Ally Financial Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Ally is a digital financial-services company centered on automotive finance and insurance, with banking, mortgage, corporate finance, brokerage, and point-of-sale lending businesses. Financial statements are unaudited.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Total net revenue | $1.985bn | $1.684bn | $6.007bn | $4.705bn |
| Net financing revenue and other interest income | $1.594bn | $1.200bn | $4.513bn | $3.400bn |
| Provision for credit losses | $76m | $147m | $31m | $1.337bn |
| Net income | $712m | $476m | $2.408bn | $398m |
| Net income attributable to common stockholders | $683m | $476m | $2.379bn | $398m |
| Diluted EPS | $1.89 | $1.26 | $6.42 | $1.06 |
| Net interest spread | 3.56% | 2.49% | 3.34% | 2.39% |
| Net yield on interest-earning assets | 3.66% | 2.65% | 3.46% | 2.57% |
Q3 revenue rose 18% and net income rose 50% year over year. For the nine-month period, net income increased substantially from 2020, when the company recorded much higher credit-loss provisions amid pandemic-related economic deterioration. Lower funding costs, improved credit performance, and stronger operating-lease results supported 2021 earnings. The nine-month comparison also reflects prior-year COVID-related reserve builds, so the provision decline is not solely a measure of current-period credit trends.
Noninterest expense was $1.002bn in Q3, up from $905m, and $3.020bn for nine months, up from $2.810bn. Ally cited higher compensation, investment in digital capabilities and consumer products, and $54m of charitable contributions during the nine-month period. Q3 diluted EPS reflects preferred dividends; common dividends declared were $0.25 per share, versus $0.19 a year earlier.
Balance sheet, liquidity, and capital
- At September 30, total assets were $179.2bn, total equity $17.3bn, and deposits $139.4bn, compared with $182.2bn, $14.7bn, and $137.0bn, respectively, at December 31, 2020.
- Long-term debt was $14.9bn, down from $22.0bn at year-end 2020; short-term borrowings were zero, versus $2.1bn. The reduction includes debt repayments and the redemption of trust preferred securities.
- Cash and cash equivalents were $10.9bn. Reported available liquidity was $36.9bn, including $26.7bn of unencumbered highly liquid securities. Ally notes that liquidity is held across legal entities and may be subject to transfer restrictions.
- Deposits grew $2.4bn in the first nine months. Retail deposits increased $7.2bn, partly offset by lower brokered deposits; retail deposit customers reached 2.448m.
- Regulatory capital ratios at September 30: Common Equity Tier 1 11.20%, Tier 1 12.81%, total capital 14.56%, and Tier 1 leverage 9.99%. Ally and Ally Bank were reported well capitalized. Ally’s stress capital buffer remained 3.5%.
- Operating cash flow was $3.1bn for the nine months, versus $2.6bn. Investing activities used $1.6bn, compared with $11.0bn provided in 2020; financing activities used $6.5bn, compared with $2.6bn provided.
Portfolio, segment, and period changes
- Finance receivables and loans, net of allowance, were $111.3bn, down from $115.3bn at year-end. Consumer automotive loans rose to $77.8bn from $73.7bn, while commercial loans fell to $19.4bn from $29.3bn, principally because vehicle inventory and dealer floorplan balances declined.
- The allowance for loan losses was $3.148bn, or 2.8% of finance receivables, versus $3.283bn, or 2.8%, at year-end. Consumer nonperforming loans were $1.087bn, down from $1.361bn; commercial nonperforming loans were $198m, up from $161m. Consumer and commercial net charge-offs were $54m and zero, respectively, for Q3.
- Automotive Finance Q3 pretax income rose to $825m from $566m, supported by lower credit provision and funding costs and stronger vehicle remarketing. Insurance pretax income fell to $24m from $78m, while its combined ratio was 96.4%; nine-month pretax income rose to $252m from $101m. Mortgage Finance Q3 pretax income declined to $6m from $26m, and Corporate Finance reported $61m versus $60m.
- Used-vehicle supply constraints and demand drove Q3 operating-lease remarketing gains of $86m, versus $71m; nine-month gains were $278m, versus $62m. Management cautioned that disposition mix may limit future ability to optimize proceeds.
Outlook, risks, and unusual items
- The filing provides no specific consolidated earnings or revenue guidance. Management expected vehicle inventory constraints to keep commercial wholesale finance receivables lower through the remainder of 2021 and to restrain property-and-casualty written premiums until dealer inventories recover. The duration and severity of supply disruptions were uncertain.
- Management cited continuing uncertainty from COVID-19, supply-chain and manufacturing disruptions, workforce participation, inflation, and macroeconomic conditions. It warned that credit losses could rise and that used-vehicle values and lease residuals could weaken. Interest-rate, funding, deposit pricing, prepayment, market valuation, regulatory, cyber, and operational risks are also discussed.
- Interest-rate sensitivity analysis estimated next-12-month pretax net financing revenue would decrease $29m if rates remained unchanged relative to baseline. A gradual +100-basis-point shock was estimated to increase it by $70m; an instantaneous +100-basis-point shock by $53m.
- Ally recorded a $126m loss on extinguishment of debt for the nine months, including $121m related to partial redemptions of Series 2 trust preferred securities. It issued $2.324bn of Series B and C preferred stock and repurchased $1.4bn of common stock during the period. The remaining trust preferred securities were redeemed October 15, 2021.
- A class-action settlement received final court approval in September: Ally agreed to pay $87.5m, waive $700m of charged-off deficiency balances, and seek deletion of specified credit-reporting trade lines. The cash amount had been accrued in 2020. The filing says outcomes of other legal matters are uncertain and estimates of reasonably possible losses cannot be made for certain matters.
- After quarter-end, Ally agreed to acquire digital-first credit-card company Fair Square for $750m in cash, subject to adjustments and customary closing conditions; closing was expected by March 31, 2022. Ally also announced a $0.25 common dividend and, on November 2, issued $750m of senior unsecured notes due 2028.
Important facts for investors to verify
- Whether unusually strong used-car remarketing gains and low auto net charge-offs persist as vehicle supply, prices, and customer payment performance normalize.
- How the $3.148bn credit allowance, COVID-related loan modifications and $2.4bn of total TDRs perform, particularly as support measures and economic conditions change.
- The effect of lower dealer inventories on floorplan revenue, insurance premiums, and Ally’s automotive concentration, as well as the company’s progress in diversifying funding and revenue.
- Fair Square’s final purchase terms, regulatory approvals, closing timing, and expected capital, funding, and earnings impact.
- The continuing costs and consequences of the approved deficiency-balance settlement, and any developments in other legal or regulatory matters.