Michael A. Carpenter - CEO Christopher A. Halmy - CFO Jeffrey J. Brown - President and CEO, Dealer Financial Services Barbara A. Yastine - Chairperson, CEO and President, Ally Bank Michael Brown - Executive Director of IR.

Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc. Eric Beardsley - Goldman Sachs Don Fandetti - Citigroup Cheryl Pate - Morgan Stanley David Ho - Deutsche Bank Richard Shane - JPMorgan Moshe Orenbuch - Credit Suisse Kirk Ludtke - CRT Capital Group Kenneth Bruce - Bank of America Merrill Lynch.

Good day, ladies and gentlemen, and welcome to the Third Quarter 2014 Ally Financial Earnings Conference Call. My name is Sheila and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of this conference. (Operator Instructions).

As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed, sir..

Thanks, Sheila, and thank you everyone for joining us as we review Ally Financial’s third quarter 2014 results. You can find the presentation we’ll reference during the call on the Investor Relations section of our Web site 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 call will be governed by this language. This morning, our CEO, Michael Carpenter; and our CFO, Chris Halmy, will cover the third quarter results. We’ll also have some time set aside for Q&A at the end.

And 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 start by taking you through a few highlights for the quarter, as well as providing an update on our three-point plan to improve core return on tangible common equity. The third quarter was an excellent quarter both financially and operationally.

We posted net income of 423 million, with earnings per share of $0.74 and adjusted earnings per share of $0.53. This compares to income of 91 million a year ago and 323 million from the prior quarter. So by any account, the third quarter reflects substantial progress for the company.

Also echoing that is core income, which increased to 467 million compared to 271 million in the prior year period and 417 million in the second quarter. Driving results were continued strong performance in the auto finance franchise with originations of 11.8 billion in the quarter being a high since becoming an independent company.

Notably, originations are what we call our growth channel or the non-GM, non-price of dealers continued to gain traction and were up 54% year-over-year. This is a testament to the broad base of strength and flexibility of the Ally franchise, and is evidence that Ally can be a leader in a very crowded marketplace.

Automotive net financing revenue increased 6% year-over-year and auto-earning assets increased 7% during a period in which used car prices normalized. Retail deposits of Ally Bank continue to grow with balances up 12% from last year and loyal and expanding customer base driving that growth.

This is all as we take a greater eye toward efficiency in how we gather deposits. These core fundamentals as well as other factors have translated to a solid quarter and steady progress on our three-point plan to improve profitability going forward.

As I mentioned before, our plan to achieve an exemptible ROTCE is based on three key areas; net interest margin expansion, expense reduction and regulatory normalization. On the bottom of Slide 3 is our quarterly report card in these three areas. Our three key metrics for NIM expansion continued to improve in the third quarter.

Net financing revenue was up 17% to $936 million, NIM was up 31 basis points to 2.65% and Ally’s cost of funds decreased by 50 basis points to 1.88%. Our expenses continued to come down and importantly our adjusted efficiency ratio improved to 49% this quarter, down from 59% last year.

Lastly, we continue to experience incremental progress in achieving a more normalized regulatory environment for the company. Most recently with the support of our regulators, we conducted a tender offer for $750 million of legacy, high-cost debt and we think there is more progress to be achieved in liability management in this area in the future.

The progress Ally is making on the three-point plan is generating significant levels of incremental capital and we aim to redeploy some of this capital in the future. To anticipate a question, we have no specific plans for that redeployment at this moment. We are starting alternatives.

At almost any scenario we are likely to embark on will require approval under the CCAR process. To sum up, we are pleased with the quarter and with the progress on our longer-term plans. With that, let me turn it to Chris Halmy for a more detailed account of results..

Thanks, Mike. Let’s look at the details of the financials on Slide 4. We had a really great quarter with various aspects of the results coming in favorable to what we had been expecting. Core pretax income, excluding repositioning items, was 467 million in the third quarter, up from 271 million last year and 417 million last quarter.

Let me take you through some of the drivers. Net financing revenue of 936 million was very strong and up 135 million year-over-year and up 24 million from last quarter. The significant year-over-year improvement is driven by a combination of lower cost to funds and growth in our earning assets.

The quarter-over-quarter improvement was driven primarily by lower cost of funds offset somewhat by lower lease revenue.

Although revenue of 375 million was fairly flat year-over-year and quarter-over-quarter and provision expense of 102 million was down year-over-year due to an improved outlook on our forward retail auto credit losses, we still expect credit losses to increase from current levels but we don’t expect them to increase as much as previous estimates, so we needed to bring our retail auto allowance down by 36 million this quarter.

The quarter-over-quarter increase in provision was driven by seasonally higher charge-offs as well as the mortgage release last quarter that didn’t repeat. Total noninterest expense was 742 million, was down 14 million year-over-year and 63 million quarter-over-quarter.

