UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2010, or
For the transition period from to .
Commission file number: 1-3754
ALLY FINANCIAL INC.
(Exact name of registrant as specified in its charter)
200 Renaissance Center
P.O. Box 200, Detroit, Michigan
48265-2000
(Address of principal executive offices)
(Zip Code)
(866) 710-4623
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing for the past 90 days.
Yesþ No ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for a shorter period that the registrant was required to submit and post such files).
Yes¨ No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ No þ
At November 8, 2010, the number of shares outstanding of the Registrant’s common stock was 799,120 shares.
INDEX
Page
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PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED STATEMENT OF INCOME (unaudited)
Financing revenue and other interest income
Finance receivables and loans
Consumer
Commercial
Notes receivable from General Motors
Total finance receivables and loans
Loans held-for-sale
Interest on trading securities
Interest and dividends on available-for-sale investment securities
Interest-bearing cash
Other interest income, net
Operating leases
Total financing revenue and other interest income
Interest expense
Interest on deposits
Interest on short-term borrowings
Interest on long-term debt
Total interest expense
Depreciation expense on operating lease assets
Net financing revenue
Other revenue
Servicing fees
Servicing asset valuation and hedge activities, net
Total servicing income, net
Insurance premiums and service revenue earned
Gain on mortgage and automotive loans, net
(Loss) gain on extinguishment of debt
Other gain on investments, net
Other income, net of losses
Total other revenue
Total net revenue
Provision for loan losses
Noninterest expense
Compensation and benefits expense
Insurance losses and loss adjustment expenses
Other operating expenses
Total noninterest expense
Income (loss) from continuing operations before income tax expense (benefit)
Income tax expense (benefit) from continuing operations
Net income (loss) from continuing operations
(Loss) income from discontinued operations, net of tax
Net income (loss)
The Notes to the Condensed Consolidated Financial Statements (unaudited) are an integral part of these statements.
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CONDENSED CONSOLIDATED BALANCE SHEET (unaudited)
Assets
Cash and cash equivalents
Noninterest-bearing
Interest-bearing
Total cash and cash equivalents
Trading securities
Investment securities
Available-for-sale
Held-to-maturity
Total investment securities
Loans held-for-sale, net ($6,978 and $5,545 fair value elected)
Finance receivables and loans, net
Consumer ($2,948 and $1,303 fair value elected)
Allowance for loan losses
Total finance receivables and loans, net
Investment in operating leases, net
Mortgage servicing rights
Premiums receivable and other insurance assets
Other assets
Assets of operations held-for-sale
Total assets
Liabilities
Deposit liabilities
Total deposit liabilities
Debt
Short-term borrowings
Long-term debt ($2,793 and $1,293 fair value elected)
Total debt
Interest payable
Unearned insurance premiums and service revenue
Reserves for insurance losses and loss adjustment expenses
Accrued expenses and other liabilities
Liabilities of operations held-for-sale
Total liabilities
Equity
Common stock and paid-in capital
Preferred stock held by U.S. Department of Treasury
Preferred stock
Accumulated deficit
Accumulated other comprehensive income
Total equity
Total liabilities and equity
4
The assets of consolidated variable interest entities that can be used only to settle obligations of the consolidated variable interest entities and the liabilities of these entities for which creditors (or beneficial interest holders) do not have recourse to our general credit at September 30, 2010, were as follows.
Loans held-for-sale, net
Consumer ($2,948 fair value elected)
Long-term debt ($2,793 fair value elected)
5
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (unaudited)
Nine Months Ended September 30, 2010 and 2009
Preferredinterests
held byU.S.Departmentof Treasury
Balance at January 1, 2009
Capital contributions (a)
Net loss
Preferred interests dividends paid to the U.S. Department of Treasury
Preferred interests dividends
Dividends to members (a)
Issuance of preferred interests held by U.S. Department of Treasury
Other comprehensive income
Balance at June 30, 2009, before conversion from limited liability company to a corporation (b)
Preferredstock
Retainedearnings(accumulated
deficit)
Balance at June 30, 2009, after conversion from limited liability company to a corporation
Preferred stock dividends paid to the U.S. Department of Treasury
Preferred stock dividends (a)
Dividends to shareholders (a)
Balance at September 30, 2009
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Accumulated
deficit
Balance at January 1, 2010, before cumulative effect of adjustments
Cumulative effect of a change in accounting principle, net of tax (c)
Balance at January 1, 2010, after cumulative effect of adjustments
Capital contributions
Net income
Other comprehensive loss
Other (d)
Balance at September 30, 2010
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CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
Operating activities
Reconciliation of net income (loss) to net cash provided by operating activities
Depreciation and amortization
Operating lease impairment
Impairment of goodwill and other intangible assets
Other impairment
Amortization and valuation adjustments of mortgage servicing rights
Gain on sale of loans, net
Net gain on investment securities
Loss (gain) on extinguishment of debt
Originations and purchases of loans held-for-sale
Proceeds from sales and repayments of loans held-for-sale
Net change in:
Deferred income taxes
Other liabilities
Other, net
Net cash provided by operating activities
Investing activities
Purchases of available-for-sale securities
Proceeds from sales of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Net (increase) decrease in finance receivables and loans
Proceeds from sales of finance receivables and loans
Change in notes receivable from GM
Purchases of operating lease assets
Disposals of operating lease assets
(Purchases) sales of mortgage servicing rights, net
Sale of business unit, net (a)
Net cash (used in) provided by investing activities
8
Financing activities
Net change in short-term debt
Net increase in bank deposits
Proceeds from issuance of long-term debt
Repayments of long-term debt
Proceeds from issuance of preferred stock held by U.S. Department of Treasury
Proceeds from issuance of common stock
Dividends paid
Net cash used in financing activities
Effect of exchange-rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Adjustment for change in cash and cash equivalents of operations held-for-sale (a) (b)
Cash and cash equivalents at beginning of year
Cash and cash equivalents at September 30,
Supplemental disclosures
Cash paid for
Interest
Income taxes
Noncash items
Increase in finance receivables and loans due to a change in accounting principle (c)
Increase in long-term debt due to a change in accounting principle (c)
Loans held-for-sale transferred to finance receivables and loans
Finance receivables and loans transferred to loans held-for sale
Finance receivables and loans transferred to other assets
Originations of mortgage servicing rights from sold loans
Other disclosures
Proceeds from sales and repayments of mortgage loans held-for-investment originally designated as held-for-sale
Proceeds from sales of repossessed, foreclosed, and owned real estate
Consolidation of loans, net
Consolidation of collateralized borrowings
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
Ally Financial Inc. (formerly GMAC Inc. and referred to herein as Ally, we, our, or us) is one of the world's largest automotive financial services companies. On December 24, 2008, we became a bank holding company under the Bank Holding Company Act of 1956, as amended. Our primary banking subsidiary is Ally Bank, which is an indirect wholly owned subsidiary of Ally Financial Inc.
Our accounting and reporting policies conform to accounting principles generally accepted in the United States of America (GAAP). Additionally, where applicable, the policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and that affect income and expenses during the reporting period. In developing the estimates and assumptions, management uses all available evidence; however, actual results could differ because of uncertainties associated with estimating the amounts, timing, and likelihood of possible outcomes.
The Condensed Consolidated Financial Statements at September 30, 2010, and for the three months and nine months ended September 30, 2010 and 2009, are unaudited but reflect all adjustments that are, in management's opinion, necessary for the fair presentation of the results for the interim periods presented. All such adjustments are of a normal recurring nature. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements (and the related notes) included in our Annual Report on Form 10-K for the year ended December 31, 2009, as filed on February 26, 2010, with the U.S. Securities and Exchange Commission (SEC), as amended by the Current Report on Form 8-K filed with the SEC on October 12, 2010.
Residential Capital, LLC
Residential Capital, LLC (ResCap), one of our mortgage subsidiaries, was negatively impacted by the events and conditions in the mortgage banking industry and the broader economy. The market deterioration led to fewer sources of, and significantly reduced levels of, liquidity available to finance ResCap’s operations. ResCap is highly leveraged relative to its cash flow and previously recognized credit and valuation losses resulting in a significant deterioration in capital. ResCap’s consolidated tangible net worth, as defined, was $859 million at September 30, 2010, and ResCap remained in compliance with all of its consolidated tangible net worth covenants. For this purpose, consolidated tangible net worth is defined as ResCap’s consolidated equity excluding intangible assets. There continues to be a risk that ResCap may not be able to meet its debt service obligations, may default on its financial debt covenants due to insufficient capital, and/or may be in a negative liquidity position in 2010 or future periods.
ResCap actively manages its liquidity and capital positions and is continually working on initiatives to address its debt covenant compliance and liquidity needs including debt maturing in the next twelve months and other risks and uncertainties. ResCap’s initiatives could include, but are not limited to, the following: continuing to work with key credit providers to optimize all available liquidity options; possible further reductions in assets and other restructuring activities; focusing production on government and prime conforming products; exploring strategic alternatives such as alliances, joint ventures, and other transactions with third parties with respect to certain ResCap assets and businesses; and continued exploration of opportunities for funding and capital support from Ally and its affiliates. The outcomes of most of these initiatives are to a great extent outside of ResCap’s control resulting in increased uncertainty as to their successful execution.
During 2010, we performed a strategic review of our mortgage business. As a result of this, we effectively exited the European mortgage market through the sale of our U.K. and continental Europe operations. The sale of these operations was completed on October 1, 2010. Certain components of the sale were completed on September 30, 2010. Refer to Note 2 for additional information on the sale. We also completed the sale of certain higher-risk legacy mortgage assets and settled representation and warranty claims with certain counterparties. The ongoing focus of our Mortgage operations will be predominately the origination and servicing of conforming mortgages. While the opportunities for further risk mitigation remain, the risk in the Mortgage operations has been materially reduced as compared to recent levels.
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In the future, Ally and ResCap may take additional actions with respect to ResCap as each party deems appropriate. These actions may include Ally providing or declining to provide additional liquidity and capital support for ResCap; refinancing or restructuring some or all of ResCap’s existing debt; the purchase or sale of ResCap debt securities in the public or private markets for cash or other consideration; entering into derivative or other hedging or similar transactions with respect to ResCap or its debt securities; Ally purchasing assets from ResCap; or undertaking corporate transactions such as a tender offer or exchange offer for some or all of ResCap’s outstanding debt securities, a merger, sale, asset sales, consolidation, spin-off, distribution, or other business combination or reorganization or similar action with respect to all or part of ResCap and/or its affiliates. In this context, Ally and ResCap typically consider a number of factors to the extent applicable and appropriate including, without limitation, the financial condition, results of operations, and prospects of Ally and ResCap; ResCap’s ability to obtain third-party financing; tax considerations; the current and anticipated future trading price levels of ResCap’s debt instruments; conditions in the mortgage banking industry and general economic conditions; other investment and business opportunities available to Ally and/or ResCap; and any nonpublic information that ResCap may possess or that Ally receives from ResCap.
ResCap remains heavily dependent on Ally and its affiliates for funding and capital support, and there can be no assurance that Ally or its affiliates will continue such actions or that Ally will choose to execute any further strategic transactions with respect to ResCap, or that any transactions undertaken will be successful.
Although our continued actions through various funding and capital initiatives demonstrate support for ResCap, there are currently no commitments or assurances for future funding and/or capital support. Consequently, there remains substantial doubt about ResCap’s ability to continue as a going concern. Should we no longer continue to support the capital or liquidity needs of ResCap or should ResCap be unable to successfully execute other initiatives, it would have a material adverse effect on ResCap’s business, results of operations, and financial position.
Ally has extensive financing and hedging arrangements with ResCap that could be at risk of nonpayment if ResCap were to file for bankruptcy. At September 30, 2010, we had approximately $2.1 billion in secured financing arrangements with ResCap of which approximately $1.3 billion in loans was utilized. Amounts outstanding under the secured financing and hedging arrangements fluctuate. If ResCap were to file for bankruptcy, ResCap’s repayments of its financing facilities, including those with us, could be slower. In addition, we could be an unsecured creditor of ResCap to the extent that the proceeds from the sale of our collateral are insufficient to repay ResCap’s obligations to us. It is possible that other ResCap creditors would seek to recharacterize our loans to ResCap as equity contributions or to seek equitable subordination of our claims so that the claims of other creditors would have priority over our claims. In addition, should ResCap file for bankruptcy, our $859 million investment related to ResCap’s equity position would likely be reduced to zero. If a ResCap bankruptcy were to occur and a substantial amount of our credit exposure is not repaid to us, it would have an adverse impact on our near-term net income and capital position, but we do not believe it would have a materially adverse impact on Ally’s consolidated financial position over the longer term.
Corporate Conversion
Effective June 30, 2009, we converted (the Conversion) from a Delaware limited liability company to a Delaware corporation pursuant to Section 18-216 of the Delaware Limited Liability Company Act and Section 265 of the Delaware General Corporation Law. In connection with the Conversion, each unit of each class of common and preferred membership interests issued and outstanding immediately prior to the Conversion was converted into shares of capital stock with substantially the same rights and preferences as such membership interests. Refer to Note 17 for additional information regarding the tax impact of the conversion.
Recently Adopted Accounting Standards
Accounting for Transfers of Financial Assets (ASU 2009-16)
As of January 1, 2010, we adopted ASU 2009-16 (formerly Statement of Financial Accounting Standards Board (SFAS) No. 166), which amended Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing. This standard removes the concept of a qualifying special-purpose entity (QSPE) and creates more stringent conditions for reporting a sale when a portion of a financial asset is transferred. To determine if a transfer is to be accounted for as a sale, the transferor must assess whether the transferor and all of the entities included in the transferor's consolidated financial statements surrendered
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control of the assets. For partial asset transfers, the transferred portion must represent a pro rata component of the entire asset with no form of subordination. This standard is applied prospectively for transfers that occur on or after the effective date; however, the elimination of the QSPE concept required us to retrospectively assess all current off-balance sheet QSPE structures for consolidation under ASC Topic 810,Consolidation, and record a cumulative-effect adjustment to retained earnings for any consolidation change. Retrospective application of ASU 2009-16, specifically the QSPE removal, was assessed as part of the analysis required by ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. Refer to the section below for further information related to ASU 2009-17.
Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17)
As of January 1, 2010, we adopted ASU 2009-17 (formerly SFAS No. 167), which amended ASC Topic 810,Consolidation. This standard addresses the primary beneficiary assessment criteria for determining whether an entity is required to consolidate a variable interest entity (VIE). This standard requires an entity to determine whether it is the primary beneficiary by performing a qualitative assessment rather than using the quantitative-based model that was required under the previous accounting guidance. The qualitative assessment consists of determining whether the entity has both the power to direct the activities that most significantly impact the VIE’s economic performance and the right to receive benefits or obligation to absorb losses that could potentially be significant to the VIE. As a result of the implementation of ASU 2009-16 and ASU 2009-17, several of our securitization structures previously held off-balance sheet were recognized as consolidated entities resulting in a day-one increase of $17.6 billion to assets and liabilities on our Condensed Consolidated Balance Sheet ($10.1 billion of the increase related to operations classified as held-for-sale). As part of the day-one entry, there was an immaterial adjustment to our opening equity balance.
Expanded Disclosures about Fair Value Measurements (ASU 2010-06)
As of March 31, 2010, we adopted the majority of ASU 2010-06, which amends ASC Topic 820, Fair Value Measurements. The ASU requires fair value disclosures for each asset and liability class, disclosures related to inputs and valuation methods for measurements that use Level 2 or Level 3 inputs, disclosures of significant transfers between Levels 1 and 2, and the gross presentation of significant transfers into or out of Level 3 within the Level 3 rollforward. The ASU also requires the gross presentation of purchases, sales, issuances, and settlements within the Level 3 rollforward; however, this specific requirement will be effective for us during the three months ended March 31, 2011. The disclosure requirement by class is a higher level of disaggregation compared to the previous requirement, which was based on the major asset or liability category. While the adoption of ASU 2010-06 expanded our disclosures related to fair value measurements, it did not modify the accounting treatment or measurement of items at fair value and, as such, did not have a material impact on our financial statements.
Derivatives and Hedging – Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11)
In March 2010, the FASB issued ASU 2010-11, which clarifies that the transfer of credit risk that is only in the form of subordination of one financial instrument to another financial instrument (such as the subordination of one beneficial interest to another tranche of a securitization) is an embedded derivative feature. The embedded derivative feature should not be subject to potential bifurcation or separate accounting under ASC 815, Derivatives and Hedging. In addition, the ASU provides guidance on whether other embedded credit derivatives in financial instruments are subject to bifurcation and separate accounting. ASU 2010-11 was effective for us on July 1, 2010, and the adoption did not have a material impact on our consolidated financial condition or results of operation.
Recently Issued Accounting Standards
Revenue Arrangements with Multiple Deliverables (ASU 2009-13)
In October 2009, the FASB issued ASU 2009-13, which amends ASC Topic 605, Revenue Recognition. The guidance significantly changes the accounting for revenue recognition in arrangements with multiple deliverables and eliminates the residual method, which allocated the discount of a multiple deliverable arrangement among the delivered items. Under the guidance, entities will be required to allocate the total consideration to all deliverables at inception using the relative selling price and to allocate any discount in the arrangement proportionally to each deliverable based on each deliverable’s selling price. ASU 2009-13 is effective for revenue arrangements that we enter into or materially modify on or after January 1, 2011. We do not expect the adoption to have a material impact to our consolidated financial condition or results of operation.
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Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses (ASU 2010-20)
In July 2010, the FASB issued ASU 2010-20, which requires expanded disclosures related to the credit quality of finance receivables and loans. This disclosure will be effective for us during the December 31, 2010, reporting period. The ASU also requires a rollforward of the allowance for loan losses for each reporting period, which will be effective for us during the March 31, 2011, reporting period. Since the guidance relates only to disclosures, adoption will not have a material effect on our consolidated financial condition or results of operation.
Discontinued Operations
During 2009, we committed to sell certain operations of ResCap’s International Business Group (IBG). These operations included residential mortgage loan origination, acquisition, servicing, asset management, sale, and securitizations in the United Kingdom and continental Europe (the Netherlands and Germany). During the three months ended June 30, 2010, we classified the U.K. operations as discontinued. The continental Europe operations met the discontinued operations criteria during the three months ended December 31, 2009. On September 30, 2010, and October 1, 2010, we completed the sale of these operations. The components of the sale that were completed on October 1, 2010, were classified as assets and liabilities of operations held-for-sale on our Condensed Consolidated Balance Sheet at September 30, 2010, and were valued consistently with the proceeds received from the sale.
During 2009, we committed to sell the U.S. consumer property and casualty insurance business of our Insurance operations. These operations provided vehicle and home insurance in the United States through a number of distribution channels including independent agents, affinity groups, and the internet. The sale of our U.S. consumer property and casualty insurance business was completed during the first quarter of 2010. Additionally, during 2009, we committed to sell the U.K. consumer property and casualty insurance business. We are in active negotiations and expect to complete the sale during the first half of 2011.
During the three months ended June 30, 2010, we ceased to operate at our International Automotive Finance operations in Australia and Russia and classified them as discontinued.
During 2009, we committed to sell certain operations of our International Automotive Finance operations including our Argentina, Poland, and Ecuador operations and our Masterlease operations in Australia, Belgium, France, Italy, Mexico, the Netherlands, Poland, and the United Kingdom. Our Masterlease operations provide full-service individual leasing and fleet leasing products including maintenance, fleet, and accident management services as well as fuel programs, short-term vehicle rental, and title and licensing services. During 2009, the sales of the Masterlease operations in Italy, Mexico, and the Netherlands were completed. During the three months ended June 30, 2010, we completed the sale of our Poland operations and our Masterlease operations in Australia, Poland, Belgium, and France. In July 2010, we completed the sale of our Argentina operations. We are in active negotiations to complete the sale of our Masterlease operations in the United Kingdom and are awaiting satisfaction of certain closing conditions involving third parties in order to complete the sale of our Ecuador operations. We expect both to be completed within the next six months.
During 2009, we committed to sell the North American-based factoring business of our Commercial Finance Group. On April 30, 2010, the sale of the North American-based factoring business was completed.
We classified these operations as discontinued operations using generally accepted accounting principles in the United States of America, as the associated operations and cash flows will be eliminated from our ongoing operations and we will not have any significant continuing involvement in their operations after the respective sale transactions. For all periods presented, all of the operating results for these operations were removed from continuing operations and are presented separately as discontinued operations, net of tax. The Notes to the Condensed Consolidated Financial Statements were adjusted to exclude discontinued operations unless otherwise noted.
The pretax income or loss recognized through September 30, 2010, for the discontinued operations, including the direct costs to transact a sale, could differ from the ultimate sales price due to the fluidity of ongoing negotiations, price volatility, changing interest rates, changing foreign currency rates, and future economic conditions.
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Selected financial information of discontinued operations is summarized below.
Select Mortgage operations
Total net revenue (loss)
Pretax (loss) income including direct costs to transact a sale
Tax expense (benefit)
Select Insurance operations
Pretax income (loss) including direct costs to transact a sale (a)
Tax (benefit)
Select International operations
Select Commercial Finance operations
Tax expense
14
Held-for-sale Operations
The assets and liabilities held-for-sale at September 30, 2010, are summarized below.
Investment securities — available-for-sale
Impairment on assets of held-for-sale operations
Long-term debt
15
The assets and liabilities of held-for-sale operations at December 31, 2009, are summarized below.
16
Recurring Fair Value
The following tables display the assets and liabilities of our held-for-sale operations measured at fair value on a recurring basis. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items; therefore, they do not directly display the impact of our risk management activities. Refer to Note 19 for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to these models, and significant assumptions used.
Mortgage-backed
Residential
Total trading securities
Available-for-sale securities
Debt securities
Foreign government
Other
Total debt securities
17
U.S. Treasury and federal agencies
States and political subdivisions
Corporate debt securities
Interests retained in financial asset sales
Fair value of derivative contracts in receivable position
Interest rate contracts
Fair value of derivative contracts in liability position
The following tables present the reconciliation for all Level 3 assets and liabilities of our held-for-sale operations measured at fair value on a recurring basis. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The Level 3 items presented below may be hedged by derivatives and other financial instruments that are classified as Level 1 or Level 2. Thus, the following tables do not fully reflect the impact of our risk management activities.
Net realized/ unrealizedgains (losses)
includedin earnings (a)
Consumer mortgage finance receivables and loans, net (b)
Secured debt
On-balance sheet securitization debt (b)
18
Net unrealizedgains
includedin earningsstill held atSeptember 30,2010 (a)
Details of other income, net of losses, were as follows.
Mortgage processing fees and other mortgage income
Remarketing fees
Late charges and other administrative fees
Full-service leasing fees
Other equity method investments
Real estate services, net
Change due to fair value option elections (a)
Fair value adjustment on certain derivatives (b)
Total other income, net of losses
19
Details of other operating expenses were as follows.
Mortgage representation and warranty expense, net
Insurance commissions
Technology and communications expense
Professional services
Advertising and marketing
Vehicle remarketing and repossession
Lease and loan administration
Regulatory and licensing fees
State and local non-income taxes
Premises and equipment depreciation
Rent and storage
Full-service leasing vehicle maintenance costs
Restructuring expenses
Total other operating expenses
The fair value for our portfolio of trading securities by type was as follows.
U.S. Treasury
Asset-backed
20
Our portfolio of securities includes bonds, equity securities, asset- and mortgage-backed securities, notes, interests in securitization trusts, and other investments. The cost, fair value, and gross unrealized gains and losses on available-for-sale and held-to-maturity securities were as follows.
Residential (a)
Corporate debt
Total debt securities (b)
Equity securities
Total available-for-sale securities (c)
Held-to-maturity securities
Total held-to-maturity securities
The maturity distribution of available-for-sale debt securities outstanding is summarized in the following tables. Prepayments may cause actual maturities to differ from scheduled maturities.
Fair value of available-for-sale debt securities (b)
Total available-for-sale debt securities
Amortized cost of available-for-sale debt securities
21
Certain highly liquid investment securities with maturities of three months or less from the date of purchase are classified as cash equivalents and are composed primarily of money market accounts and short-term securities, including U.S. Treasury bills. The carrying value of cash equivalents approximates fair value. The balance of cash equivalents was $5.8 billion and $1.8 billion at September 30, 2010, and December 31, 2009, respectively.
The following table presents gross gains and losses realized upon the sales of available-for-sale securities and other-than-temporary impairment.
Gross realized gains
Gross realized losses
Other-than-temporary impairment
Net realized gains
The following table presents interest and dividends on available-for-sale securities.
