Ally Financial Inc. — Q2 2012 Form 10-Q
Business context and period. This unaudited quarterly filing covers the three and six months ended June 30, 2012. Ally is a bank holding company focused on automotive finance, direct banking, insurance and mortgage activities. Comparisons below are with the corresponding 2011 periods unless noted.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Total net revenue | $1.710 billion | $1.775 billion | $3.566 billion | $3.327 billion |
| Net financing revenue | $782 million | $718 million | $1.451 billion | $1.262 billion |
| Provision for loan losses | $29 million | $50 million | $169 million | $163 million |
| Noninterest expense | $2.530 billion | $1.534 billion | $3.880 billion | $2.874 billion |
| Continuing-operations net income (loss) | $(864) million | $108 million | $(562) million | $277 million |
| Net income (loss), including discontinued operations | $(898) million | $113 million | $(588) million | $259 million |
| Cash from operating activities | Six-month period: $4.940 billion | Prior-year six-month period: $4.363 billion |
- Net financing revenue increased 9% in Q2 and 15% for the first half, as lower interest expense more than offset lower financing revenue and higher lease depreciation expense.
- Reported earnings were dominated by a $1.192 billion Q2 charge related to Residential Capital, LLC (ResCap), including a $442 million impairment of Ally’s ResCap investment and a planned $750 million contribution to the bankruptcy estate.
- Ally reported Q2 core pretax loss of $753 million, versus core pretax income of $465 million a year earlier. This company-defined non-GAAP measure excludes specified debt-discount amortization and debt-extinguishment effects; it is not a substitute for GAAP results.
- Q2 net interest spread was 1.55%, versus 1.34%; excluding original issue discount amortization, it was 1.86%, versus 2.15%. Six-month spread was 1.40%, versus 1.10%, and 1.73% versus 2.00% excluding that amortization. Net yield on interest-earning assets was 1.92% for Q2 and 1.79% for the first half.
- Q2 efficiency ratio rose to 147.95% from 86.42%; the core efficiency ratio was 140.09% versus 74.87%. The filing attributes the deterioration chiefly to the ResCap charge.
Financial position, liquidity and capital
- At June 30, 2012, total assets were $178.560 billion, down from $184.059 billion at year-end 2011. Total equity was $18.363 billion, down from $19.371 billion; the accumulated deficit increased to $8.313 billion.
- Cash and cash equivalents were $16.126 billion, compared with $13.035 billion at year-end. Deposits were $47.992 billion, up from $45.050 billion. Long-term debt was $91.096 billion, versus $92.794 billion; short-term borrowings were $6.010 billion, versus $7.680 billion.
- Six-month investing cash outflow was $6.143 billion and financing cash inflow was $4.294 billion. Cash increased by $3.052 billion during the first half.
- Management reported available liquidity of $25.8 billion at the parent company and $13.5 billion at Ally Bank. Committed funding capacity totaled $42.3 billion, of which $20.9 billion was unused; access to secured capacity depends on eligible collateral and other conditions.
- Ally Financial’s Tier 1 and total risk-based capital ratios were 13.68% and 14.70%, respectively; Ally Bank’s were 16.82% and 17.85%. Ally Bank’s Tier 1 leverage ratio was 15.49%, against a 15% requirement under its capital maintenance agreement. Both were reported as well-capitalized and compliant with applicable capital requirements at quarter-end.
Material changes and management commentary
- ResCap filed for Chapter 11 on May 14, 2012. Ally deconsolidated it from that date, recorded a full impairment of its investment and recognized the $1.192 billion charge. The filing says the ultimate financial impact remains uncertain.
- Automotive finance remained a key earnings contributor: North American Automotive Finance pretax income was $631 million in Q2, up from $559 million. Consumer automotive originations increased, while used-vehicle pricing and lower credit losses supported results. Lease revenue and remarketing gains were affected by the runoff of legacy lease assets and lower lease termination volumes.
- Mortgage operations reported Q2 pretax income of $24 million, compared with a $125 million loss, but mortgage production fell 53% to $5.9 billion. Management cited reduced correspondent lending, partly offset by direct-channel refinancing activity. Ally Bank planned to wind down warehouse lending by year-end and was not accepting new clients.
- Ally was exploring strategic alternatives for all international operations. It also disclosed Chrysler’s notice that its agreement covering certain retail financing subvention programs would expire April 30, 2013; the notice did not rule out future cooperation.
- Management cited slower labor-market recovery, weaker global growth and possible U.S. tax and spending changes in 2013 as economic concerns. It noted stronger U.S. auto sales and used-vehicle prices and signs of housing recovery, while describing the outlook as cautious.
Risks, contingencies and unusual items
- ResCap bankruptcy and releases: The proposed plan and settlement required bankruptcy-court approval. If approved releases were not obtained, Ally warned that claims by ResCap or third parties could materially adversely affect results, financial position or cash flows. An independent examiner’s investigation into pre- and post-petition dealings and proposed releases could delay confirmation; the filing said meeting stated plan deadlines was unlikely absent agreed changes.
- Foreclosure-related matters: Ally recorded $90 million in Q2 regulatory penalties. The filing also describes obligations under a mortgage settlement and regulatory consent order, with ResCap primarily liable and Ally secondarily liable for specified performance and jointly and severally liable for financial obligations.
- Mortgage representations and warranties: Ally Bank’s reserve was $124 million at quarter-end and related to GSE exposure. Unresolved demands covered 364 loans with original unpaid principal of $82 million; actual losses and timing remain uncertain.
- Regulatory and funding risks: The Federal Reserve objected to Ally’s January capital plan; Ally submitted a revised plan in June and said acceptance was uncertain. The FDIC-guaranteed debt program included $7.4 billion outstanding and was due to mature in the second half of 2012. Credit ratings included Fitch BB- senior debt on negative watch, Moody’s B1 with stable outlook, S&P B+ with positive outlook, and DBRS BB-Low under developing review.
- Other risks include credit quality, interest and foreign-exchange movements, lease residual values, legal and compliance matters, dependence on funding markets, and ties to GM and Chrysler. The filing gives no numerical earnings guidance.
Important facts for investors to verify
- Whether the ResCap plan, settlement and third-party releases were ultimately approved, and the final cost or exposure to Ally.
- Whether the $750 million estate contribution, $1.2 billion ResCap financing receivable and related bankruptcy obligations were recovered, paid or otherwise changed.
- Subsequent changes in capital-plan status, capital ratios, available liquidity, debt maturities, credit ratings and funding access.
- Trends in auto loan originations, yields, delinquencies and charge-offs, and in lease depreciation and remarketing gains.
- Mortgage production, servicing rights valuations, GSE repurchase claims, the $124 million reserve adequacy and foreclosure-related obligations.
- Effects of the Chrysler agreement expiration and any decisions or transactions involving international operations.