The significant drop quarter-over-quarter was due to high weather losses we had in 2Q. I’ll cover more on expenses in a minute. So overall, these results drove 423 million of GAAP net income, which includes 130 million of income from discontinued operations.

Disc ops income was elevated by a one-time tax through-up related to the sale of our mortgage business last year that came through during the quarter. After taking out 67 million of preferred dividends, this results in GAAP earnings of $0.74 per share, which obviously drives a nice increase in our book value this quarter to around $29 per share.

We provide a walk here to our adjusted EPS metric of $0.53 which we view as being a very strong quarter. Adjusted EPS backs out the $0.27 for our discontinued operation results and adds back $0.06 for OID expense. We’ve also highlighted on the page some of our other key metrics.

Our unadjusted return on tangible common equity for the quarter was 10.3% with core ROTCE of 9.1%, up nicely both year-over-year and quarter-over-quarter. From an efficiency ratio perspective, we stayed flat at 49% this quarter not far from the mid-40s where we plan to exit 2015. So overall, a very strong quarter across the board.

Let’s turn to Slide 5 and we’ll look at the results by segment. I’ll go through the details of each of these segments in a minute, so I’ll just hit a few highlights here. Auto Finance pretax income of 415 million was up 76 million year-over-year given portfolio growth, strong lease performance and lower provision.

Quarter-over-quarter results were impacted by lower net lease revenue as used car prices moderated and provision was up seasonally both in line with our expectations. Insurance with pretax income of 60 million rebounded from a disciplined second quarter as we had seasonally lower weather losses.

Mortgage and corporate and other were both roughly breakeven this quarter. The significant improvement in corporate and other was driven by lower corporate cost of funds. Let’s turn to net interest margin on Slide 6.

Looking at the year-over-year trend, NIM was up 31 basis points as our cost of funds declined 50 basis points while our earning asset yield went down only 4 basis points. Quarter-over-quarter, our asset yield dropped 18 basis points due to lower lease yields as expected, but that was more than offset by a 21 basis point decline in cost of funds.

As we’ve said in the prior quarters, we still expect used car pricing to continue to moderate and thus we would expect to see asset yields come down again in the fourth quarter.

To mitigate the decline in assets yields, we expect cost of funds to continue to decline meaningfully over time, which we’ll discuss more on the next slide, so let’s turn there.

We’ve added this slide this quarter to provide more transparency into the liability structure and detail the progress we’ve made as well as the opportunity for continued improvement. The top table shows the progress we’ve made since the end of 2012 when we embarked on the process of refinancing the balance sheet.

Looking at the top line in the table, during 2013 and 2014, we’ve reduced our high cost unsecured footprint by 11 billion taking it from 28 billion to about 17 billion today. And we’ve only refinanced a portion of that, which has brought the entire unsecured footprint down by over 9 billion over the last two years.

Looking into the future opportunity, we still have about 17 billion of what we consider to be high cost legacy debt, which we define as having a coupon of over 5.5%. We detail those securities in the table on the bottom.

You can see we have a few maturities in December, February and April that will mature naturally and result in decent cost of funds reductions. Importantly, we’ve begun to attack the longer dated maturities with our first tender offer that closed earlier in the fourth quarter.

We expect that would be the first in a series of transactions designed to utilize excess capital to improve profitability and drive long-term sustainable EPS improvement. And not listed on this page are the Series A and Series G preferreds, which carry an 8.5% and 7% dividend loan, respectively.

That results in about 270 million of preferred dividends a year and we’ve talked about addressing those as being another long-term opportunity to improve the EPS. So there’s a lot of potential here and this will be an ongoing process over the coming months and years. Moving on to Slide 8, let’s discuss deposits.

As you’ll see in the top right corner, retail deposits grew by 800 million in 3Q and are up 12% year-over-year. We’ve had good success this year in our deposit business bringing both interest expense and noninterest expense down at the same time we continue to consistently grow our deposit and customer base.

Ally Bank continues to rack up the awards and importantly we are recently named Money Magazine’s Best Online Bank for the fourth year in a row as well as being recognized by Kiplinger’s Personal Finance as the Best Online Bank.

The true franchise that we’ve build at Ally Bank should position us well to hold our rates steadier for longer in a rising interest rate environment as we compete more on service and customer experience versus purely rate like some of our direct bank competitors. Let’s look at expenses on Slide 9.

Controllable expenses declined 19 million year-over-year given overall streamlining of the company. Year-to-date, we’re down a total of 128 million from 2013. Quarter-over-quarter, we were up a bit as expected given the equity compensation revaluation in the second quarter that didn’t repeat.

