Ally Financial Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012; financial statements are unaudited. Ally is a bank holding company focused on automotive finance, direct banking, insurance, and mortgage activities.
Financial performance and position
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Total net revenue | $1.713B | $1.161B | $5.279B | $4.488B |
| Net financing revenue | $777M | $607M | $2.228B | $1.869B |
| Provision for loan losses | $116M | $50M | $285M | $213M |
| Income (loss) before tax, continuing operations | $483M | $(106)M | $0 | $184M |
| Net income (loss), consolidated | $384M | $(210)M | $(204)M | $49M |
| Operating cash flow | — | — | $4.845B | $5.781B |
Q3 net income attributable to common shareholders was $183M, after preferred dividends. The filing’s displayed per-share figures are unclear, so no EPS value is stated. Q3 net interest spread was 1.46% (1.04% a year earlier); the nine-month spread was 1.42% (1.09%). Net interest spread excluding original issue discount was lower year over year for both periods.
At September 30, total assets were $182.482B, equity $18.765B, cash and cash equivalents $17.157B, deposits $49.872B, short-term borrowings $5.877B, and long-term debt $93.028B. Cash increased from $13.035B at year-end 2011; deposits increased from $45.050B. Total debt was about $98.9B, down from about $100.5B at year-end. Net cash used in investing was $7.731B and net cash provided by financing was $6.985B for the first nine months.
Ally and Ally Bank were reported as well-capitalized. Ally’s Tier 1 risk-based capital ratio was 13.64%, total risk-based capital ratio 14.63%, and Tier 1 leverage ratio 11.29%. Ally Bank’s respective ratios were 16.98%, 18.00%, and 15.47%; its leverage requirement under the capital and liquidity maintenance agreement was at least 15%.
Material changes versus comparable periods
- Q3 net income improved from a loss to profit, with net revenue up 48%. Management attributed the improvement primarily to mortgage servicing hedge performance, refinancing-related mortgage production and fees, and lower interest expense.
- Nine-month net income fell to a loss, principally reflecting a $1.2B charge related to Residential Capital, LLC (ResCap) bankruptcy and deconsolidation. The charge included impairment of Ally’s $442M ResCap investment and a planned $750M contribution to the estate.
- Interest expense declined 17% in Q3 and 16% year to date, partly due to lower original issue discount amortization and ResCap deconsolidation. Loan-loss provisions rose, driven mainly by growth in consumer and commercial auto receivables.
- Mortgage servicing income improved sharply from the prior-year comparison, largely because of more favorable hedge results. The mortgage servicing rights balance fell to $902M from $2.519B at year-end, substantially reflecting ResCap deconsolidation and valuation changes.
- Auto finance receivables and loans grew; retail originations in North American Automotive Finance were down 15% in Q3 and 4% for the nine-month period. Mortgage production declined 49% in Q3 and 44% year to date, mainly due to reduced correspondent lending.
Outlook, risks, contingencies, and unusual items
- ResCap bankruptcy: The proposed plan and settlement, including releases of claims against Ally and a $750M estate contribution, remained subject to creditor negotiations and court approval. Milestones were missed; the parties temporarily waived automatic termination through December 31, 2012, while retaining rights to rescind the waiver. If releases are not secured, claims against Ally could materially affect results, financial position, or cash flows. Ally reported $1.2B of financing due from ResCap and considered it fully collectible.
- Tax outlook: Management said a fourth-quarter reversal of approximately $1.1B–$1.4B of U.S. deferred-tax valuation allowance was likely, based on expected cumulative U.S. profitability through year-end. This would benefit fourth-quarter net income and equity, but was not assured.
- Pension charge: Actions involving the defined benefit pension plan were expected to generate a fourth-quarter settlement loss of approximately $90M–$120M; management did not expect a material change to total equity from the charge.
- Portfolio strategy: Ally agreed to sell its Mexican insurance business for $865M cash and its Canadian auto finance operation and ResMor Trust for approximately $4.1B in proceeds, subject to approvals and closing conditions. Ally Bank was exploring strategic alternatives for its agency mortgage servicing rights portfolio and business lending operations. The company also planned to continue reviewing other international operations.
- Funding and market risks: Ally reported $26B of available parent-company liquidity and $15.8B at Ally Bank. Funding access depends in part on eligible collateral and continued market access; substantial debt maturities require ongoing refinancing. Rating actions included Fitch’s negative watch and DBRS’s developing review. Management cited weak global growth and potential U.S. fiscal-policy changes as uncertainties.
- Legal and regulatory exposures: Mortgage-related litigation, the ResCap examiner investigation, and regulatory matters remained outstanding. Ally Bank’s mortgage representation-and-warranty reserve was $127M; management noted that future claims and losses are difficult to estimate. A possible regulatory change in treatment of certain bankruptcy-discharged loans could increase fourth-quarter charge-offs and provisions, though management did not expect a material adverse impact.
- Other operating risks: Chrysler gave notice that its exclusivity arrangement would expire April 30, 2013. Ally also disclosed recent cyberattacks that impaired access to its website for some customers. The filing reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the ResCap plan and settlement were approved, whether releases were obtained, and the ultimate cost or recovery on Ally’s ResCap exposure.
- Whether the anticipated $1.1B–$1.4B tax valuation-allowance reversal occurred, and its effect on reported earnings and equity.
- Closing, proceeds, and any recognized gains or losses from the announced Mexican insurance and Canadian auto finance sales.
- Subsequent credit performance, loan-loss provisions, and mortgage representation-and-warranty claims and reserve adequacy.
- Funding availability, debt refinancing needs, capital ratios, and the effect of rating changes or collateral constraints.