Ally Financial Inc. — 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also presents unaudited fourth-quarter results. Amounts are in U.S. dollars; financial statement amounts below are generally in millions unless stated otherwise.
Business context
Ally is a bank holding company and financial services provider focused on automotive finance and insurance, with mortgage operations and direct banking through Ally Bank. At year-end, assets were $182.3 billion and Ally Bank deposits were $46.9 billion. In 2012, Ally deconsolidated Residential Capital, LLC (ResCap) following its Chapter 11 filing and committed to sell substantially all remaining international businesses.
Key financial metrics
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Total net revenue | $4,898 | $3,978 |
| Net financing revenue | $1,869 | $1,081 |
| Provision for loan losses | $329 | $188 |
| Noninterest expense | $5,324 | $4,741 |
| Continuing operations pretax loss | $(755) | $(951) |
| Income tax benefit (expense) | $1,284 benefit | $(51) expense |
| Income (loss) from continuing operations | $529 | $(1,002) |
| Income from discontinued operations, net of tax | $667 | $845 |
| Net income (loss) | $1,196 | $(157) |
| Operating cash flow | $5,049 | $5,493 |
| Cash and cash equivalents, year-end | $7,513 | $13,035 |
| Total assets, year-end | $182,347 | $184,059 |
| Long-term debt, year-end | $74,561 | $92,885 |
| Total equity, year-end | $19,898 | $19,280 |
Net interest spread was 1.14% (1.46% excluding original issue discount amortization); net yield on interest-earning assets was 1.37% (1.62% excluding that amortization). The efficiency ratio was 108.70%. Ally reported $82.8 billion of principal indebtedness, including $45.1 billion secured debt. Available liquidity was $15.6 billion at the parent company and $13.2 billion at Ally Bank. Deposits totaled $47.9 billion and represented 38% of on-balance-sheet funding.
Regulatory capital ratios at year-end were 13.13% Tier 1 and 14.07% total risk-based capital for Ally; Ally Bank reported 16.26% and 17.06%, respectively. Ally Bank’s Tier 1 leverage ratio was 15.30%, against a 15% requirement. Ally stated it was in compliance with capital requirements.
Fourth quarter: Net revenue was $1,092 million versus $1,098 million in Q4 2011; continuing operations produced a $1,300 million profit versus a $319 million loss. Q4 2012 included a $1,337 million income tax benefit, making the quarter’s reported profit highly tax-driven. Net income including discontinued operations was $1,400 million, versus a $206 million loss in Q4 2011.
Material changes versus prior period
- FY net income improved to $1.196 billion from a $157 million loss, but continuing operations still recorded a $755 million pretax loss. A $1.284 billion tax benefit—principally release of U.S. federal and state deferred-tax valuation allowances—was a major driver of reported earnings.
- Net financing revenue rose 73%, helped by lower interest expense and growth in automotive consumer and lease assets. Interest expense fell 17%, including a $576 million reduction in OID amortization. Loan-loss provision increased 75% to $329 million as portfolios grew and underwriting expanded across a broader credit spectrum.
- Other operating expense included a $1.192 billion ResCap-related charge: $442 million impairment of Ally’s ResCap investment and a $750 million settlement accrual. ResCap was deconsolidated effective May 14, 2012.
- Reported total assets declined modestly, while long-term debt fell by $18.3 billion and deposits increased by $2.9 billion. The loan portfolio and servicing balances also changed substantially due to ResCap deconsolidation and international businesses classified as discontinued operations.
- Automotive Finance pretax income increased to $1.389 billion from $1.333 billion. Insurance pretax income fell to $160 million from $316 million, reflecting lower investment income and earned premiums and higher weather-related losses, including Storm Sandy. Mortgage operations swung to $689 million pretax income from a $622 million loss, aided by servicing hedge performance, refinancing activity, and lower expenses following ResCap’s deconsolidation.
Outlook, risks, contingencies and unusual items
- Management expected funding costs to continue improving as deposits grow, and targeted prudent automotive asset growth, increased used-vehicle lending, and diversification beyond GM and Chrysler. It expected mortgage production and related income to decline as activities were reduced. No specific company-wide earnings guidance was provided.
- Ally’s GM financing agreement expires December 31, 2013; its Chrysler agreement expires April 30, 2013, and Chrysler had announced a new financing arrangement with Santander beginning in May 2013. The company warned that expiry would likely increase competitive pressure. GM and Chrysler represented substantial portions of new-vehicle financing and dealer inventory financing.
- The ResCap settlement underpinning the $750 million accrual terminated after its waiver was not extended beyond February 28, 2013. Ally was no longer obligated to pay that contribution under the terminated settlement, but also had no releases from ResCap or third-party claimants. Ally retained its offer to contribute $750 million if an acceptable settlement is reached; substantial claims and mortgage-related litigation could result. The bankruptcy examiner’s report and court proceedings remained pending.
- Ally remained subject to bank-regulatory requirements and supervisory-improvement obligations. Activities deemed impermissible under bank holding company rules—including most insurance activities and third-party SmartAuction services—were to be terminated or disposed of by December 2013 absent conversion to financial holding company status. The filing says further extensions were unavailable.
- Funding risks include significant scheduled maturities, below-investment-grade debt ratings, reliance on secured markets and facilities, and $15.7 billion of bank CDs maturing in 2013. The $15 billion syndicated automotive facility had maturities split between March 2013 and March 2014 and was being renewed, with Ally expecting to reduce total capacity.
- Other material risks include consumer and dealer credit losses, used-vehicle residual values, mortgage representations and warranties, legal and regulatory investigations, interest-rate and liquidity stress, and reliance on GM and Chrysler. SEC and Department of Justice mortgage-related inquiries and a CFPB investigation of retail financing practices were disclosed.
- International disposals were expected to close in stages during 2013; Ally expected an overall gain when all automotive finance sales closed, though interim gains or losses could occur. The Canadian automotive finance sale closed February 1, 2013 for $4.1 billion; the mortgage business lending operation sale closed February 28, 2013.
- The filing reports an unqualified audit opinion and management and auditor conclusions that internal control over financial reporting was effective. Ally common stock was not registered with the SEC and had no established trading market.
Most important facts for investors to verify
- Whether reported profitability is sustainable apart from the $1.284 billion tax benefit and discontinued-operation income, and how continuing-operations earnings develop.
- The ultimate ResCap bankruptcy settlement, potential claims or foreclosure-review obligations, and the adequacy of the $750 million accrual and other reserves.
- Renewal terms and capacity of the March 2013/2014 syndicated facility, refinancing of upcoming debt and CD maturities, and whether stated liquidity is available across legal entities.
- The impact of the GM and Chrysler agreement expirations on originations, dealer relationships, margins, and funding needs.
- Completion, proceeds, and accounting effects of remaining international and other asset sales, including any gains or losses and tax consequences.
- Regulatory progress on required control and risk-management improvements, the December 2013 activity deadline, and constraints on dividends and capital distributions.