20% of total consumer originations. Our dealer-centric strategy continues to demonstrate success. In fact, yesterday Ally received very positive scores in the annual J.D. Power Dealer Financing Satisfaction Study, especially in comparison to other banks in this space. This ranking is based on dealer feedback, which makes it all the more meaningful for us. In turning to Ally…

Thanks Mike. Let me walk through more details on the financial results on slide four. We had a great quarter, with many aspects of the results coming in favorable, with the exception of the weather-losses that Mike mentioned. Core pre-tax income, excluding repositioning items was $417 million in the second quarter, up from $339 million in the first quarter and $211 million last year. Let me take you through some of the drivers of the line items. Net financing revenue of $912 million was very strong and up $47 million from the first quarter and $223 million year-over-year. The quarter-over-quarter improvement was driven primarily by strong lease performance and consumer loan growth. The significant year-over-year improvement is driven primarily by lower cost of funds and the impact of our debt core program. While our lease performance and strong used core prices have accelerated some of the long-term improvement in financing revenue, we believe we still have some good room to run on this line item, as cost of funds further improves over time. Other revenue of $372 million was up $51 million quarter-over-quarter, since we didn’t have the debt core expense that we did in 1Q. Year-over-year it was down $38 million due to lower investment gains in our insurance business. Provision expense of $63 million was down quarter-over-quarter and year-over-year. The quarter-over-quarter decline was driven by seasonally lower retail auto charge-offs, as well as $13 million in recoveries we had in our corporate finance business. The year-over-year drop was driven mainly by a $25 million reserve release we had in our mortgage book, similar to what you saw last quarter, as the performance of that portfolio continues to improve. We would expect to see our provision expense go back up next quarter as we come off our seasonally low…

Let me just make a few closing remarks and then we’ll go to Q&A. The second quarter I think clearly demonstrated the strength of our core Auto Franchise and our direct banking franchises. Auto originations in the quarter are evidence that Ally’s dealer-focused, go-to-market strategy is winning, despite the intensity of competition in the marketplace. Ally Bank is on track to achieve its target growth of $5 billion in retail deposits and we remain squarely focused on our three-point plan to improve returns and achieve a double-digit core ROTCE. In anticipation of the question, with respect to the remaining common equity holdings of the U.S. Treasury, we know that they will exit at some point and they will do so when and how they determine is in the best interest of the U.S. taxpayer. We stand ready to assist them and look forward to our full exit from the TARP program. Thank you all for joining the call today. With that, I’ll turn it over to Michael Brown.

Thanks Mike. As we move into Q&A, we would request that you please limit yourself to one question plus one follow-up. If you have additional follow-up questions after the Q&A session, the Investor Relations team will be available after the call. So Steve, with that, we can start the Q&A session.

(Operator Instructions). Stand by for your first question, which is from the line of Betsy Graseck from Morgan Stanley. Please go ahead.

Hi Betsy.

A couple of questions. On the expense ratio, obviously down nicely and I know you target that mid-40s number. Part of the improvement this quarter came from better revenues and I know that was – at lease versus our model, in part from better used car prices. So I’m just wondering how much more juice there is in the expense ratio? You targeted a $40 million decline in expenses. How far along are you through that? I’m just wondering if we could even go below the mid-40s you had targeted?

Right now, what I would say is that, I think it was in Mike’s comments that in the first half of the year, we’re down about $110 million from 2013, and I expect when we end 2014 we’ll be down significantly from the 2013 level. We still expect to have expense reductions come through as we go through 2015 as well, so we are targeting kind of a dollar amount at the moment. But having said that Betsy, if you look obviously at our origination number, we continue to drive great business results and with that, we need to make sure that we continue to invest in the business, both from a technology side, as well as a servicing side, which is one of the reasons we really like to point to an efficiency ratio. So at this moment, we’re sticking to somewhere in that mid-40s range as we continue to invest in the business, but we are very focused on continued expense reductions, particularly in the global functions.

Okay. And then the follow-up is on NIM, where you showed some nice improvement this quarter Q-on-Q. Part of its driven by the lower debt costs and given that the long end of the curve is down so much year-to-date, could you take advantage of that with more refinancing of the long-term debt? I know in the past you had said from here we’re just going to allow the debt to roll off and refinance it that way, but is there any interest in potentially even going beyond that, given where the curve is?

