Ally Financial Inc. — Q2 2014 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2014. Ally is a bank holding company focused on automotive finance and direct banking, with insurance, mortgage portfolio management, and corporate finance operations. Results exclude businesses classified as discontinued operations. In April, Ally completed an IPO in which the U.S. Treasury sold shares; the $2.4 billion proceeds went to Treasury, not Ally. A 310-for-one stock split accompanied the offering.
Financial performance and position
Amounts are in millions of dollars unless otherwise noted.
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total net revenue | $1,231 | $1,030 | $2,373 | $2,056 |
| Net financing revenue | $866 | $628 | $1,687 | $1,268 |
| Provision for loan losses | $63 | $89 | $200 | $220 |
| Income from continuing operations before tax | $347 | $140 | $639 | $77 |
| Net income from continuing operations | $283 | $100 | $481 | $160 |
| Net income (loss), including discontinued operations | $323 | $(927) | $550 | $166 |
| Basic and diluted EPS | $0.54 | $(2.73) | $0.87 | $(0.57) |
- Margins: Q2 net interest spread was 2.35%, versus 1.51%; net yield on interest-earning assets was 2.49%, versus 1.85%. For the first half, those measures were 2.31% versus 1.59%, and 2.45% versus 1.88%, respectively.
- Balance sheet at June 30: Assets were $149.9 billion; cash and cash equivalents were $5.8 billion; investment securities were $16.7 billion; net finance receivables and loans were $99.6 billion; and operating lease assets were $18.8 billion. Total deposits were $56.1 billion, short-term borrowings $6.4 billion, long-term debt $67.9 billion, total liabilities $135.1 billion, and equity $14.9 billion.
- Credit: Allowance for loan losses was $1.17 billion, or 1.2% of loans. Nonperforming loans were $612 million, down from $734 million at year-end 2013. First-half net charge-offs were $218 million, compared with $217 million a year earlier; consumer auto charge-offs increased while mortgage losses declined.
- Cash flow, first half: Operating activities provided $1.5 billion, investing activities provided $90 million, and financing activities used $1.4 billion. Cash and cash equivalents increased $246 million to $5.8 billion.
- Capital and liquidity: Ally reported Tier 1 and total risk-based capital ratios of 12.33% and 13.20%, respectively; Tier 1 common was 9.39%. Ally Bank’s Tier 1 leverage ratio was 15.75%, above its 15% maintenance requirement. Available liquidity was $10.7 billion at the parent and $8.1 billion at Ally Bank; some facility availability depends on eligible collateral.
Material changes and management commentary
- Continuing-operations net income rose to $283 million in Q2 and $481 million for the first half. Management attributed improvement chiefly to lower funding costs—following repayment or maturity of higher-cost debt, continued deposit growth, and lower original issue discount amortization—and the absence of prior-year mortgage servicing rights valuation losses.
- Automotive Finance pre-tax income increased to $461 million in Q2 and $800 million in the first half. Growth in lease assets, higher lease remarketing gains, and stronger used-vehicle prices helped; lease termination volume more than doubled. Higher depreciation and consumer auto loan-loss provision partly offset the benefit.
- Insurance reported a Q2 pre-tax loss of $23 million, compared with $45 million of income a year earlier. Severe Midwest hailstorms drove record wholesale floorplan weather losses; the quarterly combined ratio rose to 130.9% from 112.9%. First-half Insurance pre-tax income was $51 million, down from $106 million.
- Mortgage operations returned to pre-tax income of $27 million in Q2 and $44 million for the first half, largely reflecting lower expenses and credit provisions as Ally wound down non-strategic mortgage activity. Ally began bulk purchases of third-party-originated mortgage loans in Q2; management said this would continue as part of treasury asset-liability management. Mortgage originations through its prior direct and correspondent channels had been exited or curtailed.
- Funding expense fell 17% in Q2 and 18% for the first half versus the comparable periods. Deposits increased $2.7 billion from year-end to $56.1 billion. Ally completed $21.4 billion of secured and unsecured funding transactions and facility renewals in the first half, including $8.9 billion raised in nine U.S. asset-backed securitizations.
- Management described the U.S. economy and auto sales as improving, but remained cautious about weak real personal consumption and potentially higher interest rates. Its rate-sensitivity model showed a $122 million reduction in 12-month pre-tax net interest income under an instantaneous +100-basis-point shock, and a $185 million reduction under +200 basis points.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance is provided. Ally expected completion of the sale of its China automotive-finance joint venture to GM Financial in late 2014 or as soon as practicable. Required approvals had not been received by July 1, 2014, making the agreement terminable by either party; management considered completion probable.
- Key disclosed risks include auto credit performance and broader underwriting mix, used-vehicle residual values, interest-rate and deposit repricing sensitivity, funding-market disruption, concentration and collateral risks, and continued dependence on relationships with GM, Chrysler, and dealers.
- Ally and subsidiaries faced legal and regulatory matters, including SEC and DOJ mortgage-related subpoenas and investigations. CFPB and DOJ consent orders concerning alleged disparate impact in auto finance followed a $98 million charge in Q4 2013; failure to meet remediation targets could lead to additional payments. Management said current legal matters were not expected to materially adversely affect consolidated results, while acknowledging an unfavorable resolution could be material in a particular period.
- The mortgage representation-and-warranty reserve was $37 million at June 30, down from $45 million at year-end. Management received minimal repurchase claims in the quarter and first half. The filing also notes that actual litigation and contingency costs may differ from reserves.
- The Federal Reserve did not object to Ally’s 2014 capital plan. Ally submitted mid-year stress-test results on July 7 and said it would disclose the most severe scenario in September. Moody’s changed its outlook to Positive on July 14; the other listed agency outlooks were Stable.
- After quarter-end, the board declared preferred dividends totaling $67 million, payable August 15, 2014. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Separate recurring continuing-operations earnings from discontinued-operation gains or losses when evaluating year-over-year net income and EPS; Q2 2013 included a substantial discontinued-operations loss.
- Assess whether lease growth and elevated used-car remarketing gains can persist as lease returns rise, and monitor residual values, depreciation, and consumer auto credit losses.
- Track the impact of hail and other insurance losses on underwriting profitability, including whether the combined ratio returns below 100%.
- Review funding maturities, collateral requirements, deposit growth and retention, and the sensitivity of earnings to rising rates and deposit repricing.
- Monitor the China joint-venture transaction, mortgage-related investigations, consent-order remediation, and potential repurchase or other legal liabilities.
- Confirm capital and liquidity remain adequate under regulatory stress scenarios, taking account of the distinction between parent and bank resources and restrictions on transferring funds.