Taxable interest
Taxable dividends
Interest and dividends exempt from U.S. federal income tax
Total interest and dividends
22
The table below summarizes available-for-sale securities in an unrealized loss position in accumulated other comprehensive income. Based on the methodology described below that was applied to these securities, we believe that the unrealized losses relate to factors other than credit losses in the current market environment. As of September 30, 2010, we do not have the intent to sell the debt securities with an unrealized loss position in accumulated other comprehensive income, and it is not more likely than not that we will be required to sell these securities before recovery of their amortized cost basis. As of September 30, 2010, we had the ability and intent to hold equity securities with an unrealized loss position in accumulated other comprehensive income. As a result, we believe that the securities with an unrealized loss position in accumulated other comprehensive income are not considered to be other-than-temporarily impaired at September 30, 2010.
Foreign government securities
Mortgage-backed securities
Asset-backed securities
Total temporarily impaired debt securities
Temporarily impaired equity securities
Total temporarily impaired available-for-sale securities
We employ a systematic methodology that considers available evidence in evaluating potential other-than-temporary impairment of our investments classified as available-for-sale. If the cost of an investment exceeds its fair value, we evaluate, among other factors, the magnitude and duration of the decline in fair value, the financial health of and business outlook for the issuer, changes to the rating of the security by a rating agency, the performance of the underlying assets for interests in securitized assets, whether we intend to sell the investment, and whether it is more likely than not we will be required to sell the debt security before recovery of its amortized cost basis.
The composition of loans held-for-sale, net, was as follows.
Automobile
1st Mortgage
Home equity
Total consumer (a)
Commercial and industrial
Total loans held-for-sale (b)
23
The composition of finance receivables and loans, net, before allowance for loan losses was as follows.
Mortgage
Resort finance
Commercial real estate
Total commercial
Total finance receivables and loans (b)
The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans, net.
Three months ended September 30, ($ in millions)
Allowance at July 1,
Charge-offs
Domestic
Foreign
Total charge-offs
Recoveries
Total recoveries
Net charge-offs
Discontinued operations
Allowance at September 30,
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Allowance at January 1,
Addition of allowance due to change in accounting principle (a)
The following tables present information about our impaired finance receivables and loans. These tables exclude loans carried at fair value due to the fair value option elections.
Impaired finance receivables and loans
With an allowance
Without an allowance
Total impaired loans
Allowance for impaired loans
Average balance of impaired loans
Interest income recognized on impaired loans
At September 30, 2010, and December 31, 2009, commercial commitments to lend additional funds to debtors owing receivables whose terms had been modified in troubled debt restructuring were $16 million and $12 million, respectively.
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We sell pools of automotive and residential mortgage loans and contracts via securitization transactions, which provide permanent funding and facilitates asset and liability management. In executing the securitization transactions, we typically sell the pools to wholly owned bankruptcy-remote special-purpose entities (SPEs), which then transfer the loans or contracts to a separate, transaction-specific SPE (a securitization trust) for cash, servicing rights, and in some transactions, other retained interests. The securitization trust issues interests and interests are sold to investors. These interests are collateralized by the secured loans or contracts and entitle the investors to specified cash flows generated from the securitized loans or contracts.
Our securitization transactions are accounted for under the requirements of ASC 810, Consolidation, and ASC 860, Transfers and Servicing. ASU 2009-16, Accounting for Transfers of Financial Assets, and ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, amended ASC 810 and ASC 860. These standards became effective on January 1, 2010, and required the prospective consolidation of certain securitization assets and liabilities that were previously held off-balance sheet. We reflected our economic interest in these newly consolidated structures primarily through loans and secured debt rather than as interests held in off-balance sheet securitization trusts. Refer to Note 1 for additional information related to the adoption of ASU 2009-16 and ASU 2009-17. Refer to Note 20 for additional information related to the consolidation of certain securitization trusts due to the adoption of the new standards.
The following discussion and related information is only applicable to the transfers of finance receivables and loans that qualify for off-balance sheet treatment.
Each securitization is governed by various legal documents that limit and specify the activities of the securitization vehicle. The securitization vehicle is generally allowed to acquire the loans or contracts being sold to it, to issue interests to investors to fund the acquisition of the loans or contracts, and to enter into derivatives or other yield maintenance contracts to hedge or mitigate certain risks related to the asset pool or debt securities. Additionally, the securitization vehicle is required to service the assets it holds and the debt or interest it issues. A servicer appointed within the underlying legal documents performs these functions. Servicing functions include, but are not limited to, collecting payments from borrowers, performing escrow functions, monitoring delinquencies, liquidating assets, investing funds until distribution, remitting payments to investors, and accounting for and reporting information to investors. As part of our off-balance sheet securitizations, we typically retain servicing responsibilities and, in some cases, other retained interests. Accordingly, our servicing responsibilities result in continued involvement in the form of servicing the underlying asset (primary servicing) and/or servicing the bonds resulting from the securitization transactions (master servicing) through servicing platforms. Certain securitizations require the servicer to advance scheduled principal and interest payments due on the pool regardless of whether they are received from borrowers. Accordingly, we are required to provide these servicing advances when applicable. Refer to Note 1 to the Condensed Financial Statements in our 2009 Annual Report on Form 10-K regarding the valuation of servicing rights. Subsequent to the adoption of ASU 2009-16 and ASU 2009-17 as of January 1, 2010, we generally do not hold significant or potentially significant retained interests in our securitization trusts that qualify for off-balance sheet treatment under ASU 2009-17.
Generally, the assets initially transferred into the securitization vehicle are the sole repayment source to the investors in the securitization trust and the various other parties that perform services for the transaction, such as the servicer or the trustee. In certain transactions, a liquidity provider or facility may exist to provide temporary liquidity to the structure. The liquidity provider generally is reimbursed prior to other parties in subsequent distribution periods. Bond insurance may also exist to cover certain shortfalls to certain investors. As noted above, in certain securitizations, the servicer is required to advance scheduled principal and interest payments due on the pool regardless of whether they were received from the borrowers. The servicer is allowed to reimburse itself for these servicing advances. Additionally, certain securitization transactions may allow for the acquisition of additional loans or contracts subsequent to the initial loan. Principal collections on other loans and/or the issuance of new interests, such as variable funding notes, generally fund these loans; we are often contractually required to invest in these new interests. Lastly, we provide certain guarantees as discussed in Note 30 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.
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The investors and/or securitization trusts have no recourse to us with the exception of market customary representation and warranty repurchase provisions and, in certain transactions, early payment default provisions. Representation and warranty repurchase provisions generally require us to repurchase loans or contracts to the extent it is determined that the loans were ineligible or were otherwise defective at the time of sale. Due to market conditions, early payment default provisions are included in certain securitization transactions that require us to repurchase loans or contracts if the borrower is delinquent in making certain specific payments subsequent to the sale.
We generally hold certain conditional repurchase options that allow us to repurchase assets from the securitization. The majority of the securitizations provide us, as servicer, with a call option that allows us to repurchase the remaining assets or outstanding debt once the asset pool reaches a predefined level, which represents the point where servicing is burdensome rather than beneficial. Such an option is referred to as a clean-up call. As servicer, we are able to exercise this option at our discretion anytime after the asset pool size falls below the predefined level. The repurchase price for the loans or contracts is typically par plus accrued interest. Additionally, we may hold other conditional repurchase options that allow us to repurchase the asset if certain events, outside our control, are met. The typical conditional repurchase option is a delinquent loan repurchase option that gives us the option to purchase the loan or contract if it exceeds a certain prespecified delinquency level. We have complete discretion regarding when or if we will exercise these options, but generally, we would do so when it is in our best interest.
The loans or contracts sold into off-balance sheet securitization transactions are removed from our balance sheet. The assets obtained from the securitization are primarily reported as cash, servicing rights, or (if retained) retained interests. Typically, we conclude that the fee we are paid for servicing retail automotive finance receivables represents adequate compensation, and consequently, we do not recognize a servicing asset or liability. We elected fair value treatment for our existing mortgage servicing rights (MSRs) portfolio. Liabilities incurred as part of the transaction, such as representation and warranty provisions, are recorded at fair value at the time of sale and are reported as accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet. Upon the sale of the loans or contracts, we recognize a gain or loss on sale for the difference between the assets recognized, the assets derecognized, and the liabilities recognized as part of the transaction.
The following summarizes the pretax gains and losses recognized on the types of loans or contracts sold into off-balance sheet securitization transactions.
Retail finance receivables
Automotive wholesale loans
Mortgage loans
Total pretax (loss) gain on off-balance sheet activities
The following summarizes the type and amount of loans held by the securitization trusts in transactions that qualified for off-balance sheet treatment.
Mortgage loans (a)
Total off-balance sheet activities
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Investments in operating leases were as follows.
Vehicles and other equipment, after impairment
Accumulated depreciation
Depreciation expense on operating lease assets includes remarketing gains and losses recognized on the sale of operating lease assets. The following summarizes the components of depreciation expense on operating lease assets.
Depreciation expense on operating lease assets (excluding remarketing gains)
Gross remarketing gains
The following tables summarize activity related to MSRs carried at fair value. Sufficient market inputs exist to determine the fair value of our recognized servicing assets and servicing liabilities.
Estimated fair value at July 1,
Additions recognized on sale of mortgage loans
Additions from purchases of servicing assets
Changes in fair value
Due to changes in valuation inputs or assumptions used in the valuation model
Other changes in fair value (a)
Other changes that affect the balance
Estimated fair value at September 30,
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Estimated fair value at January 1,
Subtractions from sales of servicing assets
Decrease due to change in accounting principle (b)
Changes in fair value due to changes in valuation inputs or assumptions used in the valuation models include all changes due to revaluation by a model or by a benchmarking exercise. Other changes in fair value primarily include the accretion of the present value of the discount related to forecasted cash flows and the economic runoff of the portfolio.
We use the following key assumptions to value our MSRs.
Range of prepayment speeds
Range of discount rates
The primary risk of our servicing rights is interest rate risk and the resulting impact on prepayments. A significant decline in interest rates could lead to higher-than-expected prepayments, which could reduce the value of the MSRs. We economically hedge the income statement impact of these risks with both derivative and nonderivative financial instruments. These instruments include interest rate swaps, caps and floors, options to purchase these items, futures and forward contracts, and/or purchasing or selling U.S. Treasury and principal-only securities. Refer to Note 16 for additional information regarding derivative instruments. The net fair value of derivative financial instruments used to mitigate these risks amounted to $817 million and $675 million at September 30, 2010 and 2009, respectively. The changes in fair value of the derivative financial instruments amounted to a gain of $1.3 billion and a loss of $519 million for the nine months ended September 30, 2010 and 2009, respectively, and were included in servicing asset valuation and hedge activities, net, in the Condensed Consolidated Statement of Income.
The components of mortgage servicing fees were as follows.
Contractual servicing fees, net of guarantee fees and including subservicing
Late fees
Ancillary fees
Total
Our Mortgage operations that conduct primary and master servicing activities are required to maintain certain servicer ratings in accordance with master agreements entered into with government-sponsored entities. At September 30, 2010, our Mortgage operations were in compliance with the servicer-rating requirements of the master agreements.
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The components of other assets were as follows.
Property and equipment at cost
Net property and equipment
Restricted cash collections for securitization trusts (a)
Restricted cash and cash equivalents
Servicer advances
Collateral placed with counterparties
Cash reserve deposits held-for-securitization trusts (b)
Other accounts receivable
Debt issuance costs
Prepaid expenses and deposits
Goodwill
Investment in used vehicles held-for-sale
Accrued interest and rent receivable
Real estate and other investments
Repossessed and foreclosed assets
Total other assets
Deposit liabilities consisted of the following.
Domestic deposits
Noninterest-bearing deposits
NOW and money market checking accounts
Certificates of deposit
Dealer deposits
Total domestic deposits
Foreign deposits
Total foreign deposits
Noninterest-bearing deposits primarily represent third-party escrows associated with our Mortgage operations' loan servicing portfolio. The escrow deposits are not subject to an executed agreement and can be withdrawn without penalty at any time. At September 30, 2010, and December 31, 2009, certificates of deposit included $6.3 billion and $4.8 billion, respectively, of domestic certificates of deposit in denominations of $100 thousand or more.
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The following table presents the composition of our debt portfolio at September 30, 2010, and December 31, 2009.
Short-term debt
Commercial paper
Demand notes
Bank loans and overdrafts
Repurchase agreements and other
Total short-term debt
Due within one year
Due after one year (a)
Total long-term debt (b)
Fair value adjustment (c)
The following table presents the scheduled maturity of long-term debt at September 30, 2010, assuming that no early redemptions occur. The actual payment of secured debt may vary based on the payment activity of the related pledged assets.
2010
2011
2012
2013
2014
2015 and thereafter
Original issue discount (c)
Troubled debt restructuring concession (d)
Collateralized borrowings in securitization trusts (e)
Total long-term debt
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The following summarizes assets restricted as collateral for the payment of the related debt obligation primarily arising from secured financing arrangements, securitization transactions accounted for as secured borrowings, and repurchase agreements.
Consumer and commercial mortgage finance receivables and loans, net
Consumer automotive finance receivables and loans, net (a)
Commercial automotive finance receivables and loans, net (b)
Ally Bank (c)
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Funding Facilities
The following table highlights credit capacity under our secured and unsecured funding facilities at September 30, 2010, and December 31, 2009. We utilize both committed and uncommitted credit facilities. The financial institutions providing the uncommitted facilities are not legally obligated to advance funds under them. The amounts in the outstanding column in the table below are generally included on our Condensed Consolidated Balance Sheet.
Committed unsecured
Automotive Finance operations
Committed secured
Automotive Finance operations and other (b)
Mortgage operations
Total committed facilities
Uncommitted unsecured
Uncommitted secured
Federal Reserve funding programs
Other facilities
Other facilities (c)
Total uncommitted facilities
Total facilities
Whole-loan forward flow agreements (d)
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As a bank holding company, we and our wholly owned banking subsidiary, Ally Bank, are subject to risk-based capital and leverage guidelines by federal regulators that require that our capital-to-assets ratios meet certain minimum standards. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary action by regulators that, if undertaken, could have a direct material effect on our consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk-weightings, and other factors.
The risk-based capital ratio is determined by allocating assets and specified off-balance sheet financial instruments into several broad risk categories with higher levels of capital being required for the categories perceived as representing greater risk. Under the guidelines, total capital is divided into two tiers: Tier 1 capital and Tier 2 capital. Tier 1 capital generally consists of common equity, minority interests, and qualifying preferred stock (including fixed-rate cumulative preferred stock issued and sold to the Treasury) less goodwill and other adjustments. Tier 2 capital generally consists of preferred stock not qualifying as Tier 1 capital, limited amounts of subordinated debt and the allowance for loan losses, and other adjustments. The amount of Tier 2 capital may not exceed the amount of Tier 1 capital.
Total risk-based capital is the sum of Tier 1 capital and Tier 2 capital. Under the guidelines, banking organizations are required to maintain a minimum Total risk-based capital ratio (total capital to risk-weighted assets) of 8% and a Tier 1 risk-based capital ratio of 4%.
The federal banking regulators also established minimum leverage ratio guidelines. The leverage ratio is defined as Tier 1 capital divided by adjusted average total assets (which reflect adjustments for disallowed goodwill and certain intangible assets). The minimum Tier 1 leverage ratio is 3% or 4% depending on factors specified in the regulations.
A banking institution is considered “well-capitalized” when its Total risk-based capital ratio equals or exceeds 10% and its Tier 1 risk-based capital ratio equals or exceeds 6% unless subject to regulatory directive to maintain higher capital levels and for insured depository institutions, a leverage ratio that equals or exceeds 5%.
In conjunction with the conclusion of the Supervisory Capital Assessment Program (S-CAP), the banking regulators developed an additional measure of capital called “Tier 1 common” defined as Tier 1 capital less noncommon elements including qualified perpetual preferred stock, qualifying minority interest in subsidiaries, and qualifying trust preferred securities.
On October 29, 2010, Ally, IB Finance Holding Company, LLC, Ally Bank, and the FDIC entered into a Capital and Liquidity Maintenance Agreement (CLMA) that supersedes the original agreement dated July 21, 2008. The CLMA requires capital at Ally Bank to be maintained at a level such that Ally Bank’s leverage ratio is at least 15%, which is consistent with capital requirements currently applicable to Ally Bank and thus does not impose any additional capital requirements. For this purpose, the leverage ratio is determined in accordance with the FDIC’s regulations related to capital maintenance. The effective date of the CLMA is August 24, 2010.
Additionally, on May 21, 2009, the Federal Reserve Board (FRB) granted Ally Bank an expanded exemption from Section 23A of the Federal Reserve Act. The exemption enables Ally Bank to make certain extensions of credit for the purchase of GM vehicles or vehicles floorplanned by Ally subject to certain limitations. The exemption requires Ally to maintain a Total risk-based capital ratio of 15% and Ally Bank to maintain a Tier 1 leverage ratio of 15%.
The minimum risk-based capital requirements adopted by the federal banking agencies follow the Capital Accord of the Basel Committee on Banking Supervision. Currently all U.S. banks are subject to the Basel I capital rules. The Basel Committee issued Basel II Capital Rules, and the U.S. regulators issued companion rules applicable to certain U.S.-domiciled institutions. Ally qualifies as a “mandatory” bank holding company that must comply with the U.S. Basel II rules. The Basel Committee on Banking Supervision issued additional guidance regarding market risk capital rules and Basel II capital rules for securitizations. U.S. banking regulators have not yet issued any companion guidance. We continue to monitor developments with respect to Basel II requirements and are working to ensure successful execution within the required time.
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On January 28, 2010, the federal banking agencies published a final rule amending the risk-based capital guidelines associated with the implementation of ASU 2009-16 and ASU 2009-17. The rule permits banking organizations to phase in the effects of the consolidation on risk-weighted assets and also makes provisions associated with the impact of allowance for loan and lease losses effects on Tier 2 capital during 2010. Ally elected to utilize this optional phase-in approach. Refer to Note 1 for additional information related to the adoption of ASU 2009-16 and ASU 2009-17.
The following table summarizes our capital ratios.
Risk-based capital
Tier 1 (to risk-weighted assets)
Ally Financial Inc.
Ally Bank
Total (to risk-weighted assets)
Tier 1 leverage (to adjusted average assets) (c)
Tier 1 common (to risk-weighted assets)
At September 30, 2010, Ally and Ally Bank met all required minimum ratios and exceeded “well-capitalized” requirements under the federal regulatory agencies' definitions as summarized in the table above.
We enter into interest rate and foreign currency swaps, futures, forwards, options, swaptions, and credit default swaps in connection with our market risk management activities. Derivative instruments are used to manage interest rate risk relating to specific groups of assets and liabilities, including investment securities, loans held-for-sale, MSRs, debt, and deposits. In addition, we use foreign exchange contracts to mitigate foreign currency risk associated with foreign-currency-denominated debt and foreign exchange transactions. Our primary objective for utilizing derivative financial instruments is to manage market risk volatility associated with interest rate and foreign currency risks related to the assets and liabilities of our Automotive Finance and Mortgage operations.
Interest Rate Risk
We execute interest rate swaps to modify our exposure to interest rate risk by converting certain fixed-rate instruments to a variable rate. We apply hedge accounting for certain derivative instruments used to hedge fixed-rate debt. We monitor our mix of fixed- and variable-rate debt in relationship to the rate profile of our assets. When it is cost effective to do so, we may enter into interest rate swaps to achieve our desired mix of fixed- and variable-rate debt. Our qualifying accounting hedges consist of hedges of fixed-rate debt obligations in which receive-fixed swaps are designated as hedges of specific fixed-rate debt obligations.
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We enter into economic hedges to mitigate exposure for the following categories.
MSRs and retained interests — Our MSRs and retained interest portfolios are generally subject to loss in value when mortgage rates decline. Declining mortgage rates generally result in an increase in refinancing activity that increases prepayments and results in a decline in the value of MSRs and retained interests. To mitigate the impact of this risk, we maintain a portfolio of financial instruments, primarily derivatives that increase in value when interest rates decline. The primary objective is to minimize the overall risk of loss in the value of MSRs due to the change in fair value caused by interest rate changes and their interrelated impact to prepayments.
We use a multitude of derivative instruments to manage the interest rate risk related to MSRs and retained interests. They include, but are not limited to, interest rate futures contracts, call or put options on U.S. Treasuries, swaptions, MBS futures, U.S. Treasury futures, interest rate swaps, interest rate floors, and interest rate caps. While we do not utilize nonderivative instruments (e.g., U.S. Treasuries) to hedge this portfolio, we utilized them in the past and may utilize them again in the future. We monitor and actively manage our risk on a daily basis, and therefore trading volume can be large.
Mortgage loan commitments and mortgage and automotive loans held-for-sale — We are exposed to interest rate risk from the time an interest rate lock commitment (IRLC) is made until the time the mortgage loan is sold. Changes in interest rates impact the market price for our loans; as market interest rates decline, the value of existing IRLCs and loans held-for-sale go up and vice versa. Our primary objective in risk management activities related to IRLCs and mortgage and automotive loans held-for-sale is to eliminate or greatly reduce any interest rate risk associated with these items.
The primary derivative instrument we use to accomplish this objective for mortgage loans and IRLCs is forward sales of mortgage-backed securities, primarily the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corporation (Freddie Mac) to-be-announced securities. These instruments typically are entered into at the time the IRLC is made. The value of the forward sales contracts moves in the opposite direction of the value of our IRLCs and mortgage loans held-for-sale. We also use other derivatives, such as interest rate swaps, options, and futures, to hedge automotive loans held-for-sale and certain portions of the mortgage portfolio. Nonderivative instruments may also be periodically used to economically hedge the mortgage portfolio, such as short positions on U.S. Treasuries. We monitor and actively manage our risk on a daily basis. We do not apply hedge accounting to our derivative portfolio held to economically hedge the IRLCs and mortgage and automotive loans held-for-sale.
Debt — As part of our previous on-balance sheet securitizations and/or secured aggregation facilities, certain interest rate swaps or interest rate caps were included within consolidated variable interest entities; these swaps or caps were generally required to meet certain rating agency requirements or were required by the facility lender or provider. The interest rate swaps and/or caps are generally entered into when the debt is issued; accordingly, current trading activity on this particular derivative portfolio is minimal. Additionally, effective January 1, 2010, the derivatives that were hedging off-balance sheet securitization activities are now hedging these securitizations as on-balance sheet securitization activities. We consolidated the off-balance sheet securitizations on January 1, 2010, due to accounting principle changes associated with ASU 2009-16 and ASU 2009-17. Refer to Note 1 for additional information related to the recent adoption.
With the exception of a portion of our fixed-rate debt, we do not apply hedge accounting to our derivative portfolio held to economically hedge our debt portfolio. Typically, the significant terms of the interest rate swaps match the significant terms of the underlying debt resulting in an effective conversion of the rate of the related debt.
Other — We enter into futures, options, swaptions, and credit default swaps to economically hedge our net fixed versus variable interest rate exposure.
Foreign Currency Risk
We enter into derivative financial instrument contracts to hedge exposure to variability in cash flows related to foreign currency financial instruments. Currency swaps and forwards are used to hedge foreign exchange exposure on foreign-currency-denominated debt by converting the funding currency to the same currency of the assets being financed.
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Similar to our interest rate hedges, the swaps are generally entered into or traded concurrent with the debt issuance with the terms of the swap matching the terms of the underlying debt.
Our foreign subsidiaries maintain both assets and liabilities in local currencies; these local currencies are generally the subsidiaries' functional currencies for accounting purposes. Foreign currency exchange rate gains and losses arise when the assets or liabilities of our subsidiaries are denominated in currencies that differ from its functional currency. In addition, our equity is impacted by the cumulative translation adjustments resulting from the translation of foreign subsidiary results; this impact is reflected in our other comprehensive income (loss). We enter into foreign currency forwards and option-based contracts with external counterparties to hedge foreign exchange exposure on our net investments in foreign subsidiaries. Our net investment hedges are recorded at fair value with changes recorded to other comprehensive income (loss) with the exception of the spot to forward difference that is recorded in current period earnings. The net derivative gain or loss remains in other comprehensive income (loss) until earnings are impacted by the sale or the liquidation of the associated foreign operation.
