Ally Financial Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also reports unaudited fourth-quarter results. Dollar amounts are U.S. dollars.
Business context
Ally is a financial services company focused primarily on U.S. automotive finance and insurance, supported by direct-to-consumer Ally Bank. It reported $151.2 billion of assets. Mortgage operations were substantially wound down: following the ResCap bankruptcy plan’s effectiveness in December 2013, Ally exited mortgage origination and servicing and retained a held-for-investment mortgage portfolio. Ally became a financial holding company in December 2013.
Financial performance and position
| Metric | 2013 | 2012 |
|---|---|---|
| Total net revenue | $4.263 billion | $4.465 billion |
| Net financing revenue | $2.779 billion | $1.891 billion |
| Provision for loan losses | $501 million | $329 million |
| Income from continuing operations | $416 million | $1.370 billion |
| Net income | $361 million | $1.196 billion |
| Net cash from operating activities | $2.501 billion | $5.049 billion |
- Quarterly snapshot: Fourth-quarter 2013 total net revenue was $1.099 billion; continuing-operations income was $79 million and net income was $104 million.
- Margins: Net interest spread was 1.75%, up from 1.18%; net yield on interest-earning assets was 2.03%, up from 1.40%. The filing attributes improvement to lower funding costs and portfolio mix, among other factors.
- Balance sheet: Assets were $151.2 billion, down from $182.3 billion; total equity was $14.2 billion, down from $19.9 billion. Finance receivables and loans totaled $100.3 billion before allowance, and operating lease assets were $17.7 billion.
- Credit: Allowance for loan losses was $1.208 billion, compared with $1.170 billion. Net charge-offs were $472 million, broadly unchanged from $474 million; nonperforming loans declined to $734 million from $883 million. The 2013 provision rose as Ally expanded lending to broader credit tiers and grew its U.S. auto portfolio.
- Debt and liquidity: Balance-sheet long-term debt was $69.5 billion and short-term borrowings $8.5 billion. Deposits totaled $53.4 billion, including $52.9 billion at Ally Bank. Available liquidity was $13.3 billion at the parent and $5.9 billion at Ally Bank.
- Capital: Ally’s Tier 1 risk-based and total risk-based capital ratios were 11.79% and 12.76%; Tier 1 common was 8.84%. Ally Bank’s Tier 1 leverage ratio was 15.77%, above its 15% requirement. Both were reported as well-capitalized and compliant at year-end.
Material changes versus 2012
- Continuing-operations income fell by $954 million. Mortgage operations shifted from $595 million of pretax income to a $258 million pretax loss as Ally exited mortgage production and sold its agency mortgage servicing rights. The 2012 results also included a substantial tax benefit from valuation-allowance releases; the 2013 tax benefit was much smaller.
- Net financing revenue increased, principally reflecting growth in automotive consumer and lease assets and reduced interest expense. Lease revenue rose, but lease-asset depreciation expense also increased materially.
- Other revenue declined, including lower mortgage-related gains and servicing income. Ally recorded a $98 million charge related to CFPB and DOJ consent orders.
- Assets fell substantially, reflecting business exits and sales, including international automotive finance operations. Cash from operating activities declined; investing cash outflow narrowed significantly, while financing activities shifted to a net outflow, including debt repayment and a $5.9 billion Treasury preferred-stock repurchase.
- Retail deposits grew, supporting a funding mix in which deposits represented 41% of total on-balance-sheet funding, versus 38% in 2012.
Outlook, risks and unusual items
- Management said it expected continued improvement in funding costs as deposits grow and funding diversifies, and expected to comply with forthcoming capital requirements. The filing gives no specific earnings or revenue guidance.
- GM and Chrysler concentration remains significant. Chrysler exclusivity arrangements expired in April 2013; the prior GM agreement expired February 28, 2014. The new GM agreement, effective March 1, 2014, provides no exclusivity and is cancellable after one year. Ally reported falling shares of GM and Chrysler consumer financing.
- Automotive credit competition, broader nonprime and used-vehicle lending, lease residual values, and the performance of GM, Chrysler and their dealers may affect results. Ally disclosed $6.0 billion of nonprime auto loans, approximately 10.7% of consumer auto loans.
- Funding and refinancing are significant risks: the filing identifies substantial 2014–2016 debt maturities, $15.5 billion of bank certificates of deposit maturing in 2014, and below-investment-grade debt ratings. Deposit balances, market access and liquidity are also sensitive to competition, rates and regulatory limits.
- The ResCap settlement required $1.95 billion in cash, plus up to $150 million of insurance recoveries to be contributed, guaranteed by Ally no later than September 30, 2014. The filing also describes ongoing mortgage-related investigations and retained representation-and-warranty exposures.
- The CFPB and DOJ consent orders concerned alleged disparate impact in automotive financing and required compliance monitoring and remediation. Failure to meet remediation targets could lead to additional payments.
- Regulatory changes include Basel III capital rules and enhanced liquidity standards scheduled to take effect beginning in 2015. Federal Reserve review also governs capital distributions; the 2013 capital plan was initially objected to, while the revised plan received no objection.
- Common shares were not publicly traded as of the filing. Treasury retained approximately 37% of common stock at February 28, 2014 and held board appointment rights. Tax-benefit preservation measures adopted in January 2014 restrict certain share transfers.
Key facts for investors to verify
- Whether automotive finance growth and higher margins can offset increased credit provisions and the loss of former GM and Chrysler preferred-provider benefits.
- Actual cost and availability of refinancing as debt, secured funding and certificates of deposit mature, and whether reported liquidity is accessible across regulated entities.
- Credit performance in expanded nonprime and used-auto lending, including delinquencies, charge-offs and allowance adequacy.
- Lease residual-value assumptions and realized proceeds as off-lease vehicle volumes increase.
- Final cash cost and remaining obligations associated with ResCap, mortgage representations and warranties, and the CFPB/DOJ orders.
- How the 2012 tax valuation-allowance release, 2013 tax benefit, preferred-stock repurchase and other nonrecurring items affect comparability and common-shareholder returns.