The answer is yes. One of the things we are looking at in particular is liability management possibilities throughout the second half of this year. And to the extent that we can move forward with some liability management, we would look at the longer end of the curve as replacement debt to do that. But that liability management will most likely be focused on some of that longer debt, the 2021, 2030's that we have outstanding.

Okay, thanks.

Betsy, I would make a further comment, which is – and the further we go down that path and particularly as we get focused on the preferred side of things, it really depends on the approval of the regulators. And in some cases, it will depend on the 2015 CCAR process, what we can do next. So we are very focused on it. I think the question is what can we in fact practically do? The $500 million zero-coupon trade that we did in the second quarter was the first trade we’ve done, so that’s actually increased the earning power of the franchise, but at the expense of capital, and we’re hoping there may be some more opportunities that the regulators are comfortable with.

Okay, got it. Thanks.

And your next question is from the line of Moshe Orenbuch from Credit Suisse. Please go ahead.

So, I was just looking at it from a credit quality perspective. I mean the credit quality in the quarter kind of looks really good on the charge-off front. You’ve got that normalization on the delinquency front and so I guess could you talk about that in the context of the reserve and how you see the reserve developing kind of over the next quarter and year?

Yes, I mean from a coverage perspective we’ve been keeping the consumer auto book around 1.2%, 1.25%. My expectation is that we’ll continue to keep it in that range. I mean while we had very positive and very good results from a charge-off perspective, I always caution people to look at the seasonality of our book; the second quarter is always the lowest quarter. So from a coverage perspective we’ll continue to keep a pretty robust coverage ratio going forward. So I would say you should think about it in line with that 1.2%.

I want to make another editorial comment if I may, which is, we’ve had a lot of people talking to us about the New York Times article, including obviously our regulators and I would say in very simple terms, that article does not describe the nature the business that we are in and does not describe the way in which we run our business.

Got it. The follow-up question has to do more with capital management and you talked a little bit about liability repositioning. Would it not be easier from a regulatory standpoint to get them to approve something on the shorter end, I mean with a shorter payback? And kind of corollary to that is, does the timing of the China sale matter in terms of the CCAR if it happens in 2014 or does it matter if it gets pushed into 2015?

Yes, so to answer your first question, the zero-coupon bond that we called in June was really targeted at the short end of some of our liability. We think probably the bigger bang for our buck is really on the longer-term debt and we have a good relationship with our regulators and we’ll continue to work with them to improve the profitability of the company going forward. So I would say we’ll look across the curve, but we feel pretty good now. On the China side, the answer to that is yes, meaning that there is a significant amount of capital generation from the China sale. So the timing of that China sale does come into play. I do not think it needs to close prior to our submission or to the cut-off date for CCAR, but in order to use the capital that gets generated from China, it will obviously need to close.

Thank you.

And your next question comes from the line of Kirk Ludtke of CRT Capital Group. Please go ahead.

Good morning everyone.

Good morning.

The origination volume was impressive and particularly given that you are not moving down the credit spectrum. I think you mentioned that it was largely attributable to an increase on the number of dealers, I think 900 year-over-year if I’m not mistaken.

Yes, that’s ballpark about right. We’ve got now retail relationships, if you include on the auto side as well as RV, about 16,400 relationships. So we continue to make good progress expanding and obviously that’s showing up or manifesting itself in some of the diversification numbers that you see in origination as well. So about 20% of the originations we are doing, non-GM, non-Chrysler and then obviously Kirk. A big component this time around was the crack on the $3 billion on the used front as well. It certainly contributed to the overall health of that number.

And then J.D. recovery in our share at Chrysler quarter-over-quarter.

Yes, we were obviously very pleased to see penetration levels at Chrysler, which had got down, call it, in 8% range in the first quarter and bounced back up to about 11% in the second quarter. We continue to make good progress there; I think really demonstrating the value that we bring to the Chrysler dealer relations. So we are very pleased to see that rebound from where we’re at in the first quarter.

That’s helpful, thank you. Is there any particular reason why it increased so much this quarter and can you share what your target market is and how quickly you think you can add dealers?

