Ally swings to Q4 net income of US$79M compared with US$5B loss one year ago; company drastically reduced risk in mortgage sector, focuses on conforming mortgage origination, servicing platform, CEO says
February 1, 2011
– Ally Financial Inc. (Ally) today reported net income of $79 million for the fourth quarter of 2010, compared to a net loss of $5.0 billion for the fourth quarter of 2009. Core pre-tax income, which reflects income from continuing operations before taxes and original issue discount (OID) amortization expense from bond exchanges, totaled $533 million in the fourth quarter of 2010, compared to a core pre-tax loss of $3.5 billion in the comparable prior year period.
For full-year 2010, Ally reported net income of $1.1 billion, compared to a net loss of $10.3 billion in 2009. Core pre-tax income in 2010 totaled $2.5 billion, compared to a core pre-tax loss of $5.8 billion in the prior year.
The losses reported for the 2009 fourth quarter and full year were largely affected by losses related to legacy assets in the mortgage operations.
"2010 was a transformational year for Ally as we successfully achieved our strategic objectives and restored financial performance with $2.5 billion of core pre-tax income for the year," commented Ally Chief Executive Officer Michael A. Carpenter. "Our automotive finance business remained a leading provider of auto loans with U.S. consumer originations increasing 72 percent over last year. We substantially reduced risk in the mortgage business and are focused on our conforming mortgage origination and servicing platform; and Ally Bank has demonstrated the strength of its customer value proposition with strong deposit growth and high retention rates. These steps, along with our improved cost and capital structures and access to the capital markets, have significantly strengthened the company and will enable repayment of the U.S. Treasury's investment over time."
* Ranked No. 1 provider of new vehicle retail financing in the U.S. during 2010 (Source: AutoCount data from Experian Automotive).
* Global consumer auto financing originations increased 68 percent during 2010 compared to 2009.
* Global used consumer auto financing originations in 2010 increased 92 percent compared to 2009.
* Ally's U.S. consumer penetration of the OEMs improved in 2010.
o U.S. consumer penetration of GM was 38.2 percent during 2010 compared 28.2 percent in the prior year.
o U.S. consumer penetration of Chrysler during 2010 was 45.4 percent compared to 8.9 percent in 2009.
* Selected as recommended provider of finance and insurance products and services for Saab dealerships and as the preferred financing provider for Fiat vehicles in the U.S.
* On Dec. 30, 2010, Ally Financial and the U.S. Treasury agreed to convert $5.5 billion of the $11.4 billion of mandatorily convertible preferred (MCP) securities issued by Ally and owned by the U.S. Treasury into common equity.
* Deposits grew by $7.3 billion during 2010, which was supported by strong CD retention rates.
* Strengthened access to capital markets with nearly $36 billion of new funding transactions completed in 2010, compared to approximately $12 billion of funding transactions during 2009.
* Cost reduction efforts were successful during 2010.
o Exceeded expense reduction goal with $680 million of savings.
o Sold 15 non-core operations.
* Significant progress made in reducing mortgage risk during 2010.
o Balance sheet has been streamlined and performance has stabilized.
o Sold legacy mortgage assets totaling approximately $2.5 billion of unpaid principal balance in 2010, at a gain.
o Reduced representation and warranty exposure through several settlements, including Fannie Mae and Freddie Mac.
Liquidity and Capital
Ally's consolidated cash and cash equivalents were $11.7 billion as of Dec. 31, 2010, compared to $12.6 billion at Sept. 30, 2010. Included in the consolidated cash and cash equivalents balance are: $672 million at Residential Capital, LLC (ResCap), $3.1 billion at Ally Bank and $1.2 billion at the insurance businesses. The decrease in cash and cash equivalents during the quarter was the result of growth in the company's loan and investment securities portfolios.
Ally's total equity at Dec. 31, 2010, was $20.5 billion, compared to $21.0 billion at Sept. 30, 2010. The company's preliminary fourth quarter 2010 tier 1 capital ratio was 15.0 percent, compared to 15.4 percent in the prior quarter. The decrease was due to quarterly results, net of dividends, and a slight increase in risk-weighted assets.
