Ally Financial Inc. — Q1 2015 Form 10-Q
Business context and reporting period. Ally is a bank and financial holding company focused primarily on automotive finance, insurance, and mortgage portfolio management. This unaudited filing covers the three months ended March 31, 2015; comparisons are with Q1 2014 unless otherwise noted.
Financial performance and position
- Revenue and earnings: Total net revenue was $1.093 billion, down 4% from $1.142 billion. Net income from continuing operations was $179 million, down 10% from $198 million; diluted continuing-operations EPS was $0.23 versus $0.27. Reported net income was $576 million, or $1.06 per diluted share, versus $227 million, or $0.33, largely because discontinued operations contributed $397 million after tax in Q1 2015.
- Key unusual items: Discontinued-operations income principally reflected an approximately $400 million after-tax gain on the January 2 sale of Ally’s China automotive-finance joint-venture interest. A $198 million debt-extinguishment loss, mainly from a February tender offer, reduced continuing-operations results; the comparable-period loss was $39 million.
- Financing and expenses: Net financing revenue rose 4% to $850 million. Interest expense fell 14% to $612 million, but operating-lease depreciation increased 15% to $622 million, primarily amid lower remarketing gains and higher lease balances. Total noninterest expense declined 3% to $695 million, and loan-loss provision fell to $116 million from $137 million. Continuing pretax income was $282 million versus $292 million.
- Margins: Net interest spread was 2.31% versus 2.27%; excluding original issue discount amortization, it was 2.36% versus 2.43%. Net yield on interest-earning assets was 2.44% versus 2.40% (2.47% versus 2.53% excluding that amortization). Insurance’s combined ratio improved to 85.9% from 87.9%.
- Cash flow: Operating cash flow was $247 million, down from $932 million; investing cash flow was $805 million versus $2.147 billion; financing activities provided $1.009 billion versus using $2.716 billion. Cash and cash equivalents increased $2.060 billion during the quarter to $7.636 billion. Operating cash flow was affected by originations and purchases of loans held for sale exceeding related sale and repayment proceeds by $1.1 billion.
- Balance sheet and funding: Total assets were $153.524 billion, up from $151.828 billion at year-end 2014. Finance receivables and loans, net, were $98.924 billion; operating leases, net, were $19.021 billion. Deposits rose to $60.875 billion from $58.222 billion. Long-term debt was $65.760 billion, down from $66.558 billion; short-term borrowings were $6.447 billion. Total equity was $15.934 billion, and equity to assets was 10.38%.
- Credit: The allowance for loan losses was $933 million, down from $977 million at year-end. Net charge-offs increased to $150 million from $133 million, with the total net charge-off ratio at 0.6% versus 0.5%. Nonperforming loans were $599 million, down from $653 million at year-end.
- Capital and liquidity: Under transitional Basel III, Ally’s common equity tier 1 ratio was 10.94%, tier 1 ratio 13.16%, total capital ratio 14.11%, and tier 1 leverage ratio 11.43%; management said Ally and Ally Bank met applicable requirements and were well-capitalized. Available liquidity was reported as $8.7 billion at the parent and $10.5 billion at Ally Bank; these amounts are entity-specific and include funding capacity subject to conditions.
Changes versus comparable periods
- Continuing earnings declined despite lower funding costs and lower loan-loss provision. The debt-tender loss and lower lease remarketing gains were significant offsets.
- Consumer automotive originations increased to $9.844 billion from $9.192 billion. Growth in Chrysler and non-GM/Chrysler channels more than offset lower GM lease and subvented originations. GM’s decision to route certain lease subvention programs exclusively through GM Financial is expected to reduce Ally’s related GM lease originations to negligible levels over the near term.
- Commercial finance receivables declined $1.1 billion from year-end, primarily reflecting seasonal dealer-inventory levels; consumer balances increased $1.1 billion.
- Insurance pretax income improved to $78 million from $74 million, while Mortgage pretax income rose to $69 million from $17 million, helped by the $66 million gain on sale of a $614 million unpaid-principal-balance portfolio of restructured loans. Corporate and Other’s pretax loss widened to $196 million from $138 million, largely due to the debt-tender loss.
Outlook, commentary, risks, and contingencies
- No quantified consolidated earnings guidance is provided. Management expected continued bulk purchases of high-quality jumbo mortgages for treasury asset-liability management and diversification, and expected lease terminations to remain near current levels through 2015.
- Management described the U.S. economy and automotive market as continuing to expand, but remained cautious given weak global growth and expected Federal Reserve rate normalization. Ally was moderately liability-sensitive: its modeled 12-month pretax net financing revenue change was +$31 million for an immediate 100-basis-point rate decrease, −$89 million for a 100-basis-point increase, and −$191 million for a 200-basis-point increase.
- Funding actions included $2.5 billion of unsecured debt issuance, $2.7 billion from four U.S. securitizations, and a $1.0 billion automotive whole-loan sale. The company renewed or extended $12.5 billion of automotive credit facilities through March 2017. Management said it planned further preferred-stock redemptions during 2015 and 2016 and opportunistic repurchases of high-cost unsecured debt.
- After quarter-end, Ally redeemed approximately $1.3 billion of Series G preferred stock and announced a tender offer for up to 13 million Series A preferred shares at $26.65 per share. Ally also announced its selection as Mitsubishi’s preferred U.S. financing and leasing provider, including intended purchases of approximately $750 million of consumer loans and leases and financing of approximately $300 million in dealer floorplan assets; these are subsequent events, not Q1 results.
- Principal risks include auto-credit and lease-residual performance, interest-rate and funding-market changes, deposit repricing, dependence on manufacturer relationships and continued diversification, capital regulation, and litigation or regulatory outcomes. Investigations include DOJ and SEC mortgage-related matters and DOJ/SEC requests concerning subprime auto finance and securitizations. Ally was also subject to CFPB and DOJ consent orders concerning alleged disparate impact in auto finance; the orders include remediation obligations and potential monetary payments if targets are not met. Management said current legal matters were not expected to have a material adverse effect, while noting an unfavorable resolution could be material in a particular period.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing stated there were no material changes to the risk factors in the 2014 Form 10-K.
Investor facts to verify
- Separate the recurring $179 million continuing-operations earnings from the $397 million discontinued-operations gain, and assess the $198 million debt-extinguishment charge.
- Track lease remarketing gains, vehicle residual values, depreciation, and the effect of GM’s channel changes on originations and portfolio mix.
- Assess consumer credit performance alongside rising net charge-offs, allowance coverage, and growth across risk tiers; also monitor the increase in criticized commercial exposures, including energy-sector exposure.
- Confirm the quality and transferability of reported liquidity, facility availability and collateral requirements, upcoming debt maturities, and capital effects of preferred-stock actions.
- Monitor developments and potential financial exposure from DOJ, SEC, CFPB, and other legal or regulatory matters; evaluate the stated capital ratios in light of Basel III phase-in and planned distributions.