Ally Financial Inc. annual report, FY2011

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Ally Financial Inc. — 2011 Form 10-K

Reporting period: Fiscal year ended December 31, 2011; the filing also reports fourth-quarter results. Unless noted, amounts are U.S. dollars.

Business context

Ally is a bank holding company operating in automotive finance and insurance, residential mortgage origination and servicing, and legacy mortgage portfolios. At year-end, it reported $184.1 billion in assets, served automotive dealers and customers in multiple countries, and had $39.6 billion of deposits at Ally Bank. Its results remain materially exposed to GM and Chrysler relationships and to the mortgage subsidiary Residential Capital, LLC (ResCap).

Financial performance and position

  • Revenue and earnings: 2011 total net revenue was $6.071 billion, down 21% from $7.642 billion in 2010. Net financing revenue was $2.475 billion, down 5%. Ally reported a $112 million loss from continuing operations and a $157 million consolidated net loss, compared with continuing-operations income of $986 million and net income of $1.075 billion in 2010. The loss attributable to common shareholders was $919 million.
  • Fourth quarter: Net revenue was $1.583 billion; Ally recorded a $190 million loss from continuing operations and a $206 million consolidated net loss. The filing’s quarterly data do not provide a single clear fourth-quarter cash-flow figure.
  • Margins and expenses: Net interest spread fell to 1.07% from 1.26%; excluding original issue discount (OID) amortization, it was 1.79% versus 2.32%. Net yield on interest-earning assets was 1.57% versus 1.81%. Interest expense declined 7% to $6.223 billion, while OID amortization remained substantial at $925 million.
  • Credit and losses: Provision for loan losses fell to $219 million from $442 million. Net charge-offs declined to $553 million from $1.198 billion, and nonperforming finance receivables and loans fell to $1.116 billion from $1.768 billion. The allowance for loan losses was $1.503 billion at year-end.
  • Cash flow: Operating activities provided $5.493 billion, down from $11.607 billion. Investing activities used $14.128 billion; financing activities provided $10.050 billion. Cash and cash equivalents ended the year at $13.035 billion.
  • Balance sheet, debt, and liquidity: Total assets rose to $184.059 billion from $172.008 billion; total equity declined to $19.371 billion from $20.489 billion. Year-end long-term debt was $92.794 billion; the filing cites approximately $101.6 billion of total outstanding debt principal, including $53.0 billion secured. Deposits totaled $45.050 billion, up from $39.048 billion. Available liquidity was $26.9 billion at the parent company and $10.0 billion at Ally Bank.
  • Capital: Regulatory Tier 1 capital ratio was 13.71%, total risk-based capital 14.75%, Tier 1 leverage 11.50%, and Tier 1 common capital ratio 7.57%. Ally and Ally Bank reported compliance with applicable capital requirements; Ally Bank was subject to a 15% leverage requirement under its capital and liquidity agreement.

Material changes versus 2010

  • Results moved from $986 million of continuing-operations income to a $112 million loss. Lower mortgage servicing income and loan-sale gains, plus the foreclosure-related charge, were major contributors; lower credit-loss provisions and representation-and-warranty expense partly offset the declines.
  • Mortgage servicing income, net, fell to $569 million from $1.099 billion, reflecting lower interest rates, market volatility, and servicing valuation changes. Mortgage and automotive loan gains fell to $470 million from $1.261 billion.
  • North American Automotive Finance pretax income decreased to $2.106 billion from $2.344 billion, despite stronger consumer originations, primarily because of lower lease remarketing results and the end of automotive forward-flow agreements. Consumer originations rose; North American retail originations were $36.528 billion versus $31.471 billion.
  • Mortgage Origination and Servicing shifted from $920 million pretax income to a $347 million pretax loss. Legacy Portfolio and Other reported a $402 million pretax loss, compared with $267 million.
  • Deposits increased and funding mix continued shifting toward Ally Bank and secured funding. Total on-balance-sheet funding was $144.466 billion, with deposits representing 31%, versus 29% in 2010.
  • Ally committed to sell its Canadian mortgage operations, certain U.K. insurance operations, and specified European full-service leasing operations; the filing expected these sales to be completed in 2012. The mortgage legacy portfolio continued to run off.

Outlook, commentary, and key risks

  • Outlook: Ally expected mortgage originations in 2012 to decline following its decision to reduce correspondent lending and prioritize retail and direct channels. Management said overall mortgage profitability was not expected to be significantly affected if retail and direct volumes increased through government refinancing programs. No quantified company-wide earnings guidance is provided.
  • Foreclosure matters: A $230 million fourth-quarter 2011 charge related to a February 2012 agreement in principle with federal and state authorities and a related Federal Reserve penalty. The agreement includes an approximately $110 million payment and $200 million of borrower-relief commitments; final documentation and regulatory and court approvals remained pending. The filing estimates additional mortgage servicing compliance costs of about $40 million annually in 2012 and 2013 and foreclosure-review costs of up to $200 million, potentially higher if scope expands.
  • ResCap: The filing states substantial doubt about ResCap’s ability to continue as a going concern. ResCap had $390 million of unrestricted liquidity at year-end, covenant breaches following the foreclosure charge, and significant reliance on Ally support. Ally cured a tangible-net-worth shortfall with a $197 million intercompany-debt forgiveness in January 2012; future support is not assured. Ally disclosed $2.6 billion in funding arrangements with ResCap.
  • Mortgage claims and litigation: The representation-and-warranty reserve was $825 million. Unresolved demands represented $1.069 billion of original unpaid principal balance; the company said additional losses beyond reserves were reasonably possible but could not estimate a range. Related MBS litigation includes claims by investors and monoline insurers, including MBIA and FGIC.
  • Funding and regulatory constraints: Approximately $12.0 billion of unsecured debt and $14.4 billion of secured debt were scheduled to mature in 2012, alongside $15.6 billion of bank certificates of deposit. The company cited below-investment-grade debt ratings and capital-market volatility as refinancing risks. New capital planning, stress-testing, liquidity and other Dodd-Frank requirements could constrain distributions or business activity.
  • Other exposures: Risks include reliance on GM and Chrysler, competitive pressure on auto-finance yields, interest-rate and mortgage-servicing-right valuation volatility, used-vehicle residual values, housing-market conditions, and deposit retention. Treasury held about 74% of common voting power and retained significant governance influence.

Important facts for investors to verify

  • Reconcile the $157 million consolidated net loss, $112 million continuing-operations loss, and $919 million loss attributable to common shareholders, including preferred dividends and discontinued operations.
  • Review the drivers and sustainability of the decline in net interest spread, servicing income, and mortgage and automotive loan-sale gains.
  • Assess 2012 debt and certificate-of-deposit maturities against available liquidity, secured-funding capacity, and actual refinancing access.
  • Track ResCap liquidity, covenant compliance, Ally’s subsequent support, and any implications of a ResCap restructuring or bankruptcy.
  • Monitor completion and final costs of the foreclosure settlement, servicing remediation, and independent foreclosure review.
  • Evaluate whether the $825 million mortgage representation-and-warranty reserve is adequate given unresolved demands, litigation, and possible further claims.
  • Confirm progress on planned asset sales, correspondent-channel reductions, and the shift toward retail and direct mortgage production.