Yes, I mean look, the increase in dealer relationships continues to be a very steady uptick quarter-over-quarter. So the 900 or so dealers that you cited, those have come sort of evenly across the past year, but I think we just continue to demonstrate things like the J.D. Power Survey that Mike mentioned in his opening remarks certainly helped. It shows other dealers what our capabilities are, what strengths we bring to the table, and obviously what J.D. Power Survey cited is dealers are now willing to pay a premium to have enhanced servicing. So I think our model is proving to work out very well here. We did see a record number of applications in the quarter as well, so we’re getting a lot of looks on flow. The benefit there is obviously a very healthy SAR environment right now that we’re benefiting from, but I mean, even I think what we saw during the quarter was we actually outpaced the growth in SAR and again, that comes back to really demonstrating the strength of the franchise, improving financials that we have in-house. I think it just makes us much more attracted to a wider universe of dealers.

That make sense, thank you. I may be mistaken, but is there something like 50,000 dealers domestically and how many of those would you consider doing business with?

Yes Kirk, let me get back to you with a more educated number. I think the number that would be in our universe would be something much smaller. I think when we think about the relationships, we try to conquest. They are more of the franchise dealers and I think that’s somewhere in the neighborhood of more like 18,000 dealers. So obviously at 16,400 dealers we are doing the lion’s share of them today. But let us come back to you with a more defined answer.

Great. Thank you very much.

You got it.

And your next question comes from the line of Sanjay Sakhrani from KBW. Please go ahead.

Thank you. I guess just following up on that line of questioning before. I mean when we think about same dealer kind of origination growth, how is that trending kind of relative to what it has been in the past, and maybe you could just talk about the competitive environment?

Sure. I mean, let me take the competitive environment to begin with. Obviously, it remains extremely robust. We sound like a broken record for pretty much the past year, but the environment, very aggressive right now. You see it not only on the retail front, but certainly on other lenders trying to conquest the floorplan relationships. But obviously, floorplan balances for us, it kind of maintained in that $32 billion-ish type of range for quite some time. So we’re doing the best we can in defending our relationships, albeit we have sacrificed a little margin there to combat the competitive pressures, but there are a lot of lenders that like the product right now in this type of rate environment. Similar on the retail front, you do see tremendous competition for the super prime product. You see pretty aggressive competition continuing in the subprime, the deep subprime space. It’s a little less in the belly of where we compete, but still that shouldn’t imply that it’s not a very competitive market. I mean one of the stats we’ve continued to quote is how many of our dealers use multiple products. We continue to see that increase in the second quarter. I think we had about north of 5,300 dealers who were using four or more of our products. That’s generally been about consistent from where it was a year ago, but it’s popped from the past couple of quarters, so we do continue to penetrate deeper into the dealer relationships we have.

Okay. I guess a follow-up question, just on the consumer balance sheet or the loan growth. I mean that seems to be tracking a little bit lower than kind of what you guys have been anticipating. I wonder, is it seasonality or is that something that you’re seeing in terms of maybe higher repayment rates or something like that?

No, I don’t think there’s significantly higher repayment rates and listen, it’s almost 2% this quarter. I think it’s somewhat within our expectations. We are seeing some of the, what I would call the lease book turnover quickly and one of the drivers of some of the lease income this quarter was that there were just more cars coming back from lease and being pulled ahead from future quarters. So some of it has to do with some of the leases being turned in, but I mean overall I think somewhere just shy of a 2% growth on a quarterly basis is somewhere where we would expect it.

All right great, thank you.

And your next question is from the line of Don Fandetti from Citigroup. Please go ahead.

Yes, I was wondering if you could provide a little bit of perspective on the remarketing gains and what your outlook is for used car pricing. I mean it’s one of the trickier things. The quarterly earnings look very good, obviously, but you have this big benefit from these gains and I was just curious if you could you talk about when you think that might turn. Just to provide some color for us.

A couple of things. One is, used car prices continue to be strong. Going into this year, we did expect used-car prices to start moderating. They really haven’t moderated in the first half of this year. When I look forward at our expectations and our forecasts, we do expect it to continue to come down. Obviously, if you look at the Manheim Index, it continues to stay pretty high. So from a future forecast perspective, I think it’s important that you understand that we are anticipating lower used car prices going forward. But having said that, one of the other drivers that I think is just worth noting this quarter is that from a termination perspective, we had almost 85,000 cars terminated in the second quarter. So that was up almost 40% from somewhere around 60,000 in the first quarter, which helped drive some of that lease gain and overall lease revenue. So the expectation is it will start moderating towards the second half of the year, particularly when you get into the colder weather-related months. So it’s built into our expectations.

