Ally Financial Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Ally is a digital financial-services company, with automotive finance and insurance as its core businesses, alongside a direct bank, mortgage and corporate finance, brokerage, and point-of-sale lending. Financial statements are unaudited.
Financial performance and position
| Metric | Q2 2021 | Prior comparable period |
|---|---|---|
| Total net revenue | $2.085 billion | $1.609 billion; up 30% |
| Net income from continuing operations | $899 million | $242 million |
| Net income | $900 million; diluted EPS $2.41 | $241 million; diluted EPS $0.64 |
| Provision for credit losses | $32 million benefit | $287 million expense |
| Net interest spread / yield on interest-earning assets | 3.42% / 3.55% | 2.23% / 2.40% |
- First half: Net revenue was $4.022 billion versus $3.021 billion. Net income was $1.696 billion versus a net loss of $78 million; diluted EPS was $4.52 versus a loss of $0.21. The $45 million provision benefit compared with $1.190 billion of provision expense in the first half of 2020.
- Cash flow, first half: Operating cash flow was $1.622 billion; investing activities used $91 million and financing activities used $3.663 billion. Cash and cash equivalents were $13.664 billion at June 30, down from $15.621 billion at year-end; cash plus restricted cash totaled $14.445 billion.
- Balance sheet, June 30: Assets were $180.470 billion; deposits $139.104 billion; long-term debt $16.896 billion, with no short-term borrowings; and equity $17.530 billion. Deposits increased $2.1 billion and long-term debt declined $5.1 billion from December 31, 2020.
- Liquidity and capital: Reported available liquidity was $41.581 billion. Ally’s CET1 ratio was 11.32%, total capital ratio 14.83%, and Tier 1 leverage ratio 10.00%; Ally and Ally Bank were reported as well capitalized.
Material changes and drivers
- Earnings improved principally as credit-loss provisions fell amid economic recovery and strong payment performance, funding costs declined, and automotive lease remarketing results strengthened. Q2 auto remarketing gains were $128 million, compared with $11 million of losses a year earlier; first-half gains were $192 million versus $9 million of losses.
- Ally reported higher consumer automotive financing revenue and originations. Conversely, commercial automotive revenue and floorplan balances fell as new-vehicle inventories were constrained by semiconductor shortages.
- Noninterest expense rose to $1.075 billion in Q2 from $985 million, including increased compensation and growth-related investment and a $50 million contribution to the Ally Charitable Foundation. The prior-year quarter included a $50 million Ally Invest goodwill impairment.
- Insurance’s combined ratio improved to 96.7% from 120.9% in Q2, mainly reflecting lower weather-related losses; Q2 insurance pretax income nevertheless declined, largely because prior-year investment gains were unusually high.
- Ally issued $1.35 billion of Series B and $1.0 billion of Series C preferred stock and used proceeds to redeem trust preferred securities. The Q2 statements include a $73 million debt-extinguishment loss. A further $1.04 billion trust preferred redemption was completed July 2, 2021.
- The company repurchased $721 million of common stock in the first half and declared $0.19 per share in dividends for the first two quarters. After quarter-end, the Board raised the 2021 repurchase authorization to $2.0 billion and declared a $0.25-per-share Q3 dividend, subject to regulatory and other conditions.
Outlook, risks, and unusual items
- Management expected favorable vehicle remarketing trends to continue in the near term and adjusted depreciation rates for leased vehicles scheduled to terminate through December 31, 2022. Results remain exposed to used-vehicle prices and residual-value estimates.
- Management anticipated semiconductor-related production constraints would continue to weigh on dealer inventories, commercial wholesale receivables, and P&C insurance written premiums during 2021; the duration and severity were uncertain.
- The allowance for loan losses was $3.126 billion, or 2.8% of finance receivables. Management continued qualitative reserves for pandemic-related uncertainty. It cautioned that future credit losses could rise as economic disruption evolves. Consumer automotive TDR balances remained elevated in part because of COVID-19-related modifications.
- A roughly $78 million release of a valuation allowance on foreign tax credit carryforwards benefited continuing-operations taxes in the first half. Management said valuation allowances may change over the next 12 months.
- A proposed class-action settlement in the vehicle-repossession notice case includes an $87.5 million cash payment and waiver of $700 million in charged-off deficiency balances; final court approval remained pending. Separate consolidated short-squeeze trading class actions seek indeterminate damages, and Ally said it would defend them. The filing did not provide a clear estimate of reasonably possible losses for these matters.
- Interest-rate, funding, credit, vehicle residual, regulatory, cyber and operational risks remain relevant. Management’s 12-month sensitivity analysis showed net financing revenue below baseline under the disclosed rate-shock scenarios, including a $159 million decline for an instantaneous +200-basis-point shock.
Key investor verification points
- Assess how much earnings depended on unusually strong used-vehicle remarketing gains and whether those gains persist as lease vehicles return.
- Review credit quality, TDR trends, reserve assumptions, and the sustainability of provision benefits as pandemic support and economic conditions change.
- Confirm the effect of vehicle-production constraints on floorplan lending, origination mix, and insurance premiums.
- Track funding costs, deposit composition, liquidity availability, capital ratios, and regulatory limits on buybacks and dividends.
- Monitor final court approval and implementation of the $87.5 million / $700 million settlement, plus developments in the short-squeeze litigation.
- Separate recurring earnings from investment valuation gains, the tax valuation-allowance release, charitable contribution, and debt-redemption costs.