Ally Financial Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2014. Ally is a financial holding company focused on automotive finance and insurance, with direct-banking operations through Ally Bank and a continuing held-for-investment mortgage portfolio. Results exclude operations classified as discontinued unless noted.
Key financial metrics
Amounts are in millions of dollars, except per-share data and ratios.
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total net revenue | $1,264 | $1,108 | $3,637 | $3,164 |
| Net financing revenue | $889 | $737 | $2,576 | $2,005 |
| Provision for loan losses | $102 | $141 | $302 | $361 |
| Noninterest expense | $742 | $762 | $2,276 | $2,521 |
| Continuing-operations pretax income | $420 | $205 | $1,059 | $282 |
| Continuing-operations net income | $293 | $177 | $774 | $337 |
| Net income, including discontinued operations | $423 | $91 | $973 | $257 |
| Basic and diluted EPS, including discontinued operations | $0.74 | $(0.27) | $1.60 | $(0.83) |
- Margins: Q3 net interest spread was 2.38%, versus 1.84%; net yield on interest-earning assets was 2.52%, versus 2.15%. For the first nine months, those measures were 2.34% versus 1.68%, and 2.47% versus 1.97%, respectively.
- Balance sheet at September 30: Assets were $149.2 billion; cash and cash equivalents $5.7 billion; investment securities $16.7 billion; net finance receivables and loans $98.4 billion; operating lease assets $19.3 billion; deposits $56.9 billion; short-term borrowings $5.3 billion; long-term debt $67.3 billion; and equity $15.2 billion.
- Credit: Allowance for loan losses was $1.113 billion, or 1.1% of loans. Nine-month net charge-offs were $367 million, up from $343 million; the consumer-auto charge-off ratio rose to 0.8% from 0.7%. Nonperforming loans were $623 million, down from $734 million at year-end 2013.
- Cash flow, first nine months: Operating activities provided $2.458 billion, investing activities provided $5 million, and financing activities used $2.294 billion. Cash increased $168 million to $5.699 billion.
- Liquidity and capital: Management reported available liquidity of $11.4 billion at the parent and $7.5 billion at Ally Bank. Ally Financial’s Tier 1 and total risk-based capital ratios were 12.65% and 13.47%; Ally Bank’s were 17.32% and 17.97%. Both were reported well-capitalized and compliant with applicable requirements.
Material changes versus comparable periods
- Q3 net income from continuing operations rose 66% year over year; nine-month continuing income more than doubled. Lower funding costs—reflecting repayment and maturity of higher-cost debt, deposit growth, and reduced original-issue-discount amortization—were significant drivers.
- Automotive Finance pretax income increased to $415 million in Q3 from $339 million. Higher lease revenue and remarketing gains, stronger originations, and lower-than-expected Q3 auto credit losses helped; higher lease depreciation and competitive pressure on financing yields partly offset the gains.
- Insurance pretax income fell to $60 million from $83 million in Q3 and to $111 million from $189 million year to date. Severe hail-related losses contributed to a combined ratio of 98.4% for Q3 and 106.0% year to date, compared with 89.6% and 100.8%.
- Mortgage operations recorded $41 million of pretax income for nine months, versus a $251 million loss in 2013, reflecting reduced expenses and lower mortgage-loss provisions after exiting non-strategic lending and selling mortgage servicing rights. The legacy held-for-investment portfolio continued to run off.
- Deposit liabilities rose $3.5 billion from December 31, 2013, while short-term borrowings fell $3.3 billion and long-term debt fell $2.2 billion. Total assets were $149.2 billion, versus $151.2 billion at year-end.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings guidance. Management described a cautious economic outlook, citing weak global growth, geopolitical risks, and expected higher interest rates. It expected lease termination volumes to remain near Q3 levels and said used-vehicle price trends were normalizing, with average gains per returned vehicle expected to continue declining.
- Rate sensitivity: Ally characterized itself as moderately liability-sensitive. Its modeled next-12-month pretax net financing revenue change was positive $75 million for an immediate 100-basis-point rate decrease, negative $164 million for a 100-basis-point increase, and negative $252 million for a 200-basis-point increase. Outcomes depend on assumptions, particularly deposit repricing.
- Regulatory and legal matters: SEC and DOJ subpoenas cover mortgage-related matters, including mortgage-backed securities and loan origination or underwriting; Ally also reported an SEC document request concerning subprime auto finance and securitization. CFPB and DOJ consent orders concerning alleged disparate impact in auto finance followed a $98 million charge in Q4 2013. Failure to meet remediation targets could require additional payments. Management said current legal matters were not expected to materially affect the company overall, but an unfavorable resolution could be material in a period.
- Other contingencies: The mortgage loan representation-and-warranty reserve was $37 million, down from $45 million at year-end 2013. The filing notes that estimates and ultimate legal, regulatory, and other claim costs may differ.
- Subsequent events: The board declared preferred dividends totaling $68 million, payable in November 2014. On October 22, Ally completed a $750 million tender offer for specified senior notes and expected a roughly $160 million debt-extinguishment loss in Q4. The China automotive-finance joint-venture sale remained subject to approvals; management expected completion in late 2014 or as soon as practicable thereafter. Its $603 million of assets were classified as held for sale at quarter-end.
- IPO: The April 2014 IPO involved 95 million shares at $25 per share, with proceeds of approximately $2.4 billion going to the U.S. Treasury as the selling shareholder—not to Ally. A further 7.2 million shares were sold through the over-allotment option.
Most important facts for investors to verify
- Whether lower funding costs and continued deposit growth can offset competitive pressure on auto-finance yields and rising consumer-auto charge-offs.
- Whether lease asset growth remains profitable as depreciation rises and used-vehicle prices and remarketing gains normalize.
- Whether insurance underwriting results recover after weather-related losses and the year-to-date combined ratio exceeded 100%.
- Progress and potential financial consequences of the DOJ, SEC, CFPB, and other regulatory matters, including compliance with the auto-finance consent orders.
- Completion and final financial effect of the China joint-venture sale, and the actual Q4 cost of the debt tender offer.
- Ally’s ability to maintain liquidity and capital buffers as regulatory liquidity requirements phase in and interest rates change.