Ally Financial Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; unaudited. Ally is a financial holding company focused primarily on automotive finance, insurance, mortgage portfolio management, and direct banking through Ally Bank.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total net revenue | $1.127 billion | $1.231 billion | $2.220 billion | $2.373 billion |
| Net financing revenue | $916 million | $866 million | $1.766 billion | $1.687 billion |
| Provision for loan losses | $140 million | $63 million | $256 million | $200 million |
| Continuing-operations pretax income | $263 million | $347 million | $545 million | $639 million |
| Continuing-operations net income | $169 million | $283 million | $348 million | $481 million |
| Net income, including discontinued operations | $182 million | $323 million | $758 million | $550 million |
| Basic and diluted EPS | $(2.22) | $0.54 | $(1.16) | $0.87 |
Q2 revenue declined 8%, pretax income from continuing operations fell 24%, and continuing net income fell 40% year over year. Six-month continuing net income declined 28%. The reported common-share losses reflect unusually large preferred dividends recognized in connection with preferred-stock transactions: $1.251 billion in Q2 and $1.318 billion for the first half, including $1.193 billion of additional return to preferred holders. Thus, reported net income and common EPS diverged materially.
Net interest spread was 2.43% in Q2 versus 2.35% a year earlier, and 2.37% for the first half versus 2.31%. Net yield on interest-earning assets was 2.55% and 2.49%, respectively, for Q2 and 2.49% and 2.45% for the first half. These reported measures include the effects of original issue discount amortization; excluding it, spread was lower year over year for both periods.
Balance sheet, cash flow, debt, and capital
- At June 30, total assets were $156.5 billion, up from $151.8 billion at December 31, 2014. Finance receivables and loans, net, were $104.2 billion; operating lease assets were $18.0 billion; and investment securities were $19.1 billion.
- Cash and cash equivalents were $5.9 billion. Deposits totaled $61.9 billion, up $3.7 billion from year-end. Short-term borrowings were $10.0 billion and long-term debt was $65.9 billion. Total equity was $14.3 billion, down from $15.4 billion.
- Six-month operating cash flow was $1.7 billion, compared with $1.5 billion in 2014. Investing activities used $5.2 billion, versus $90 million provided in 2014; financing activities provided $3.7 billion, versus $1.4 billion used. Cash increased $282 million to $5.9 billion.
- Management reported available liquidity of $5.1 billion at the parent and $9.9 billion at Ally Bank. Committed funding capacity totaled $22.4 billion, with $1.3 billion unused; access depends in part on eligible collateral. Ally Bank’s total deposits were $61.7 billion, including $51.8 billion retail deposits.
- At June 30, Ally’s Basel III Common Equity Tier 1 ratio was 9.83%, Tier 1 ratio 11.74%, total capital ratio 12.63%, and Tier 1 leverage ratio 10.35%. Ally Bank’s Tier 1 leverage ratio was 15.42%; it is subject to a 15% minimum under a capital and liquidity maintenance agreement. The company stated that Ally and Ally Bank met applicable capital requirements.
Material changes and management commentary
- Lower funding costs—reflecting deposit growth, repayment of higher-cost legacy debt, and lower debt-discount amortization—supported net financing revenue. However, lower lease remarketing gains increased depreciation expense and reduced lease economics: Q2 net operating lease revenue fell 21% to $297 million.
- Debt tender offers to reduce high-cost debt generated extinguishment losses of $156 million in Q2 and $354 million in the first half. The transactions included tenders for $950 million of debt in Q1 and $875 million in Q2. Management said it expects to continue accessing unsecured debt markets and to reduce high-cost debt opportunistically.
- Loan-loss provision rose, primarily due to growth and seasoning in consumer automotive lending, broader risk-spectrum originations, and lower mortgage reserve releases. Q2 net charge-offs were $100 million versus $85 million; first-half net charge-offs were $250 million versus $218 million. Management described consumer credit performance as strong and commercial credit performance as strong, with no commercial net charge-offs in the first half.
- Consumer automotive originations were $10.8 billion in Q2 and $20.6 billion in the first half. Nonprime originations were 13.7% of Q2 volume versus 9.4% a year earlier, and 12.9% for the first half versus 9.3%. Ally noted that GM lease and subvented volume fell after GMF became GM’s exclusive provider of lease subvention programs; growth in Chrysler and non-GM/Chrysler channels partly offset this.
- Insurance pretax income improved to $15 million in Q2 from a $23 million loss, and to $93 million for the first half from $51 million. Lower weather-related and other claims helped; the Q2 combined ratio remained above 100% at 112.2% (first half: 99.1%). Ally launched its Ally Premier Protection vehicle service contract and announced preferred financing relationships with Mitsubishi and Aston Martin. A letter of intent covered a potential purchase of approximately $0.7 billion of Mitsubishi consumer loans and leases.
- First-half net income included $410 million of discontinued-operations income, primarily associated with the January 2015 sale of Ally’s China joint-venture interest, which generated an approximately $400 million after-tax gain. Mortgage operations also sold a $614 million unpaid-principal-balance portfolio of restructured loans in Q1.
- Interest-rate sensitivity modeling showed a $110 million decrease in projected next-12-month pretax net financing revenue under an instantaneous +100 basis-point shock, and a $266 million decrease under +200 basis points. Management described Ally as moderately liability-sensitive and highlighted uncertainty in deposit repricing assumptions.
Outlook, risks, and contingencies
- Management expected bulk purchases of high-quality jumbo mortgage loans to continue for asset-liability management and diversification. It expected lease termination volumes to remain near then-current levels through 2015, while noting they may vary.
- Management cited weak global growth and expected Federal Reserve rate normalization as reasons for caution. Key risks include consumer credit performance and underwriting mix, vehicle lease residual values, funding-market disruption and liquidity, interest-rate exposure, credit ratings, regulatory requirements, and the company’s relationships with GM and Chrysler.
- Ally and subsidiaries faced DOJ and SEC mortgage-related inquiries concerning former Residential Capital RMBS and potential claims, including under the False Claims Act; the FCA limitations period was voluntarily extended to January 2016. The company also reported SEC, DOJ, and New York DFS inquiries concerning subprime automotive finance and securitization. Ally said it was cooperating. The filing cautions these matters could result in significant settlements, penalties, judgments, or other adverse consequences.
- Ally and Ally Bank remain subject to CFPB and DOJ consent orders concerning alleged disparate impact in auto finance, including compliance and remediation requirements. Management said current legal matters were not expected to have a material adverse effect overall, but unfavorable resolution could be material in a particular period.
- The board received Federal Reserve non-objection to its 2015 capital plan. Additional preferred redemptions in 2015 were possible, subject to regulatory and other factors. A quarterly dividend on Series A and Series G preferred stock was declared after quarter-end.
Investor verification priorities
- Reconcile GAAP net income to common EPS, especially the $1.193 billion preferred-stock transaction-related charge and its treatment in earnings per share.
- Assess the sustainability of earnings excluding the China joint-venture gain, debt-extinguishment losses, and other transaction-related effects.
- Track auto-loan growth, nonprime mix, delinquencies, charge-offs, and reserve adequacy as the expanded consumer portfolio seasons.
- Evaluate lease residual values and remarketing gains, including the impact of reduced GM lease originations and changing termination volumes.
- Review available liquidity, collateral requirements and facility maturities, debt refinancing costs, regulatory capital buffers, and interest-rate sensitivity assumptions.
- Monitor the outcomes and potential financial exposure from the mortgage, subprime automotive, and consent-order matters.