Like we said last quarter there can be variability on a quarterly basis, but we continue to make progress over time towards our efficiency ratio target. Another thing to keep in mind is that we continue to invest in the core businesses, particularly as originations have come in stronger than expected.

And we’ve also invested in our servicing operations, which has helped keep our credit cost lower. The significant quarter-over-quarter decrease in other noninterest expense to 273 million were driven mostly by a decline in weather-related losses this quarter. Let’s turn to capital on Slide 10.

We generated some good capital organically this quarter with 356 million of net income to common, which resulted in our Tier 1 common ratio increasing 30 basis points this quarter to 9.7%. Again, we view the capital we’re building now as excess capital and we can redeploy over time particularly as we get through the next CCAR process.

Let’s move to asset quality on Slide 11. In the upper left corner, consolidated charge-offs increased seasonally to 60 basis points, which was really driven by our retail auto charge-offs shown in the bottom right. Retail auto net losses increased to 93 basis points this quarter in line with seasonal expectations.

Remember that from a charge-off perspective, the second quarter will typically be the lowest, fourth quarter will be our highest and the first and third quarter should be in between. We continue to expect charge-offs to increase on a year-over-year basis from here and we are maintaining around 1.2% coverage ratio on the retail loan book.

In the bottom left corner, our second quarter delinquency rate increased to 2.28% due to seasonality as well. Delinquencies are a point in time measure and typically increase from March 30 to December 31. Year-over-year delinquencies were up 18 basis points, which is consistent with our expectations and normalization of our portfolio.

I should mention that we did execute in off balance sheet securitization of higher quality loans this quarter that resulted in our delinquency rate being about 6 basis points higher than otherwise would have, largely due to a denominator effect.

Finally our commercial auto book is shown in the top right where we once again had negligible losses for the quarter.

Overall, the takeaway here is that asset quality continues to perform in line or better than expected, investments that we’ve made in servicing and risk management are paying dividends and our expectations as we look forward have actually improved from our expectations earlier this year.

Now let’s turn to Slide 12 and go through the segment results starting with Auto Finance. We reported pretax income of 415 million, which is up 76 million year-over-year but down 46 million from last quarter. Net financing revenue continues to be strong at 850 million.

This is up 6% year-over-year, driven primarily by portfolio growth and lease performance. The quarter-over-quarter decline is driven largely by lower net lease revenue, which you can see was down 25 million quarter-over-quarter.

Since used car prices and impacts to our net lease revenue are such hot topics, we added some additional disclosure down on the bottom right of the page.

Here we show our internal used vehicle value index and as a little background, this is an internally developed index based on our used vehicle performance as well as data from other external sources.

We feel our index provides several benefits versus other publicly used indices including it is much more representative of Ally’s portfolio mix, it allows for greater analysis of individual collateral and we update it weekly versus monthly to more frequently capture movements in the market.

In the chart, you can see how used vehicle prices have performed over time and our expectation through the end of 2016.

As we have previously mentioned, our expectations are that used vehicle values will decline a little over 10% over the next few years during which time we expect our lease portfolio to remain solidly profitable but just down from today’s elevated levels.

It’s very important to understand that we expect these declines and we have baked them into our forecast and residual setting process as we underwrite new leases. So obviously used vehicle price performance relative to our expectations is the key factor to keep in mind.

And it’s also important to note that used car prices are seasonal, so they will be nominally weaker in the fourth quarter and higher in the second quarter. We also thought that it would be helpful to give you an estimate of our forecasted annual lease terminations.

I will caution, however, that while we do our best to forecast these volumes, actual terminations may vary due to our origination levels and potential OEM pull-ahead programs, which can affect the timing. Now on to provision, which was down year-over-year, driven by a decline in our expectations for future credit losses as I discussed earlier.

Again, just to be clear, we are still expecting losses to tick-up in the portfolio just not quite at the same magnitude as previously estimated. On a quarter-over-quarter basis, provision was up mainly due to seasonally higher charge-offs in 3Q.

Asset balances were up 7% year-over-year but we had a slight decline quarter-over-quarter as our strong consumer origination levels were offset by seasonally lower floorplan balances and we also completed a $1.6 billion off balance sheet securitization in the quarter. For the origination discussion, let’s flip to Slide 13.

As Mike mentioned earlier, we had a very strong quarter with 11.8 billion, up both year-over-year and quarter-over-quarter. These origination levels are driven by strong performance across multiple channels as shown on the top left chart.

In the GM space, we saw strong originations and increased penetration as a result of an incentive program they ran this summer. We continue to be a major player in the Chrysler channel with our penetrations slightly up this quarter and our growth channel originations were up 54% from the prior year.

In the top right, you can see the pop in subvented business driven by the incentivized program GM ran in the quarter and it’s notable that we had our second straight quarter of record used car loan originations.

