Ally Financial Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2013. Unaudited results; amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Ally is a bank holding company focused on automotive finance, insurance and direct banking. During 2013 it continued to exit noncore mortgage and international businesses; results include substantial discontinued operations and are not fully comparable with prior periods.
Key financial metrics
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Total net revenue | $1.108 billion | $1.247 billion | $3.164 billion | $3.374 billion |
| Net financing revenue | $737 million | $472 million | $2.005 billion | $1.280 billion |
| Continuing-operations pretax income | $205 million | $297 million | $282 million | $467 million |
| Continuing-operations net income | $177 million | $251 million | $337 million | $436 million |
| Net income (loss), including discontinued operations | $91 million | $384 million | $257 million | $(204) million |
| Net income (loss) attributable to common shareholders | $(110) million | $183 million | $(344) million | $(805) million |
| Basic and diluted EPS | $(0.82) | $1.38 | $(2.59) | $(6.05) |
- Revenue and margin: Q3 net financing revenue rose 56%, as lower interest expense and higher lease and consumer finance revenue more than offset increased lease depreciation. Total net revenue fell 11%, principally because mortgage-related servicing, loan-sale and fee revenue declined. Net interest spread improved to 1.84% from 1.12%; net yield on interest-earning assets rose to 2.15% from 1.38%. Nine-month figures were 1.68% and 1.97%, respectively, versus 1.06% and 1.29%.
- Expenses and credit: Q3 noninterest expense fell to $762 million from $845 million, while provision for loan losses increased to $141 million from $105 million. Nine-month provision rose to $361 million from $236 million. The company attributed the increase mainly to growth in U.S. auto lending and expansion across a broader credit spectrum.
- Cash flow: For the first nine months, operating cash flow was $4.365 billion, investing cash flow was $3.530 billion, and financing cash flow was $(10.858) billion. Cash and cash equivalents ended at $6.549 billion, down from $7.513 billion at year-end 2012. Investing cash flow included $6.937 billion of net proceeds from business-unit sales and $911 million from mortgage servicing-rights sales; financing outflows reflected debt repayments.
- Balance sheet and funding: At September 30, total assets were $150.556 billion, total equity $19.061 billion, deposits $52.031 billion, short-term borrowings $6.015 billion and long-term debt $60.701 billion. Assets declined from $182.347 billion at year-end 2012, largely amid business exits and reclassification of operations held for sale. Parent-company available liquidity was $22.0 billion and Ally Bank available liquidity was $10.4 billion.
- Capital: Ally Financial reported a 15.37% Tier 1 risk-based capital ratio, 16.40% total risk-based capital ratio, 13.16% Tier 1 leverage ratio and 7.92% Tier 1 common ratio. Ally and Ally Bank were reported as well-capitalized and compliant with applicable requirements; Ally Bank’s leverage ratio exceeded its 15% requirement.
Material changes versus the prior comparable period
- Q3 net income fell to $91 million from $384 million; continuing-operations net income declined to $177 million from $251 million. The common-shareholder result was a loss after preferred dividends. For nine months, consolidated net income improved to $257 million from a $204 million loss, but continuing-operations income declined and common shareholders still recorded a loss.
- Auto and lease activity strengthened: operating lease revenue increased to $832 million in Q3 from $631 million, and auto finance pretax income was $339 million versus $337 million. Auto credit costs rose, with Q3 consumer-auto net charge-offs of $115 million versus $96 million.
- Mortgage operations contracted sharply as Ally exited direct and correspondent lending, ceased new jumbo production and sold its agency mortgage servicing rights. Q3 mortgage segment revenue was $32 million versus $491 million, and pretax results shifted to a $4 million loss from $331 million income.
- Insurance Q3 pretax income rose to $83 million from $13 million, mainly reflecting investment gains. Its nine-month combined ratio worsened to 100.8% from 96.4%, primarily due to weather-related losses.
- Funding costs declined: Q3 interest expense was $787 million versus $1.029 billion. Deposits grew to $52.031 billion from $47.915 billion at year-end, while long-term debt fell from $74.561 billion.
Outlook, management commentary, risks and unusual items
- Business exits: Management said remaining international auto-finance sales were expected to close in 2013 or possibly 2014 and anticipated a cumulative net gain when sales were complete. The remaining Latin American business, including Brazil, was sold to GM Financial on October 1, 2013, for approximately $611 million, subject to post-closing adjustments; the China joint-venture sale remained pending.
- ResCap bankruptcy and settlements: Ally recorded a $170 million pretax discontinued-operations charge in Q3 related to FHFA and FDIC settlements and reported $520 million accrued for those settlements. Separately, the ResCap plan required a $1.95 billion cash contribution plus up to $150 million of insurance recoveries; these amounts were reflected in accrued liabilities. Plan confirmation was scheduled to begin November 19, 2013, with effectiveness subject to court approval and other conditions. Failure to obtain the contemplated releases could expose Ally to substantial claims and material adverse effects.
- Capital actions: A proposed $1 billion private placement of common stock was conditional on regulatory non-objection, repurchase of Treasury-held Series F-2 preferred stock and other conditions; it could be terminated if not completed by November 30, 2013. The Federal Reserve had objected to Ally’s January 2013 capital plan; Ally submitted a revised plan in September and reported ongoing discussions with the regulator.
- Regulatory and legal risk: The CFPB was investigating auto-finance practices and had advised Ally that it believed Ally had obligations regarding independent dealers’ retail financing practices under fair-lending law. Ally said possible outcomes could include fines, settlements, regulatory actions or business-practice changes, but it could not estimate an impact. SEC and Department of Justice mortgage-related inquiries were also disclosed.
- Other risks and outlook: Management cited uncertainty around the economy, government spending and debt-ceiling issues, global growth, vehicle residual values, funding-market access, credit ratings and evolving regulation. Ally expected to comply with Basel III requirements within applicable timeframes. No specific earnings guidance was provided in the supplied filing text.
- Unusual items: Q3 included a $42 million loss on debt extinguishment. Nine-month tax benefits included effects of tax-law changes and valuation-allowance releases. The reported discontinued-operations results were materially affected by ResCap-related charges and business-sale gains and losses.
Most important facts for investors to verify
- Whether the ResCap plan became effective, the releases were granted, and the required contributions and settlement payments were completed.
- Completion, final proceeds and any adjustments from the remaining business divestitures, including the China joint venture.
- Whether the conditional $1 billion equity placement and Treasury preferred-stock repurchase were completed, and the resulting capital and dilution effects.
- Trends in auto-loan delinquencies, charge-offs and loss provisions as Ally expands lending to a broader credit spectrum.
- Progress and potential financial or operating consequences of the CFPB inquiry and other mortgage-related legal or regulatory matters.
- Whether deposit growth, available liquidity and debt repayments remain sustainable, including the availability of secured facilities and access to capital markets.