In addition, we have a centralized lending program to manage liquidity for all of our subsidiary businesses. Foreign-currency-denominated loan agreements are executed with our foreign subsidiaries in their local currencies. We evaluate our foreign currency exposure resulting from intercompany lending and manage our currency risk exposure by entering into foreign currency derivatives with external counterparties. Our foreign currency derivatives are recorded at fair value with changes recorded as income offsetting the gains and losses on the hedged foreign currency transactions.
With limited exceptions, we elected not to treat any foreign currency derivatives as hedges for accounting purposes principally because the changes in the fair values of the foreign currency swaps are substantially offset by the foreign currency revaluation gains and losses of the underlying assets and liabilities.
Credit Risk
Derivative financial instruments contain an element of credit risk if counterparties are unable to meet the terms of the agreements. Credit risk associated with derivative financial instruments is measured as the net replacement cost should the counterparties that owe us under the contract completely fail to perform under the terms of those contracts, assuming no recoveries of underlying collateral as measured by the market value of the derivative financial instrument.
To further mitigate the risk of counterparty default, we maintain collateral agreements with certain counterparties. The agreements require both parties to maintain collateral in the event the fair values of the derivative financial instruments meet established thresholds. In the event that either party defaults on the obligation, the secured party may seize the collateral. Generally, our collateral arrangements are bilateral such that we and the counterparty post collateral for the value of their total obligation to each other. Contractual terms provide for standard and customary exchange of collateral based on changes in the market value of the outstanding derivatives. The securing party posts additional collateral when their obligation rises or removes collateral when it falls. We also have unilateral collateral agreements whereby we are the only entity required to post collateral.
We placed collateral totaling $1.6 billion and $1.8 billion at September 30, 2010, and December 31, 2009, respectively, in accounts maintained by counterparties. We received cash collateral from counterparties totaling $1.6 billion and $432 million at September 30, 2010, and December 31, 2009, respectively. The collateral placed and received are included on our Condensed Consolidated Balance Sheet in other assets and accrued expenses and other liabilities, respectively. In certain circumstances, we receive or post securities as collateral with counterparties. We do not record such collateral received on our consolidated balance sheet unless certain conditions are met.
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Balance Sheet Presentation
The following table summarizes the fair value amounts of derivative instruments reported on our Condensed Consolidated Balance Sheet. The fair value amounts are presented on a gross basis, are segregated by derivatives that are designated and qualifying as hedging instruments or those that are not, and are further segregated by type of contract within those two categories.
Qualifying accounting hedges
Interest rate risk
Fair value accounting hedges
Foreign exchange risk
Net investment accounting hedges
Cash flow accounting hedges
Total foreign exchange risk
Total qualifying accounting hedges
Economic hedges
MSRs and retained interests
Mortgage loan commitments and mortgage and automotive loans held-for-sale
Off-balance sheet securitization activities
Total interest rate risk
Credit risk
Total economic hedges
Total derivatives
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Statement of Income Presentation
The following table summarizes the location and amounts of gains and losses reported in our Condensed Consolidated Statement of Income on derivative instruments.
Gain (loss) recognized in earnings on derivatives
(Loss) gain recognized in earnings on hedged items
Loss on mortgage and automotive loans, net
Other gain (loss) on investments, net
Total interest rate contracts
Foreign exchange contracts (a)
Total foreign exchange contracts
Effective June 30, 2009, we converted (the Conversion) from a limited liability company (LLC) treated as a pass-through entity for U.S. federal income tax purposes to a corporation. As a result of the Conversion, we became subject to corporate U.S. federal, state, and local taxes beginning in the third quarter of 2009. Due to this change in tax status as of June 30, 2009, an additional net deferred tax liability of $1.2 billion was established through income tax expense from continuing operations.
Prior to the Conversion, certain U.S. entities were pass-through entities for U.S. federal income tax purposes. U.S. federal, state, and local income taxes were generally not provided for these entities as they were not taxable entities except in a few local jurisdictions that tax LLCs or partnerships. LLC members were required to report their share of our taxable income on their respective income tax returns. In addition, our banking, insurance, and foreign subsidiaries generally were and continue to be corporations that are subject to U.S. and foreign income taxes and are required to provide for these taxes. The Conversion did not change the tax status of these subsidiaries.
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We recognized total income tax expense from continuing operations of $48 million and $117 million during the three months and nine months ended September 30, 2010, respectively, and income tax benefit from continuing operations of $291 million and income tax expense of $681 million during the three months and nine months ended September 30, 2009, respectively. A reconciliation of the statutory U.S. federal income tax rate to our effective income tax rate for continuing operations is shown in the following table.
Statutory U.S. federal tax rate
Change in tax rate resulting from
Effect of valuation allowance change
Foreign capital loss
Prior year adjustments
Taxes on unremitted earnings of subsidiaries
State and local income taxes, net of federal income tax benefit
Foreign income tax rate differential
Tax-exempt income
Change in tax status
LLC results not subject to federal or state income taxes
Effective tax rate
The valuation allowances that were previously established against our domestic net deferred tax assets and certain international net deferred tax assets increased by approximately $126 million during the three months ended September 30, 2010. The increase in the valuation allowance was due to additional realized capital losses within Mortgage operations related to the disposition of its European operations.
During the nine months ended September 30, 2010, the valuation allowance decreased $575 million primarily as a result of profitability of our operations in various tax jurisdictions in combination with an election made by the company to treat the U.S. consumer property and casualty insurance business disposition as an asset sale versus a stock sale for U.S. tax purposes. This election resulted in a smaller ordinary loss than the capital loss that was previously recorded.
The amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate was approximately $137 million at September 30, 2010, compared to $157 million at December 31, 2009. We do not expect a significant change in the unrecognized tax benefits within the next 12 months.
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Related party activities represent transactions with GM, FIM Holdings LLC (FIM Holdings), and affiliated companies. GM and FIM Holdings have both a direct and indirect ownership interest in Ally.
Balance Sheet
A summary of the balance sheet effect of transactions with GM, FIM Holdings, and affiliated companies follows.
Available-for-sale investment in asset-backed security — GM (a)
Secured
Wholesale automotive financing — GM (b)
Term loans to dealers — GM (b)
Lending receivables — affiliates of FIM Holdings
Investment in operating leases, net — GM (c)
Notes receivable from GM (d)
Other — GM
Total secured
Unsecured
Subvention receivables (rate and residual support) — GM
Lease pull-ahead receivable — GM
Total unsecured
Unsecured debt
Notes payable to GM
Wholesale payable — GM
Other payables — GM
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Statement of Income
A summary of the statement of income effect of transactions with GM, FIM Holdings, and affiliated companies follows.
GM and affiliates lease residual value support — North American operations (a)
GM and affiliates rate support — North American operations
Wholesale subvention and service fees from GM
Interest earned on wholesale automotive financing
Interest earned on term loans to dealers
Interest expense on loans with GM
Interest on notes receivable from GM and affiliates
Interest on wholesale settlements (b)
Interest income on loans with FIM Holdings affiliates, net
Consumer lease payments from GM (c)
Insurance premiums earned from GM
Service fees on transactions with GM
Revenues from GM-leased properties, net
U.S. automotive operating leases (e)
Expense
Off-lease vehicle selling expense reimbursement (f)
Payments to GM for services, rent, and marketing expenses (g)
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Statement of Changes in Equity
A summary of the changes to the statement of changes in equity related to transactions with GM, FIM Holdings, and affiliated companies follows.
Capital contributions received (a)
Dividends to shareholders/members (b)
Preferred stock dividends — GM
Other (c)
GM, GM dealers, and GM-related employees compose a significant portion of our customer base, and our Global Automotive Services operations are highly dependent on GM production and sales volume. As a result, a significant adverse change in GM’s business, including significant adverse changes in GM’s liquidity position and access to the capital markets, the production or sale of GM vehicles, the quality or resale value of GM vehicles, the use of GM marketing incentives, GM’s relationships with its key suppliers, GM’s relationship with the United Auto Workers and other labor unions, and other factors impacting GM or its employees could have a significant adverse effect on our profitability and financial condition.
We provide vehicle financing through purchases of retail automotive and lease contracts with retail customers of primarily GM dealers. We also finance the purchase of new and used vehicles by GM dealers through wholesale financing, extend other financing to GM dealers, provide fleet financing for GM dealers to buy vehicles they rent or lease to others, provide wholesale vehicle inventory insurance to GM dealers, provide automotive extended service contracts through GM dealers, and offer other services to GM dealers. As a result, GM’s level of automobile production and sales directly impacts our financing and leasing volume; the premium revenue for wholesale vehicle inventory insurance; the volume of automotive extended service contracts; and the profitability and financial condition of the GM dealers to whom we provide wholesale financing, term loans, and fleet financing. In addition, the quality of GM vehicles affects our obligations under automotive extended service contracts relating to such vehicles. Further, the resale value of GM vehicles, which may be impacted by various factors relating to GM’s business such as brand image, the number of new GM vehicles produced, the number of used vehicles remarketed, or reduction in core brands, affects the remarketing proceeds we receive upon the sale of repossessed vehicles and off-lease vehicles at lease termination.
At September 30, 2010, we had an estimated $959 million in secured credit exposure, which included primarily wholesale vehicle financing to GM-owned dealerships, notes receivable from GM, and vehicles leased directly to GM. We further had approximately $809 million in unsecured credit exposure, which included estimates of payments from GM related to residual support and risk-sharing agreements. Under the terms of certain agreements between Ally and GM, Ally has the right to offset certain of its exposures to GM against amounts Ally owes to GM.
Retail and Lease Programs
GM may elect to sponsor incentive programs (on both retail contracts and operating leases) by supporting financing rates below the standard market rates at which we purchase retail contracts and leases. These marketing incentives are also referred to as rate support or subvention. When GM utilizes these marketing incentives, they pay us the present value of the difference between the customer rate and our standard rate at contract inception, which we defer and recognize as a yield adjustment over the life of the contract.
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GM may also sponsor residual support programs as a way to lower customer monthly payments. Under residual support programs, the customer’s contractual residual value is adjusted above our standard residual values. In addition, under risk-sharing programs and eligible contracts, GM shares equally in residual losses at the time of the vehicle’s disposal to the extent that remarketing proceeds are below our standard residual values (limited to a floor).
For contracts where we are entitled to receive residual support, GM pays the present value of the expected residual support owed to us at contract origination as opposed to after contract termination at the time of sale of the related vehicle. The residual support amount GM ultimately owes us is finalized as the leases actually terminate. Under the terms of the residual support program, in cases where the estimate was incorrect, GM may be obligated to pay us, or we may be obligated to reimburse GM.
Based on the September 30, 2010, outstanding North American operating lease and retail balloon portfolios, the additional maximum contractual amount that could be paid by GM under the residual support programs was approximately $627 million and would be paid only in the unlikely event that the proceeds from the entire portfolio of lease assets were lower than the contractual residual value and no higher than our standard residual rates.
Based on the September 30, 2010, outstanding North American operating lease portfolio, the maximum contractual amount that could be paid under the risk-sharing arrangements was approximately $844 million and would be paid only in the unlikely event that the proceeds from all outstanding lease vehicles were lower than our standard residual rates and no higher than the contractual risk-sharing floor.
Retail and lease contracts acquired by us that included rate and residual subvention from GM, payable directly or indirectly to GM dealers as a percentage of total new GM retail and lease contracts acquired, were as follows.
GM and affiliates subvented contracts acquired
North American operations
International operations (a)
We entered into various services agreements with GM that are designed to document and maintain our current and historical relationship. We are required to pay GM fees in connection with certain of these agreements related to our financing of GM consumers and dealers in certain parts of the world.
GM also provides payment guarantees on certain commercial assets we have outstanding with certain third-party customers. At September 30, 2010, and December 31, 2009, commercial obligations guaranteed by GM were $59 million and $68 million, respectively. Additionally, GM is bound by repurchase obligations to repurchase new vehicle inventory under certain circumstances, such as dealer franchise termination.
Fair Value Measurements
For purposes of this disclosure, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, entities are required to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring the fair value of a liability.
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A three-level hierarchy is to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. The following is a description of the three hierarchy levels.
Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.
Trading securities — Trading securities are recorded at fair value. Our portfolio includes U.S. Treasury, asset-backed, and mortgage-backed securities (including senior and subordinated interests) and may be investment grade, noninvestment grade, or unrated securities. We base our valuation of trading securities on observable market prices when available; however, observable market prices may not be available for a significant portion of these assets due to current illiquidity in the markets. When observable market prices are not available, valuations are primarily based on internally developed discounted cash flow models (an income approach) that use assumptions consistent with current market conditions. The valuation considers recent market transactions, experience with similar securities, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (e.g., prepaymentspeeds, delinquency levels, and credit losses). We classified 64% and 94% of the trading securities reported at fair value as Level 3 at September 30, 2010, and December 31, 2009, respectively. Trading securities account for 1% and 2% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively.
Available-for-sale securities — Available-for-sale securities are carried at fair value primarily based on observable market prices. If observable market prices are not available, our valuations are based on internally developed discounted cash flow models (an income approach) that use a market-based discount rate and consider recent market transactions, experience with similar securities, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we are required to utilize various significant assumptions including market observable inputs (e.g., forward interest rates) and internally developed inputs (including prepayment speeds, delinquency levels, and credit losses). We classified less than 1% of the available-for-sale securities reported at fair value as Level 3 at both September 30, 2010, and December 31, 2009. Available-for-sale securities account for 35% and 37% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively.
Loans held-for-sale, net — We elected the fair value option for certain mortgage loans held-for-sale. The loans elected were government- and agency-eligible residential loans funded after July 31, 2009. These loans are presented in the table of recurring fair value measurements. Refer to the section in this note titled Fair Value Option of Financial Assets and Financial Liabilities for additional information. The loans not elected under the fair value option are accounted for at the lower of cost or fair value. We classified 15% and 49% of the loans held-for-sale reported at fair value as Level 3 at September 30, 2010, and December 31, 2009, respectively. Loans held-for-sale account for 24% and 32% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively.
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Approximately 3% and 4% of the total loans held-for-sale carried at fair value are automotive loans at September 30, 2010, and December 31, 2009, respectively. These automotive loans are presented in the nonrecurring fair value measurement table. We based our valuation of automotive loans held-for-sale on internally developed discounted cash flow models (an income approach) and classified all these loans as Level 3. These valuation models estimate the exit price we expect to receive in the loan’s principal market, which depending on characteristics of the loans may be the whole-loan market or the securitization market. Although we utilize and give priority to market observable inputs, such as interest rates and market spreads within these models, we are typically required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates. While numerous controls exist to calibrate, corroborate, and validate these internal inputs, these internal inputs require the use of judgment and can have a significant impact on the determination of the loan’s value. Accordingly, we classified all automotive loans held-for-sale as Level 3.
Approximately 97% and 96% of the total loans held-for-sale carried at fair value are mortgage loans at September 30, 2010, and December 31, 2009, respectively. We originate or purchase mortgage loans in the United States that we intend to sell to Fannie Mae, Freddie Mac, and the Government National Mortgage Association (Ginnie Mae) (collectively, the Government Sponsored Enterprises (GSEs)). Mortgage loans held-for-sale are typically pooled together and sold into certain exit markets depending on underlying attributes of the loan, such as agency eligibility (domestic only), product type, interest rate, and credit quality. Two valuation methodologies are used to determine the fair value of mortgage loans held-for-sale. The methodology used depends on the exit market as described below.
Level 2 mortgage loans — This includes all mortgage loans carried at fair value due to fair value option elections. The election includes all domestic loans that can be sold to the Agencies, which are valued predominantly using published forward agency prices. Level 2 also includes all nonagency domestic loans or international loans where recently negotiated market prices for the loan pool exist with a counterparty (which approximates fair value) or quoted market prices for similar loans are available. As these valuations are derived from quoted market prices, we classify these valuations as Level 2 in the fair value disclosures. At September 30, 2010, and December 31, 2009, 87% and 52%, respectively, of the mortgage loans held-for-sale currently being carried at fair value were classified as Level 2.
Level 3 mortgage loans — This includes all mortgage loans measured at fair value on a nonrecurring basis. The fair value of these loans was determined using internally developed valuation models because observable market prices were not available. These valuation models estimate the exit price we expect to receive in the loan’s principal market, which depending on characteristics of the loan may be the whole-loan or securitization market. Although we utilize and give priority to market observable inputs such as interest rates and market spreads within these models, we are typically required to utilize internal inputs, such as prepayment speeds, credit losses, and discount rates. While numerous controls exist to calibrate, corroborate, and validate these internal inputs, the generation of these internal inputs requires the use of judgment and can have a significant impact on the determination of the loan’s fair value. Accordingly, we classify these valuations as Level 3 in the fair value disclosures. At September 30, 2010, and December 31, 2009, 13% and 48%, respectively, of the mortgage loans held-for-sale currently being carried at fair value are classified as Level 3.
Consumer mortgage finance receivables and loans, net — We elected the fair value option for certain consumer mortgage finance receivables and loans. The elected mortgage loans collateralized on-balance sheet securitization debt in which we estimated credit reserves pertaining to securitized assets that could have exceeded or already had exceeded our economic exposure. We also elected the fair value option for all mortgage securitization trusts required to be consolidated due to the adoption of ASU 2009-17. The elected mortgage loans represent a portion of the consumer finance receivable and loans on the Condensed Consolidated Balance Sheet. The balance that was not elected was reported on the balance sheet at the principal amount outstanding, net of charge-offs, allowance for loan losses, and premiums or discounts.
Securitized mortgage loans are legally isolated from us and are beyond the reach of our creditors. The loans are measured at fair value using a portfolio approach or an in-use premise. Values of loans held on an in-use basis may differ considerably from loans held-for-sale that can be sold in the whole-loan market. This difference arises
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primarily due to the liquidity of the asset- and mortgage-backed securitization market and is evident in the fact that spreads applied to lower rated asset- and mortgage-backed securities are considerably wider than spreads observed on senior bonds classes and in the whole-loan market. The objective in fair valuing the loans and related securitization debt is to account properly for our retained economic interest in the securitizations. As a result of reduced liquidity in capital markets, values of both these loans and the securitized bonds are expected to be volatile. Since this approach involves the use of significant unobservable inputs, we classified all the mortgage loans elected under the fair value option as Level 3, at September 30, 2010, and December 31, 2009. Consumer finance receivables and loans accounted for 9% and 4% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively. Refer to the section within this note titled Fair Value Option of Financial Assets and Financial Liabilities for additional information.
Commercial finance receivables and loans, net — We evaluate our commercial finance receivables and loans, net, for impairment. We generally base the evaluation on the fair value of the underlying collateral supporting the loans when expected to be the sole source of repayment. When the carrying value exceeds the fair value of the collateral, an impairment loss is recognized and reflected as a nonrecurring fair value measurement. At both September 30, 2010 and December 31, 2009, 6% and 94% of the impaired commercial finance receivables and loans were classified as Level 2 and Level 3, respectively. Commercial finance receivables and loans accounted for 2% and 4% of all assets reported at fair value at September 30, 2010, and December 31, 2009.
MSRs — We typically retain MSRs when we sell assets into the secondary market. MSRs currently do not trade in an active market with observable prices; therefore, we use internally developed discounted cash flow models (an income approach) to estimate the fair value of MSRs. These internal valuation models estimate net cash flows based on internal operating assumptions that we believe would be used by market participants combined with market-based assumptions for loan prepayment rates, interest rates, and discount rates that we believe approximate yields required by investors in this asset. Cash flows primarily include servicing fees, float income, and late fees in each case less operating costs to service the loans. The estimated cash flows are discounted using an option-adjusted spread-derived discount rate. All MSRs were classified as Level 3 at September 30, 2010, and December 31, 2009. MSRs accounted for 8% and 10% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively.
Interests retained in financial asset sales — Interests retained in financial asset sales are carried at fair value. The interests retained are in securitization trusts and deferred purchase prices on the sale of whole-loans. Due to inactivity in the market, valuations are based on internally developed discounted cash flow models (an income approach) that use a market-based discount rate. The valuation considers recent market transactions, experience with similar assets, current business conditions, and analysis of the underlying collateral, as available. To estimate cash flows, we utilize various significant assumptions, including market observable inputs (e.g., forward interest rates) and internally developed inputs (e.g., prepayment speeds, delinquency levels, and credit losses). All interests retained were classified as Level 3 at September 30, 2010, and December 31, 2009. Interests retained in financial assets sales accounted for 2% and less than 1% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively.
Derivative instruments — We manage risk through our balance of loan production and servicing businesses while using financial instruments (including derivatives) to manage risk related specifically to the value of loans held-for-sale, loans held-for-investment, MSRs, foreign currency debt; and we enter into interest rate swaps to facilitate transactions where the underlying receivables are sold to a nonconsolidated entity. Refer to Note 16 for additional information regarding the gains and losses recognized on the fair value of economic hedges within the Condensed Consolidated Statement of Income.
We enter into a variety of derivative financial instruments as part of our hedging strategies. Certain of these derivatives are exchange traded, such as Eurodollar futures, or traded within highly active dealer markets, such as agency to-be-announced securities. To determine the fair value of these instruments, we utilize the exchange price or dealer market price for the particular derivative contract; therefore, we classified these contracts as Level 1. We
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classified less than 1% of the derivative assets and 3% of the derivative liabilities reported at fair value as Level 1 at September 30, 2010. We classified 7% of the derivative assets and 9% of the derivative liabilities reported at fair value as Level 1 at December 31, 2009.
We also execute over-the-counter derivative contracts, such as interest rate swaps, floors, caps, corridors, and swaptions. We utilize third-party-developed valuation models that are widely accepted in the market to value these over-the-counter derivative contracts. The specific terms of the contract and market observable inputs (such as interest rate forward curves and interpolated volatility assumptions) are entered into the model. We classified these over-the-counter derivative contracts as Level 2 because all significant inputs into these models were market observable. We classified 96% of the derivative assets and 94% of the derivative liabilities reported at fair value as Level 2 at September 30, 2010. We classified 77% of the derivative assets and 73% of the derivative liabilities reported at fair value as Level 2 at December 31, 2009.
We also hold certain derivative contracts that are structured specifically to meet a particular hedging objective. These derivative contracts often are utilized to hedge risks inherent within certain on-balance sheet securitizations. To hedge risks on particular bond classes or securitization collateral, the derivative’s notional amount is often indexed to the hedged item. As a result, we typically are required to use internally developed prepayment assumptions as an input into the model to forecast future notional amounts on these structured derivative contracts. Accordingly, we classified these derivative contracts as Level 3. We classified 4% of the derivative assets and 3% of the derivative liabilities reported at fair value as Level 3 at September 30, 2010. We classified 16% of the derivative assets and 18% of the derivative liabilities reported at fair value as Level 3 at December 31, 2009.
We are required to consider all aspects of nonperformance risk, including our own credit standing, when measuring fair value of a liability. We consider our credit risk and the credit risk of our counterparties in the valuation of derivative instruments through a credit valuation adjustment (CVA). The CVA calculation utilizes our credit default swap spreads and the spreads of the counterparty. Additionally, we reduce credit risk on the majority of our derivatives by entering into legally enforceable agreements that enable the posting and receiving of collateral associated with the fair value of our derivative positions on an ongoing basis.
Derivative assets accounted for 17% and 8% of all assets reported at fair value at September 30, 2010, and December 31, 2009, respectively. Derivative liabilities accounted for 63% and 59% of all liabilities reported at fair value at September 30, 2010, and December 31, 2009, respectively.
Collateral placed with counterparties — Collateral in the form of investment securities are primarily carried at fair value using quoted prices in active markets for similar assets. We classified 100% and 96% of securities posted as collateral as Level 1 at September 30, 2010, and December 31, 2009, respectively. Securities posted as collateral accounted for 2% of all assets reported at fair value at both September 30, 2010, and December 31, 2009.
Repossessed and foreclosed assets — Foreclosed on or repossessed assets resulting from loan defaults are carried at the lower of either cost or fair value and are included in other assets on the Condensed Consolidated Balance Sheet. The fair value disclosures include only assets carried at fair value.
The majority of assets acquired due to default are foreclosed assets. We revalue foreclosed assets on a periodic basis. We classified properties that are valued by independent third-party appraisals as Level 2. When third-party appraisals are not obtained, valuations are typically obtained from third-party broker price opinion; however, depending on the circumstances, the property list price or other sales price information may be used in lieu of a broker price opinion. Based on historical experience, we adjust these values downward to take into account damage and other factors that typically cause the actual liquidation value of foreclosed properties to be less than broker price opinion or other price sources. This valuation adjustment is necessary to ensure the valuation ascribed to these assets considers unique factors and circumstances surrounding the foreclosed asset. As a result of applying internally developed adjustments to the third-party-provided valuation of the foreclosed property, we classified these assets as Level 3 in the fair value disclosures. At September 30, 2010, we classified 36% and 64% of foreclosed and repossessed properties carried at fair value as Level 2 and Level 3, respectively. At December 31, 2009, we classified 51% and 49% of foreclosed and repossessed properties carried at fair value as
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Level 2 and Level 3, respectively. Repossessed and foreclosed assets account for less than 1% of all assets reported at fair value at both September 30, 2010, and December 31, 2009.