From an asset quality perspective, we don’t have it on the page but our FICO mix skewed a little bit towards the prime end of the spectrum this quarter with our subprime mix dropping below 9%. In the bottom left, you can see that our origination levels continue to drive modest consumer asset growth, despite our off balance sheet securitization.

In the bottom right, we show our commercial portfolio, which averaged 31.4 billion this quarter, up nicely year-over-year but down a bit seasonally quarter-over-quarter. Now let’s turn to insurance on Slide 14. Our insurance business reported pretax income of 60 million this quarter, down 23 million year-over-year but up 83 million from last quarter.

The main driver of the results both year-over-year and quarter-over-quarter is obviously the weather-related losses in our dealer floorplan insurance business. On a year-over-year basis, weather-related losses were up slightly but mostly offset by lower vehicle service contract claims, which you can see on the bottom left of the page.

As we’ve discussed, 2Q is a seasonal high for these losses so you saw that number come down quarter-over-quarter. Investment income remained strong at 53 million and written premiums were steady both year-over-year and quarter-over-quarter at 265 million. Over on Slide 15 we show results for both mortgage as well as our corporate and other segment.

Mortgage reported a pretax loss of 3 million, which is up slightly year-over-year but down from the prior quarter. Remember, we had the provision release in 2Q, which is the main driver here.

Looking at corporate and other, you could see that we had a pretax loss of 5 million, which has improved significantly year-over-year and quarter-over-quarter as we’ve made progress reducing cost of funds and corporate overhead expenses.

So overall, we had a really great quarter across the board and are pleased with the performance of our core businesses and the progress we continue to make towards improving the long-term profitability of the company. With that, I’ll turn it back to Mike to wrap up..

Thanks, Chris. As I said in the start and Chris has certainly explained in detail, we do feel good about the progress in the quarter. Our franchises are showing their underline strengths and our key metrics are moving in the right direction.

We know that the path toward our goal of achieving a run rate of 9% to 11% core return on tangible common equity may not be in a straight line, as Chris has described, there are seasonal patterns to our business, which investors need to understand.

We’re also anticipating that lease revenue will continue to decline as used car prices retreat to normal levels, but we’re expecting that this will remain within our expected underwritten levels and furthermore we believe that continued improvements to our cost of funds will more than offset these declines.

We expect to remain on track with achieving our stated profitability and efficiency goals by the end of next year. And lastly, the U.S. treasury continues to reduce their common equity holdings in Ally and currently has 11.4% of the stock, the U.S.

tax payers receive $18.3 billion on the $17.2 billion they invested in Ally, over $1 billion more than what was invested in the company and they still own the 10.4%, which they will earn an attractive return. So thank you for joining the call today. With that, I’ll turn it over to Michael Brown for questions..

Thanks, Mike. As we move into Q&A, we request that you please limit yourself to one question plus a single follow up. If you have additional follow-up questions after the call, feel free to reach out to the Investor Relations team. So, Sheila, with that, we’re ready to start the Q&A session..

Thank you. (Operator Instructions). Your first question comes from the line of Sanjay Sakhrani of KBW. Please proceed..

Thank you. Good morning. I guess I want to just touch on the yield; good color on the yield. You guys talk about the fact that it’s remained fairly flat despite a competitive environment, but you guys expect some decline in the yield over time.

But could you just talk about why it’s remained so resilient on a relative basis, because you hear all sorts of bad stuff about the competition in this space? And I’ll just ask my second question upfront. Mike, you’ve talked about your confidence in the government exiting its stake in the company by the end of the year.

Do you still hold that belief? Thank you..

Thanks, Sanjay. This is Chris Halmy. I’ll try to take the first one around asset yields. One of the reasons asset yields have remained resilient and actually have increased for us during 2014 really has to do with the lease performance.

So since we have actually booked pretty healthy gains on off-vehicle leases, those gains actually flow through the yield which has actually increased our yield somewhat this year.

Now obviously our expectations is that used car prices will continue to come down and therefore the gains that we have experienced during 2014 on the off-lease vehicles will continue to come down and therefore will affect the overall yield. So I expect our normalized yield to come down.

But on both the retail and wholesale side, we continue to be competitive but we continue to be able to hold our market share due to the relationships that we have with the dealers and we’re able to really hold the overall yields on some of the other programs.

So while I wouldn’t lead everyone to believe asset yields will continue to come down, because of the lease performance, I do expect that over time, particularly given the large unsecured debt maturities we have in 2014, that cost of funds will more than offset that as we look out over the next year or 18 months.

Do you want to answer the treasury?.

Yes. Sanjay, let me try and answer the treasury question. I’ll be the first to say I had expected that we would be making more progress on that front than we have or they have. I would point out that this is not something we control or influence. It’s absolutely their decision.

