Ally Financial Inc. — Q2 2011 Form 10-Q
Reporting period: Three and six months ended June 30, 2011. The interim financial statements are unaudited. Ally provides automotive finance, insurance, mortgage origination and servicing, and direct banking services.
Financial performance and condition
Amounts are in U.S. dollars; financial amounts are in millions unless noted.
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Total net revenue | $1,827 | $2,097 | $3,434 | $3,947 |
| Net financing revenue | $711 | $709 | $1,248 | $1,461 |
| Provision for loan losses | $51 | $218 | $164 | $362 |
| Income from continuing operations before tax | $192 | $435 | $294 | $622 |
| Net income from continuing operations | $110 | $402 | $280 | $553 |
| Net income, including discontinued operations | $113 | $565 | $259 | $727 |
| Net income (loss) attributable to common shareholders | $(78) | $540 | $(103) | $199 |
Margins and expenses: Net interest spread was 1.31% in Q2 (1.48% prior year) and 1.06% for the first half (1.55%). Net yield on interest-earning assets was 1.82% and 1.63%, respectively, versus 2.00% and 2.07%. Noninterest expense was $1.584 billion in Q2, up from $1.444 billion; first-half expense was $2.976 billion versus $2.963 billion. Management’s non-GAAP core pretax income was $466 million for Q2 and $894 million for the first half, compared with $727 million and $1.311 billion. Core pretax income excludes original issue discount amortization and discontinued operations and is not a GAAP measure.
Cash flow: For the first half, operating activities provided $4.363 billion (prior year $11.583 billion); investing activities used $6.774 billion (prior year $808 million); financing activities provided $5.749 billion (prior year used $12.177 billion). Cash and cash equivalents ended June 30 at $14.901 billion, up from $11.670 billion at year-end 2010.
Balance sheet and liquidity: At June 30, total assets were $178.889 billion and equity $20.423 billion. Deposits were $42.262 billion; short-term borrowings $7.130 billion; long-term debt $91.723 billion. Deposits grew from $39.048 billion at year-end. Ally reported $24.7 billion of available parent-company liquidity and $12.2 billion at Ally Bank; liquidity is held at different entities and is subject to transfer restrictions. Total committed funding facilities were $37.5 billion, including $17.7 billion unused capacity, with availability dependent in part on eligible collateral.
Credit and capital: The allowance for loan losses was $1.739 billion, down from $1.873 billion at year-end. First-half net charge-offs were $310 million versus $623 million a year earlier; nonperforming on-balance-sheet loans were $4.364 billion versus $5.041 billion at year-end. Ally Financial’s Tier 1 and total risk-based capital ratios were 14.65% and 15.87%; Ally Bank’s Tier 1 leverage ratio was 15.63%, against a 15% maintenance requirement. Both were reported as well-capitalized and compliant with applicable requirements.
Material changes versus comparable periods
- Revenue fell 13% in both Q2 and the first half. Continuing-operations pretax income declined 56% in Q2 and 53% year to date; continuing-operations net income declined 73% and 49%, respectively.
- Lower loan-loss provisions supported results, reflecting improved credit performance, portfolio runoff, and a reserve release in Commercial Finance. Net charge-offs and nonperforming loans also declined.
- Revenue was pressured by lower lease revenue and remarketing gains, reduced mortgage servicing income, lower mortgage and automotive loan-sale gains, and the expiry of automotive forward-flow agreements. Auto consumer finance revenue increased with higher asset balances and originations.
- Mortgage representation-and-warranty expense increased, including a $121 million expense tied to rescinded mortgage insurance on certain securitized loans. Other income included a $121 million gain from early settlement of a historical automotive forward-flow loss-holdback provision.
- Mortgage origination and servicing pretax income fell to $47 million in Q2 from $249 million; Legacy Portfolio and Other recorded a $174 million pretax loss versus a $19 million loss. Insurance pretax income fell to $73 million from $108 million, partly due to lower realized investment gains and weather-related losses.
- Discontinued operations included the second-quarter sale of the U.K. consumer property and casualty insurance business and the first-quarter sale of Ecuador operations. Ally expected to complete the sale of Venezuela operations by December 31, 2011.
Outlook, risks, contingencies, and unusual items
- No numerical company-wide earnings guidance is provided in the supplied filing text. Management described economic uncertainty, including a slow labor-market recovery, housing-market weakness, higher gasoline prices, and uncertainty in developed economies. It cautioned these conditions could affect credit performance and automotive demand.
- ResCap going-concern risk: ResCap had $772 million of consolidated tangible net worth and complied with its covenants at June 30, but Ally disclosed substantial doubt about ResCap’s ability to continue as a going concern. ResCap remained dependent on Ally and affiliates for funding and capital support, with no commitment or assurance of future support. Ally had $1.3 billion of loans utilized under $1.9 billion of secured financing arrangements with ResCap; its $772 million equity investment could be reduced to zero in a ResCap bankruptcy.
- Mortgage servicing and foreclosure matters: Ally and related entities entered an FRB/FDIC consent order requiring operational, compliance, and foreclosure-review improvements. Ally estimated incremental implementation and ongoing compliance costs of approximately $30–$40 million annually in 2011–2013, potentially higher. The company said a monetary fine was probable but could not estimate a loss or range; it recorded about $9 million for certain probable and estimable fines and penalties.
- Mortgage representations, warranties, and litigation: The reserve was $829 million. Unresolved demands represented $1.078 billion of original unpaid principal balance at June 30, including $874 million relating to monolines; these balances are not estimates of losses. Ally reported 14 private-label MBS cases and two MBIA cases, expected further demands, and said possible losses above reserves could be material but could not be estimated.
- Funding and market risks: The filing identifies reliance on capital markets and securitization, funding costs and availability, credit ratings, interest rates, foreign exchange, and vehicle residual values as risks. Ally reported that S&P downgraded the U.S. sovereign rating to AA+ on August 5, 2011, after quarter-end; the filing said this could affect funding availability and pricing.
- Bank regulation: Ally’s bank-holding-company status restricts certain activities and investments. An extension to bring activities into compliance ran through December 2011, with possible additional extensions; failure to retain or obtain needed permissions could require dispositions and adversely affect results.
- Preferred capital and dividends: Treasury sold all Series 2 trust preferred securities in March 2011; Ally received no proceeds. In July 2011, the board declared preferred dividends totaling $201 million, payable August 15.
Most important facts for investors to verify
- Whether ongoing profitability and margins can stabilize after the decline in revenue, net interest spread, and core pretax income.
- Whether credit improvement and lower loan-loss provisions persist as auto lending grows and economic conditions remain uncertain.
- The adequacy of the $829 million mortgage representation-and-warranty reserve relative to new claims, the MBIA litigation, mortgage-insurance rescissions, and foreclosure-related exposure.
- ResCap’s liquidity, debt-service capacity, covenant compliance, and need for—and availability of—future Ally support.
- How much reported liquidity and committed capacity is usable by each legal entity, and whether collateral and market access support refinancing needs.
- The actual cost and financial consequences of the foreclosure consent order, investigations, and any fines or remediation requirements.
- Effects of the U.S. sovereign downgrade and any subsequent rating or market changes on Ally’s funding costs and access.