During 2010, Ally completed nearly $36 billion of new funding transactions, as it executed on its strategic objective of improving its access to the capital markets. During the year, the company issued more than $8 billion of unsecured debt, raised more than $9 billion in the domestic asset-backed securities (ABS) market, completed $6 billion of international ABS transactions and entered into new revolving facilities with more than $12 billion of capacity.
U.S. Treasury MCP Securities Converted to Common Equity
On Dec. 30, 2010, Ally and the U.S. Treasury agreed to convert $5.5 billion of the $11.4 billion of MCP securities issued by Ally and owned by the U.S. Treasury into common equity. This action represents a critical step toward full repayment of U.S. Treasury investments, as it conforms the company's capital structure to one more typical of a bank holding company. It also removes GM's status as an affiliate of Ally Bank for the purposes of Sections 23A and 23B of the Federal Reserve Act, which imposes limitations on transactions between banks and affiliates. The conversion reduces dividends by $500 million per year, assists with capital preservation and is expected to improve profitability with a lower cost of funds.
The company continued to grow deposits during the quarter through its subsidiaries, Ally Bank and ResMor Trust. Ally deposits increased in the fourth quarter to $39.0 billion, from $38.0 billion at Sept. 30, 2010. Deposits continue to be an increasingly important component of Ally's strategic business plan and now comprise 29 percent of the company's total funding. Retail deposits at Ally Bank were $21.9 billion at Dec. 31, 2010, compared to $20.5 billion at Sept. 30, 2010. Retail deposits have grown 29 percent over the last year and now account for approximately 64 percent of Ally Bank's total deposit base. Brokered deposits at Ally Bank totaled approximately $10.0 billion at quarter-end, which is relatively flat compared to the prior quarter end.
For purposes of quarterly financial reporting, Ally Bank's operating results are divided between the North American Automotive Finance and Mortgage Operations segments based on its underlying business activities. During the fourth quarter of 2010, Ally Bank reported pre-tax income from continuing operations of $317 million, compared to a pre-tax loss from continuing operations of $1.5 billion in the corresponding prior year period. Performance in the quarter was driven by continued strong automotive originations and improved cost of funds. The loss in the corresponding prior year period was due to a loss on the sale of mortgage assets to the parent company of $1.3 billion. Total assets at Ally Bank were $70.3 billion at Dec. 31, 2010, compared to $66.2 billion at Sept. 30, 2010. The growth in assets was due to the increase in automotive asset levels resulting from strong retail originations and increased wholesale funding.
Global Automotive Services
Global Automotive Services consists of Ally's auto-centric businesses, including: North American Automotive Finance, International Automotive Finance and Insurance. Global Automotive Services reported fourth quarter 2010 pre-tax income from continuing operations of $765 million, compared to $283 million in the comparable prior year period.
North American Automotive Finance, which includes results for the U.S. and Canada, reported pre-tax income from continuing operations of $589 million in the fourth quarter of 2010, compared to $343 million in the comparable prior year period. Results were driven by a significantly lower loan loss provision due to improved credit quality, continued growth in originations and stable wholesale penetration. Origination levels have been supported by automakers' incentive programs, the expanded features and benefits of the Ally Dealer Rewards program and access to a broader dealer network via DealerTrack.
International Automotive Finance reported pre-tax income from continuing operations of $12 million in the fourth quarter of 2010, compared to a pre-tax loss of $145 million in the same period last year. This improvement was driven by favorable loss performance and lower restructuring charges on wind-down operations. The quarter was negatively impacted by $12 million of certain tax and legal provisions. The company's international auto finance footprint currently consists of 15 countries, including the company's five core international markets: Germany, U.K., Brazil, Mexico and its joint venture in China.
Insurance, which focuses primarily on dealer-centric products, such as extended service contracts and dealer inventory insurance, reported pre-tax income from continuing operations of $164 million in the fourth quarter of 2010, compared to $85 million in the prior year period. Results were driven by realized gains related to the investment portfolio and lower acquisition and underwriting expenses.