I would also point out that they have absolutely no operational involvement or influence on the company. It’s purely limited to having the ability to select one Board member.

So at this point I look at them as a 10.4% shareholder who does not have a long-term objective of owning the stock and I hope we’ll see an accelerated exit, but I don’t control it..

Thank you..

Thank you. Your next question comes from the line of Eric Beardsley of Goldman Sachs. Please proceed..

Hi. Thank you.

Just on the consumer auto reserves, I was wondering if you could share a little bit more color as to what you’re seeing there in terms of the relatively better expectations that caused you to lower the allowance?.

There’s a couple of dynamics there.

One is particularly during the last couple of quarters, we’ve been exceeding our originations, some of our origination targets and a lot of that has to do with higher quality loans that we continue to put on the books, some of that driven really by the incentivized programs which tend to attract a higher credit quality customer.

So our book is skewing a little bit towards the higher credit quality which will bring losses from a percentage basis really down. But then overall, we did expect losses really to be higher as we sit today and we look out over the next year than we’re actually experiencing.

Some of this is obviously driven by an improving economy and therefore from an accounting perspective, when you look at your expected next 12 months of charge-offs, it created a need for us to release some of the allowance this quarter..

Got it.

And then just as a follow up, would you say that you’re competing more on price today or specifically in the third quarter than you were earlier in the year?.

It’s J.B. Eric.

I’d say, look, the environment remains still hypercompetitive particularly in the super-prime space, but I think where we excelled this quarter again with our service model and the ability to continue to rollout national campaigns as I think Chris mentioned during his remarks, GM did run a number of programs throughout the third quarter.

Our subvented volumes were up about $1 billion from where they’ve been running and I think that speaks to our capability of when the manufacturer or when a manufacturer wants to put a big program out and in place, we can do it.

So pricing is still ultracompetitive but I think what you’ll really see come through this quarter is really the strength of our ability to execute..

I don’t think during the year we’ve seen any evidence of increasing price competitors is the way I would describe it. I think it’s been continuously competitive but not getting worse and in fact I think to some degree in the third quarter we saw some competitors back off a little bit..

Okay, great. Thank you..

Your next question comes from the line of Don Fandetti of Citigroup. Please proceed..

Yes. I was wondering if you can talk about the commercial floorplan market share? It looks like it dipped down a little bit.

I mean definitely there is seasonality but from a market share perspective, can you talk about what the outlook is there and if the competitive framework has changed? And then secondarily, if you could just walk through the quarter-over-quarter decline in funding costs? It seemed to be a little bit more than we had expected..

Don, on the floorplan, penetration levels are still running for us kind of mid-60s with respective GM dealers and in kind of mid-40s with respective Chrysler dealers. And I think that’s largely been consistent from where we’ve been at the past year. So I mean you do get small fluctuations in place.

The one nice thing we have seen and obviously we report the information, floorplan dealer account has continued to come down. We actually saw that stabilize this quarter. But I don’t see any major changes there. I think we continue to have excellent delivery for our dealers.

We see our dealer relationships strengthening rather than weakening, but you do see a lot of regional banks out there offering very aggressive rates to try to capture floorplan relationships, and again our model’s not to just compete on the price but come back to have a service offering that takes care of the dealers.

When I look at the numbers, I don’t see any major change in penetrations with the two big OEMs that we’re in place with today..

Listen up, on the cost of funds side to that question, really the biggest driver of that drop has to do with the zero coupon bond. The zero coupon bond that we tendered for at the end of the second quarter did result in an upfront payment of about 30 million.

So if you think about both the interest expense associated with that bond as well as the premium we really paid or the difference between the face and the book there, that really drove the quarter-over-quarter differential in cost of funds.

So not having the zero coupon bond, not paying that premium really drove a much lower cost of funds in the second quarter..

Thanks..

Thank you. Your next question comes from the line of Cheryl Pate of Morgan Stanley. Please proceed..

Hi. Good morning. Congratulations on a strong quarter and we really appreciate the additional color on the leasing volume terminations.

Just to that point, I’m wondering if you can share some color as to the portfolio mix within the leasing portfolio by car type versus truck perhaps to give us some idea of the sensitivities within the portfolio?.

Yes. We have a pre-well diversified portfolio and Cheryl it’s important for us to keep a diversified portfolio. So it’s something that we consciously do because there’s obviously different movements in car prices and truck prices at different times. To give you a little a bit of the mix, today we are about 60% truck SUV and about 40% cars.

So to give you just a little color on the dynamic there, as you’re seeing gasoline prices come down, what we’re seeing is we’re seeing better demand on the truck and SUV side and we’re seeing less demand on the car side.