Okay, and then just quickly, as you had mentioned CCAR and potentially thinking about the preferreds, is it correct that the Series G are redeemable now, but you’re not really talking about the Series A. I think those are redeemable sometime in mid-‘16, is that correct? And then could you take out a portion of the G or do you have to do it all at once?

Yes, G is redeemable today and it’s redeemable in parts or whole. So you could take out pieces of it. From a Series A perspective, you are correct that Series A is callable out in 2016. You could look at Series A more from a liability management perspective and do some kind of tenders as well if you wanted to do it early, but you are correct, that in the first half of 2016 it’s due.

Okay, just a little wrap up. Is the China sale sort of slipping a little bit in terms of timing? I know you had mentioned that it could close this year. Can you talk a little bit about what has to happen for that to close and are we now talking about ....

We’re just waiting on Chinese Regulatory approvals.

It’s really as simple as that, which is a little bit unpredictable on timing.

Got it.

And your next question is from the line of Chris Donat from Sandler O’Neill. Please go ahead. Chris Donat - Sandler O’Neill : Hi, thanks for taking my questions. I wanted to get a little color on the quarter-on-quarter move in depreciation expense on the operating leases. Just with that down 6%, is that sort of a function of the high termination number of leases or what’s driving that decrease?

Yes, that’s part of it. In one of the things I think it’s important to look at and we continue to look at our depreciation rates on the overall lease book. You have to look at the lease performance all with the revenue, the depreciation, as well as the gains and if we were depreciating slower over the last couple of years because we anticipated higher used car prices, that lease revenue would have just come through lower depreciation as opposed to the gains. My expectation going forward is that we’ll do a better job depreciating the overall book and therefore the gain number will come in lower. Now to me it’s just a timing of revenue recognition. If you depreciate more accurately, therefore you would have lower depreciation or higher depreciation, depending on where used car prices are. So I would encourage you to kind of look at it altogether and going forward, I wouldn’t expect large gain on sale of lease dispositions, because I would expect that we would be more accurate from a depreciation perspective, and that’s something we are trying to do. Chris Donat - Sandler O’Neill : Okay, that’s helpful. And then just one more question on the competitive environment and market share. So GM Financial has announced that they are rolling out their prime offering that they began in the second quarter, and with the expiration of your exclusive agreement with GM in February, it looks like your markets are actually improved with GM. Can you comment a little bit on where you saw – basically, how did you improve market share, even though you had the termination? What went right there?

Yes, I mean – look, it’s JB. Our relationship with GM right now remains quite strong and obviously you cited GMF. They are entering the prime space. It’s really, to us, to some degree, it’s no different from what we face with other lenders day in and day out. I mean you do have not only GMF, but you have a lot of other lenders that like the prime product right now, given the low rate environment and given the credit quality of those types of assets. That’s not to imply that we are not actively watching what’s going on with GMF, but we continue to be able to weather the storm. I think how are we continuing to grow? Obviously, we are a big player in lease product. I think that’s one of the unique capabilities and strengths that we have relative to other lenders that are out there. We are very comfortable with lease, given the backend SmartAuction platforms that we have, we are comfortable taking that risk. So I think while we’ve maybe shifted a little out of the retail loan product, we certainly increased our fair share of the lease space as well and so net-net that’s been a nice additive component for us.

I’ll make one other comment, which is, I think far too much is made of the expiration of the GM contract. The GM contract only related to subvented business and practically speaking, has not been relevant for a couple of years now. Chris Donat - Sandler O’Neill : Got it. Okay, thanks Mike.

Your next question is from the line of Brian Foran from Autonomous Research. Please go ahead.

Hi, good morning.

Hi Brian.

I guess on mortgage, one of the things we saw from a lot of banks early, or at least several banks this quarter was sales of legacy mortgages kind of running the gamut from distress, scratch and dent, performing, and is pretty consistently at a gain. So as you look at the remaining mortgage portfolios, that’s something that you could consider in the back half of the year, both to accelerate the line down and also I guess it would help with some of your CCAR at the margins, since it would take away a stressed asset?

