Ally Financial Posts Second Quarter 2014 Financial Results

Proquest LLC

Ally Financial on July 29 reported net income of $323 million, or $0.54 per diluted common share, for the second quarter of 2014 compared to net income of $227 million, or $0.33 per diluted common share, in the prior quarter, and a net loss of $927 million, or a loss of $2.73 per diluted common share, for the second quarter of 2013.

In its release on July 29, the company reported core pre-tax income of $400 million in the second quarter of 2014, compared to core pre-tax income of $336 million in the prior quarter and $201 million in the comparable prior year period. Core pre-tax income, excluding repositioning items, was $417 million for the second quarter of 2014, an increase of $205 million compared to same period last year. Adjusted earnings per diluted common share for the quarter were $0.42, compared to $0.34 for the previous quarter and a loss of $0.13 for the comparable prior year period.

Results for the quarter were primarily driven by strong performance from the auto finance franchise. Consumer financing originations increased to $10.9 billion, the second highest quarter in Ally's history. Additionally, the company continued to improve its cost of funds by increasing retail deposits 15 percent and improving its debt structure, which resulted in an increase in net financing revenue of 32 percent year-over-year. Moreover, strong credit performance contributed to an approximately 30 percent decline in provision for loan loss expense year-over-year. Partially offsetting results were unprecedented weather-related losses in the insurance business. Affecting the year-over-year comparison was also the non-recurrence of a $1.6 billion one-time charge taken in the second quarter of 2013 related to the comprehensive settlement agreement in the ResCap Chapter 11 bankruptcy case.

"Ally's second quarter results demonstrate clear progress in our key objectives to improve profitability and drive value for our shareholders," said Chief Executive Officer Michael A. Carpenter. "Our core auto finance franchise had an outstanding quarter, posting the second highest level of consumer auto originations in Ally's history. Helping to drive these results were two high-water marks for the business, with the most decisioned applications in a quarter and the highest volume of used originations on record. These accomplishments speak to the strength of our franchise and our dealer-focused strategy."

"Historically high weather losses due to severe hail storms in the Midwest during the quarter impacted results in the insurance business, but written premiums remained strong, totaling $267 million for the quarter," continued Carpenter. "Ally Bank continued to maintain steady momentum with retail deposits growing 15 percent in the past year to total $45.9 billion, and its customer base of loyal and purposeful savers expanded 18 percent during that time."

Carpenter concluded, "We continue to make significant headway in all three areas of focus - net interest margin expansion, expense reduction and regulatory normalization - to reach double-digit core return on tangible common equity, which improved 190 basis points since last quarter to 8.4 percent. Going forward, our continued focus will be executing upon our three-pronged approach to further increase shareholder value, as we fully exit TARP and advance our leading dealer financial services and direct banking franchises."

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Liquidity and Capital Highlights

-Improved cost of funds, excluding OID, by 63 basis points in the past year.

-Improved preliminary second quarter 2014 capital ratios, with Tier 1 at 12.3 percent and Tier 1 Common at 9.4 percent.

Ally's consolidated cash and cash equivalents were $5.8 billion as of June 30, down slightly from $5.9 billion at Mar. 31. Included in this quarter's balance are: $2.2 billion at Ally Bank and $1.4 billion at the Insurance business.

Ally's total equity was $14.9 billion at June 30, up from $14.5 billion at the end of the prior quarter. The company's preliminary second quarter 2014 Tier 1 capital ratio was 12.3 percent and Ally's preliminary Tier 1 Common capital ratio was 9.4 percent, both improving as a result of the company's second quarter net income and reduction in disallowed deferred tax assets. Ally's estimated fully- phased-in Basel III Common Equity Tier 1 ratio improved to 9.5 percent for the quarter.

Ally continued to execute a diverse funding strategy during the second quarter of 2014. This strategy included strong growth in deposits, which represent approximately 43 percent of Ally's funding portfolio, and completion of new term U.S. auto securitizations totaling approximately $3.2 billion for the quarter. The company continued to successfully execute a liability management strategy to reduce high-cost legacy debt, redeeming a zero coupon bond totaling more than $535 million in the second quarter.

Ally Bank Highlights

-Retail deposits grew to $45.9 billion, up $6.1 billion or 15 percent year-over-year.

-Approximately 68 percent of Ally's total assets were funded at Ally Bank at the close of the period.

-Customer base grew 18 percent year-over-year to approximately 854,000 primary customers.

-Sustained strong momentum with 45 percent brand recognition and 93 percent customer satisfaction.

-Launched iPad app to further expand the franchise's suite of mobile services.

-Ranked again top 5 among customers and top 10 among non- customers in 2014 American Banker/Reputation Institute survey of bank reputations.

For purposes of quarterly financial reporting, operating results for Ally Bank, the company's direct banking subsidiary, are included within Auto Finance, Mortgage and Corporate and Other, based on its underlying business activities.

