Ally Financial Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing also reports unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
Ally is a financial holding and bank holding company focused primarily on automotive finance and insurance, with a smaller mortgage business and middle-market lending. It reported $158.6 billion in consolidated assets. Ally Bank, a direct-to-consumer bank, held $111.3 billion in assets and $66.2 billion in deposits; deposits funded approximately 70% of Ally’s total assets.
Financial performance and position
| Metric | 2015 | 2014 | Change / context |
|---|---|---|---|
| Total net revenue | $4.861 billion | $4.651 billion | Up 5% |
| Net financing revenue | $3.719 billion | $3.375 billion | Up 10% |
| Income before tax from continuing operations | $1.393 billion | $1.246 billion | Up 12% |
| Net income from continuing operations | $897 million | $925 million | Down 3% |
| Net income, including discontinued operations | $1.289 billion | $1.150 billion | Includes $392 million after tax from discontinued operations in 2015 |
| Provision for loan losses | $707 million | $457 million | Up 55% |
| Net interest spread / net yield on interest-earning assets | 2.45% / 2.57% | 2.28% / 2.41% | Both improved |
| Operating cash flow | $5.095 billion | $3.403 billion | Investing cash outflow was $9.747 billion; financing cash inflow was $5.460 billion |
| Total assets | $158.581 billion | $151.631 billion | Up about 5% |
| Total equity | $13.439 billion | $15.399 billion | Down; preferred-stock actions and other equity movements contributed |
| Long-term debt / total debt on balance sheet | $66.234 billion / $74.004 billion | $66.380 billion / $72.990 billion | Separately, the filing cites about $75.6 billion of principal indebtedness |
| Available liquidity | $8.683 billion at Ally Bank; $6.232 billion at parent | — | Combined $14.915 billion; estimated Modified LCR exceeded 100% |
| Regulatory capital ratios, Ally Financial | CET1 9.21%; Tier 1 11.10%; total capital 12.52%; leverage 9.73% | Basel I measures reported for 2014 | Ally and Ally Bank reported compliance with applicable requirements |
Fourth quarter: Net revenue was $1.339 billion, income before tax from continuing operations was $431 million, continuing-operations net income was $276 million, and total net income was $263 million. Fourth-quarter loan-loss provision was $240 million.
Common-shareholder earnings require care: Basic and diluted EPS were both a loss of $3.47 from continuing operations and a loss of $2.66 overall, despite positive consolidated net income. EPS reflected $2.571 billion of preferred dividends, including $2.364 billion recognized as an additional return to preferred holders on Series G redemption and Series A repurchase. Ally had never paid a cash dividend on common stock.
Material changes versus 2014
- Net financing revenue rose as interest expense fell 13%, reflecting deposit growth, repayment or maturity of higher-cost debt, and lower original-issue-discount amortization.
- Loan-loss provision increased $250 million, mainly from growth and a broader risk mix in consumer auto lending, plus mortgage portfolio growth and lower mortgage reserve releases. Management said credit performance remained in line with expectations.
- Automotive Finance pretax income fell 7% to $1.335 billion. Lower lease revenue and remarketing gains, higher loan-loss provision, and competitive wholesale pricing offset consumer-loan growth and lower funding costs.
- Insurance pretax income increased to $211 million from $197 million; the combined ratio improved to 92.8% from 100.2%, primarily due to lower weather-related losses. Premiums and service revenue earned declined.
- Mortgage pretax income rose to $90 million from $59 million, helped by gains on sales of troubled-debt-restructured loans. Mortgage assets grew with $4.1 billion of bulk loan purchases.
- Debt extinguishment losses increased to $357 million from $202 million, largely due to 2015 tender offers for high-coupon legacy debt. Total equity declined, in part following preferred-stock redemptions and repurchase.
Outlook, commentary, risks, and unusual items
- Ally’s strategy emphasizes profitable automotive lending growth, diversification beyond GM and Chrysler, prudent expansion across borrower risk tiers, and continued direct-bank deposit growth. Growth-channel originations rose 53% and used-vehicle originations rose 27% in 2015. Nonprime loans were 14.0% of consumer auto loans at year-end, versus 11.9% in 2014.
- Concentration remains meaningful: GM and Chrysler together represented 69% of 2015 consumer auto financing volume; GM alone accounted for 46%. GM shifted its subvention programs to a wholly owned finance subsidiary during 2015.
- Management expected Ally Bank deposits to remain a core funding source. Brokered deposits were $10.7 billion, or 16% of Ally Bank deposits. Ally reported significant upcoming maturities, including approximately $1.9 billion of unsecured debt in 2016, $4.4 billion in 2017, and $16.3 billion of bank CDs in 2016.
- Management expected auto lease termination volumes to increase in 2016, with a significant decline in 2018 and thereafter associated with lower GM lease originations. Average lease remarketing gain per vehicle fell to $1,329 from $1,461; management expected the trend to continue near term.
- Ally planned to continue bulk purchases of high-quality jumbo and low-to-moderate-income mortgages in 2016 and introduce limited direct mortgage originations in late 2016. A credit-card offering was planned for 2016 through a cobrand structure that management said would not expose Ally to credit risk.
- Ally expected to submit its 2016 capital plan by April 5, 2016, with a Federal Reserve response expected by June 30. Following 2015 regulatory approval, the company expected to redeem or repurchase the remaining approximately $700 million of Series A preferred stock and $500 million of trust preferred securities in the first half of 2016.
- Key risks include consumer-credit deterioration as longer-term, used, and nonprime lending grows; used-vehicle residual-value declines; auto-industry and GM/Chrysler concentration; interest-rate and funding-market changes; refinancing needs; and extensive banking, consumer-protection, and capital regulation. Below-investment-grade unsecured ratings increase funding costs and can constrain market access.
- Legal and regulatory matters include DOJ and SEC mortgage-related inquiries, DOJ/SEC and New York DFS inquiries into subprime auto finance and securitization, and the 2013 CFPB/DOJ consent orders on alleged disparate impact in auto finance. The filing says outcomes could include material settlements, penalties, or other actions, while management did not expect current proceedings to have a material adverse effect overall based on information available.
- Unusual income item: discontinued operations included a $452 million pretax gain associated with the January 2015 sale of Ally’s China finance joint-venture interest. The filing also describes preferred-stock redemption premiums that materially reduced earnings attributable to common shareholders.
Most important facts for investors to verify
- Reconcile consolidated net income with common EPS and the $2.571 billion preferred-dividend charge, separating recurring operating performance from preferred redemption accounting.
- Track whether higher auto provision, nonprime exposure, extended loan terms, delinquencies, and charge-offs remain consistent with management’s expected risk-adjusted returns.
- Assess deposit stability, brokered-deposit reliance, liquidity availability, and the ability to refinance near-term debt and CD maturities.
- Monitor GM and Chrysler business concentration, changes to manufacturer incentive programs, and the economics of lease residuals and remarketing gains.
- Follow outcomes of the mortgage and subprime auto investigations, CFPB/DOJ consent-order remediation, and Federal Reserve capital-plan decisions and planned preferred-security actions.