On-balance sheet securitization debt — We elected the fair value option for certain mortgage loans held-for-investment and the related on-balance sheet securitization debt. We value securitization debt that was elected pursuant to the fair value option and any economically retained positions using market observable prices whenever possible. The securitization debt is principally in the form of asset- and mortgage-backed securities collateralized by the underlying mortgage loans held-for-investment. Due to the attributes of the underlying collateral and current market conditions, observable prices for these instruments are typically not available. In these situations, we consider observed transactions as Level 2 inputs in our discounted cash flow models. Additionally, the discounted cash flow models utilize other market observable inputs, such as interest rates, and internally derived inputs including prepayment speeds, credit losses, and discount rates. Fair value option elected financing securitization debt is classified as Level 3 as a result of the reliance on significant assumptions and estimates for model inputs. On-balance sheet securitization debt accounted for 37% and 41% of all liabilities reported at fair value at September 30, 2010, and December 31, 2009, respectively. Refer to the section within this note titled Fair Value Option for Financial Assets and Financial Liabilities for further information about the election. The debt that was not elected under the fair value option is reported on the balance sheet at cost, net of premiums or discounts and issuance costs.
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The following tables display the assets and liabilities measured at fair value on a recurring basis including financial instruments elected for the fair value option. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The tables below display the hedges separately from the hedged items; therefore, they do not directly display the impact of our risk management activities.
Total available-for-sale securities
Mortgage loans held-for-sale, net (a)
Consumer mortgage finance receivables and loans, net (a)
Foreign currency contracts
Total fair value of derivative contracts in receivable position
Collateral placed with counterparties (b)
On-balance sheet securitization debt (a)
Total fair value of derivative contracts in liability position
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Cash reserve deposits held-for-securitization trusts
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The following tables present the reconciliation for all Level 3 assets and liabilities measured at fair value on a recurring basis. Transfers into or out of any hierarchy levels, if any (including any transfers shown in the following tables), are recognized at the end of the reporting period in which the transfer occurred. We often economically hedge the fair value change of our assets or liabilities with derivatives and other financial instruments. The Level 3 items presented below may be hedged by derivatives and other financial instruments that are classified as Level 1 or Level 2. Thus, the following tables do not fully reflect the impact of our risk management activities.
Purchases,
issuances,andsettlements,net
Fair valueatSeptember 30,2010
Net unrealizedgains (losses)included in
earnings stillheld atSeptember 30,2010
Fair value of derivative contracts in receivable (liability) position, net
Interest rate contracts, net
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($ in millions)
Fair valueatJuly 1,2009
Purchases,issuances,andsettlements,net
NettransfersintoLevel 3
Fair valueatSeptember 30,2009
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Fair valueatJanuary 1,2010
Fair value of derivative contracts in receivable (liability) position, net Interest rate contracts, net
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Nonrecurring Fair Value
We may be required to measure certain assets and liabilities at fair value from time to time. These periodic fair value measures typically result from the application of lower of cost or fair value accounting or certain impairment measures under GAAP. These items would constitute nonrecurring fair value measures.
The following tables display the assets and liabilities measured at fair value on a nonrecurring basis and held at September 30, 2010 and 2009.
Loans held-for-sale, net (a)
Automotive
Total loans held-for-sale, net
Commercial finance receivables and loans, net (c)
Total commercial finance receivables and loans, net
Real estate and other investments (d)
Repossessed and foreclosed assets (f)
n/m = not meaningful
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Real estate and other investments (e)
Repossessed and foreclosed assets (g)
Goodwill (h)
Fair Value Option for Financial Assets and Financial Liabilities
On January 1, 2008, we elected to measure at fair value certain domestic consumer mortgage finance receivables and loans and the related debt held in on-balance sheet mortgage securitization structures. During the three months ended September 30, 2009, we also elected the fair value option for government- and agency-eligible mortgage loans held-for-sale funded after July 31, 2009. As of January 1, 2010, we elected the fair value option for all on-balance sheet mortgage securitization structures that were required to be consolidated due to the adoption of ASU 2009-17. Refer to Note 1 for additional information related to the adoption. Our intent in electing fair value for all these items was to mitigate a divergence between accounting losses and economic exposure for certain assets and liabilities.
A description of the financial assets and liabilities elected to be measured at fair value is as follows.
On-balance sheet mortgage securitizations — We carry the fair value-elected loans as consumer finance receivable and loans, net, on the Condensed Consolidated Balance Sheet. Our policy is to separately record interest income on the fair value-elected loans (unless the loans are placed on nonaccrual status); however, the accrued interest was excluded from the fair value presentation. We classified the fair value adjustment recorded for the loans as other income, net of losses, in the Condensed Consolidated Statement of Income.
We continued to record the fair value-elected debt balances as secured debt on the Condensed Consolidated Balance Sheet. Our policy is to separately record interest expense on the fair value-elected securitization debt, which continues to be classified as interest expense in the Condensed Consolidated Statement of Income. We classified the fair value adjustment recorded for this fair value-elected debt as other income, net of losses, in the Condensed Consolidated Statement of Income.
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Government- and agency-eligible loans — During the three months ended September 31, 2009, we elected the fair value option for government- and agency-eligible mortgage loans held-for-sale funded after July 31, 2009. We elected the fair value option to mitigate earnings volatility by better matching the accounting for the assets with the related hedges.
Excluded from the fair value option were government- and agency-eligible loans funded on or prior to July 31, 2009, and those repurchased or rerecognized. The loans funded on or prior to July 31, 2009, were ineligible because the election must be made at the time of funding. Repurchased and rerecognized government- and agency-eligible loans were not elected because the election will not mitigate earning volatility. We repurchase or rerecognize loans due to representation and warranty obligations or conditional repurchase options. Typically, we will be unable to resell these assets through regular channels due to characteristics of the assets. Since the fair value of these assets is influenced by factors that cannot be hedged, we did not elect the fair value option.
We carry the fair value-elected government- and agency-eligible loans as loans held-for-sale, net, on the Condensed Consolidated Balance Sheet. Our policy is to separately record interest income on the fair value-elected loans (unless they are placed on nonaccrual status); however, the accrued interest was excluded from the fair value presentation. Upfront fees and costs related to the fair value-elected loans were not deferred or capitalized. The fair value adjustment recorded for these loans is classified as gain (loss) on mortgage loans, net, in the Condensed Consolidated Statement of Income. In accordance with GAAP, the fair value option election is irrevocable once the asset is funded even if it is subsequently determined that a particular loan cannot be sold.
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The following tables summarize the fair value option elections and information regarding the amounts recorded as earnings for each fair value option-elected item.
Three months ended
September 30, ($ in millions)
Mortgage loans held-for-sale, net
Consumer mortgage finance receivables and loans, net
On-balance sheet securitization debt
2009
59
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The following table provides the aggregate fair value and the aggregate unpaid principal balance for the fair value option-elected loans and long-term debt instruments.
Total loans
Nonaccrual loans
Loans 90+ days past due (b)
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Fair Value of Financial Instruments
The following table presents the carrying and estimated fair value of assets and liabilities that are considered financial instruments. Accordingly, items that do not meet the definition of a financial instrument are excluded from the table. When possible, we use quoted market prices to determine fair value. Where quoted market prices are not available, the fair value is internally derived based on appropriate valuation methodologies with respect to the amount and timing of future cash flows and estimated discount rates. However, considerable judgment is required in interpreting market data to develop estimates of fair value, so the estimates are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange. The effect of using different market assumptions or estimation methodologies could be material to the estimated fair values. Fair value information presented herein was based on information available at September 30, 2010, and December 31, 2009.
Financial assets
Financial liabilities
Debt (c)
Deposit liabilities (d)
The following describes the methodologies and assumptions used to determine fair value for the respective classes of financial instruments. In addition to the valuation methods discussed below, we also followed guidelines for determining whether a market was not active and a transaction was not distressed. As such, we assumed the price that would be received in an orderly transaction (including a market-based return) and not in forced liquidation or distressed sale.
Trading securities — Refer to the previous section of this note titled Trading securities for a description of the methodologies and assumptions used to determine fair value.
Investment securities — Bonds, equity securities, notes, and other available-for-sale investment securities are carried at fair value. Refer to the previous section of this note titled Available-for-sale securities for a description of the methodologies and assumptions used to determine fair value. The fair value of the held-to-maturity investment securities is based on valuation models using market-based assumption.
Loans held-for-sale, net — Refer to the previous sections of this note also titled Loans held-for-sale, net, for a description of methodologies and assumptions used to determine fair value.
Finance receivables and loans, net — With the exception of mortgage loans held-for-investment, the fair value of finance receivables was based on discounted future cash flows using applicable spreads to approximate current rates applicable to each category of finance receivables (an income approach). The carrying value of wholesale receivables in certain markets and certain other automotive- and mortgage-lending receivables for which interest rates reset on a short-term basis with applicable market indices are assumed to approximate fair value either because of the short-term nature or because of the interest rate adjustment feature. The fair value of wholesale receivables in other markets was based on discounted future cash flows using applicable spreads to approximate current rates applicable to similar assets in those markets.
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For mortgage loans held-for-investment used as collateral for securitization debt, we used a portfolio approach or an in-use premise to measure these loans at fair value. The objective in fair valuing these loans (which are legally isolated and beyond the reach of our creditors) and the related collateralized borrowings is to reflect our retained economic position in the securitizations. For mortgage loans held-for-investment that are not securitized, we used valuation methods and assumptions similar to those used for mortgage loans held-for-sale. These valuations consider unique attributes of the loans such as geography, delinquency status, product type, and other factors. Refer to the previous section in this note titled Loans held-for-sale, net, for a description of methodologies and assumptions used to determine the fair value of mortgage loans held-for-sale.
Derivative assets and liabilities — Refer to the previous section of this note titled Derivative instruments for a description of the methodologies and assumptions used to determine fair value.
Collateral placed with counterparties — Collateral placed with counterparties in the table above represents only collateral in the form of investment securities. Refer to the previous section of this note also titled Collateral placed with counterparties for additional information.
Interests retained in financial asset sales — Interest retained in financial asset sales are carried at fair value. Refer to the previous sections of this note titled Interests retained in financial asset sales for a description of the methodologies and assumptions used to determine fair value.
Debt — The fair value of debt was determined using quoted market prices for the same or similar issues, if available, or was based on the current rates offered to us for debt with similar remaining maturities.
Deposit liabilities — Deposit liabilities represent certain consumer bank deposits as well as mortgage escrow deposits. The fair value of deposits with no stated maturity is equal to their carrying amount. The fair value of fixed-maturity deposits was estimated by discounting cash flows using currently offered rates for deposits of similar maturities.
We account for VIEs under the requirements of ASC 810, Consolidation. ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amended ASC 810, became effective on January 1, 2010, and upon adoption, we consolidated certain entities, including securitization trusts that were previously held off-balance sheet. On January 1, 2010, we recognized a day-one net increase of $17.6 billion to assets and liabilities on our consolidated balance sheet ($10.1 billion of the increase relates to operations classified as held-for-sale). Refer to Note 1 for additional information related to the adoption of ASU 2009-17. Refer to our Condensed Consolidated Balance Sheet for a detailed listing of the assets and liabilities of our consolidated VIEs at September 30, 2010.
The following describes the VIEs that we consolidated or in which we had a significant variable interest. We had certain secured funding arrangements that were structured through consolidating entities, as described in further detail in Note 14.
On-balance sheet securitization trusts — We hold variable interests in certain securitization transactions that are VIEs. The nature of, purpose of, activities of, and our continuing involvement with the consolidated securitization trusts is virtually identical to those of our off-balance sheet securitization trusts, which are discussed in Note 9. As part of our securitizations, we typically retain servicing responsibilities. We also hold retained interests in these consolidated securitization trusts, which represent a continuing economic interest in the securitization. The retained interests include, but are not limited to, senior or subordinate mortgage- or asset-backed securities, interest-only strips, principal-only strips, and residuals. Certain of these retained interests provide credit enhancement to the securitization structure as they may absorb credit losses or other cash shortfalls. Additionally, the securitization documents may require cash flows to be directed away from certain of our retained interests due to specific over collateralization requirements, which may or may not be performance-driven. Because the securitization trusts are consolidated, these retained interests are not recognized as a separate asset on our Condensed Consolidated Balance Sheet.
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Prior to the adoption of ASU 2009-17, we were the primary beneficiary because we typically held the first loss position in these securitization transactions and, as a result, anticipated absorbing the majority of the expected losses of the VIE; thus, we consolidated these entities. Subsequent to adoption of ASU 2009-17, we are the primary beneficiary because we have a controlling financial interest in the VIE as we have both power over the VIE, primarily due to our servicing activities, and we hold a variable interest in the VIE. The assets (and associated beneficial interests) of the consolidated securitization trusts totaled $37.2 billion and $38.4 billion at September 30, 2010, and December 31, 2009, respectively. The majority of the assets are included as finance receivables and loans, net, on the Condensed Consolidated Balance Sheet. The majority of the beneficial interests were included as secured debt on the Condensed Consolidated Balance Sheet. We do not have a contractual obligation to provide any type of financial support in the future, nor did we provide noncontractual financial support to the entity during the three months ended September 30, 2010.
The assets of the securitization trusts generally are the sole source of repayment on the securitization trusts’ liabilities. The creditors of the securitization trusts do not have recourse to our general credit with the exception of the customary representation and warranty repurchase provisions and, in certain transactions, early payment default provisions as discussed in Note 30 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.
Servicing funding — To assist in the financing of our servicing advance receivables, our Mortgage operations formed an SPE to issue term notes to third-party investors that are collateralized by servicing advance receivables. These servicing advance receivables were transferred to the SPE and consisted of delinquent principal and interest advances made by our Mortgage operations, as servicer, to various investors; property taxes and insurance premiums advanced to taxing authorities and insurance companies on behalf of borrowers; and amounts advanced for mortgages in foreclosure. The SPE funds the purchase of the receivables through financing obtained from the third-party investors and subordinated loans or an equity contribution from our Mortgage operations. Management determined that we were the primary beneficiary of the SPE and therefore consolidated the entity. The assets of this entity totaled $1.0 billion and $1.4 billion at September 30, 2010, and December 31, 2009, respectively, and were included in other assets on the Consolidated Balance Sheet. The liabilities of this entity totaled $1.0 billion at September 30, 2010, consisting of $748 million in third-party term notes that were included in debt on the Condensed Consolidated Balance Sheet and $241 million in affiliate payables to ResCap, which were eliminated in consolidation. The liabilities of this entity totaled $1.4 billion at December 31, 2009, consisting of $700 million in third-party term notes that were included in debt on the Consolidated Balance Sheet and $677 million in affiliate payables to ResCap that were eliminated in consolidation. The beneficial interest holder of this VIE does not have legal recourse to our general credit. We do not have a contractual obligation to provide any type of financial support in the future, nor did we provide noncontractual financial support to the entity during the three months ended September 30, 2010.
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Financial information for our reportable operating segments is summarized as follows.
Three months endedSeptember 30,
Net financing revenue (loss)
Other noninterest expense
Income (loss) from discontinued operations, net of tax
Income (loss) from continuing operations before income tax (benefit) expense
Income tax (benefit) expense from continuing operations
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Nine months endedSeptember 30,
Other revenue (loss)
Loss from discontinued operations, net of tax
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Certain of our senior notes are guaranteed by a group of subsidiaries (the Guarantors). The Guarantors, each of which is a 100% directly owned subsidiary of Ally Financial Inc, are Ally US LLC, IB Finance Holding Company, LLC, GMAC Latin America Holdings LLC, GMAC International Holdings B.V., and GMAC Continental LLC. The Guarantors fully and unconditionally guarantee the senior notes on a joint and several basis.
The following financial statements present condensed consolidating financial data for (i) Ally Financial Inc. (on a parent company only basis), (ii) the combined Guarantors, (iii) the combined nonguarantor subsidiaries (all other subsidiaries), (iv) an elimination column for adjustments to arrive at the information for the parent company, Guarantors, and nonguarantors on a consolidated basis, and (v) the parent company and our subsidiaries on a consolidated basis.
Investments in subsidiaries are accounted for by the parent company and the Guarantors using the equity method for this presentation. Results of operations of subsidiaries are therefore classified in the parent company's and Guarantors’ investment in subsidiaries accounts. The elimination entries set forth in the following condensed consolidating financial statements eliminate distributed and undistributed income of subsidiaries, investments in subsidiaries, and intercompany balances and transactions between the parent, Guarantors, and nonguarantors.
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Condensed Consolidating Statement of Income
Three months ended September 30, 2010
Intercompany
Interest and dividends on available-for-sale investment securities – intercompany
Interest on intercompany debt
Net financing (loss) revenue
Dividends from subsidiary
Bank subsidiary
Nonbank subsidiaries
Loss on extinguishment of debt
(Loss) income from continuing operations before income tax (benefit) expense and undistributed income of subsidiaries
Net (loss) income from continuing operations
Undistributed income of subsidiaries
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Three months ended September 30, 2009
Interest and dividends on available-for-sale investmentsecurities – intercompany
Interest in intercompany debt
Dividends from subsidiaries
(Loss) gain on mortgage and automotive loans, net
Gain on extinguishment of debt
(Loss) income from continuing operations before income tax (benefit) expense and undistributed (loss) income of subsidiaries
Undistributed (loss) income of subsidiaries
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Nine months ended September 30, 2010
Income from discontinued operations, net of tax
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Nine months ended September 30, 2009
Gain (loss) on extinguishment of debt
Loss from continuing operations before income tax expense (benefit) and undistributed (loss) income of subsidiaries
Net loss from continuing operations
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Condensed Consolidating Balance Sheet
Interest-bearing – intercompany
Finance receivables and loans, net of unearned income
Intercompany loans to
Intercompany receivables from
Investment in subsidiaries
Intercompany debt to
Intercompany payables to
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Condensed Consolidating Statement of Cash Flows
Net decrease (increase) in investment securities – intercompany
Net decrease in loans – intercompany
Net (increase) decrease in operating lease assets
Purchases of mortgage servicing rights, net
Capital contributions to subsidiaries
Returns of contributed capital
Sale of business unit, net
Net change in short-term debt – third party
Proceeds from issuance of long-term debt – third party
Repayments of long-term debt – third party
Net change in debt – intercompany
Dividends paid – third party
Dividends paid and returns of contributed capital – intercompany
Capital contributions from parent
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Adjustment for change in cash and cash equivalents of operations held-for-sale
Cash and cash equivalents at September 30
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Net decrease (increase) in loans – intercompany
Proceeds from issuance of common members' interests
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents reclassified to assets held-for-sale
Temporary Suspension of Mortgage Foreclosure Sales and Evictions
On September 17, 2010, GMAC Mortgage, LLC (GMACM), an indirect wholly owned subsidiary of Ally Financial Inc., temporarily suspended mortgage foreclosure home sales and evictions and postponed hearings on motions for judgment in certain states. This decision was made after a procedural issue was detected in the execution of certain affidavits used in connection with judicial foreclosures in some but not all states. The issue relates to whether persons signing the affidavits had
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appropriately verified the information in them and whether they were signed in the immediate physical presence of a notary. In response to this and to enhance existing processes, GMACM has recently implemented supplemental procedures that are used in all new foreclosure cases to seek to ensure that affidavits are prepared in compliance with applicable law. GMACM is also reviewing all foreclosure files in all states prior to going to foreclosure sale. After each foreclosure case is reviewed and it is determined that moving forward is appropriate, GMACM will proceed with the foreclosure process to completion using existing or substitute affidavits where applicable or required.
Our review related to this matter is ongoing, and we cannot predict the ultimate impact of any deficiencies that have been or may be identified in our historical foreclosure processes. However, thus far we have not found any evidence of unwarranted foreclosures. There are potential risks related to these matters, which may extend beyond potential liability on individual foreclosure actions. Specific risks could include, for example, claims and litigation related to foreclosure file remediation and resubmission; claims from investors that hold securities that become adversely impacted by continued delays in the foreclosure process; actions by courts, state attorneys general or regulators to delay further the foreclosure process after submission of corrected affidavits; regulatory fines and sanctions; and reputational risks. While there are risks and uncertainties as a result of these matters, based on information currently available we do not believe that there is a probable and estimable unasserted claim or loss contingency that should be recorded as of September 30, 2010. Based on all available information, an estimate of future possible loss or range of loss cannot be made at this time.
Loan Repurchases and Obligations Related to Loan Sales
Our Mortgage operations sell loans through agency sales to the GSEs, private label securitizations, and whole-loan purchasers. In connection with these activities we provide to the GSEs, investors, whole-loan purchasers, and financial guarantors (monolines) various representations and warranties related to the loans sold. These representations and warranties generally relate to, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with the criteria for inclusion in the transaction, including compliance with underwriting standards or loan criteria established by the buyer, ability to deliver required documentation and compliance with applicable laws. Generally, the representations and warranties described above may be enforced at any time over the life of the loan. ResCap assumes all of the customary representation and warranty obligations for loans purchased from Ally Bank and subsequently sold into the secondary market. In the event ResCap fails to meet these obligations, Ally Financial Inc. has provided a guarantee to Ally Bank that covers it from liability.
Upon a breach of a representation, we correct the breach in a manner conforming to the provisions of the sale agreement. This may require us either to repurchase the loan or to indemnify (make-whole) a party for incurred losses or provide other recourse to a GSE or investor. Repurchase demands and claims for indemnification payments are reviewed on a loan-by-loan basis to validate if there has been a breach requiring repurchase or a make-whole payment. We actively contest claims to the extent we do not consider them valid. In cases where we repurchase loans, we bear the subsequent credit loss on the loans. Repurchased loans are classified as held-for-sale and initially recorded at fair value. We seek to manage the risk of repurchase and associated credit exposure through our underwriting and quality assurance practices and by servicing mortgage loans to meet investor standards.
The reserve for representation and warranty obligations reflects management’s best estimate of probable lifetime loss. We consider historic and recent demand trends in establishing the reserve. The methodology used to estimate the reserve considers a variety of assumptions including borrower performance (both actual and estimated future defaults), repurchase demand behavior, historic loan defect experience, historic and estimated future loss experience, which includes projections of future home price changes as well as other qualitative factors including investor behavior. In cases where we do not have current or historical demand experience with an investor, because of the inherent difficulty in predicting the level and timing of future demands, if any, losses cannot be reasonably estimated and a liability is not recognized. Management monitors the adequacy of the overall reserve and makes adjustments to the level of reserve, as necessary, after consideration of other qualitative factors including ongoing dialogue with counterparties.
At the time a loan is sold, an estimate of the liability is recorded and classified in accrued expenses and other liabilities on our Condensed Consolidated Balance Sheet, and recorded as a component of gain (loss) on mortgage and automotive loans, net, in our Condensed Consolidated Statement of Income. We recognize changes in the reserve throughout the life of the loans, as necessary, when additional relevant information becomes available. Changes in the liability are recorded as other operating expenses in our Condensed Consolidated Statement of Income.
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The following tables summarize the changes in our reserve for representation and warranty obligations.
Balance at July 1,
Provision for mortgage representation and warranty expenses
Loan sales
Change in estimate – continuing operations
Change in estimate – discontinued operations
Total additions
Realized losses (a)
Balance at September 30,
Balance at January 1,
In March 2010, our subsidiaries, GMACM and Residential Funding Company, LLC, entered into an agreement with Freddie Mac under which we made a one-time payment to Freddie Mac for the release of repurchase obligations relating to mortgage loans sold to Freddie Mac prior to January 1, 2009. The release does not affect any of our potential repurchase obligations related to mortgage loans sold to Freddie Mac after January 1, 2009. Amounts paid by us in connection with the agreement were consistent with previously established related reserves. This agreement does not release any of our obligations with respect to loans where our subsidiary, Ally Bank, is the owner of the servicing.