Yes, let me address one of the parts of your comment, which is we are really not looking to wind down the mortgage book. We actually like the held for investment mortgage book and if anything, we would look to add to it in the future. It’s a great ALCO tool; it’s a great investment for us. From our perspective it’s a profitable business, so it’s something we actually like and we talk a lot about, so I don’t expect us to be net sellers of that portfolio in the future. Now having said that, are there ways sometimes to trim pieces of the portfolio that you think attract more capital, particularly stress capital around CCAR that may have a better bit in the market today? I think the answer to that is yes. We may look at that on the margin. We do watch that pretty closely from a market perspective, but overall I think you should look for us to potentially add to that portfolio moving forward.

That’s helpful, thank you. On used car prices, I mean I guess it’s coming back to the comment you made about the expectation coming into the year that they had peaked. I think certainly a lot of us look at the same thing, which is lease schedules coming off or rising and we are lapping the trough in new car sales four, five years ago, which kind of matches the average trade-in time. So when you kind of revisit the first half of this year, is it clear what’s driving the strength in used car prices and is it something that’s clearly temporary and you are already seeing reverse back out or is it something that maybe continues to provide upside support to used car prices in the short term?

Yes, I don’t think it’s temporary and I’ll give you a couple of things. One is, you’re seeing increased discipline out of all of the OEMs on new car prices, and when you have that discipline on new car prices that helps translate into better used car prices; I think that’s one thing. I think the second aspect of it is, if you look at used car demand, it’s really outpacing the supply. So when you look at kind of days supply inventory on the used car side, it’s actually quite low compared to the market over the last five or six years. So you are seeing just a greater demand in a growing market with just less supply. Now the question then comes, is where are you getting the growing demand from? And some of this is probably related to unemployment. So as you continue to see employment numbers get better and better and people go back to work, they need cars, and the used car market tends to benefit from that. So overall, we don’t think it’s something that’s temporary. Now do we think it will moderate a bit? I think the answer is yes, but do we think it will come crashing down? No, we don’t believe that.

If I could sneak in one last one on the Chrysler penetration, I guess Chrysler Capital’s parent was announced at a conference that they had pulled back a little in April and May, but then re-expanded in June. So when we think about that tick-up from 8 to 11, is there any way to size I guess the run rate into 3Q? Is it something that you think is a new base or continue to grow from or is there any temporary market disruptions that maybe contributed a little bit of volume this quarter?

Brian, I’d just very simply say sustainable to expanding and just leave it at that.

Fair enough. Thank you very much guys.

Thanks.

Thanks.

And your next question is from the line of Eric Beardsley from Goldman Sachs. Please go ahead.

Hi Eric.

Your line is open. You may be on mute.

Hi, thank you. Just on used car prices again, if you were to see residual values to hang in here, what type of financial benefit might you see, I guess if you were to compare to your expectations in the back half of the year?

Yes. To give you a little sensitivity, about a 1% move in used car prices probably translates to $10 million to $15 million per quarter for us. So depending on where used prices go up or down, that gives you a little bit of sensitivity of what we would expect.

Got it. Now, is that 1% relative to your expectations or just 1% from current levels?

Yes, it’s a good question. Well, relative to our expectations. But we are expecting them to come down. The way I would explain it is over the next two years, and on somewhat of a linear approach, we would expect it to come down about 5% per year.

Okay, great, thank you. And then just on your allowance, as you are starting to grow in the used space. I know you said you haven’t gone down market much, how do you think about your reserve adequacy and where might that go over the next couple of years?

Listen, we think our reserve is very adequate today. We do expect charge-offs to continue to kind of creep up on a year-over-year basis, but we think that will be somewhat predictable and measurable. So when I look at the overall coverage, once again for the consumer auto book at 1.25%, we think that’s very, very adequate right now. So I don’t think and I wouldn’t want you to believe that our coverage ratios are going to increase significantly from here.

Okay, great. Thank you.

And your next question is from the line of David Lapierre from Loomis Sayles. Please go ahead.

Hey David.

Hi. Just a quick question on the bank. You had mentioned a while back about possibly originating lower FICO loans out of the bank. Has that happened yet or is that still on the come?

It’s still on the come, so we have not started originating below the 660 FICO at the bank. At the moment that continues to be tied to our repayment of TARP or a full repayment of TARP to back to U.S. Treasury. So it’s something we expect to have shortly after that final sale.

Okay great, thanks.

And now, I’d like to turn the call back over to Michael for closing remarks.

Great, thanks a lot Steve. If anybody has any additional questions, please feel free to reach out to Investor Relations. Thanks for joining us this morning. Thanks Steve.

Thanks all.

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a good day.