Deposits The company remains focused on growing quality deposits through Ally Bank, which continued to build its deposit base and maintained strong customer loyalty, attracting and retaining customers with its consumer-centric value proposition. Retail deposits at Ally Bank increased to $45.9 billion as of June 30, compared to $45.2 billion at the end of the prior quarter. Year- over-year, retail deposits increased $6.1 billion, up 15 percent. Brokered deposits at Ally Bank totaled approximately $9.7 billion as of June 30, flat from the prior quarter. The Ally Bank franchise has continued strong expansion of its customer base to approximately 854,000 primary customer accounts, growing 18 percent year-over- year.

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Automotive Finance Highlights

-Consumer financing originations totaled $10.9 billion for the quarter, up 11 percent year-over year, marking the second highest quarterly originations total in Ally history.

-Net financing revenue improved 14 percent versus the prior year period.

-Automotive earning assets increased 7 percent year-over-year.

-Strong growth in new and used originations from diversified dealers, up 48 percent year-over-year, and now accounts for 20 percent of total consumer originations.

-Used originations totaled $3.1 billion for the period - highest in Ally history.

-Increased average commercial auto balances to approximately $33 billion for the quarter, up 9 percent year-over-year.

Auto Finance reported pre-tax income of $461 million for the second quarter of 2014, compared to $382 million in the corresponding prior year period. Results for the quarter were primarily driven by strong net financing revenue, due to strong lease performance and earning asset growth across all products, despite continued intense competition. While credit performance remains strong, results were partially offset by an increase in provision expense as a result of earning asset growth and portfolio seasoning, as well as increased non-interest expense to service the portfolio.

Total end-of-period earning assets for Auto Finance, comprised primarily of consumer and commercial receivables and leases, were $110 billion for the quarter. Consumer earning assets totaled $77 billion, up 7 percent year-over-year, due to continued strong origination volume. End-of-period commercial earning assets increased to $33 billion, compared to approximately $30 billion in the prior year period, as a result of higher dealer stock and growth in the dealer loan portfolio.

Consumer financing originations in the second quarter of 2014 were $10.9 billion, compared to $9.2 billion in the prior quarter and $9.8 billion in the corresponding prior year period. The originations were comprised of $4.7 billion of new retail, $3.1 billion of used retail and $3.2 billion of leases. Consumer financing origination levels in the second quarter of 2014 were driven by year-over-year growth in all channels, with very strong growth in the used and lease channels, up 23 percent and 16 percent, respectively. Notably, volume from diversified dealers grew significantly in new and used, increasing 48 percent year-over-year and accounting for 20 percent of total consumer originations. Growth in these channels has more than offset lower subvented volumes.

Insurance Highlights

-Solid written premiums, totaling $267 million in the quarter for the Dealer Products and Services group, up $23 million from the first quarter.

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-Unprecedented weather-related losses due to severe hailstorms in the Midwest.

Insurance, which focuses on dealer-centric products such as extended vehicle service contracts (VSCs) and dealer inventory insurance, reported a pre-tax loss from continuing operations of $23 million in the second quarter of 2014, compared to pre-tax income of $45 million in the corresponding prior year period. This was driven by an underwriting loss of $77 million in the quarter as the result of record wholesale floorplan weather-related losses related to severe hailstorms in the Midwest. This compares to an underwriting loss of $32 million in the corresponding prior year period. Total investment income remained strong at $54 million in the second quarter of 2014, compared to $77 million in the comparable prior year period, as the result of a very strong equity market in 2013.

Mortgage During the second quarter of 2014, Mortgage reported pre- tax income of $27 million, compared to a pre-tax loss of $27 million in the prior year period, excluding repositioning items related to costs associated with the completion of the sale of Ally Bank's mortgage servicing rights portfolio taken in the prior year. Income was driven by improved credit performance in the held-for- investment portfolio resulting from sustained growth in home prices and runoff of the legacy portfolio. The remaining mortgage held-for- investment portfolio is less than $8 billion as of June 30, down approximately $290 million from the prior quarter.

Corporate and Other Corporate and Other primarily consists of Ally's centralized treasury activities, the residual impacts of the company's corporate funds transfer pricing, asset liability management activities, and the amortization of the discount associated with debt issuances and bond exchanges. Corporate and Other also includes the Corporate Finance business, certain investment portfolio activity and reclassifications, eliminations between the reportable operating segments, and overhead previously allocated to operations that have since been sold or discontinued.

Corporate and Other reported a core pre-tax loss (excluding core OID amortization expense and repositioning items) of $48 million, compared to a loss of $189 million in the comparable prior year period. Results were primarily affected by lower interest expense through the company's liability management strategy, a reduction in unsecured debt levels and refinancing other legacy debt prior to maturity. Ally's efforts to streamline the business and reduce controllable expenses further contributed to improved results. This was partially offset by expenses associated with the company's debt redemption during the quarter.

Core OID amortization expense totaled $53 million in the second quarter of 2014, including $7 million related to the redemption of the zero coupon bond this quarter, compared to $61 million reported in the corresponding prior year period.

Ally Financial is an automotive financial services company.

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