Ally Financial Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Unaudited results; amounts are in U.S. dollars unless stated otherwise. Ally is a bank holding company focused on automotive finance, direct banking and insurance, while exiting or winding down several other operations.
Financial performance and condition
| Metric | Q1 2013 | Comparable period / change |
|---|---|---|
| Total net revenue | $1.026 billion | Up 7% from $956 million |
| Net financing revenue | $640 million | Up from $351 million |
| Pre-tax income from continuing operations | Loss of $63 million | Income of $3 million |
| Net income from continuing operations | $60 million | $2 million |
| Net income | $1.093 billion | $310 million; included $1.033 billion from discontinued operations |
| Core pre-tax income (non-GAAP) | Loss of $6 million | Income of $111 million |
| Provision for loan losses | $131 million | Up from $98 million |
| Net cash from operating activities | $2.254 billion | $2.142 billion |
| Cash and cash equivalents | $7.437 billion at March 31 | $7.513 billion at December 31, 2012 |
| Total assets | $166.199 billion | $182.347 billion at December 31, 2012 |
| Deposits | $50.326 billion | $47.915 billion at December 31, 2012 |
| Long-term debt | $67.621 billion | $74.561 billion at December 31, 2012 |
| Total equity | $20.474 billion | $19.898 billion at December 31, 2012 |
- Net interest spread rose to 1.67% from 0.86%; excluding original issue discount amortization, it was 1.89% versus 1.29%. Net yield on interest-earning assets increased to 1.90% from 1.11%.
- Parent-company available liquidity was $19.5 billion and Ally Bank available liquidity was $10.4 billion. Ally Bank deposits totaled $49.5 billion, including $38.8 billion in retail deposits.
- At March 31, Ally Financial’s Tier 1 risk-based capital ratio was 14.59%, total risk-based capital ratio 15.59%, Tier 1 leverage ratio 12.01%, and Tier 1 common ratio 7.89%. Ally Bank’s Tier 1 leverage ratio was 15.59%, above its 15% maintenance requirement. Both were reported as well-capitalized and compliant with applicable capital requirements.
Material changes and business developments
- Automotive Finance pre-tax income increased to $343 million from $241 million, supported by growth in consumer financing and operating leases. Higher loan-loss provision partly offset the gains; consumer auto net charge-offs rose to $93 million from $74 million.
- Mortgage operations posted a $204 million pre-tax loss, versus $63 million income. The decline reflected MSR valuation and hedge losses, lower mortgage production, and $83 million of representation-and-warranty expense. Mortgage production fell 28% to $6.1 billion.
- Insurance pre-tax income fell to $61 million from $100 million. Its combined ratio worsened to 99.7% from 91.4%, mainly due to unusually high early-season hailstorm losses and lower investment income.
- Other operating expense increased to $558 million from $454 million, including $83 million of mortgage representation-and-warranty expense. Servicing valuation and hedge activities produced a $201 million loss, compared with a $106 million loss.
- Discontinued operations generated $1.033 billion of after-tax income, including an $888 million pre-tax gain from selling Canadian automotive finance operations. The report also classifies ResCap operations and other businesses being sold or wound down as discontinued.
- After quarter-end, Ally completed the sale of most European and Latin American automotive finance operations to GM Financial for $2.6 billion, including a $2.4 billion closing payment and $190 million of pre-closing dividends. In April, it sold about $115 billion of agency MSRs for approximately $850 million and announced it would exit correspondent mortgage lending and stop originating new jumbo loans.
Outlook, risks and contingencies
- No specific consolidated earnings or revenue guidance was provided. Management said it expected staged sales of remaining automotive finance operations during 2013 and possibly 2014, with gains or losses possible at individual closings; it expected a cumulative net gain on those sales.
- Management described U.S. economic and auto-sales trends as improving, but remained cautious about uneven manufacturing, slow global growth and uncertainty about U.S. federal spending cuts. It cited credit, lease residual, market, operational, insurance, country and liquidity risks.
- The ResCap bankruptcy settlement lapsed after plan milestones were missed. Ally is no longer obligated under that settlement to contribute $750 million or entitled to the contemplated releases, but has not withdrawn its offer to contribute that amount if an acceptable settlement is reached. The balance sheet still included a $750 million ResCap-related accrual. Management said a resolution could require a substantially higher payment or no settlement, and warned that substantial claims could materially affect results, financial position or cash flows.
- The ResCap creditors’ committee sought authority to pursue claims against Ally and alleged potential liability of billions of dollars; Ally disputed the claims. One group of RMBS investors terminated its plan-support agreement, and approval of the proposed RMBS settlements remained uncertain. Mortgage-related lawsuits resumed against Ally’s non-debtor entities after bankruptcy stays expired on May 1, 2013.
- Ally warned that obligations under the foreclosure-review consent order could be material if ultimately borne by Ally. Its $170 million mortgage representation-and-warranty reserve depends on estimates of future defaults, demands, defects, recoveries and home prices.
- The Federal Reserve objected to Ally’s 2013 capital plan on quantitative and qualitative grounds. The filing reports ongoing dialogue with the Fed; the objection constrains proposed capital actions and highlights the significance of contingent ResCap liabilities in stress scenarios.
Most important facts for investors to verify
- Whether ResCap bankruptcy proceedings, creditor claims, RMBS settlements and foreclosure-review obligations lead to payments beyond the recorded $750 million accrual.
- How much of Q1 reported net income reflects discontinued operations and sale gains, and whether continuing operations can return to sustainable profitability.
- The realized proceeds, final adjustments and accounting gains or losses from the MSR and international-business sales, plus the timing and terms of remaining divestitures.
- Whether auto-loan credit performance and lease residual values remain consistent with the assumptions behind provisioning and asset valuations.
- Ally’s ability to sustain liquidity and funding access, meet debt maturities, and address the Federal Reserve’s capital-plan objection while maintaining regulatory capital requirements.