Declaration of Quarterly Dividend Payments
On October 1, 2010, the Ally Board of Directors declared quarterly dividend payments on certain outstanding preferred stock. This included a cash dividend of $1.125 per share, or a total of $257 million, on Fixed Rate Cumulative Mandatorily Convertible Preferred Stock, Series F-2, and a cash dividend of approximately $17.31 per share, or a total of approximately $45 million, on Fixed Rate Cumulative Perpetual Preferred Stock, Series G. The dividends are payable on November 15, 2010.
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Selected Financial Data
The selected historical financial information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations, our Condensed Consolidated Financial Statements, and the Notes to Condensed Consolidated Financial Statements. The historical financial information presented may not be indicative of our future performance.
Financial statement data
Income tax expense (benefit) from continuing operations (a)
Financial ratios (b)
Return on assets
Return on equity
Equity to assets ratio
Regulatory capital ratios
Tier 1 capital
Total risk-based capital
Tier 1 leverage
Tier 1 common
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Overview
Ally is one of the world’s largest automotive financial services companies with approximately $173.2 billion of assets at September 30, 2010. Founded in 1919 as a wholly owned subsidiary of General Motors Corporation (currently General Motors Company or GM), Ally is the official preferred source of financing for GM, Chrysler, Saab, Suzuki, Fiat, and Thor Industries vehicles and offers a full suite of automotive financing products and services in key markets around the world. Our other business units include mortgage operations and commercial finance, and our subsidiary, Ally Bank, which offers online retail banking products. Ally also operates as a bank holding company. On December 24, 2008, we became a bank holding company under the Bank Holding Company Act of 1956, as amended.
During 2009, we committed to sell certain operations of our International Automotive Finance operations, Insurance operations, Mortgage operations, and Commercial Finance Group, and classified certain of these operations as discontinued. During 2010, the operations of our International Automotive Finance operations in Australia and Russia and our U.K. mortgage operations were classified as discontinued. For all periods presented, all of the operating results for these operations were removed from continuing operations. Refer to Note 2 to the Condensed Consolidated Financial Statements for additional information regarding our discontinued operations.
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Primary Lines of Business
Global Automotive Services and Mortgage operations are our primary lines of business. The following table summarizes the operating results excluding discontinued operations of each line of business for the three months and nine months ended September 30, 2010 and 2009. Operating results for each of the lines of business are more fully described in the MD&A sections that follow.
Global Automotive Services
North American Automotive Finance operations
International Automotive Finance operations
Insurance operations
Corporate and Other
Our Global Automotive Services offer a wide range of financial services and products to retail automotive consumers, automotive dealerships, and other commercial businesses. Our Global Automotive Services consist of three separate reportable segments — North American Automotive Finance operations, International Automotive Finance operations, and Insurance operations. Our North American Automotive Finance operations include the automotive activities of Ally Bank and ResMor Trust. The products and services offered by our automotive finance services include the purchase of retail installment sales contracts and leases, offering of term loans to dealers, financing of dealer floorplans and other lines of credit to dealers, fleet leasing, and vehicle remarketing services. In addition, our automotive finance services utilize bank deposit funding at Ally Bank, asset securitizations, whole-loan sales through our forward flow agreements, and debt issuances, to the extent available, as components of our diversified funding strategy.
We also offer vehicle service contracts and selected commercial insurance coverages in the United States and internationally. We are a leading provider of vehicle service contracts with mechanical breakdown and maintenance
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coverages. Our vehicle service contracts offer vehicle owners and lessees mechanical repair protection and roadside assistance for new and used vehicles beyond the manufacturer’s new vehicle warranty. Additionally, we provide commercial insurance primarily covering dealers’ wholesale vehicle inventory.
We have significantly streamlined our international presence to focus on strategic operations. Our International Automotive Finance operations will focus the majority of originations in five core international markets: Germany, the United Kingdom, Brazil, Mexico, and China through our joint venture.
On September 30, 2010, we announced that we were selected to be the preferred financing provider for Fiat vehicles in the United States. We will offer retail financing, leasing, wholesale financing, working capital and facility loans, and remarketing services to the new Fiat dealer network. In October 2010, Chrysler LLC began announcing dealers that secured a Fiat franchise in the United States.
On August 6, 2010, we entered into an agreement with Chrysler LLC (Chrysler) to provide automotive financing products and services to Chrysler dealers and customers. The agreement replaced and superseded the legally binding term sheet that we entered into with Chrysler on April 30, 2009, which contemplated this definitive agreement. We are Chrysler’s preferred provider of new wholesale financing for dealer inventory in the United States, Canada, Mexico, and other international markets upon the mutual agreement of the parties. We provide dealer financing and services and retail financing to Chrysler dealers and customers as we deem appropriate according to our credit policies and in our sole discretion. Chrysler is obligated to provide us with certain exclusivity privileges including the use of Ally for designated minimum threshold percentages of certain of Chrysler’s retail financing subvention programs. The agreement extends through April 30, 2013, with automatic one-year renewals unless either we or Chrysler provides sufficient notice of nonrenewal. The agreement is filed as Exhibit 10.1 to this Form 10-Q.
On July 13, 2010, we announced our intention to rebrand the GMAC consumer and dealer-related automotive finance operations in the United States, Canada, and Mexico and begin using the Ally name during the month of August 2010. The Ally brand will be used for automotive financing activities to support the following manufacturers: General Motors, Chrysler, Saab, Thor Industries, and Fiat United States and Mexico. Our automotive finance operations outside of these three countries will continue to operate under the GMAC brand as options for further use of the Ally brand are evaluated.
On April 5, 2010, we announced that we expanded our automotive finance operations to include recreation vehicles and were selected by Thor Industries as the preferred financial provider for their retail customers. During June 2010, we began accepting retail finance applications for new and used recreation vehicles from Thor dealers in certain high volume states. We expect to expand retail financing nationwide to all qualified dealers in Thor’s U.S. network by the end of 2010.
On March 15, 2010, we announced that Spyker Cars N.V., which recently purchased Saab Automobile from General Motors, selected Ally as the preferred source of wholesale and retail financing for qualified Saab dealers and customers in North America and internationally.
Our Mortgage operations engage in the origination, purchase, servicing, sale, and securitization of consumer (i.e., residential) mortgage loans and mortgage-related products. Mortgage operations include the Residential Capital, LLC (ResCap) legal entity, the mortgage operations of Ally Bank, and the Canadian mortgage operations of ResMor Trust. In response to market conditions, our Mortgage operations substantially eliminated production of loans that do not conform to the underwriting guidelines of the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the Government National Mortgage Association (Ginnie Mae) (collectively, the Government Sponsored Enterprises (GSEs)) in the United States.
Corporate and Other consist of our Commercial Finance Group, certain equity investments, other corporate activities, the residual impacts of our corporate funds transfer pricing (FTP) and treasury asset liability management (ALM) activities, and reclassifications and eliminations between the reportable operating segments.
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Consolidated Results of Operations
The following table summarizes our consolidated operating results excluding discontinued operations for the periods shown.
Net servicing income
We earned net income from continuing operations of $278 million for the three months ended September 30, 2010, compared to a net loss of $569 million for the three months ended September 30, 2009, and net income of $836 million for the nine months ended September 30, 2010, compared to a net loss of $3.8 billion for the nine months ended September 30, 2009. Continuing operations for the three months and nine months ended September 30, 2010, were favorably impacted by the stabilization of our consumer and commercial portfolios, which resulted in significant decreases in our provision for loan losses and our continued focus on cost reduction resulted in lower operating expenses. The nine months ended September 30, 2010, were also favorably impacted by an increase in net servicing income and the absence of impairments on equity investments, lot option projects, model homes, and foreclosed real estate. Lastly, income tax expense decreased for the nine months ended September 30, 2010, relative to the prior year as a result of the initial tax expense adjustment associated with the recording of deferred tax liabilities related to our conversion from a limited liability company to a corporation in 2009.
Total financing revenue and other interest income decreased by 14% and 13% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. Our International Automotive Finance operations experienced lower consumer and commercial asset levels due to lower dealer inventory levels and the runoff of wind-down portfolios. Declines in asset levels at our Mortgage operations resulted from asset sales and portfolio runoff. Operating lease revenue (along with the related depreciation expense) at our Global Automotive Services decreased as a result of a net decline in the size of our operating lease portfolio due to our decision in late 2008 to significantly curtail leasing. The decreases were partially offset by lease portfolio remarketing gains due to strong used vehicle prices and increases in consumer and commercial financing revenue related to the addition of non-GM automotive financing business.
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Interest expense decreased $15 million and $582 million in the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. Interest expense decreased as a result of a change in our funding mix with an increased amount of funding coming from deposit liabilities and lower asset levels.
Net servicing income was $377 million and $992 million for the three months and nine months ended September 30, 2010, respectively, compared to $269 million and $489 million for the same periods in 2009. The increase for the three months and nine months ended was primarily due to movement of the hedges mitigating the decline in the mortgage servicing asset.
Insurance premiums and service revenue earned decreased 8% and 6% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily driven by lower earnings from our U.S. extended service contracts due to a decrease in domestic written premiums related to lower vehicle sales volume during the period 2007 to 2009. The decrease for the nine months ended September 30, 2010, was partially offset by increased volume in our international operations.
Gain on mortgage and automotive loans increased 84% and 30% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The increases during both periods were related to unfavorable valuation adjustments taken during 2009 on our held-for-sale automotive loan portfolios, gains on mortgage whole-loan sales in 2010, compared to no whole-loan sales in 2009, higher gains on mortgage loan resolutions in 2010, and gains due to higher commitment volume. Additionally, the nine months ended September 30, 2010, were favorably impacted by higher levels of retail automotive whole-loan sales. These increases were partially offset by higher gains on the sale of wholesale automotive financing receivables during 2009 compared to no gains in 2010 as there were no off-balance sheet wholesale funding transactions.
We incurred a loss on extinguishment of debt of $2 million and $123 million for the three months and nine months ended September 30, 2010, respectively, compared to gains of $10 million and $667 million for the three months and nine months ended September 30, 2009, respectively. The activity in all periods related to the extinguishment of certain Ally debt, which for the nine months ended September 30, 2010, included $101 million of accelerated amortization of original issue discount.
Other gain on investments was $104 million and $339 million for the three months and nine months ended September 30, 2010, respectively, compared to $216 million and $299 million for the three months and nine months ended September 30, 2009, respectively. The three months and nine months ended September 30, 2010, decreased due to the elimination of mark-to-market accounting on retained interests effective January 1, 2010, as those off-balance sheet assets have been brought on-balance sheet in 2010. The increase during the nine months ended September 30, 2010, was primarily related to higher realized investment gains driven by market repositioning and the sale of our tax-exempt securities portfolio. During the nine months ended September 30, 2009, we recognized other-than-temporary impairments of $47 million.
Other income, net of losses, decreased $48 million and increased $550 million for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decrease for the three months ended September 30, 2010, was primarily due to net derivative activity. Both periods in 2010 were favorably impacted by the absence of loan origination income deferral in 2010 due to the fair value option election for our held-for-sale loans during the fourth quarter of 2009. Additionally, the nine months ended September 30, 2010, increased due to significant impairments recognized in 2009. In 2009, we recorded impairments on equity investments, lot option projects, and model homes and an $87 million fair value impairment upon the transfer of our resort finance portfolio from held-for-sale to held-for-investment. Also in 2010, we recognized gains on the sale of foreclosed real estate compared to losses and impairments in 2009.
The provision for loan losses was $9 million and $375 million for the three months and nine months ended September 30, 2010, respectively, compared to $680 million and $2.5 billion for the same periods in 2009. The provision for both periods in 2010 was favorably impacted by the improved asset mix as a result of the strategic actions taken during the fourth quarter of 2009 to write-down and reclassify certain legacy mortgage loans from held-for-investment to held-for-sale. Additionally, the higher provision for loan losses in 2009 was impacted by significant specific reserve increases in the resort finance portfolio while 2010 benefited from the recognition of a $69 million recovery through provision upon the sale of this portfolio in September 2010.
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Insurance losses and loss adjustment expenses decreased 10% and 17% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily driven by lower loss experience within our Mortgage operation’s captive reinsurance portfolio.
Other operating expenses decreased 22% and 15% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009, reflecting our continued expense reduction efforts. The improvements were primarily due to lower mortgage representation and warranty expenses of $163 million and $427 million, reduced professional service expenses of $40 million and $126 million, lower full-service leasing vehicle maintenance costs of $21 million and $49 million, lower insurance commissions of $20 million and $37 million, and lower technology and communications expense of $15 million and $44 million for the three and nine months ended September 30, 2010, respectively. The favorable impacts during the nine months ended September 30, 2010, were partially offset by increased restructuring expenses of $52 million primarily related to a corporate-wide cost savings initiative.
We recognized consolidated income tax expense from continuing operations of $48 million and $117 million for the three months and nine months ended September 30, 2010, respectively, compared to an income tax benefit of $291 million and income tax expense of $681 million for the same periods in 2009. During 2010, income tax expense primarily included foreign taxes on our foreign subsidiary income as the tax on the current year earnings of our U.S. operations was offset fully by a corresponding valuation allowance reduction. During 2009, we recorded tax benefits on pretax losses for the three months ended September 30, 2009, and higher tax expense during the nine months ended September 30, 2009, related to the establishment of deferred tax liabilities related to our conversion from a limited liability company to a corporation effective June 30, 2009. Refer to Note 17 to the Condensed Consolidated Financial Statements for additional information regarding our change in tax status.
Results for Global Automotive Services are presented by reportable segment, which includes our North American Automotive Finance operations, our International Automotive Finance operations, and our Insurance operations.
Our Global Automotive Services operations offer a wide range of financial services and insurance products to retail automotive consumers, automotive dealerships, and other commercial businesses. Our automotive finance services include purchasing retail installment sales contracts and leases, offering term loans to dealers, financing dealer floorplans and other lines of credit to dealers, and vehicle remarketing services. We also are a leading provider of vehicle service contracts with mechanical breakdown and maintenance coverages, and we provide commercial insurance primarily covering dealers’ wholesale vehicle inventory.
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North American Automotive Finance Operations
Results of Operations
The following table summarizes the operating results of our North American Automotive Finance operations for the periods shown. The amounts presented are before the elimination of balances and transactions with our other reportable segments.
Interest and dividend income
Gain (loss) on automotive loans, net
Other income
Income before income tax expense (benefit)
Income tax expense (benefit)
Our North American Automotive Finance operations earned net income of $407 million and $1.3 billion for the three months and nine months ended September 30, 2010, respectively, compared to $299 million and $395 million for the three months and nine months ended September 30, 2009, respectively. Results for the three months and nine months ended September 30, 2010, were favorably impacted by increased loan origination volume related to improved economic conditions, the growth of our non-GM consumer and commercial automotive financing business, and favorable remarketing results, which reflected continued strength in the used vehicle market and higher remarketing volumes. Additionally, during the nine months ended September 30, 2010, income tax expense decreased primarily related to our conversion from a limited liability company to a corporation effective June 30, 2009.
Total financing revenue and other interest income decreased 17% and 15% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily related to a decline in operating lease revenue. Operating lease revenue (along with the related depreciation expense) decreased in both periods primarily due to a decline in the size of our operating lease portfolio resulting from our decision in late 2008 to significantly curtail leasing. This decision was based on credit market dislocation and the significant decline in used vehicle prices that resulted in increasing residual losses during 2008 and an impairment of our lease portfolio. During the latter half of 2009, we re-entered the leasing market with more targeted lease product offerings. As a result, runoff of the legacy portfolio exceeded
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new origination volume. The decreases in operating lease revenue were largely offset by associated declines in depreciation expense, which were also favorably impacted by remarketing gains as a result of continued strength in the used vehicle market and higher remarketing volume. Consumer financing revenue (combined with interest income on consumer loans held-for-sale) increased 17% and 13% during the three months and nine months ended September 30, 2010, respectively, due to an increase in consumer asset levels primarily related to the consolidation of consumer loans that were previously classified as off-balance sheet securitization transactions. Refer to Note 20 to the Condensed Consolidated Financial Statements for further information regarding the consolidation of these assets. Additionally, consumer loan origination volume increased during both periods as a result of improved economic conditions and increased volume from non-GM channels. The increases were partially offset by a change in the consumer asset mix related to the runoff of the higher yielding Nuvell nonprime automotive financing portfolio. Commercial revenue increased 26% and 30%, compared to the three months and nine months ended September 30, 2009, respectively, primarily due to increases in the commercial loan balance driven by the growth of non-GM wholesale floorplan business and the recognition of all wholesale funding transactions as on-balance sheet in 2010, compared to certain transactions that were off-balance sheet in 2009. Interest and dividend income decreased 54% and 38% for the three months and nine months ended September 30, 2010, respectively, primarily due to a change in funding mix including lower levels of off-balance sheet securitizations.
Net gain on automotive loans was $23 million and $202 million for the three and nine months ended September 30, 2010, respectively, compared to a net loss of $13 million and a net gain of $138 million for the same periods in 2009. The increases during both periods were related to unfavorable valuation adjustments taken during 2009 on the held-for-sale portfolio. Additionally, the nine months ended September 30, 2010, was favorably impacted by higher levels of retail whole-loan sales. These increases were partially offset by higher gains on the sale of wholesale receivables during 2009 as there were no off-balance sheet wholesale funding transactions during 2010.
Other income increased 79% and decreased 25% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The increase during the three-month period ended was primarily due to favorable swap mark-to-market activity related to the held-for-sale loan portfolio. The decrease during the nine-month period ended was primarily due to favorable foreign currency movements in 2009 and unfavorable swap mark-to-market activity related to the held-for-sale loan portfolio in 2010.
The provision for loan losses was $60 million and $267 million for the three months and nine months ended September 30, 2010, respectively, compared to $123 million and $272 million for the same periods in 2009. The decreases for the three months and nine month ended September 30, 2010, were primarily due to the continued runoff of our Nuvell portfolio and improved loss performance in the consumer loan portfolio reflecting improved pricing in the used vehicle market and higher credit quality of 2010 originations.
Noninterest expense decreased 29% and 17% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were due primarily to lower non-income tax expense, lower compensation and benefits expense due primarily to lower employee headcount resulting from restructuring activities, and unfavorable foreign currency movements during the three months and nine months ended September 30, 2009.
Our North American Automotive Finance operations incurred income tax expense of $161 million and $594 million for the three months and nine months ended September 30, 2010, respectively, compared to an income tax benefit of $27 million and income tax expense of $989 million for the three months and nine months ended September 30, 2009, respectively. The increase during the three months ended September 30, 2010, was primarily due to higher pretax income. Additionally, during the three months ended September 30, 2009, we recorded favorable adjustments related to our conversion to a corporation, which did not recur in 2010. The decrease in tax expense during the nine months ended September 30, 2010, was primarily related to the establishment of deferred tax liabilities related to our conversion from a limited liability company to a corporation effective June 30, 2009. Refer to Note 17 to the Condensed Consolidated Financial Statements for additional information regarding our change in tax status.
During 2007, the Company recorded a noncash charge of $89 million to establish an accounting valuation allowance against deferred tax assets of a Canadian subsidiary. The valuation allowance was recorded based on the subsidiary’s losses before income taxes in 2007 and prior. Since that time, earnings performance in our Canadian subsidiary has improved and, if current earnings performance continues to remain favorable, it is reasonably possible that we will reverse this valuation allowance.
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International Automotive Finance Operations
The following table summarizes the operating results of our International Automotive Finance operations excluding discontinued operations for the periods shown. The amounts presented are before the elimination of balances and transactions with our other reportable segments and include eliminations of balances and transactions among our North American Automotive Finance operations and Insurance operations.
Income from continuing operations before income tax expense
Income tax expense from continuing operations
Our International Automotive Finance operations earned net income from continuing operations of $65 million and $221 million during the three months and nine months ended September 30, 2010, respectively, compared to net income from continuing operations of $3 million and a net loss from continuing operations of $142 million during the three months and nine months ended September 30, 2009, respectively. Results for the three months and nine months ended September 30, 2010, were favorably impacted by lower provision for loan losses due to improved credit performance and the sale or liquidation of wind-down operations in certain countries. Additionally, the nine months ended September 30, 2010, were favorably impacted by lower income tax expense due to our conversion from a limited liability company to a corporation effective June 30, 2009.
Total financing revenue and other interest income decreased 21% for both the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to decreases in consumer and commercial asset levels as the result of lower dealer inventory levels and the runoff of wind-down portfolios.
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Interest expense decreased 21% and 29% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to reductions in borrowing levels consistent with a lower asset base.
Depreciation expense on operating lease assets decreased 53% and 46% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to the continued runoff of the full-service leasing portfolio.
Net gain on automotive loans was $5 million and $15 million for the three months and nine months ended September 30, 2010, respectively, compared to net losses of $20 million and $22 million for the three and nine months ended September 30, 2009, respectively. The losses for the three months and nine months ended September 30, 2009, were due primarily to lower-of-cost or market adjustments to reduce the value of certain loans held-for-sale in certain wind-down operations. The gains for the three months and nine months ended September 30, 2010, were primarily due to the partial release of lower-of-cost or market adjustments on loans held-for-sale in wind-down operations.
Other income decreased 27% and 9% for the three months and nine months ended September 30, 2010, compared to the same periods in 2009. The decrease for the three months ended September 30, 2010, was primarily related to unfavorable mark-to-market adjustments on derivatives and a reduction in full-service leasing fees resulting from the wind-down of the related operations.
The provision for loan losses decreased $37 million and $112 million for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to improved delinquency and charge-off trends in the consumer portfolio and reduced asset levels due to the wind-down of operations in nonstrategic countries.
Noninterest expense decreased 14% and 11% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases in both periods were primarily due to lower compensation and benefits expense driven by employee headcount reductions and decreases in full-service leasing expenses.
Income tax expense from continuing operations decreased $19 million and $166 million for the three months and nine months ended September 30, 2010, compared to the same periods in 2009. The decrease for the nine months ended September 30, 2010, was primarily due to a favorable adjustment for U.S. tax liabilities on unremitted foreign income, compared to the same period in 2009, which included an unfavorable adjustment related to the impact of our conversion from a limited liability company to a corporation as of June 30, 2009.
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Automotive Financing Volume
The following table summarizes our new and used vehicle consumer financing volume and our share of consumer sales.
GM new vehicles
North America
Retail contracts
Leases
Total North America
International (retail contracts and leases) (a) (b)
Total GM new units financed
Used units financed
Non-GM new units financed
Chrysler new units financed
Other non-GM units financed (c)
Total non-GM new units financed
Total consumer automotive financing volume
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Our consumer automotive financing volume and penetration levels are influenced by the nature, timing, and extent of manufacturers’ use of rate, residual, and other financing incentives for marketing purposes on consumer retail automotive contracts and leases. Financing volume was higher in 2010 reflecting improved general economic conditions compared to historically low industry sales and leases in 2009, and the addition of the Chrysler retail activity. GM penetration levels were higher in 2010 due to tighter underwriting standards in 2009 as we aligned our originations to levels consistent with reduced funding sources as a result of the disruption in the capital markets.
Retail contracts acquired that included rate and residual subvention from GM decreased as a percentage of total new retail contracts acquired due to reductions in our standard rates to be more competitive with market pricing, coupled with a reduction in incentivized programs offered by GM.
The following tables summarize the average balances of our commercial wholesale floorplan finance receivables of new and used vehicles and share of dealer inventory in markets where we operate.
North America (a)
International (b) (c) (d)
Total GM vehicles financed
Used vehicles financed
Non-GM vehicles financed
Chrysler new vehicles financed (a)
Other non-GM vehicles financed
Total non-GM vehicles financed
Total commercial wholesale finance receivables
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Chrysler new vehicles financed
Our commercial wholesale finance receivable products continue to be the primary funding sources for GM and Chrysler dealers. Average total commercial wholesale finance receivables increased to $30.1 billion and $29.0 billion during the three months and nine months ended September 30, 2010, respectively, from $23.2 billion and $27.3 billion during the three months and nine months ended September 30, 2009, respectively. The increase was driven primarily by increasing vehicle sales and the addition of Chrysler wholesale financing.
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Insurance Operations
The following table summarizes the operating results of our Insurance operations excluding discontinued operations for the periods shown. The amounts presented are before the elimination of balances and transactions with our other operating segments.
Insurance premiums and other income
Investment income
Total insurance premiums and other income
Acquisition and underwriting expense
Total expense
Net income from continuing operations
Insurance premiums and service revenue written
Combined ratio (a)
Our Insurance operations earned net income from continuing operations of $97 million and $305 million for the three months and nine months ended September 30, 2010, respectively, compared to $50 million and $151 million for the three months and nine months ended September 30, 2009, respectively. The increase in the three-month period net income was primarily attributable to unfavorable tax expense in 2009 that did not recur. During the nine-month period, net income increased primarily due to higher realized investment gains driven by overall market improvement.