And obviously that will flip back and forth, which is why it’s very important for us when we write leases today to make sure that we have a diversified portfolio mix..

The other comment I would make, Cheryl, is – this is probably not obvious to people, but we look at residuals and we do so and we project on an individual model basis, and in that process we not only look at the vehicle, we look at what the manufacturer’s strategy is vis-à-vis the vehicle in terms of promotion.

We look at how the vehicle is behaving from an aftermarket reliability, et cetera, point of view. So within the kind of overall mix, trying to understand what’s going on in the used car markets, we literally are making pricing decisions and underwriting decisions on a model by model basis. And please tell Betsy that we heard her loud and clear..

All right, I appreciate the color on that. And then just secondly as a follow up, I appreciate the color on the liability management and sort of quantifying the 5.5% plus high cost debt and obviously saw some tendering earlier last month.

Just wondering if you can speak to maybe the opportunity there to continue to be proactive in calling that and particularly sort of time that has a potential offset to some of these used car pricing declines, which are already well embedded in your expectations?.

Yes. So a couple things on that, which is we obviously have some big maturities in 2015, particularly in the first half, which will kind of naturally mature, which will help the overall cost of funds.

So while I don’t necessarily expect to see a big cost of funds reduction over the next quarter or two, by the time you get into the middle next year because of some of those big unsecured debt maturities, you’ll see a much bigger cost of funds reduction kind of middle of the year next year.

But ahead of that and in really conjunction with utilizing some excess capital, you should expect that we’ll continue to do tender offers to the extent that it makes economic sense for us to go ahead and do some of that.

So the CCAR process continues to be an important process for utilizing capital and our expectation is that we will attempt to embed some type of capital usage for liability management on an ongoing basis into the next submission..

All right, great. Thanks very much..

Thank you. Your next question comes from the line of David Ho of Deutsche Bank. Please proceed..

Good morning. Just wanted to get a better sense of the trajectory of the credit provisioning from here.

Obviously, adjusting for seasonality, can we expect kind of the more favorable outlook to impact the reserve in future periods? And just remind us when do peak losses occur and when might you see some of the impact of the stronger, more recently stronger vintages and originations hitting the provision?.

It’s always important to understand the seasonality, so the second quarter will always be the lowest quarter from a charge-off perspective and the fourth quarter will always be the highest. Now from an overall charge-off rate perspective, our expectation is 2014 on an annualized basis will be somewhere in the low to mid-50s.

Now, we do expect that to go into the 60s and eventually into the 70s out a couple of years from now. What will drive that is a charge-off rate associated with the retail or the loan book, which as we previously said, will on an annualized basis really go through 1%.

Today, it’s below 1% but next year and the year after, we’re going to expect it to get through that 1% level. So we don’t expect particularly on the retail order loan allowance, we don’t expect future allowance releases.

We expect to continue to build allowance associated with a higher charge-off amount, but obviously we look at this every quarter and we look out what our next 12 months projections are going to be. We have been positively affected by where charge-offs are in our outlook, so we take that as a good thing..

Okay. And just following up on the funding costs, have you contemplated the possibility of ratings agency upgrades over time? Obviously, the ROA needs to go a little higher, a little reduction in the regulatory and government impact.

But is that a possibility? And was that contemplated in some of the comments you made earlier?.

Yes, great question. At the moment, when we forecast out what our unsecured debt is going to be and the overall effect on the cost of funds, we are not taking into our forecast any type of significant upgrades.

So, to the extent that we do get upgraded particularly through the investment grade space, there could be potential upside associated with that. But I never like to bake into forecast something I can’t control..

Great. Thank you..

Thank you. Your next question comes from the line of Rick Shane of JPMorgan. Please proceed..

Hi, Rick..

Thanks, guys, for taking my question this morning. You guys have explored this conversation or this topic with David and Eric, but I’d love to delve a little bit more into the reserve release. Basically, what you guys said was that the expectations of future losses are going to be a little bit below what you had previously assumed.

I’d love to think about this in terms of what you’ve seen, is this a backwards looking thing that you’re just coming off of a lower charge-off rate or are there forward indicators, macro indicators that give you confidence in that? And then one level deeper, which is do you see this as a frequency of default variance or a severity of default variance?.

Yes, so a little detail. It’s mostly forward-looking, so we’re looking at really the next 12 months and our expectations of the next 12 months. Some of it has to do with our portfolio mix that’s skewing towards a higher quality, a higher FICO-type loan.

And when we look at the overall coverage ratio, if you think our coverage ratio particularly on the retail order loan, which is the loan class which is the driver here, we have about 1.2% coverage ratio of this and we have a loss rate that is below 1% today. So we’re just well covered.