Automotive originations and penetration
Total consumer financing originations increased 56 percent during the fourth quarter of 2010 to $12.7 billion, compared to $8.2 billion in the prior year period. Fourth quarter 2010 consumer auto originations were comprised of $9.9 billion of new originations, $1.4 billion of used originations and $1.4 billion of new leases, while fourth quarter 2009 consumer auto originations included $6.8 billion of new originations, $1.0 billion of used originations and approximately $300 million of new leases. Growth in consumer financing originations was driven by higher industry sales and an increase in GM consumer penetration driven by year-end marketing programs. The increase in used originations during the quarter reflects the company's view that this market continues to be a growth opportunity. Leasing increased to 11.0 percent of total originations in the fourth quarter from 4.1 percent in the corresponding period last year, as Ally continues to grow this business under prudent underwriting principles.
North American consumer financing originations in the fourth quarter of 2010 were $10.2 billion, which included $9.3 billion in the U.S. Fourth quarter 2009 consumer financing originations in North America were $6.6 billion, which included approximately $5.9 billion in the U.S.
International consumer originations from continuing operations, which include a non-consolidated joint venture in China, were $2.5 billion during the fourth quarter of 2010, compared to $1.6 billion in the fourth quarter of 2009. International consumer originations continued to be driven by the company's five key markets with strong growth in China, Brazil and Mexico during the quarter. Consumer originations increased 100 percent in Brazil, 97 percent in China and 54 percent in Mexico compared to the fourth quarter of 2009.
Ally's average U.S. wholesale penetration for GM dealer stock was 82.1 percent in the fourth quarter of 2010, compared to 83.7 percent in the prior quarter and 87.0 percent in the fourth quarter of 2009. U.S. consumer penetration for GM was 49.7 percent during the fourth quarter of 2010, compared to 34.2 percent in the prior quarter and 30.3 percent in the fourth quarter of 2009. Ally continues to diversify its business as GM incentivized business accounted for 22 percent of Ally's overall consumer originations in 2010, compared to 45 percent for full year 2009.
Ally's average U.S. wholesale penetration for Chrysler dealer stock was 76.0 percent in the fourth quarter of 2010, compared to 76.2 percent in the third quarter of 2010 and 74.8 percent in the corresponding period last year. Ally's U.S. consumer penetration for Chrysler during the fourth quarter of 2010 was 36.3 percent, compared to 49.4 percent in the prior quarter and 25.5 percent in the fourth quarter of 2009. The sequential quarterly decline was due to a change in the mix of sales incentives with Chrysler.
Ally's Mortgage Operations, which includes ResCap and the mortgage activities of Ally Bank and ResMor Trust, ranks as the fifth largest originator and the fifth largest servicer in the U.S. (Source: Inside Mortgage Finance, Nine Months 2010). Mortgage Operations reported pre-tax income from continuing operations of $123 million during the fourth quarter of 2010, versus a pre-tax loss from continuing operations of $3.4 billion in the comparable prior year period.
The company's Mortgage Operations business is now reported as two distinct segments: Origination and Servicing and Legacy Portfolio and Other. The principal activities of the Origination and Servicing segment include originating, purchasing, selling, and securitizing conforming and government-insured residential mortgage loans in the U.S. and Canada; servicing residential mortgage loans for Ally and others; and providing collateralized lines of credit to other mortgage originators, which the company refers to as warehouse lending. In addition, the segment also originates high-quality prime jumbo mortgage loans in the U.S. The company utilizes three primary channels for originating mortgages: wholesale lending, traditional retail lending and community financial institutions. The Legacy Portfolio and Other segment primarily consists of loans originated prior to Jan. 1, 2009, and includes non-core business activities including portfolios in run off.