Insurance premiums and service revenue earned was $462 million and $1.4 billion for the three months and nine months ended September 30, 2010, respectively, compared to $500 million and $1.5 billion for the same periods in 2009. Insurance premiums and service revenue earned decreased primarily due to lower earnings from our U.S. extended service contracts due to a decrease in domestic written premiums related to lower vehicle sales volume during the period 2007 to 2009. The decrease for the nine months ended September 30, 2010, was partially offset by increased volume in our international operations.
Investment income totaled $89 million and $316 million for the three months and nine months ended September 30, 2010, respectively, compared to $87 million and $180 million for the same periods in 2009. The increase during the nine months ended September 30, 2010, was primarily due to higher realized investment gains driven by market repositioning and the sale of our tax-exempt securities portfolio. During the nine months ended September 30, 2009, we realized other-than-temporary impairments of $45 million. The increase in investment income was also slightly offset by reductions in the size of the investment portfolio. The fair value of the investment portfolio was $4.7 billion and $5.2 billion at September 30, 2010 and 2009, respectively.
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Acquisition and underwriting expense decreased 16% and 10% for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. The decreases were primarily due to lower expenses in our U.S. dealership-related products matching our decrease in earned premiums. The decrease for the nine months ended was partially offset by increased expenses within our international operations to match the increase in earned premiums.
Income tax expense from continuing operations was $17 million and $100 million for the three months and nine months ended September 30, 2010, respectively, compared to $59 million and $93 million for the same periods in 2009. Income tax expense decreased for the three months ended September 30, 2010, due to unfavorable tax expense in 2009 related to the impact of our conversion from a limited liability company to a corporation. During the nine months ended September 30, 2010, income tax expense increased due to higher income from continuing operations before income taxes, partially offset by unfavorable tax expense in 2009 related to our conversion to a corporation effective June 30, 2009.
Insurance premiums and service revenue written was $404 million and $1.2 billion for the three months and nine months ended September 30, 2010, respectively, compared to $391 million and $1.1 billion for the same periods in 2009. Insurance premiums and service revenue written increased due to higher written premiums in our U.S. dealership-related products, particularly our vehicle service contract products. Vehicle service contract revenue is earned over the life of the service contract on a basis proportionate to the expected loss pattern. As such, the majority of earnings from vehicle service contracts written during the three months and nine months ended September 30, 2010, will be recognized as income in future periods.
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Mortgage Operations
The following table summarizes the operating results for our Mortgage operations excluding discontinued operations for the periods shown. Our Mortgage operations include the ResCap LLC legal entity, the mortgage operations of Ally Bank, and the Canadian mortgage operations of ResMor Trust. The amounts presented are before the elimination of balances and transactions with our other reportable segments.
Gain on mortgage loans, net
Our Mortgage operations earned net income from continuing operations of $149 million and $529 million for the three months and nine months ended September 30, 2010, respectively, compared to net losses from continuing operations of $501 million and $2.5 billion for the three months and nine months ended September 30, 2009, respectively. The 2010 results from continuing operations were primarily driven by strong production and margins, consistent servicing fees, favorable servicing asset valuation, net of hedge, and gains on the sale of domestic legacy assets.
Net financing revenue was $147 million and $483 million for the three months and nine months ended September 30, 2010, respectively, compared to $152 million and $421 million for the same periods in 2009. During the nine months ended September, 30, 2010, net financing revenue was favorably impacted by lower interest expense driven primarily by a reduction in average borrowings commensurate with a smaller asset base and lower cost of funds. Additionally, lower financing revenue and other interest income was due primarily to a decline in average asset levels.
Net servicing income was $316 million and $814 million for the three months and nine months ended September 30, 2010, respectively, compared to $213 million and $308 million for the same periods in 2009. The increase for the three months and nine months ended was primarily due to movement of the hedges mitigating the decline in the mortgage servicing asset.
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The net gain on mortgage loans was $298 million and $646 million for the three months and nine months ended September 30, 2010, respectively, compared to $210 million and $557 million for the same periods in 2009. The increases were primarily due to gains on whole-loan sales in 2010 compared to no whole-loan sales in 2009, higher gains on loan resolutions in 2010, and higher commitment volume.
Other income, net of losses, was $44 million and $98 million for the three months and nine months ended September 30, 2010, respectively, compared to $5 million and a loss of $469 million for the same periods in 2009. The increases in other income for both periods were related to the absence of loan origination income deferral in 2010 due to the fair value option election for our held-for-sale loans during the third quarter of 2009. During the nine months ended September 30, 2009, we recognized significant impairments on equity investments, lot option projects, and model homes. Additionally, the increase for the nine months ended September 30, 2010, was due to the recognition of gains on the sale of foreclosed real estate in 2010 compared to losses and impairments in 2009.
The provision for loan losses was $22 million and $121 million for the three months and nine months ended September 30, 2010, respectively, compared to $330 million and $1.8 billion for the same periods in 2009. The provision for both periods in 2010 was favorably impacted by the improved asset mix resulting from the strategic actions taken during the fourth quarter of 2009 related to certain legacy mortgage loans. The provision for loan losses for both the three months and nine months ended September 30, 2009, were driven by significant increases in delinquencies and severity in our domestic mortgage loan portfolio. Additionally, during the nine months ended September 30, 2009, higher reserves were recognized against our real estate-lending portfolio.
Total noninterest expense decreased 30% for both the three months ended September 30, 2010, and the nine months ended September 30, 2010, compared to the same periods in 2009. Although we recorded $344 million of representation and warranty expense during the three months ended September 30, 2010, which increased the associated reserve to $1.1 billion, our representation and warranty expense decreased for both the three months and nine months ended September 30, 2010 as compared to the same periods in 2009. Both periods also reflect decreases in compensation and benefits expense related to lower headcount, and decreases in professional services expense related to cost reduction efforts. During 2009, our captive reinsurance portfolio experienced deterioration due to higher delinquencies, which drove higher insurance reserves. The decrease was partially offset during the nine months ended September 30, 2010, by unfavorable foreign currency movements on hedge positions.
We recognized income tax expense from continuing operations of $5 million and $11 million for the three months and nine months ended September 30, 2010, respectively, compared to income tax benefits of $151 million and $421 million for the same periods in 2009. The increases in income tax expense for both periods were primarily the result of the reduction in the tax benefit related to losses realized by our domestic C-corporation entities, Ally Bank and CapRe of Vermont, in 2009. Additionally, during the nine months ended September 30, 2009, tax benefits were recognized due to our conversion from a tax partnership to a corporation effective June 30, 2009.
The Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, announced on July 12, 2010, that it issued 64 subpoenas to various entities seeking documents related to private-label mortgage-backed securities in which Fannie Mae and Freddie Mac had invested. Certain of our mortgage subsidiaries received such subpoenas and are currently formulating a response. The FHFA has indicated that documents provided in response to the subpoenas will enable the FHFA to determine whether they believe issuers of PLS are potentially liable to Fannie Mae and Freddie Mac for losses they might have suffered. We believe it is premature to speculate as to what, if any, actions may be taken by the FHFA as a result of these requests.
During the three months ended September 30, 2010, a procedural issue was detected resulting in the temporary suspension of mortgage foreclosure home sales and evictions in certain states. Refer to Note 23 to the Condensed Consolidated Financial Statements for additional information related to this matter.
Our Mortgage operations sell loans through agency sales to the Federal National Mortgage Association (Fannie Mae), Federal Home Loan Mortgage Corporation (Freddie Mac) and Government National Mortgage Association (Ginnie Mae) (collectively the GSEs), private label securitizations and whole-loan purchasers. In connection with these activities we provide to the GSEs, investors, whole-loan purchasers, and financial guarantors (monolines) various representations and
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warranties related to the loans sold. These representations and warranties generally relate to, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with the criteria for inclusion in the transaction, including compliance with underwriting standards or loan criteria established by the buyer, ability to deliver required documentation and compliance with applicable laws. Generally, the representations and warranties described above may be enforced at any time over the life of the loan. ResCap assumes all of the customary representation and warranty obligations for loans purchased from Ally Bank and subsequently sold into the secondary market. In the event ResCap fails to meet these obligations, Ally Financial Inc. has provided a guarantee to Ally Bank that covers it from liability.
Refer to Note 23 to the Condensed Consolidated Financial Statements for additional information related to representation and warranties.
The following table summarizes the unpaid principal balance of mortgage loans repurchased under representation and warranty obligations.
GSEs
Monolines
Whole-loan investors
Total loan repurchases
The following table summarizes indemnification (make-whole) payments associated with representation and warranty obligations.
GSE’s
Total make-whole payments
The following table presents the unpaid principal balance of loans related to unresolved repurchase demands previously received. Claims and losses are primarily related to the 2006 through 2008 loan vintages.
Monolines (a)
Other investors
Total unpaid principal balance
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During the three months ended September 30, 2010, we experienced an increase in new claims in comparison with the prior quarter. Going forward we expect that claims activity will remain volatile. The following table presents quarterly total new claims by vintage (original unpaid principal balance).
September 30,
March 31,
June 30,
Pre 2004
2005
2006
2007
2008
Post 2008
Unspecified
Total claims
Mortgage Loan Production and Servicing
Mortgage loan production was $20.5 billion and $47.3 billion for the three months and nine months ended September 30, 2010, respectively, compared to $15.9 billion and $48.1 billion for the same periods in 2009. Mortgage operations domestic loan production increased $4.8 billion, or 31%, and decreased $794 million, or 2%, for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. Mortgage operations international loan production decreased $78 million, or 18%, and increased $34 million, or 4%, for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009. International mortgage loan production primarily represents insured mortgages in Canada. All other international loan production has been suspended.
The following table summarizes consumer mortgage loan production for the periods shown.
Production by product type
Total U.S. production
International production
Total production by product type
U.S. production by channel
Retail and direct channels
Correspondent channel
Total U.S. production by channel
Number of U.S. produced loans (in units)
Total number of U.S. produced loans
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The following table summarizes the primary mortgage loan servicing portfolio.
On-balance sheet mortgage loans
Held-for-sale and held-for-investment
Operations held-for-sale
Off-balance sheet mortgage loans
Loans sold to third-party investors
Securitizations
Whole-loan and agency
Purchased servicing rights
Total primary mortgage loan servicing portfolio (a)
Loans Outstanding
Mortgage loans held-for-sale were as follows.
Prime conforming
Prime nonconforming
Prime second-lien
Government
Nonprime
International
Total (a) (b)
Net discounts
Fair value option election adjustment
Lower of cost or fair value adjustment
Total, net (a)
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Held-for-investment consumer mortgage finance receivables and loans were as follows.
Net premiums
Total, net (a) (b)
ASU 2009-16, Accounting for Transfers of Financial Assets, and ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities, which amended Accounting Standards Codification (ASC) Topic 860, Transfers and Servicing, and ASC Topic 810, Consolidation, became effective on January 1, 2010, and required the prospective consolidation of certain securitization assets and liabilities that were previously held off-balance sheet. The adoption on day one resulted in $1.2 billion in off-balance sheet consumer mortgage loans being brought on-balance sheet. Refer to Note 1 to the Condensed Consolidated Financial Statements for further information regarding the adoption of ASU 2009-16 and ASU 2009-17.
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The following table summarizes the activities of Corporate and Other excluding discontinued operations for the periods shown. Corporate and Other represents our Commercial Finance Group, certain equity investments, other corporate activities, the residual impacts of our corporate funds transfer pricing (FTP) and treasury asset liability management (ALM) activities, and reclassifications and eliminations between the reportable operating segments.
Net financing loss
Other (expense) revenue
Total other revenue (expense)
Total net expense
Loss from continuing operations before income tax benefit
Income tax benefit from continuing operations
Net loss from continuing operations for Corporate and Other was $440 million and $1.5 billion for the three months and nine months ended September 30, 2010, respectively, compared to $420 million and $1.7 billion for the three months and nine months ended September 30, 2009, respectively. Corporate and Other’s net loss from continuing operations for all periods is primarily due to net financing losses, which primarily represent the net impact of our FTP methodology. The net impact of our FTP methodology includes the unallocated cost of maintaining our liquidity and investment portfolios and other unassigned funding costs and unassigned equity. The unfavorable results for both periods were driven by net derivative activity and higher compensation and benefits expenses related to the build out and centralization of global functions. Additionally, the nine months ended September 30, 2010, was impacted by a $123 million loss related to the extinguishment of certain Ally debt, which includes $101 million of accelerated amortization of original issue discount compared to a $663 million gain in the prior year. At the corporate level, the nine months ended September 30, 2010, were favorably impacted by our conversion from a limited liability company to a corporation as of June 30, 2009.
Corporate and Other also includes the results of our Commercial Finance Group. Our Commercial Finance Group earned net income from continuing operations of $75 million and $101 million for the three months and nine months ended September 30, 2010, respectively, compared to net losses from continuing operations of $128 million and $315 million for the three months and nine months ended September 30, 2009, respectively. The increases in net income for both periods were primarily due to significant provision for loan loss reserves on the resort finance portfolio in 2009. During the three months ended September 30, 2010, we sold the resort finance portfolio and realized a gain on sale through a $69 million recovery through provision. Additionally, the favorable variance for the nine months ended September 30, 2010, was impacted by the absence of an $87 million fair value impairment recognized upon transfer of the resort finance portfolio from held-for-sale to held-for-investment during 2009, a decrease in specific reserves on clients within our European operations, and lower interest expense related to a reduction in borrowing levels consistent with a lower asset base. Partially offsetting the increases in both periods was higher income tax expense related to higher pretax income.
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Risk Management
Managing the risk-to-reward trade off is a fundamental component of operating our business. Through our risk management process, we monitor potential risks and manage the risk to be within our risk appetite. The primary risks include credit, market, operational, liquidity, and legal and compliance risk. For more information on our risk management process, refer to the Risk Management MD&A section of our 2009 Annual Report on Form 10-K.
Loan and Lease Exposure
The following table summarizes the gross carrying value of our loan and lease exposures.
Held-for-investment loans
Held-for-sale loans
Total on-balance sheet loans
Off-balance sheet securitized loans
Operating lease assets, net
Serviced loans and leases
The risks inherent in our loan and lease exposures are largely driven by changes in the overall economy and its impact to our borrowers. The potential financial statement impact of these exposures varies depending on the accounting classification and future expected disposition strategy. We retain the majority of our automotive loans as they complement our core business model. We primarily originate mortgage loans with the intent to sell them and, as such, retain only a small percentage of the loans that we underwrite. Loans that we do not intend to retain are sold to investors, such as U.S. agencies and sponsored entities. However, we may retain an interest or right to service these loans. We ultimately manage the associated risks based on the underlying economics of the exposure.
Credit Risk Management
During 2010, the financial markets experienced some improvement; however, high unemployment and the distress in the housing market persisted, creating uncertainty for the financial services sector. Since the onset of this turbulent economic cycle, we saw both the housing and vehicle markets significantly decline affecting the credit quality for both our consumer and commercial segments. We have seen signs of continued stabilization in some housing and vehicle markets; however, we anticipate the uncertainty will continue through at least the remainder of 2010.
In response to the dynamic credit environment and other market conditions, we continued to follow a more conservative lending policy across our lines of business, generally focusing our lending to more creditworthy borrowers. For example, our mortgage operations eliminated production of new home equity loans. We also significantly limited production of loans that do not conform to the underwriting guidelines of the GSEs. In addition, effective January 2009, we ceased originating automotive financing volume through Nuvell, a legacy nonprime automotive financing operation.
Additionally, we have implemented numerous initiatives in an effort to mitigate loss and provide ongoing support to customers in financial distress. For example, as part of our participation in certain governmental programs, we may offer mortgage loan restructurings to our borrowers. Generally these modifications provide the borrower with some form of concession and, therefore, are deemed to be troubled debt restructurings (TDRs). Refer to Note 1 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K for additional information on TDRs. Furthermore, we have internally designed proprietary programs aimed at homeowners at risk of foreclosure. Each program has unique qualification criteria for the borrower to meet as well as associated modification options that we analyze to determine the best solution for the borrower. We have also implemented periodic foreclosure moratoriums that are designed to provide borrowers with extra time to sort out their financial difficulties while allowing them to stay in their homes.
We have policies and practices that are committed to maintaining an independent and ongoing assessment of credit risk and quality. Our policies require an objective and timely assessment of the overall quality of the consumer and commercial
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loan portfolios including identification of relevant trends that affect the collectability of the portfolios, isolation of segments of the portfolios that are potential problem areas, identification of loans with potential credit weaknesses, and assessment of the adequacy of internal credit risk policies and procedures to monitor compliance with relevant laws and regulations.
We manage credit risk based on the risk profile of the borrower, the source of repayment, the underlying collateral, and current market conditions. Our business is focused on automotive, residential real estate, commercial real estate, and commercial lending. We classify these loans as either consumer or commercial and analyze credit risk in each as described below. We monitor the credit risk profile of individual borrowers and the aggregate portfolio of borrowers — either within a designated geographic region or a particular product or industry segment. To mitigate risk concentrations, we take part in loan sales, syndications, and/or third-party insurance.
On-balance Sheet Portfolio
Our on-balance sheet portfolio includes both held-for-investment and held-for-sale finance receivables and loans. At September 30, 2010, this primarily included $81.0 billion of automotive finance receivables and loans and $28.5 billion of mortgage finance receivables and loans. Within our on-balance sheet portfolio, we have elected to account for certain loans at fair value. The valuation allowance recorded on fair value elected loans is separate from the allowance for loan losses. Changes in the fair value of loans are classified as gain on mortgage and automotive loans, net, in the Condensed Consolidated Statement of Income.
During the three months ended September 30, 2010, we further executed on our strategy of discontinuing and selling or liquidating nonstrategic operations in both our international mortgage and automotive markets. Refer to Note 2 to the Condensed Consolidated Financial Statements for additional information on specific actions taken during the quarter. Additionally, in September 2010, we completed the sale of our resort finance portfolio, primarily consisting of loans related to timeshare resorts throughout North America.
In 2009, we executed various changes and strategies throughout our lending operations that had a significant positive impact on our current period results and ultimately our year-over-year comparisons. Some of our strategies included focusing primarily on the prime lending market, participating in several loan modification programs, implementing tighter underwriting standards, and enhanced collection efforts. Additionally, we discontinued and sold multiple nonstrategic operations, mainly in our international segments. Within our automotive operations, we exited certain underperforming dealer relationships and added the majority of Chrysler dealers. We see the results of these efforts as our overall credit risk profile has improved; however, our total credit portfolio continues to be affected by sustained levels of high unemployment and continued housing weakness.
On January 1, 2010, we adopted ASU 2009-16 and ASU 2009-17, which resulted in approximately $18.3 billion of off-balance sheet loans being consolidated on-balance sheet. This included $7.2 billion of consumer automobile loans classified as held-for-investment and recorded at historical cost. We recorded an initial allowance for loan loss reserve of $222 million on those loans. The remaining loans consolidated on-balance sheet were mortgage products and included $9.9 billion classified as operations held-for-sale (refer to Note 2 to the Condensed Consolidated Financial Statements for additional information) and $1.2 billion classified as held-for-investment and recorded at fair value.
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The following table presents our total on-balance sheet consumer and commercial finance receivables and loans reported at gross carrying value.
Loans held-for-investment
Loans at historical cost
Loans at fair value
Total loans held-for-investment (d)
Total consumer loans
Total commercial loans
Total on-balance sheet loans outstanding at September 30, 2010, increased $13.7 billion to $112.0 billion from December 31, 2009, reflecting an increase of $10.1 billion in the consumer portfolio and $3.5 billion in the commercial portfolio. The increase in total on-balance sheet loans outstanding from December 31, 2009, was the result of the impact of adopting ASU 2009-16 and ASU 2009-17, increased automotive originations due to strengthened industry sales and improved automotive manufacturer penetration, and increased retention of originated automotive loans. The increase was partially offset by automotive whole-loan sales.
The total TDRs outstanding at September 30, 2010, increased $799 million to $1.8 billion from December 31, 2009. This increase was driven primarily by our continued foreclosure prevention and loss mitigation procedures. We have participated in a variety of government modification programs, such as HARP and HAMP, as well as internally developed modification programs.
Total nonperforming loans at September 30, 2010, decreased $905 million to $5.7 billion from December 31, 2009, reflecting a decrease of $1.1 billion of commercial nonperforming loans, offset somewhat by an increase of $193 million of consumer nonperforming loans. The decrease in total nonperforming loans from December 31, 2009, was largely due to sale of the resort finance portfolio and improved dealer performance. Partially offsetting the improvement in nonperforming loans was the impact of adopting ASU 2009-16 and ASU 2009-17, continued housing weakness, and seasoning of 1st mortgage loans remaining within our portfolio.
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The following table includes held-for-investment consumer and commercial net charge-offs for loans at historical cost and related ratios reported at gross carrying value.
Loans held-for-investment at historical cost (b)
Loans held-for-investment at historical cost
Total held-for-investment at historical cost
Our net charge-offs were $334 million and $959 million for the three months and nine months ended September 30, 2010, respectively, compared to $1.0 billion and $3.2 billion for the three months and nine months ended September 30, 2009, respectively. This decline was driven primarily by portfolio composition changes as a result of strategic actions during the fourth quarter of 2009 including the write-down and reclassification of certain legacy mortgage loans and improvement in 2010 in our Nuvell portfolio, partially offset by charge-offs taken on our resort finance portfolio recorded prior to its sale. Loans held-for-sale are accounted for at the lower of cost or fair value, and therefore we do not record charge-offs.
The Consumer Credit Portfolio and Commercial Credit Portfolio discussions that follow relate to consumer and commercial credit loans held-for-investment. Loans held-for-investment are recorded at historical cost and may have an associated allowance for loan losses. Held-for-investment loans measured at fair value and conditional repurchase option loans were excluded from these discussions since those exposures do not carry an allowance. Additionally, the reclassification of certain legacy mortgage loans in the fourth quarter of 2009 substantially changed the composition of our held-for-investment consumer mortgage loan portfolio when comparing the three months and nine months ended September 30, 2010, to the same periods in 2009.
Consumer Credit Portfolio
During the three months and nine months ended September 30, 2010, the credit performance of the consumer portfolio continued to improve overall as nonperforming loans and charge-offs declined. The slight decline in nonperforming loans was primarily driven by improvement in our Nuvell portfolio due to enhanced collection efforts and some seasonality. The year-over-year decline in net charge-offs was driven by the improved asset mix as the result of strategic actions that included the write-down and reclassification of certain legacy mortgage loans in the fourth quarter of 2009 as well as improvement in our Nuvell portfolio.
For information on our consumer credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.
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The following table includes held-for-investment consumer finance receivables and loans recorded at historical cost reported at gross carrying value.
1st lien
2nd lien
Total domestic
Total foreign
Total consumer finance receivables and loans
Total consumer outstanding finance receivables and loans increased $15.8 billion at September 30, 2010, compared with December 31, 2009. The increase in domestic automobile outstandings was driven by the consolidation of previously off-balance sheet loans due to the adoption of ASU 2009-16 and ASU 2009-17, increased originations due to strengthened industry sales and improved automotive manufacturer penetration (primarily Chrysler), and increased retention of automotive originated loans. The decrease in foreign automotive outstandings was driven by continued exit and liquidations in nonstrategic countries and overall contracting markets in Europe.
Total consumer nonperforming loans at September 30, 2010, decreased $9 million to $807 million from December 31, 2009, reflecting a decrease of $185 million of consumer automotive nonperforming loans and an increase of $176 million of consumer mortgage nonperforming loans. Nonperforming consumer automotive loans decreased primarily due to enhanced collection efforts, increased quality of newer vintages and a change to our Nuvell portfolio nonaccrual policy to be consistent with our other automotive nonaccrual policies. Nonperforming consumer mortgage loans increased due to seasoning of the 1st mortgage loans remaining in our portfolio subsequent to the strategic actions taken in late 2009. Nonperforming consumer finance receivables and loans as a percentage of total outstanding consumer finance receivables and loans were 1.4% and 2.0% at September 30, 2010, and December 31, 2009, respectively.
Consumer domestic automotive loans accruing and past due 30 days or more decreased $26 million to $808 million at September 30, 2010, compared with December 31, 2009, primarily due to a decrease in delinquencies in our Nuvell portfolio resulting from enhanced collection efforts and increased quality of newer vintages.