And obviously, we have to abide by GAAP and from an accounting perspective you need to make sure that your reserves are adequate but also accurate for the next 12 months. So as we look out the next 12 months, we just don’t expect a significant increase in the overall charge-off.

Do we expect it to continue to tick-up? Yes, but overall we feel very comfortable where our coverage ratio is and we really don’t want to increase that coverage ratio until we start seeing a bigger increase when it comes to the actual charge-offs.

Now to your question on kind of frequency and severity, a lot of this is really going to be driven more on the frequency side than the severity side because we do expect used car prices to continue to come down, which will affect severity over time. So having said that, the biggest driver will be on the frequency end..

Great. Chris, that’s helpful. I’ll leave it at that. Thank you very much..

Thanks, Rick..

Thank you. Your next question comes from the line of Moshe Orenbuch of Credit Suisse. Please proceed..

Great. Thanks. Maybe just to talk a little bit about the lease gains, I mean they kind of came down in line with what you had projected three months ago. Just talk a little bit about how that line kind of will develop in the forecast that you set out.

I mean does it go down to zero and maybe how that impacts the returns in that business?.

Yes. I always try to focus everybody on net lease revenue because net lease revenue really is the driver because when we look out particularly from an accounting perspective, if we do our depreciation and forecast our depreciation correctly, you really will have no gain or loss from a lease perspective.

So we’re obviously experiencing gains and pretty high gains this year because we didn’t expect used car prices to be as high this year from a depreciation perspective. So the important thing to understand also related to leases is that there is a real seasonality effect as well, okay, both from a terminating units perspective as well as from a price.

So we normally see used car prices the highest in the second quarter. People get tax refunds, the springtime’s coming, the weather is better, unemployment gets better at that time. So you tend to see better used car prices in the springtime than you will see over the winter months.

So when you look at the overall net lease revenue and particularly what comes through the gain line, you’ll see some fluctuations particularly in the fourth quarter and the second quarter, which will be a little bit more dramatic because of the way used car prices will go up and down.

But our expectation over time is that when you look at the overall net lease revenue this quarter, that will continue to come down but our expectation is that leases will continue to be a very profitable asset class for us moving forward..

Maybe just a quick follow up.

Could you talk a little bit about what the costs are of origination? Like how should we think about the interplay between originations this quarter being really strong and expenses, how do those two relate to one another?.

Yes. Listen, there’s a pretty big component of what I would call fixed costs there. So from an originations perspective, there’s not a big variable cost that will drive the expenses up.

Having said that, though, when you have higher originations, we will tend to have higher servicing costs, particularly in the lease side because you need to do something with the car when it comes back.

So higher originations will drive higher expenses later on, on the servicing side, but from an origination perspective doesn’t really drive cost up in those current quarters..

Great. Thanks very much..

Your next question comes from the line of Kirk Ludtke of CRT Capital Group. Please proceed..

Good morning, everyone..

Good morning..

A big picture question. You’ve got this huge opportunity to reduce funding costs and I’m sure it makes sense to lock it in before rate go up.

I know it’s hard to anticipate regulatory approval, but how long does it take, how many years does it take you to address the 16 billion of high cost debt in the Series A and G preferreds?.

Yes. Listen, we’re not going to address the whole 16 billion or 17 billion meaning there are things like large OID associated with some of those bonds, which wouldn’t make economic sense but certainly take them out.

But what I would say is that over the next couple of years, meaning kind of through '15 and '16, the expectation is that we will get through a much more normalized capital stack and funding structure due particularly to the excess capital that were generating today.

So there is real opportunity over the next couple of years and then I think it starts to wane a little bit..

Great. Thank you..

I’d add one thing to that, which is both with regard to the zero coupon deal we did a while ago and also the bonds that we repurchased very recently, both of those required regulatory approval. From a regulatory point of view, actions which improve the safety and soundness, i.e.

profitability of the company tend to be attractive from a regulatory point of view. And so we have been able to get a couple of things done outside of the CCAR process, but the CCAR process which literally began this week is really the next opportunity to have a serious dialogue with the regulators on what can we do next..

Great. Thank you. That’s helpful. And along the same lines, the average retail portfolio interest rate continues to trend down. There still seems to be some room here for some improvement given where other banks take deposits.

Assuming no change in interest rates overall, how do you see this trending? Do you see it as a major opportunity or do you think it will level off here?.

You’re talking about the cost of deposits to us..

Yes..

I will make a couple of observations. We’re in the transition, right, so we started building Ally Bank in 2009 and have invested a great deal of money in building what we think is a great franchise.

It’s got significant brand recognition, it’s got tremendous consumer appeal, it keeps getting recognized for the state-of-the-art of its systems and so on and so forth. I think at this point we feel like we’ve built the franchise. And the question really is one of optimizing the franchise at this point.