The Origination and Servicing segment reported fourth quarter 2010 pre-tax income from continuing operations of $172 million, compared to a pre-tax loss from continuing operations of $180 million during the fourth quarter 2009. Results were driven by strong originations from refinancings, continued strong margins, higher net servicing revenue, lower provision for loan losses and lower non-interest expense.
Total mortgage loan production in the fourth quarter of 2010 was $23.8 billion, compared to $20.5 billion in the third quarter of 2010 and $18.1 billion in the fourth quarter of 2009. The vast majority of fourth quarter 2010 production was driven by the origination of prime conforming loans. Production increased compared to the prior quarter, as the refinance market remained strong during the quarter. Approximately, 84 percent of the company's global mortgage loan production during the quarter was due to refinancings.
The Legacy Portfolio and Other segment of Mortgage Operations reported a pre-tax loss from continuing operations of $49 million, compared to a $3.2 billion pre-tax loss from continuing operations in the corresponding prior year period. The results in the quarter were primarily driven by an improved gain on the sale of loans, significantly lower loan loss provision and lower representation and warranty expense compared to the fourth quarter of 2009.
Fannie Mae Settlement
ResCap and certain of its subsidiaries reached an agreement with Fannie Mae to resolve potential repurchase exposure for breaches of selling representations and warranties. The agreement covers loans serviced by GMAC Mortgage on behalf of Fannie Mae prior to June 30, 2010, and all mortgage-backed securities that Fannie Mae purchased at various times prior to the settlement, including private label securities. The settlement was for approximately $462 million and releases ResCap and its subsidiaries from liability related to originations for approximately $292 billion of original UPB ($84 billion of current UPB) on these loans.
During the fourth quarter, Ally's indirect subsidiary, GMAC Mortgage, continued to make significant progress in its review of foreclosure cases where an affidavit may have been used that was subject to a procedural issue. Of the approximately 25,000 potentially affected affidavits identified at the end of the third quarter, all but 2,548 have been remediated or, where necessary, re-executed. As each of the files were addressed and deemed to be appropriate, the foreclosure process for those select cases continued to move forward. Of the remaining population being reviewed and, where needed, remediated, there are 2,540 cases in three states where further guidance from the states on remediation efforts is required. The company has not found any evidence of inappropriate foreclosures in its review process to date related to the affidavit matter.
GMAC Mortgage continues to demonstrate a leadership position in preserving home ownership having executed more than twice as many loan modifications than foreclosures. Among the large servicers, the company's conversion rate for HAMP trial modifications to HAMP permanent modifications is 73 percent, a significantly higher success rate than that of its nearest competitor (Source: U.S. Treasury December HAMP report). Since 2008, GMAC Mortgage has completed more than 610,000 default workouts for borrowers, which comprises 22 percent of loans serviced during that time period.
Corporate and Other
Corporate and Other reported a fourth quarter 2010 core pre-tax loss of $355 million, compared to a core pre-tax loss of $420 million in the fourth quarter of 2009. Including OID, Corporate and Other reported a pre-tax loss from continuing operations of $656 million in the fourth quarter of 2010, compared to a pre-tax loss from continuing operations of $735 million in the comparable prior year period. The improved results in the fourth quarter of 2010 were primarily due to a lower loss provision expense in the Commercial Finance Group's European operations and resort finance portfolio, which was sold in the third quarter of 2010. The performance of Corporate and Other during the fourth quarter of 2010 was also driven by the net impacts of the corporate funds transfer pricing methodology and asset liability management activities and $301 million of OID amortization expense. The net impact of the funds transfer pricing methodology represents the unallocated cost of maintaining the liquidity and investment portfolios and other unassigned funding costs and unassigned equity.
About Ally Financial Inc.
Ally Financial Inc. (formerly GMAC Inc.) is one of the world's largest automotive financial services companies. The company offers a full suite of automotive financing products and services in key markets around the world. Ally's other business units include mortgage operations and commercial finance, and the company's subsidiary, Ally Bank, offers online retail banking products. With more than $172 billion in assets as of Dec. 31, 2010, Ally operates as a bank holding company. For more information, visit the Ally media site at http://media.ally.com.