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The following table includes held-for-investment consumer net charge-offs and related ratios reported at gross carrying value.
Automobile (b)
Our net charge-offs from total consumer automobile loans decreased $209 million and $350 million for the three months and nine months ended September 30, 2010, compared to the same periods in 2009. The decrease in net charge-offs was primarily due to one-time charge-offs taken in the third quarter of 2009, as we aligned our internal policies to FFIEC guidelines. Also contributing to the decrease in net charge-offs were improvements in loss severity driven by improved pricing in the used vehicle market and in loss frequency and customer recoveries due to enhanced collection efforts.
Our net charge-offs from total consumer mortgage and home equity loans were $64 million and $167 million for the three months and nine months ended September 30, 2010, respectively, compared to $409 million and $1.7 billion for the same periods in 2009. The significant decreases were driven by portfolio composition changes as a result of strategic actions that included the write-down and reclassification of certain legacy mortgage loans from held-for-investment to held-for-sale during the fourth quarter of 2009.
The following table summarizes the total consumer loan originations at unpaid principal balance for the periods shown. Total consumer loan originations include loans classified as held-for-investment and held-for-sale during the period.
Total consumer loan originations
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Total domestic automobile-originated loans increased $1.7 billion and $7.4 billion for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009, primarily due to the improved automotive market as well as the addition of Chrysler automotive financing business. Domestic automotive originations continue to reflect tightened underwriting standards and most of these originations for 2010 were retained on-balance sheet as held-for-investment. Driven by improved Canadian automotive sales, total foreign automotive originations increased $712 million and $2.2 billion for the three months and nine months ended September 30, 2010, respectively, compared to the same periods in 2009.
Total domestic mortgage originated loans increased $4.8 billion for the three months ended September 30, 2010 and decreased $794 million for the nine months ended September 30, 2010. The increase for the three months ended September 30, 2010, was due in part to an increase in refinance volumes as a result of lower interest rates. The decrease for the nine months ended September 30, 2010, was due in part to overall industry declines and strategic changes in product offerings including the more conservative focus on the prime lending market.
Consumer loan originations retained on-balance sheet as held-for-investment were $9.9 billion and $24.5 billion for the three months and nine months ended September 30, 2010, respectively, and $3.0 billion and $6.6 billion for the three months and nine months ended September 30, 2009, respectively. The increases during both periods were primarily due to increased automotive loan origination driven by improved industry sales and increased balance sheet retention.
The following table shows held-for-investment consumer finance receivables and loans recorded at historical cost reported at gross carrying value by state and foreign concentration. Total automotive loans were $46.1 billion and $30.2 billion at September 30, 2010, and December 31, 2009, respectively. Total mortgage and home equity loans were $11.1 billion and $11.2 billion at September 30, 2010, and December 31, 2009, respectively.
California
Texas
Florida
Michigan
New York
Illinois
Pennsylvania
Georgia
Ohio
Virginia
Other United States
Canada
Germany
Brazil
Other foreign
We monitor our consumer loan portfolio for concentration risk across the geographies in which we lend. The highest concentrations of loans in the United States were in California and Texas, which represented an aggregate of 16.5% of our total outstanding consumer loans at September 30, 2010. Our domestic concentrations in the automotive portfolio increased due to the adoption of ASU 2009-16 and ASU 2009-17 and higher retained originations.
Concentrations in our mortgage operations are closely monitored given the volatility of the housing markets. Our consumer mortgage loan concentrations in California, Florida, and Michigan receive particular attention as the real estate value depreciation in these states has been the most severe.
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Our foreign automotive outstandings are heavily concentrated in Canada and Germany, representing 14.8% and 6.9%, respectively, of total consumer automotive loans outstanding at September 30, 2010.
Repossessed and Foreclosed Assets
We classify an asset as repossessed or foreclosed (included in other assets on the Condensed Consolidated Balance Sheet) when physical possession of the collateral is taken regardless of whether foreclosure proceedings has taken place. For more information on repossessed and foreclosed assets, refer to Note 1 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.
Repossessed assets in our automotive finance operations at September 30, 2010, increased $14 million to $64 million from December 31, 2009. Foreclosed mortgage assets at September 30, 2010, increased $20 million to $169 million from December 31, 2009.
Higher Risk Mortgage Loans
During the three months and nine months ended September 30, 2010, we primarily focused our origination efforts on prime conforming and government guaranteed mortgages in the United States and high-quality insured mortgages in Canada. In June 2010, we ceased offering interest-only jumbo mortgage loans given the continued volatility of the housing market and the delayed principal payment feature of that loan product. We continued to hold mortgage loans that have features that expose us to potentially higher credit risk including high original loan-to-value mortgage loans (prime or nonprime), payment-option adjustable-rate mortgage loans (prime nonconforming), interest-only mortgage loans (classified as prime conforming or nonconforming for domestic production and prime nonconforming or nonprime for international production), and teaser-rate mortgages (prime or nonprime).
In circumstances when a loan has features such that it falls into multiple categories, it is classified to a category only once based on the following hierarchy: (1) high original loan-to-value mortgage loans, (2) payment-option adjustable-rate mortgage loans, (3) interest-only mortgage loans, and (4) below market rate (teaser) mortgages. Given the continued stress within the housing market, we believe this hierarchy provides the most relevant risk assessment of our nontraditional products.
The following table summarizes the higher-risk mortgage loan originations unpaid principal balance for the periods shown. These higher-risk mortgage loans are classified as held-for-investment and are recorded at historical cost.
High original loan-to-value (greater than 100%) mortgage loans
Payment-option adjustable-rate mortgage loans
Interest-only mortgage loans (a) (b)
Below market rate (teaser) mortgages
Total higher-risk mortgage loan production
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The following table summarizes held-for-investment mortgage loans and portfolios recorded at historical cost and reported at gross carrying value by higher-risk loan type.
Interest-only mortgage loans
Total higher-risk mortgage loans
The allowance for loan losses was $274 million or 6.4% of total higher risk held-for-investment mortgage loans recorded at historical cost based on gross carrying value outstanding at September 30, 2010.
The following tables include our five largest state and foreign concentrations based on our higher risk held-for-investment loans recorded at historical cost and reported at gross carrying value.
Maryland
All other domestic and foreign
Commercial Credit Portfolio
During the three months and nine months ended September 30, 2010, the credit performance of the commercial portfolio improved as nonperforming loans and net charge-offs declined. The decline in nonperforming loans was primarily driven by the sale of the resort finance portfolio, some improvement in dealer performance, and continued mortgage asset dispositions. The decline in charge-offs in 2010 was primarily attributed to improved portfolio composition compared to 2009 due to the workout of certain commercial real estate assets and the strategic exit of underperforming automotive dealers.
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For information on our commercial credit risk practices and policies regarding delinquencies, nonperforming status, and charge-offs, refer to Note 1 to the Consolidated Financial Statements in our 2009 Annual Report on Form 10-K.
The following table includes total held-for-investment commercial finance receivables and loans reported at gross carrying value.
Total commercial finance receivables and loans
Total commercial finance receivables and loans outstanding increased $3.7 billion to $38.5 billion at September 30, 2010, from December 31, 2009. Domestic commercial and industrial outstandings increased due to the addition of the Chrysler automotive financing business and improved automotive industry sales with a corresponding increase in inventories partially offset by the sale of the resort finance portfolio. Foreign commercial and industrial outstandings decreased $14 million from December 31, 2009, as a result of dealer exits and continued portfolio runoff within exited countries. Domestic and foreign commercial real estate outstandings decreased $116 million from December 31, 2009, due to continued asset dispositions.
Total commercial nonperforming loans were $785 million, a decrease of $1.1 billion compared to December 31, 2009, primarily due to the sale of the resort finance portfolio, some improvement in dealer performance, and continued mortgage asset dispositions. Total nonperforming commercial finance receivables and loans as a percentage of outstanding commercial finance receivables and loans were 2.0% and 5.4% at September 30, 2010, and December 31, 2009, respectively.
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The following table includes total held-for-investment commercial net charge-offs and related ratios reported at gross carrying value.
Our net charge-offs from commercial loans totaled $130 million and $318 million for the three months and nine months ended September 30, 2010, respectively, compared to $276 million and $755 million for the same periods in 2009. The decreases in net charge-offs were largely driven by an improved mix of loans in the existing portfolio driven by the workout of certain commercial real estate assets.
Commercial Real Estate
The commercial real estate portfolio consists of loans issued primarily to developers, homebuilders, and commercial real estate firms. Commercial real estate finance receivables and loans outstanding decreased slightly to $2.4 billion at September 30, 2010, compared to $2.5 billion at December 31, 2009.
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The following table shows held-for-investment commercial real estate loans reported at gross carrying value by geographic region and property type.
Geographic region
Oregon
Alabama
United Kingdom
Total outstanding commercial real estate loans
Property type
Automobile dealerships
Land and land development
Apartments
Commercial Criticized Exposure
Exposures deemed criticized are loans classified as special mention, substandard, or doubtful. These classifications are based on regulatory definitions and generally represent loans within our portfolio that are of a higher default risk or have already defaulted. These loans require additional monitoring and review including specific actions to mitigate our potential economic loss.
The following table shows industry concentrations for held-for-investment commercial criticized loans reported at gross carrying value. Total criticized exposures were $3.6 billion and $4.9 billion at September 30, 2010, and December 31, 2009, respectively.
Industry
Banks and finance companies
Health/medical
Manufacturing
Real estate
Retail
Services
Electronics
All other (a)
Total commercial criticized loans
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Total criticized exposure decreased $1.3 billion to $3.6 billion from December 31, 2009, primarily due to the sale of the resort finance portfolio, improvement in dealer credit quality, and continued mortgage asset dispositions. The increase in our automotive criticized concentration rate was solely due to the significant decrease in the overall criticized amounts outstanding at September 30, 2010, compared to December 31, 2009.
Allowance for Loan Losses
The following tables present an analysis of the activity in the allowance for loan losses on finance receivables and loans.
Total charge-offs (a)
Provision for loan losses (b)
Balance at September 30, (c)
Allowance for loan losses to finance receivables and loans outstanding at September 30, (d)
Net charge-offs to average finance receivables and loans outstanding at September 30, (d)
Allowance for loan losses to total nonperforming finance receivables and loans at September 30, (d)
Ratio of allowance for loans losses to net charge-offs at September 30,
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Cumulative effect of change in accounting principles (a)
Total charge-offs (b)
Provision for loan losses (c)
Balance at September 30, (d)
Allowance for loan losses to finance receivables and loans outstanding at September 30, (e)
Net charge-offs to average finance receivables and loans outstanding at September 30, (e)
Allowance for loan losses to total nonperforming finance receivables and loans at September 30, (e)
The allowance for consumer loan losses at September 30, 2010, declined $432 million compared to September 30, 2009, reflecting the improved asset mix resulting from the strategic actions taken in late 2009 related to certain legacy mortgage loans. Partially offsetting this decline was an increase in the allowance for automotive loan losses due to increased loans outstanding.
The allowance for commercial loan losses declined $488 million at September 30, 2010, compared to September 30, 2009, primarily related to the sale of the resort finance portfolio, portfolio runoff in our liquidating commercial real estate portfolio, and improved portfolio credit quality due to improved dealer performance, strategic dealer exits, and the wind down of operations in several nonstrategic countries.
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Allowance for Loan Losses by Type
The following table summarizes the allocation of the allowance for loan losses by product type.
Total allowance for loan losses
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Provision for Loan Losses
The following table summarizes the provision for loan losses by product type.
Commercial and industrial (a)
Total provision for loans losses
Credit Derivatives
The following table summarizes our credit derivatives.
Credit derivatives
Purchased protection
Credit default swaps
Total return swaps
Total purchased protection
Written protection
Total written protection
Total credit derivatives
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We use credit derivatives to hedge credit risk and reduce risk concentrations on our balance sheet. We regularly monitor our counterparty credit risk on an absolute and net exposure basis. Overall, net credit risk decreased $2 million at September 30, 2010, compared to December 31, 2009, primarily due to changes in hedging activities in our international operations.
Market Risk
Our automotive financing, mortgage, and insurance activities give rise to market risk representing the potential loss in the fair value of assets or liabilities caused by movements in market variables, such as interest rates, foreign-exchange rates, equity prices, market perceptions of credit risk, and other market fluctuations that affect the value of securities and assets held-for-sale. We are primarily exposed to interest rate risk arising from changes in interest rates related to financing, investing, and cash management activities. More specifically, we enter into contracts to provide financing, to retain mortgage servicing rights, and to retain various assets related to securitization activities all of which are exposed in varying degrees to changes in value due to movements in interest rates. Interest rate risk arises from the mismatch between assets and the related liabilities used for funding. We enter into various financial instruments, including derivatives, to maintain the desired level of exposure to the risk of interest rate fluctuations. Refer to Note 16 to the Condensed Consolidated Financial Statements for further information.
We are exposed to foreign-currency risk arising from the possibility that fluctuations in foreign-exchange rates will affect future earnings or asset and liability values related to our global operations. Our most significant foreign-currency exposures relate to the Euro, the Canadian dollar, the British pound sterling, the Brazilian real, and the Mexican peso. We may enter into hedges to mitigate foreign exchange risk.
We are also exposed to equity price risk, primarily in our Insurance operations, which invests in equity securities that are subject to price risk influenced by capital market movements. We enter into macro equity hedges to mitigate our exposure to price fluctuations in the overall portfolio.
Although the diversity of our activities from our complementary lines of business may partially mitigate market risk, we also actively manage this risk. We maintain risk management control systems to monitor interest rates, foreign-currency exchange rates, equity price risks, and any of their related hedge positions. Positions are monitored using a variety of analytical techniques including market value, sensitivity analysis, and value at risk models.
Since December 31, 2009, there have been no material changes in these market risks. Refer to our Annual Report on Form 10-K for the year ended December 31, 2009, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for further discussion on value at risk and sensitivity analysis.
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Liquidity Management, Funding, and Regulatory Capital
Liquidity management involves forecasting funding requirements driven by asset growth and liability maturities. The goal of liquidity management is to ensure we maintain adequate funds to meet changes in loan and lease demand, debt maturities, unexpected deposit withdrawals, and other seen and unforeseen corporate needs. Our primary funding objective is to ensure we maintain access to stable and diverse liquidity sources throughout all market cycles including periods of financial distress. Sources of liquidity include both retail and brokered deposits and secured and unsecured market-based funding across maturities, interest rate characteristics, currencies, and investor profiles. Further liquidity is available through committed facilities as well as funding programs supported by the Federal Reserve and the Federal Home Loan Bank of Pittsburgh (FHLB).
Liquidity risk arises from the failure to recognize or address changes in market conditions affecting both asset and liability flows. Effective liquidity risk management is critical to the viability of financial institutions to ensure an institution has the ability to meet contractual and contingent financial obligations. The ability to manage liquidity needs and contingent funding exposures has been essential to the solvency of financial institutions.
ALCO, the Asset-Liability Committee, is responsible for monitoring Ally’s liquidity position, funding strategies and plans, contingency funding plans, and counterparty credit exposure arising from financial transactions. ALCO delegates the planning and execution of liquidity management strategies to Corporate Treasury. We manage liquidity risk at the business segment, legal entity, and consolidated levels. Each reporting segment, along with Ally Bank and ResMor Trust, prepares periodic forecasts depicting anticipated funding needs and sources of funds with oversight and monitoring by Corporate Treasury. Corporate Treasury manages liquidity under baseline projected economic scenarios as well as more severe economically stressed environments. Corporate Treasury, in turn, plans and executes our funding strategies.
In addition, we have established internal management committees to assist senior leadership in monitoring and managing our liquidity positions and funding plans. The Liquidity Risk Council is responsible for monitoring liquidity risk tolerance while maintaining adequate liquidity and analyzing liquidity risk measurement standards, liquidity position and investment alternatives, funding plans, forecasted liquidity needs and related risks and opportunities, liquidity buffers, stress testing, and contingency funding. The Structured Funding Risk Council measures and monitors all risks associated with achieving securitization plans, including market, reputational, and credit risks.
We maintain excess liquidity available in the form of cash, highly liquid, unencumbered securities and available credit facility capacity that, taken together, are intended to allow us to operate and to meet our contractual obligations in the event of market-wide disruptions and enterprise-specific events. We maintain excess liquidity at various entities, including Ally Bank and Ally Financial Inc., the parent company, and consider regulatory and tax restrictions that may limit our ability to transfer funds across entities.
Funding Strategy
Our liquidity and ongoing profitability are largely dependent on our timely access to funding and the costs associated with raising funds in different segments of the capital markets. We continue to be extremely focused on maintaining and enhancing our liquidity. Our funding strategy primarily focuses on the development of diversified funding sources across a global investor base to meet all our liquidity needs and to ensure an appropriate maturity profile. These funding sources include unsecured debt capital markets, asset-backed securitizations, whole-loan sales, domestic and international committed and uncommitted bank lines, brokered certificates of deposits, and retail deposits. We also supplement these sources with a modest amount of short-term borrowings, including Demand Notes, unsecured bank loans, and repurchase arrangements. Creating funding from a wide range of sources across geographic locations strengthens our liquidity position and limits dependence on any single source. We evaluate funding markets on an ongoing basis to achieve an appropriate balance of unsecured and secured funding sources and the maturity profiles of both. In addition, we further distinguish our funding strategy between bank funding and holding company or nonbank funding.
Today, all new bank-eligible assets in the United States are being directed to Ally Bank in order to reduce and minimize our nonbanking exposures and funding requirements. During 2009, we received an expanded exemption from the Federal Reserve allowing Ally Bank to originate a limited amount of GM-related retail and wholesale assets subject to certain
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conditions. Previously, we were more limited in the GM-related assets that could be originated in Ally Bank due to Section 23A of the Federal Reserve Act. The restrictions of Section 23A would cease to apply to GM-related transactions if GM and Ally ceased to be deemed “affiliates” under applicable bank regulatory standards; this would then allow us to use bank funding for a wider array of our automotive finance assets and to provide a sustainable long-term funding channel for the business. If the restrictions of Section 23A continue into 2011 and we reach our exemption limit granted by the Federal Reserve, we would revert to funding a higher amount of retail and wholesale assets outside of Ally Bank through nonbank funding sources.
Bank Funding
At September 30, 2010, Ally Bank maintained cash liquidity of $4.1 billion and highly liquid U.S. federal government and U.S. agency securities of $3.3 billion, excluding certain securities that were encumbered at September 30, 2010. In addition, at September 30, 2010, Ally Bank had unused capacity in committed secured funding facilities of $7.5 billion, including $3.7 billion from a shared facility also available to the parent company. Our ability to access this unused capacity depends on having eligible assets to collateralize the incremental funding and, in some instances, the execution of interest rate hedges.
Maximizing bank funding is the cornerstone of our long-term liquidity strategy. We have made significant progress in migrating assets to Ally Bank and growing our retail deposit base since becoming a bank holding company. Growth in retail deposits is key to further reducing our cost of funds and decreasing our reliance on the capital markets and other sources of funding. We believe deposits provide a low-cost source of funds that are less sensitive to interest rate changes, market volatility, or changes in our credit ratings than other funding sources. We have continued to expand our deposit gathering efforts through our direct and indirect marketing channels. Current retail product offerings consist of a variety of savings products including certificates of deposits (CDs), savings accounts, and money market accounts, as well as an online checking product. In addition, we have brokered deposits, which are obtained through the use of third-party intermediaries. In the first nine months of 2010, the deposit base at Ally Bank grew $4.2 billion, ending the quarter at $33.0 billion from $28.8 billion at December 31, 2009. The growth in deposits is primarily attributable to our retail deposit portfolio. Strong retention rates have materially contributed to our growth in retail deposits during 2010. In the third quarter of 2010, we retained 88% of CD balances up for renewal during the quarter. In addition to retail and brokered deposits, Ally Bank has access to funding through a variety of other sources including FHLB advances, the Federal Reserve’s Discount Window, securitizations and private funding arrangements. At September 30, 2010, debt outstanding from the FHLB totaled $4.3 billion with no debt outstanding from the Federal Reserve. Also, as part of our liquidity and funding plans, Ally Bank utilizes certain securities as collateral to access funding from repurchase agreements with third parties. Funding from repurchase agreements is accounted for as debt on our Condensed Consolidated Balance Sheet. At September 30, 2010, and December 31, 2009, Ally Bank had no debt outstanding under repurchase agreements.
In the third quarter of 2010 we continued to be active in the securitization markets to finance our Ally Bank retail and wholesale automotive loans, completing three transactions that generated approximately $2.2 billion of funding. On a year-to-date basis through September 30, 2010, Ally Bank has completed eight automotive term asset-backed securitizations totaling $6.1 billion in funding. We intend to continue to utilize the securitization markets to finance our growing Ally Bank retail and wholesale automotive loan portfolio, while ensuring adequate available liquidity by maintaining committed secured facilities. At September 30, 2010, the total credit commitments capable of financing Ally Bank’s automotive loan portfolios were $12.0 billion, which includes $3.7 billion of commitments available to Ally Bank or the parent company. There was $4.5 billion of debt outstanding under these facilities at September 30, 2010.
In Canada, we are also focused on growing our deposit-raising platform. Through our ResMor Trust subsidiary (ResMor), we began raising deposits in 2009. ResMor launched its online deposit platform in September 2009, providing a variety of products under the Ally brand. At September 30, 2010, this retail deposit channel had deposits of $963 million. This is in addition to a brokered deposit product line that had a balance of $2.3 billion at September 30, 2010, compared to $1.5 billion at December 31, 2009.
Refer to Note 13 to the Condensed Consolidated Financial Statements for a summary of deposit funding by type.
Nonbank Funding
At September 30, 2010, the parent company maintained cash liquidity in the amount of $7.3 billion and unused capacity in committed credit facilities of $9.1 billion, excluding $3.7 billion from a shared facility that is also available to Ally Bank. Our ability to access unused capacity in secured facilities depends on having eligible assets to collateralize the incremental funding and, in some instances, the execution of interest rate hedges. For purposes of this section of the MD&A (Nonbank
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Funding), parent company includes Ally consolidated less our Insurance operations, ResCap, and Ally Bank. As we shift our focus to growing bank funding capabilities in line with increasing asset originations at Ally Bank, we are similarly focused on minimizing uses of our parent company liquidity and reducing the amount of assets funded outside the bank. Funding sources at the parent company generally consist of longer-term unsecured debt, private credit facilities, asset-backed securitizations, and a modest amount of short-term borrowings.
Throughout 2010, we have targeted transactions in the unsecured debt markets to further strengthen the parent company liquidity position and to prefund upcoming debt maturities. In the first nine months of 2010, we raised $7.0 billion in the bond markets, including a $1.8 billion issuance in the third quarter. Slightly more than half of the $7.0 billion issued this year had a term of 10 years, while the remaining amount had a term of 5 years. In addition to the debt capital markets, we offer unsecured debt through two retail debt programs, known as SmartNotes and Demand Notes. SmartNotes are floating rate instruments, with fixed maturity dates ranging from 9 months to 30 years that we have issued through a network of participating broker-dealers. There was $10.0 billion and $10.9 billion of SmartNotes outstanding at September 30, 2010, and December 31, 2009, respectively.
We also obtain short-term unsecured funding from the sale of floating-rate demand notes under our Demand Notes program. The holder has the option to require us to redeem these notes at any time without restriction. Demand Notes outstanding were $1.8 billion at September 30, 2010, compared to $1.3 billion at December 31, 2009. Unsecured short-term bank loans also provide short-term funding. At September 30, 2010, we had $3.9 billion in short-term unsecured debt outstanding, an increase of $0.6 billion from December 31, 2009. Refer to Note 14 to the Condensed Consolidated Financial Statements for additional information about our outstanding short-term and long-term unsecured debt.
In our North American and International Automotive Finance operations, we maintain numerous credit facilities funded by a variety of financial institutions. In North America, our primary facility is a $7.9 billion syndicated facility that can fund U.S. and Canadian automotive retail and commercial loans, as well as leases. The facility is set to mature in June 2011. Historically, we have also had automotive whole-loan forward flow agreements that provide commitments from third parties to purchase U.S. automotive retail assets. However, the arrangements expired in 2010, with the final transaction completed under these arrangements in October 2010. During the first nine months of 2010, our U.S. term securitization issuance activity has been exclusively conducted through Ally Bank. Internationally, in the first nine months of 2010, we have been active in the public and private securitization markets, completing a total of eight transactions in Canada, Mexico, and Germany that raised approximately $5.4 billion in funding. In addition, in October 2010, we entered the German public securitization market with our first-ever public securitization of retail automotive loans in that market resulting in approximately $635 million in funding.