And if you look at the numbers as the franchises continue to grow, the operating efficiency side of things has improved quite dramatically. And the question is, what can we do on the cost of funds side? And we basically this year have sort of turned our attention, if you will, to optimizing that as well. So we’ve already made some significant changes.

For example, we had an incentive for renewal, which was significant. That’s been reduced during the year. So we actually have the view that we can make the deposit franchise more efficient. Chris will tell you that today securitization and the bank are about a wash in terms of fund raising.

We think in a different environment, in a rising rate environment that the bank is going to be a much more productive source of funding and we believe that as rates rise, we experience that we’re likely to have in terms of the need to raise rates is going to be more consistent with a bank that has a true franchise than it is with a bank which is more hot money.

And so I think we believe that not only is Ally Bank a tremendous – an important strategic asset from a funding the company point of view, but in fact it actually represents meaningful upside on a go-forward basis in terms of our overall cost of funds..

Can I just add a comment, Mike?.

Sure..

It’s Barbara Yastine. You will see Ally Bank continue to be in the competitive zone of direct banks on our pricing. That is our value promise to our customers. The question is whether you’re at the high end of that zone or at the low end of that zone.

We believe and have a done a lot of research and see day-in and day-out that the majority of our customers want us in the competitive zone and don’t want to wake up surprised that we’ve dropped rates hugely, dramatically.

They want to feel good about the banking relationship but the vast majority of them don’t want to have to look at the rates every single day. And so we are just much more conscious and intentional about how we do that and frankly we’re not very interested in attracting people who change banks for the last basis point.

Those won’t actually be helpful to us in the years ahead. So we’re quite comfortable with how it’s been proceeding and feel very good about it..

Great. Thank you very much..

Thanks, Kirk..

Sheila, we’ve got time for one more question this morning..

Thank you, sir. Your next question comes from the line of Ken Bruce with Bank of America Merrill Lynch. Please proceed..

Thank you. Good morning. My question relates specifically to the mortgage portfolio. You’re not making any money in that business. Obviously, you’re losing a little bit, it’s not much but there’s quite a bit of capital tied up in those assets.

Could you discuss kind of what your thoughts are around that portfolio, what the efficacy of keeping it is at this point or if it’s something that you might be able to sell and release some more excess capital to direct into other of your priorities?.

Listen, at this point we are very comfortable with that mortgage portfolio, we’re comfortable with the performance of it. And while the bottom line is pretty much a breakeven segment today, the contribution margin is actually pretty good on this business.

The other thing I would say is we have selectively albeit in small amounts currently have bought a couple of pools of mortgage loans and we think over time we’ll have opportunities actually to replenish some of this portfolio and make it more profitable over time.

So it’s a portfolio we like and while it’s a breakeven segment today, like I said has a pretty good contribution margin and our expectation is that it will continue to improve over time and it’s a business we want to be in, particularly from an investment purpose..

Okay. And moving on to something you addressed in some part, but I would like to understand a little bit around the priorities for capital management and the Series A and G.

Obviously, there’s quite a bit of controversy as to kind of what the priorities are for dealing with that or what the issues are that are going to impact your decisions around that.

And I’m hoping you could maybe tease out as to, in the – as you consider things like upgrades, as you think about excess capital usage and CCAR and safety and soundness, all these different issues are going to impact how you kind of deal with that particular series of high cost debt.

But if you could give us any insight into your thinking, that would be very helpful..

Yes, hopefully it’s not too controversial but listen, we obviously have CCAR coming up. We’re running our stresses, which will take the next month or six weeks to get through, which will give us a pretty good indication of the amount of capital that we will look to redeploy through this next CCAR process.

When it comes to both a Series A, the Series G perspective, we think about them very differently meaning one as in the Series G really affects the Tier 1 common ratio, the Series A really affects the total capital, the Tier 1 capital level. So when we think about the two securities, they really touch different areas of the capital.

I think we’ve been pretty public to say that when we look the preferred stack, meaning both Series A and our TruPs and a little bit of Series G that we have probably too much from a preferred perspective. Our restrictor really is on the Tier 1 common side of the equation.

So the expectation is that we will deal potentially with both securities over the next couple of years. Series A becomes callable out in 2016, it’s not callable in 2015. That doesn’t mean we can’t look at it more like a debt security and look at potential tender offers. It’s something that’s on the table.

But because those two securities really affect different parts of the capital stack, we think about them differently. And in overall I would say that we want to deal with both of them over time..

Okay. Thank you..

Thank you. I would now like to turn the call over to Michael Brown for closing remarks..

Great. Thanks, again, everyone for joining us this morning. If you have additional follow-ups, feel free to reach out to Investor Relations. Thanks, Sheila..

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