Recent Funding Developments
During the first nine months of 2010, we completed funding transactions totaling more than $30 billion and we renewed key existing funding facilities as we realized ready access to both the public and private markets. Key funding highlights from the first nine months of 2010 are as follows.
We issued over $7 billion of unsecured debt, which included issuances in both the U.S. and European markets. In the third quarter 2010, we issued $1.8 billion of unsecured long-term debt with a maturity of 10 years.
We raised over $12 billion from the sale of asset-backed securities publicly and privately in multiple jurisdictions. In the United States, we issued Ally Bank-sponsored transactions totaling $6.1 billion of which $2.2 billion was completed in the third quarter. We also completed $674 million of issuance supported by mortgage servicer advances and mortgage loans. Outside the United States, we issued approximately $5.4 billion through public and private automotive securitization transactions.
We created more than $11 billion of new committed credit capacity including $8.3 billion solely dedicated to fund automotive assets at Ally Bank and new mortgage facilities in the United States that provide committed credit capacity of $725 million. In the third quarter, we entered into new committed secured auto facilities in Canada and France that provide total capacity of $684 million and a new committed secured mortgage facility with total capacity of $125 million.
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We renewed over $2 billion of key private funding facilities at our International Automotive Finance operations and Mortgage operations. In the third quarter, we renewed committed secured auto facilities in Europe and Mexico that provide total capacity of approximately $493 million.
Funding Sources
The following table summarizes debt and other sources of funding and the amount outstanding under each category for the periods shown.
Secured financings
Institutional term debt
Retail debt programs (a)
Temporary Liquidity Guarantee Program (TLGP)
Bank loans and other
Total debt (b)
Bank deposits (c)
Off-balance sheet securitizations
Total off-balance sheet securitizations
Refer to Note 14 to the Condensed Consolidated Financial Statements for a summary of the scheduled maturity of long-term debt at September 30, 2010.
We utilize both committed and uncommitted credit facilities. The financial institutions providing the uncommitted facilities are not legally obligated to advance funds under them. The amounts outstanding under our various funding facilities are included on our Condensed Consolidated Balance Sheet.
Funding Facilities — Operating Segment
Most of our committed capacity is concentrated in our Automotive Finance operations, which is consistent with our strategic focus. Our funding facility capacity for Mortgage operations is sourced from private bank facilities, the Federal Reserve Bank, and FHLB advances. Refer to Note 14 to the Condensed Consolidated Financial Statements for additional information on our funding facilities by operating segment.
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Funding Facilities — Bank/Nonbank Funding
At September 30, 2010, Ally Bank’s total committed capacity was $12.0 billion of which $3.7 billion was available to both Ally Bank and the parent company, Ally Financial Inc. Each of these committed facilities has a 364-day maturity and is available to fund automotive receivables. Ally Bank’s largest facility is a $7.0 billion secured revolving syndicated credit facility that matures in April 2011. If this facility is not renewed, the outstanding debt will be repaid over time as the underlying collateral amortizes. At September 30, 2010, the amount outstanding under this facility was $3.5 billion. Ally Financial Inc.’s largest facility is a $7.9 billion secured revolving syndicated credit facility that matures in June 2011. If this facility is not renewed any remaining outstanding debt will become immediately due and payable. At September 30, 2010, the amount outstanding under this facility was $493 million. Other funding facilities available to Ally Bank are generally composed of Federal Reserve Bank and FHLB advances, as well as repurchase arrangements with third-party lenders.
Nonbank funding
Automotive Finance operations and other
Bank funding
Shared capacity (b)
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Committed Unsecured Funding Facilities
Revolving credit facilities — At September 30, 2010, we maintained $486 million of commitments in our U.S. unsecured revolving credit facility maturing June 2012. This facility was fully drawn. We also maintained $264 million of committed unsecured bank facilities in Canada and $48 million in Europe. The European facility expires in March 2011 while the Canadian facilities expire in June 2012.
Committed Secured Funding Facilities
Facilities for Automotive Finance Operations
Our nonbank secured revolving credit facility mentioned above includes a leverage ratio covenant that requires our reporting segments, excluding our Mortgage operations reporting segment, to have a ratio of consolidated borrowed funds to consolidated net worth not to exceed 11.0:1. For purposes of this calculation, the numerator is our total debt on a consolidated basis (excluding obligations of bankruptcy-remote special-purpose entities) less the total debt of our Mortgage operations reporting segment on our Condensed Consolidated Balance Sheet (excluding obligations of bankruptcy-remote special-purpose entities). The denominator is our consolidated net worth less our Mortgage operations consolidated net worth and certain extensions of credit from us to our Mortgage operations. At September 30, 2010, the leverage ratio was 2.7:1. The following table summarizes the calculation of the leverage ratio covenant.
Consolidated borrowed funds
Less
Obligations of bankruptcy-remote SPEs
Intersegment eliminations
Consolidated borrowed funds used for leverage ratio
Consolidated net worth
Intersegment credit extensions
Consolidated net worth used for leverage ratio
Leverage ratio (a)
In addition to our syndicated revolving credit facilities, we also maintain various bilateral and multilateral credit facilities that fund our Automotive Finance operations. These are primarily private securitization facilities that fund a specific pool of assets. Some of the facilities have revolving commitments and allow for the funding of additional assets during the commitment period.
Facilities for Mortgage Operations
At September 30, 2010, we had capacity of $600 million to fund eligible mortgage servicing rights and capacity of $475 million to fund mortgage servicer advances. We also maintain an additional $600 million of committed capacity to fund mortgage loans.
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Cash Flows
Net cash provided by operating activities was $11.5 billion for the nine months ended September 30, 2010, compared to $2.0 billion for the same period in 2009 reflecting the improved operating results in 2010. During the nine months ended September 30, 2010, the net cash inflow from sales and repayments of mortgage and automotive loans held-for-sale exceeded cash outflows from new originations and purchases of such loans by $6.2 billion. These activities resulted in a net cash outflow of $5.4 billion for the nine months ended September 30, 2009. This was primarily a result of new auto loan originations in 2010 primarily being classified as held-for-investment as opposed to held-for-sale in 2009.
Net cash used in investing activities was $3.6 billion for the nine months ended September 30, 2010, compared to net cash provided of $8.7 billion for the same period in 2009. Net cash flows associated with finance receivables and loans, including notes receivable from GM, decreased $20.9 billion during the nine months ended September 30, 2010, compared to the same period in 2009. These decreases were partially offset by an increase in cash received from sales and maturities of available-for-sale investment securities, net of purchases, of $8.5 billion during the nine months ended September 30, 2010, compared to the same period in 2009.
Net cash used in financing activities for the nine months ended September 30, 2010, totaled $11.3 billion, compared to $11.0 billion for the same period in 2009. Cash provided from new equity issuances was $8.7 billion in 2009. There were no similar equity issuances in 2010. Also contributing to the increase in net cash used was an increase of $3.9 billion in cash outflows to settle short-term debt obligations, and a decrease of $3.4 billion in cash provided by bank deposits in 2010, compared to 2009. Proceeds from the issuance of long-term debt increased $8.4 billion during the nine months ended September 30, 2010, while cash used to repay debt decreased $7.2 billion, as we managed our funding profile.
Regulatory Capital
Refer to Note 15 to the Condensed Consolidated Financial Statements.
Credit Ratings
The cost and availability of unsecured financing are influenced by credit ratings, which are intended to be an indicator of the creditworthiness of a particular company, security, or obligation. Lower ratings result in higher borrowing costs and reduced access to capital markets. This is particularly true for certain institutional investors whose investment guidelines require investment-grade ratings on term debt and the two highest rating categories for short-term debt (particularly money market investors).
Nationally recognized statistical rating organizations rate substantially all our debt. The following table summarizes our current ratings and outlook by the respective nationally recognized rating agencies.
Fitch
Moody’s
S&P
DBRS
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In addition, ResCap, our indirect wholly owned subsidiary, has ratings (separate from Ally) from the nationally recognized rating agencies. The following table summarizes ResCap’s current ratings and outlook by the respective agency.
Off-balance Sheet Arrangements
Refer to Note 9 to the Condensed Consolidated Financial Statements.
Critical Accounting Estimates
We identified critical accounting estimates that, as a result of judgments, uncertainties, uniqueness, and complexities of the underlying accounting standards and operations involved could result in material changes to our financial condition, results of operations, or cash flows under different conditions or using different assumptions.
Our most critical accounting estimates are as follows.
Fair value measurements
Valuation of securities
Valuation of loans held-for-sale
Valuation of automotive lease residuals
Valuation of mortgage servicing rights
Determination of reserves for insurance losses and loss adjustment expenses
Determination of provision for income taxes
There have been no significant changes in the methodologies and processes used in developing these estimates from what was described in our 2009 Annual Report on Form 10-K; however, the valuation of interests in securitized assets is no longer considered a critical accounting estimate as of January 1, 2010, due to the adoption of Accounting Standards Update (ASU) 2009-16, Accounting for Transfers of Financial Assets and ASU 2009-17, Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities. The adoption resulted in the removal of certain retained interests because we were required under the new standards to consolidate the assets and liabilities of the related securitization structures. We now reflect our economic interest in these structures primarily through loans and secured debt. Refer to Note 1 to the Condensed Consolidated Financial Statements for more information on ASU 2009-16 and ASU 2009-17.
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We follow the fair value hierarchy set forth in Note 19 to the Condensed Consolidated Financial Statements to prioritize the data used to measure fair value. We review and modify, as necessary, our fair value hierarchy classifications on a quarterly basis. As such, there may be reclassifications between hierarchy levels.
At September 30, 2010, approximately 20% of total assets ($34.0 billion) and approximately 5% of total liabilities ($7.5 billion) were recorded at fair value on either a recurring or a nonrecurring basis. Level 3 inputs were used to calculate the fair value of approximately 25% and 39% of these assets and liabilities, respectively. See Note 19 to the Condensed Consolidated Financial Statements for descriptions of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized.
While we execute various hedging strategies to mitigate our exposure to changes in fair value, we cannot fully eliminate our exposure to volatility caused by fluctuations in market prices. In recent years, the credit markets across the globe experienced dislocation. Market demand for asset-backed securities, particularly those backed by mortgage assets, significantly contracted and in many markets virtually disappeared. Further, market demand by whole-loan purchasers also contracted. These unprecedented market conditions adversely affected us as well as our competitors. As market conditions evolve, our assets and liabilities are subject to valuation adjustment and changes in the inputs we utilize to measure fair value.
At September 30, 2010, our Level 3 assets declined 37%, or $5.1 billion, and our Level 3 liabilities increased 80%, or $1.3 billion compared to December 31, 2009. The decline in Level 3 assets was primarily due to the $4.2 billion decline in loans held-for-sale measured at fair value on a nonrecurring basis at September 30, 2010, compared to December 31, 2009. During 2009, we reclassified mortgage loans with an unpaid principal balance of $8.5 billion from finance receivables and loans, net, to loans held-for-sale, net, because we changed our intent to hold these loans for the foreseeable future. As a result, we recognized a valuation loss of approximately $3.4 billion during 2009 when we adjusted these loans from their cost basis to their fair value. The valuation adjustments recognized in 2010 were not as significant. Also contributing to the decline in Level 3 assets were unfavorable mortgage servicing rights valuation results because of declining mortgage rates and portfolio runoff, fewer nonrecurring fair value measurements related to our commercial finance receivables and loans, and a decline in trading securities because ASU 2009-17 eliminated certain retained interests we had held. A partial offset to the overall decrease in the Level 3 assets was a $1.6 billion increase in consumer finance receivables and loans carried at fair value on a recurring basis because of a fair value option election. The increase in the consumer loans was primarily related to the implementation of ASU 2009-17. The implementation required several of our securitization structures previously held off-balance sheet to be consolidated as of January 1, 2010. Upon consolidation, we elected the fair value option for the consumer finance receivables and loans, as well as the related debt. The election made to the related debt was the primary reason the Level 3 liabilities increased $1.3 billion compared to December 31, 2009.
We have numerous internal controls in place to ensure the appropriateness of fair value measurements. Significant fair value measures are subject to detailed analytics and management review and approval. We have an established model validation policy and program in place that covers all models used to generate fair value measurements. This model validation program ensures a controlled environment is used for the development, implementation, and use of the models and change procedures. Further, this program uses a risk-based approach to select models to be reviewed and validated by an independent internal risk group to ensure the models are consistent with their intended use, the logic within the models is reliable, and the inputs and outputs from these models are appropriate. Additionally, a wide array of operational controls is in place to ensure the fair value measurements are reasonable, including controls over the inputs into and the outputs from the fair value measurement models. For example, we backtest the internal assumptions used within models against actual performance. We also monitor the market for recent trades, market surveys, or other market information that may be used to benchmark model inputs or outputs. Certain valuations are benchmarked to market indices when appropriate and available. We schedule model and/or input recalibrations that occur on a periodic basis but will recalibrate earlier if significant variances are observed as part of the backtesting or benchmarking noted above.
Considerable judgment is used in forming conclusions from market observable data used to estimate our Level 2 fair value measurements and in estimating inputs to our internal valuation models used to estimate our Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, our estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.
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Statistical Tables
The accompanying supplemental information should be read in conjunction with the more detailed information, including our Condensed Consolidated Financial Statements and the notes thereto, which appear elsewhere in this Quarterly Report.
Net Interest Margin Tables
The following tables present an analysis of net interest margin excluding discontinued operations for the periods shown.
Interest-bearing cash and cash equivalents
Investment securities (b)
Finance receivables and loans, net (c) (d)
Investment in operating leases, net (e)
Total interest earning assets
Noninterest-bearing cash and cash equivalents
Interest-bearing deposit liabilities
Long-term debt (f) (g) (h)
Total interest-bearing liabilities (g) (i)
Noninterest-bearing deposit liabilities
Net interest spread (j)
Net interest spread excluding original issue discount (j)
Yield on interest earning assets (k)
Yield on interest earning assets excluding original issue discount (k)
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Refer to Note 1 to the Condensed Consolidated Financial Statements.
Forward Looking Statements
The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations and other portions of this Form 10-Q contain various forward-looking statements within the meaning of applicable federal securities laws, including the Private Securities Litigation Reform Act of 1995, that are based upon our current expectations and assumptions concerning future events that are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
The words “expect,” “anticipate,” “estimate,” “forecast,” “initiative,” “objective,” “plan,” “goal,” “project,” “outlook,” “priorities,” “target,” “intend,” “evaluate,” “pursue,” “seek,” “may,” “would,” “could,” “should,” “believe,” “potential,” “continue,” or the negative of any of these words or similar expressions is intended to identify forward-looking statements. All statements herein, other than statements of historical fact, including without limitation statements about future events and financial performance, are forward-looking statements that involve certain risks and uncertainties.
While these statements represent our current judgment on what the future may hold and we believe these judgments are reasonable, these statements are not guarantees of any events or financial results, and Ally’s actual results may differ materially due to numerous important factors that are described in the most recent reports on Forms 10-K and 10-Q for Ally, each of which may be revised or supplemented in subsequent reports on Forms 10-Q and 8-K. Such factors include, among others, the following: our inability to repay our outstanding obligations to the U.S. Department of the Treasury, or to do so in a timely fashion and without disruption to our business; uncertainty of Ally’s ability to enter into transactions or execute strategic alternatives to realize the value of its Residential Capital, LLC (ResCap) operations; our inability to successfully accommodate the additional risk exposure relating to providing wholesale and retail financing to Chrysler dealers and customers and the resulting impact to our financial stability; uncertainty related to Chrysler’s and GM’s recent exits from bankruptcy; uncertainty related to the new financing arrangement between Ally and Chrysler; securing low cost funding for Ally and ResCap and maintaining the mutually beneficial relationship between Ally and GM, and Ally and Chrysler; our ability to maintain an appropriate level of debt and capital; the profitability and financial condition of GM and Chrysler; our ability to realize the anticipated benefits associated with our conversion to a bank holding company, and the increased regulation and restrictions that we are now subject to; continued challenges in the residential mortgage and capital markets; the potential for deterioration in the residual value of off-lease vehicles; the continuing negative impact on ResCap and our mortgage business generally due to the decline in the U.S. housing market; any impact resulting from delayed foreclosure sales or related matters; risks related to potential repurchase obligations due to alleged breaches of representations and warranties in mortgage securitization transactions; changes in U.S. government-sponsored mortgage programs or disruptions in the markets in which our mortgage subsidiaries operate; disruptions in the market in which we fund Ally’s and ResCap’s operations, with resulting negative impact on our liquidity; changes in our accounting assumptions that may require or that result from changes in the accounting rules or their application, which could result in an impact on earnings; changes in the credit ratings of ResCap, Ally, Chrysler, or GM; changes in economic conditions, currency exchange rates or political stability in the markets in which we operate; and changes in the existing or the adoption of new laws, regulations, policies or other activities of governments, agencies and similar organizations (including as a result of the recently enacted financial regulatory reform bill). Investors are cautioned not to place undue reliance on forward-looking statements. Ally undertakes no obligation to update publicly or otherwise revise any forward-looking statements, whether as a result of new information, future events or other such factors that affect the subject of these statements, except where expressly required by law.
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Refer to the Market Risk section of Item 2, Management’s Discussion and Analysis.
We maintain disclosure controls and procedures, as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act), designed to ensure that information required to be disclosed in reports filed under the Exchange Act is recorded, processed, summarized, and reported within the specified time periods. As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer evaluated, with the participation of our management, the effectiveness of our disclosure controls and procedures. Based on our evaluation, Ally’s Chief Executive Officer and Chief Financial Officer each concluded that our disclosure controls and procedures were effective at September 30, 2010.
There were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that materially affected, or were reasonably likely to materially affect, our internal controls over financial reporting.
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or our internal controls will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Ally have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II — OTHER INFORMATION
We are subject to potential liability under various governmental proceedings, claims, and legal actions that are pending or otherwise asserted against us. We are named as defendants in a number of legal actions, and we are occasionally involved in governmental proceedings arising in connection with our respective businesses. Some of the pending actions purport to be class actions. We establish reserves for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be higher or lower than any amounts reserved for the claims. On the basis of information currently available, advice of counsel, available insurance coverage, and established reserves, it is the opinion of management that the eventual outcome of the actions against us will not have a material adverse effect on our consolidated financial condition, results of operations, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of legal matters, if unfavorable, may be material to our consolidated financial condition, results of operations, or cash flows. Certain of these existing actions include claims related to various mortgage-backed securities offerings, which are described in more detail below.
Mortgage-Backed Securities Litigation
There are six cases relating to various mortgage-backed securities (MBS) offerings that are currently pending. Plaintiffs in these cases include Cambridge Place Investment Management Inc. (case pending in Suffolk County Superior Court, Massachusetts), The Charles Schwab Corporation (case pending in San Francisco County Superior Court, California), Federal Home Loan Bank of Chicago (case pending in Cook County Circuit Court, Illinois), Federal Home Loan Bank of Indianapolis (case pending in Marion County Superior Court, Indiana), New Jersey Carpenters Health Fund, et al. (a putative class action not yet certified pending in federal court in the Southern District of New York), and the West Virginia Investment Management Board (case pending in the Kanawha County Circuit Court, West Virginia). Each of the above cases include as defendants certain of our mortgage subsidiaries, and the New Jersey Carpenters case also includes as defendants certain current and former employees. The plaintiffs in all cases have alleged that the various defendant subsidiaries made misstatements and omissions in registration statements, prospectuses, prospectus supplements and other documents related to MBS offerings. The alleged misstatements and omissions typically concern underwriting standards. Plaintiffs claim that such misstatements and omissions constitute violations of state and/or federal securities law and common law including negligent misrepresentation and fraud. Plaintiffs seek monetary damages, and rescission.
There are two additional cases currently pending in the New York County Supreme Court where MBIA Insurance Corp. (MBIA) has alleged that two of our mortgage subsidiaries breached their contractual representations and warranties relating to the characteristics of the mortgage loans contained in certain insured MBS offerings. MBIA further alleges that the defendant subsidiaries failed to follow certain remedy procedures set forth in the contracts and improperly serviced the mortgage loans. Along with claims for breach of contract, MBIA alleges fraud, negligent misrepresentation, and breach of the duty of good faith and fair dealing.
All of the matters described above are at various procedural stages of litigation.
Other than with respect to the risk factors provided below, there have been no material changes to the Risk Factors described in our 2009 Annual Report on Form 10-K and subsequent quarterly report on Form 10-Q for the three months ended June 30, 2010.
Risks Related to Our Business
Our business and financial condition could be adversely affected as a result of our temporary suspension of mortgage foreclosure home sales and evictions in certain states.
On September 17, 2010, GMAC Mortgage, LLC (GMACM), an indirect wholly owned subsidiary of Ally Financial Inc., temporarily suspended mortgage foreclosure home sales and evictions and postponed hearings on motions for judgment in certain states. This decision was made after a procedural issue was detected in the execution of certain affidavits used in connection with judicial foreclosures in some but not all states. The issue relates to whether persons signing the affidavits had appropriately verified the information in them and whether they were signed in the immediate physical presence of a notary. In response to this and to enhance existing processes, GMACM has recently implemented supplemental procedures that are used in all new foreclosure cases to seek to ensure that affidavits are prepared in compliance with applicable law. GMACM is also reviewing all foreclosure files in all states prior to going to foreclosure sale.
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Our review related to this matter is ongoing, and we cannot predict the ultimate impact of any deficiencies that have been or may be identified in our historical foreclosure processes. However, thus far we have not found any evidence of unwarranted foreclosures. There are potential risks related to these matters that extend beyond potential liability on individual foreclosure actions. Specific risks could include, for example, claims and litigation related to foreclosure file remediation and resubmission; claims from investors that hold securities that become adversely impacted by continued delays in the foreclosure process; actions by courts, state attorneys general or regulators to delay further the foreclosure process after submission of corrected affidavits; regulatory fines and sanctions; and reputational risks. If the magnitude of any negative impact related to the foregoing proves to be material, it could have an adverse affect on our business, results of operations, and financial position.
We may be required to repurchase mortgage loans or indemnify investors if we breach representations and warranties, which could harm our profitability.
When our mortgage subsidiaries sell mortgage loans through whole-loan sales or securitizations, we are required to make customary representations and warranties about the loans to the purchaser or securitization trust. These representations and warranties relate to, among other things, the ownership of the loan, the validity of the lien securing the loan, the loan’s compliance with the criteria for inclusion in the transaction, including compliance with underwriting standards or loan criteria established by the buyer, ability to deliver required documentation and compliance with applicable laws. Generally, the representations and warranties described above may be enforced at any time over the life of the loan. As the industry continues to experience higher repurchase requirements and additional investors begin to attempt to put back loans, a significant increase in activity beyond that experienced today, could have a material adverse affect on our business, results of operations, and financial position.
Certain of our mortgage subsidiaries face potential legal liability resulting from legal claims related to the sale of private-label mortgage-backed securities.
Claims related to private-label mortgage-backed securities (PLS) have been brought under federal and state securities laws (among other theories) and it is possible that additional similar claims will be brought in the future. The claims made to date are similar in some respects to the repurchase demands we have previously disclosed related to alleged breaches of representations and warranties our mortgage subsidiaries made in connection with mortgage loans they sold or securitized. Further, and as previously disclosed, the Federal Housing Finance Agency (FHFA), as conservator of Fannie Mae and Freddie Mac, announced on July 12, 2010, that it issued 64 subpoenas to various entities seeking documents related to PLS in which Fannie Mae and Freddie Mac had invested. Certain of our mortgage subsidiaries received such subpoenas. The FHFA has indicated that documents provided in response to the subpoenas will enable the FHFA to determine whether they believe issuers of PLS are potentially liable to Fannie Mae and Freddie Mac for losses they might have suffered. A final outcome in any existing or future legal proceeding related to the foregoing, if unfavorable, could result in additional liability, which could have a material adverse effect on our business, reputation, results of operations or financial condition.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. (Removed and Reserved)
Item 5. Other Information
Item 6. Exhibits
The exhibits listed on the accompanying Index of Exhibits are filed as a part of this report. This Index is incorporated herein by reference.
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, this 8th day of November 2010.
(Registrant)
James G. Mackey
Interim Chief Financial Officer
David J. DeBrunner
Vice President, Chief Accounting Officer, and
Corporate Controller
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INDEX OF EXHIBITS
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The following exhibit shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liability of that Section. In addition, Exhibit No. 32 shall not be deemed incorporated into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.